Electric cars and the COVID-19 effect

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Personal Investing

10 August 2020

While sales of electric cars have increased in this pandemic, we believe that’s not wholly good news for European car manufacturers.

Car manufacturing in the UK is most definitely not firing on all cylinders. Recent figures from the Society of Motor Manufacturers and Traders (SMMT)[1] reveal that, for the first half of 2020, output has fallen to its lowest level since 1954. That puts the UK on track to make just 800,000 cars this year – a far cry from the two million the SMMT predicted for 2020 just before the UK’s decision to leave the European Union in June 2016.

The parlous state of the UK automotive market has been mirrored elsewhere in Europe. Economic lockdowns and weak consumer demand brought about by the onset of COVID-19 have had an understandably painful effect on the automotive sector.

A silver lining

However, one silver lining has been the continued increase in market share for battery electric vehicles, hybrids and plug-in hybrids (collectively known as electric vehicles or EVs). Statistics from Germany, France, the UK, Spain and Italy show that electric vehicles have steadily grown their share of vehicle sales, reaching as high as 16.0% in June 2020[2]. This compares with just over 6%[3]is the source/date the same for this as per Bloomberg? the same time a year ago and ahead of even the most optimistic forecasts.

The market share of battery electric vehicle (BEV) sales has also notched up healthy gains. For those needing a quick reminder, battery electric vehicles are 100% pure electric cars – powered solely by an electric battery which needs to be plugged into a power source to charge. European examples of BEVs include the BMW i3 and the Volkswagen e-Golf.

European governments – gearing up incentives

There can be few positive side-effects of this ongoing pandemic but the move towards a cleaner, greener environment must surely be one. Findings from a recent survey our firm undertook concluded that investors came alive when talking about climate change. You can read the report here. European governments are themselves launching ‘green’ incentives. As a reaction to the fall in vehicle sales on account of COVID-19, the German government announced recently that it would double its share of purchase incentives for BEVs to €6,000. The French government plans to support sales of plug-in hybrids (PHEVs) with incentives ranging from €2,000 up to €7,000. While not as ‘pure’ as BEVs, PHEVs are equipped with both a liquid fuel tank and an internal combustion engine, allowing virtually unlimited driving.

Our Global Fixed Income team believes both government moves are a likely boost for the European automotive sector as manufacturers seek to avoid penalties for exceeding their CO2 emissions that could run into several billion euros if breached. This is not to mention the long-lasting reputational damage that could ensue if targets aren’t met.

A double-edged sword?

While the increase market share for EVs could be a definite bonus for the automotive sector, the team still sees roadblocks ahead for European car manufacturers.

The acceleration in EV take up will, in their view, shorten the remaining lifespan of combustion engine technologies such as diesel and petrol. And it is these more traditional technologies, with their relatively lower costs of production, that are currently more profitable to produce than EVs and which, through the cashflows they generate via sales, allow auto companies to pay dividends to investors, invest for the future and finance their sizeable borrowings. So, according to our Global Fixed Income Team, the European auto sector continues to face a rocky road ahead.          

[1] Source: SMMT as at 30 July 2020.

[2] Source: Bloomberg, National Auto Associations data, July 2020.

[3] Source: Bloomberg, National Auto Associations data, July 2020.

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Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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