After various firms have published a bleak outlook for 2024 and beyond, investors have given up hope on EV companies such as Rivian Automotive Inc and Lucid Group Inc. To compete for market share, there was a time when the entire automotive sector rushed into the production of EVs and they were applauded by investors and the larger community. Today, however, several key manufacturers reviewed their strategies, have reduced production, cancelled entire lines, or even exited the market, and investors following the hype in an imprudent manner got burned.
What happened in between? The market started cooling in Summer 2023. That occurred on the back of three areas of concern: a) the immediately addressable market for EVs has reached its limits, b) consumers can not afford the switch because government incentives are too low, and c) in the absence of efficient charging infrastructure, consumers cannot switch.
From a granular view, research suggests this: Rivian, which manufactures delivery vans for companies like FedEx, UPS, and Amazon, will maintain its production flat while it increases productivity by shrinking its workforce. In the case of Lucid, which is majority-owned by Saudi-Arbia’s wealth fund PIF, the expected production trend is still upwards (probably over-stated by purpose), but its output forecast for 2024 and 2025 are well below expectations. Ford, the Detroit-based car manufacturer, announced last month that it would reduce the production for its F-150 Lightning from around 3’200 units per week to about 1’600 per week amid soft demand for EVs. Less than a month later, the company announced that it would halt production in full due to market conditions.
The background to the shifting market conditions
Last summer, Tesla started issuing warning signals by saying that interest in EVs is declining. To maintain market share, TSLA reduced multiple times prices for specific models. Given this, Tesla has underperformed the broader market by about 20%. Tesla’s competition for market share took the competition by surprise and pure plays took a real hit.
From a technical point of view, the business models of Tesla, Rivian, Lucid, Nikola, XPeng, Nio, and Li are disruptive and forward-looking. Therefore, the key factors investors search for are output capacity and market share. Given the present market conditions, the immediate growth potential appears to be limited, hence the reality checks for OEMs.
EV winter is setting in!
Research suggests that EU fully-electric car sales in January fell 42.3% from December 2023.
Once again, Chinese subsidized car manufacturing companies impose overall conditions by flooding the market. To safeguard sales and to compete with the Chinese manufacturers, the industry leader Tesla is cutting prices. Because of its market dominance, large-scale production facility, and distribution network, Tesla can afford a price cannibalization strategy, though it is eliminatory for cash-burning and unprofitable companies. In contrast, legacy OEMs such as Ford and Volkswagen, among others, have reduced EV production or have shifted their business attention elsewhere.
The hype around EV has diminished and a serious reality check is being addressed. The weaknesses newcomers have to overcome are: a) scaling production while facing an uncertain market, b) developing a distribution network, and c) competing for consumers. With limited leverage in the market and the absence of any technological advantage, the way to go forward for them is to play with the sales price. That this strategy is misfiring can be seen in the market cap of Rivian and Lucid. Today, they are worth a fraction of the price in 2021.
As summarized by Adam Jones from Morgan Stanley, EV startups, which is the entire DM market ex Tesla, have turned into restructuring stories and whoever can rise capital may have a chance to survive.
For legacy automakers, the situation is even a little more complex. These car manufacturers rely on up to 250 external suppliers whereas their Chinese rivals operate within a highly vertically integrated business model. Their advantage consists in producing almost everything in-house and they therefore can keep costs in check. The difference in the market is visible – for example: BYD’s electric Dolphin hatchback sells for about $32k, which is about 27% less than the equivalent model ID.3 from VW.
Figures published by Stellantis evidence that 85% of EV costs are related to material purchases and the company suggests that the supply chain has to bear a proportionate burden in reducing costs. Up to now, automakers have been able to preserve their profit ratios as they focused production and marketing on higher-margin models. This however resulted in fewer cars being sold, which in turn puts the supply chain industry in the hot seat.
Historic EBIT margins in the automotive supplier industry are around 10%. Now, with nickel and aluminium prices on the rise, legacy suppliers such as Forvia (ex-Faurecia), and Continental, among others, feel the heat from both sides, i.e. they are being squeezed by suppliers and purchasers. Industry experts suggest that larger and well-capitalized suppliers can withstand the strain and adapt to new market conditions, but warn that smaller entities may be pushed to the edge, like the German-based Allgaier, which filed for bankruptcy last year.
Goodbye to EV – Welcome to hydrogen-based engines
Up to very recently, EVs were promised to dominate the automotive market in full. But as argued in the past, EVs are transitory because of lacking fast charging infrastructure, high costs, and limited range capacities. Above all, environmentally sensible consumers consider the fact that a reliable battery recycling industry is more than a decade away.
It is for these reasons that incumbent care manufacturers are diverting their attention to hydrogen-based engines. After all, a hydrogen-based engine resembles a traditional engine design rather than the of an EV, which they aren’t mastering yet in full.
Besides this, there are in multiple countries exceptions to policies for the transition to electrification. These countries were anticipating the fact that it would have been nearly impossible for automakers to produce electric cars as expected and the industry to set up a reliable infrastructure.
The EV strategy in developed markets was faulty to start with as it has aimed at exiting traditional combustion engines rather than considering EVs as a complementary component of a sustainable transportation system. Given this, CO2 emission objectives and transportation issues are mismanaged, with longer-term concerns remaining unsolved given that CO2 emission is generated at a different stage of the process.
The use of EVs is greatly beneficial in the fight against climate change as long as EVs can capitalize on daily commutes that can be achieved with vehicles offering an excellent cost/reward ratio. Practicing long-distance travel, where 3rd party charging becomes expensive and in the absence of fast charging opportunities, the use of EVs is inefficient. A mass roll-out of EVs was an elusive project.
The alternative to EV
EVs offer undeniably several advantages but are lacking in other areas. There are some very weak areas such as their incapacity capacity to operate in extreme temperatures and the sudden battery death in hot and humid conditions.
Given this and to master the energy transition, car manufacturers are switching their attention to hydrogen engines. After all, hydrogen offers one of the most efficient ways of storing and transporting renewable energy.
BMW had been testing its pilot fleet in intensive hot-weather conditions in the UAE. Regardless of the external condition, i.e. high temperatures or changing humidity, hydrogen-based engines passed the benchmark levels effortlessly.
There are similar developments performed at Honda. The Japanese company is already working on new hydrogen fuel cell developments, which consist of a new hydrogen engine set-up. But since this type of vehicle requires further testing, they chose to focus for now on the hybrid market, while continuing their hydro developments.
Research undertaken by Honda and BMW suggests that customers who travel frequently and long distances or who do not have access to electric charging at home or work might be more inclined to opt for a hydrogen car solution because it offers the benefit of fast charging and the comfort and experience of EV driving.
BMW’s iX5 hydrogen car technology is for now not available for commercial use, but the intensification of tests reveals that the subject tracks a specific commercial interest. The development undertaken at BMW come along under a joint venture with Anglo-American Platinum and Sasol and is known under the name of Sasol BMW Fuel Cell Electric Vehicle, or Sasol BMW FCEV. The South-African based joint venture expects to create a sustainable transportation ecosystem by utilizing BMW’s FCEV technical experience, Sasol’s hydrogen production expertise, and Anglo-American Platinum’s supply of platinum group metals (PGMs), which are essential for FCEVs.
Under the agreement, Sasol will supply mobile refueling solutions and renewable hydrogen, BMW will deliver FCEVs, and Anglo-American the required metals. The JV GTM is expected to occur prior 2030.
Is this the future?