The auto industry needs help making its next turnaround

William Todts — October 30, 2020

What’s the biggest automotive industry turnaround in recent memory? Chances are most people will mention Obama’s 2009 auto bailout. But what has happened in Europe since Dieselgate is actually at least as impressive, and potentially more lasting.

In 2015 the European car industry was engulfed in the biggest ever corporate cheating scandal. In the years since, €100 billion has been invested in electric cars. A dozen battery factories are being built, and in the first half of 2020 the EU was the world’s biggest electric car market. Meanwhile the old villain, diesel, is on its way out. In September 2020 sales of electrified vehicles (including hybrids) overtook diesel for the first time and EU carmakers are comfortably hitting the 2020 CO2 standards.

This turnaround was not made in Germany or California. It was made in Brussels. From 2015 the EU Commission quietly charted a new course for its auto industry: tests and regulations were tightened, the battery alliance launched and, most importantly, new CO2 standards were introduced – requiring sales of 15-20% electric vehicles in 2025.

Thanks to the Commission’s foresight, the industry is now much better positioned in the global electric vehicle race than competitors like General Motors, Ford and Toyota.

But are the Europeans now leading the race? To answer that question it’s useful to have a brief look at one of their main challengers, Tesla. In 2019, the upstart sold 110,000 cars in Europe – around a fifth of EU EV sales. But they achieved this mainly through just Model 3 sales which, at a €49k starting price, is still a pretty expensive car. Currently Tesla exports cars out of California but in summer 2021 Tesla’s Berlin plant becomes operational. The plant has a capacity of 500,000 units per year. No tariffs, reduced transportation costs and mass manufacturing in a state-of-the-art factory will be a game changer for Tesla in Europe.

The recent announcement that the Berlin facility will also be making Tesla’s brand new proprietary cells, and pioneering a breakthrough production process, to power its cars was low key but could be very significant. Tesla promises to cut battery costs by more than half and increase the range by 50% in the next three years. If European companies have a plan to do similar or better, we are not aware of it.

Add to this that the Tesla models 3 and Y are perfectly suited for Europe’s large and generously subsidised company car market, and that they have the best charging network in Europe, and you start to understand why investors think Tesla is such a valuable company. And, of course, Tesla isn’t the only competitor; there’s also the Chinese electric car manufacturers that benefit from a huge home market and massive government support.

So, this is not a time for complacency. The lesson of the history of business in the 21st century is that complacency is fatal. Barnes & Nobles, Nokia, Blackberry, Kodak and all those other fallen giants were overtaken by startups. The main reason why they failed is that they tried to preserve their old business and shor-term profits whilst competing with a ruthlessly focused new entrant that was taking the long view. Sadly, this is also the attitude of most of our industry.

What needs to happen? European carmakers have to go all in on electrification. That means from now on all new powertrain investment must be reserved for battery electric vehicles and plans for redundant new engines should be ditched and the industry’s reliance on suboptimal and poorly performing plug-in-hybrids must be radically reduced.

It also means the industry needs to stop relying on the state to develop the EV eco-system. Carmakers should see it as their top priority to invest in EV charging, software, battery manufacturing, recycling and perhaps even mining. How is it possible that in 2020 the largest European charging network is owned by a Californian start up?

Currently carmakers seem to see all of this as a burdensome regulatory cost, that they’d prefer to shift to taxpayers. That’s not just unfair to taxpayers but it’s the wrong attitude. A massive new market is being created. Being part of that is not a burden, it’s an opportunity.

The truth is there are only two ways European carmakers will go all in. The first is when Tesla and the Chinese start claiming parts of the market, profits are eroded, and carmakers have their back against the wall. If that happens, it will be too late for most of the industry. The other is if policymakers tell them to go all in right now. This is why the European Commission’s plan to update the 2025-2030 CO2 standards and set an end date for the combustion engine is so important for the future of our automotive industry.

The Commission saved the European car industry once. It is an incredible and underreported success story. It’s time for Von der Leyen and Frans Timmermans to be a lot less timid with carmakers and their political friends. Recent history shows that, left to their own devices, carmakers are fickle and short sighted. They need our help.

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