Electric Vehicles – Unready for Reality pt. III

EU tariffs will weaken demand further.  

• The EU has announced import tariffs on Chinese EVs that are likely to trigger a retaliation and an increase in price to the European consumer of an EV is likely to slow adoption even further.
• Recent years have seen Chinese companies make real progress in vehicle manufacturing such that they are currently able to make high-quality petrol and electric vehicles (EVs) at very reasonable prices.
• Consequently, Chinese vehicle makers have seen large increases in market share in Europe, the Middle East and Latin America putting pressure on local producers, especially in Europe.
• This has given rise to the question of whether the Chinese can do this organically or are they in receipt of some form of state aid.
• In October 2023, the EU kicked off an investigation into Chinese subsidies for Chinese EVs and has unsurprisingly concluded that further import tariffs are warranted.
• The current regime is a 10% tariff with a further 17.4% to 38.1% to be added depending on the level of cooperation that the EU received from Chinese EV makers.
• BYD which co-operated fully has received the minimum tariff of 17.4% while Geely has ended up with 20% and SAIC will receive the full 38.1% which will take tariffs on its vehicles to 48.1%.
• Even the lowest tariff will increase the cost of EVs substantially which is likely to soften demand even further than inflation, electricity costs and lower oil prices have already achieved.
• This is the problem with tariffs as a method of economic policy because it is not the company exporting its product that pays the tariff, but the consumer and so it is really a tax on citizens.
• However, what it will do is level the playing field somewhat with the cheapest vehicles rising in price to be closer to those that are produced locally.
• This is not good news for the fledgling EV industry where the high cost of the vehicle and the very immature state of the charging infrastructure greatly diminishes its appeal to the mass market.
• For the last 5 to 10 years, EV buyers have essentially been drawn from the wealthier end of the population who have been willing to be beta-testers for products that they have purchased at full price.
• This demographic in Europe and the USA is now fairly well penetrated meaning that further growth depends on EVs penetrating the mass market and it is going to be a while before the products and the infrastructure are mature enough to do that in volume.
• Increasing the price by 20% at the lower end of the market which is where one would expect the volume to occur will slow the market adoption down even further.
• I remain unconvinced that the issues of cost, range, charging and technology maturity are going to be fixed any time soon and I think that for now, EV demand is going to remain soft.
• Tesla will survive comfortably as it can generate plenty of cash when it has to, and I think that Lucid will also survive.
• Lucid is in a similar position to Fisker except it has valuable EV technology that gives it differentiation and its software is passable.
• Most importantly, it is majority-owned by Saudia Arabia’s sovereign wealth fund and I suspect that one day the fund will get fed up with marking its stake down day after day and buy out the shares it doesn’t already own.
• Buying Lucid on this proposition is risky as it is impossible to know where Saudia Arabia’s pain threshold is, and it is not 100% certain that it will buy out Lucid as it did decline to rescue Credit Suisse.
• The net result is the outlook for EVs remains difficult in the short-term but once the problems with EVs are solved, then there is a strong case for them to become the majority of the market over time.
• However, this is going to take a while and I think that we see many more targets rolled back by both EV makers and governments.
• Against this backdrop, the shakeout is far from over and there is more blood to be let meaning that I would stay away for now.