Breakingviews – China is bitter medicine for Europe’s EV pivot

LONDON, Sept 12 (Reuters Breakingviews) – China can offer a bitter medicine for Europe’s bold electric vehicle pivot. Ditching combustion engines by 2035 in the region requires carmakers like Volkswagen (VOWG_p.DE) or Stellantis (STLAM.MI) to dramatically boost sales of battery rides. That’s tricky while high prices deter buyers from e-cars. Competition from more efficient Chinese players will help.

Europe’s bold plan to eliminate CO2 emissions from new cars by 2035 has a long way to go. While the share of e-car registrations in the EU trebled to 12% of the total between 2019 and 2022, the monthly market share averaged around 13% this year in the seven months to July, data from the European Automobile Manufacturers’ Association shows. This is partly thanks to a push from non-European players. While Tesla’s (TSLA.O) cars have outsold all other brands this year, Chinese marques like BYD (1211.HK), (002594.SZ) have increased their collective market share in Europe to 8%, as per Inovev, a consultancy.

The average level masks huge discrepancies across the region. While early EV adopter Norway is close to eliminating combustion engines, other countries are very far away: in Italy, Europe’s fourth largest market, battery rides made up just 3% of the total in July. Initial national data for August suggests an increase in EV sales, but the long road ahead has led industry executives including BMW (BMWG.DE)CEO Oliver Zipse to question the European Union’s ability to hit its green target. Inovev estimates that, by 2030, the share of EVs in Europe may still only be 40%.

Charging is one problem. The number of chargers across Europe has increased sixfold between 2016 and 2022, roughly a third the rate of increase seen in e-cars themselves. Still, that should be solvable: Chancellor Olaf Scholz this month unveiled a push to expand the charging network in Germany, but gave no timeframe for the initiative.

Pricing is a much bigger hurdle. Electric vehicles have fewer parts than combustion engine cars, but rely on expensive batteries, which can make up half a car’s total cost, leaving less value for the manufacturer. That has prompted carmakers to develop premium e-cars for richer punters, rather than mass market vehicles. In 2022, the average price of the top selling battery electric passenger vehicles in Europe was nearly 40,000 euros, according to Morgan Stanley, double that of gasoline cars. That’s in contrast to China, where widely popular battery rides can sell for as little as $4,000, and are priced on average at less than half the cost of European ones, according to Jato Dynamics.

Raw materials could also be a wildcard. Encouragingly, the average price of an NCM battery, one of the most widely used technologies, has fallen by 15% this year, according to Benchmark Mineral Intelligence, thanks to tumbling lithium prices. But a rise in EV demand and delays to mine openings may lead to a shortage of key materials, keeping battery prices elevated.

NEW ENTRANTS

Governments could speed up EV adoption through purchase subsidies and tax incentives to buyers, like Norway did. But the level of aid can vary. Countries like Latvia and Bulgaria are offering just tax sweeteners. Meanwhile states including both Britain and Germany have started to roll back support schemes.

Carmakers will likely have to do most of the heavy lifting. That means slashing production costs. Volkswagen, for example, is developing its own battery manufacturer, a move that would allow it to generate savings through economies of scale and give it greater bargaining power with suppliers. Still, its cheapest e-car, the ID.2, will retail at around 25,000 euros when launched in 2026. That will still be some 6,000 euros pricier than its closest combustion engine peer, the Polo.

China may help accelerate the trend. Manufacturers like BYD benefit from cheap energy and labour costs, and a vast battery supply chain. That allows them to undercut Western rivals and offer lower-cost vehicles.

True, EU governments may seek to preserve jobs by imposing bigger tariffs on cars produced by BYD and its peers, and only allowing subsidies for locally made goods. That will force Chinese companies to manufacture cars on the continent, as they are already doing with electric batteries. Smaller European nations may welcome the prospect of investments and the jobs associated with new manufacturing plants. And even if subsidies or tariffs forced BYD to assemble its Seal car in Europe, the brand would still be 25% cheaper than comparable models from rivals like Renault (RENA.PA) or Volkswagen, UBS reckons. The bank predicts growing sales from new entrants like BYD will reduce the German group’s grip on the EU car market by a quarter to 15% by 2030.

More competition from Chinese carmakers should help bring down prices of electric vehicles in Europe. It will force Western players to keep cutting costs to avoid losing too much market share, boosting overall e-car adoption. But a savings push could be bad news for the 2.6 million people employed in Europe’s auto manufacturing industry. Turning to China may save Europe’s green ambitions, but only at a cost.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

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CONTEXT NEWS

Oliver Zipse, CEO of BMW, in an interview with the Financial Times published on Sept. 4 questioned the European Union’s ability to meet a self-imposed 2035 deadline for the phasing out of combustion engine vehicles.

Zipse pointed to a 2026 review of the plan to stop selling petrol and diesel cars, as well as EU member states’ delays in developing charging infrastructure. “You wouldn’t do a review if legislators were certain that everything was in order,” he said, according to the FT interview.

Electric vehicles accounted for some 13.6% of total passenger car registrations in the European Union in July, according to the European Automobile Manufacturers’ Association.

Sales of EVs picked up in August, with Jefferies analysts estimating a total market share across Europe of 23%.

German Chancellor Olaf Scholz announced on Sept. 5 that Germany would introduce a law requiring operators of 80% of service stations to provide fast-charging options for e-cars.

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