How Electric Vehicles Are Changing The Auto Landscape

001aa0ba5c8510faf6d001As automakers gather at the Frankfurt Auto Show next Thursday, an unprecedented transformation of the $1.8 trillion auto industry is already underway, whether it has been fully embraced by the industry or not. In addition to the new models and concept cars that will be on display at the show, the proverbial elephant will also be in the room, or convention hall, as you like. At Frankfurt this year, the impending threat of electric vehicles (EVs) to the internal combustion engine (ICE) will be on everyone’s mind.

Although EVs and Plug in Hybrid Electric Vehicles (PHEVs) account for only about one percent of the 95 million vehicles produced globally every year, leading auto industry analysts are, one by one, coming to the conclusion that EVs will substantially change the auto landscape as we know it. For example, Bernstein, a well-regarded Wall Street research firm that closely monitors the industry, published a report earlier this year analyzing what it calls the coming “Electric Revolution.” In its authoritative 262-page report on the subject, the Bernstein research team cites declining technology costs and an expanding charging infrastructure, among other factors, as the principal reasons why EVs are quickly gaining traction. Bernstein predicts that in 20 years, EVs are likely to account for as much as 40 percent of all of the vehicles sold globally, causing sweeping changes at the assemblers and throughout the supply chain.

Apart from newcomers like Tesla (NASDAQ: TSLA), and a select few automakers such as Volvo, however, the industry has been slow to respond. Tesla, of course, is widely credited with leading the Electric Revolution, but Volvo stunned the industry in July when it announced that it would phase out vehicles powered solely by an ICE as early as 2019 and that all of its car models launched after that date would be EVs or PHEVs. No doubt, Volvo’s ownership by Geely (0175.HK), one of China’s leading car makers, was an important influence. As a country, China has made a large commitment to EVs in order to fight the country’s serious air pollution problem.

While the industry as a whole has been largely silent, waiting for Tesla to fail and the EV trend to run out of steam, government leaders and investors have already made up their minds.

Established 50 years ago by then-Governor Ronald Reagan, the California Air Resources Board (CARB) has lead the way in the United States by enacting strict emission standards and implementing a wide range of policies that encourage EV adoption, including production credits for auto companies that sell zero emission vehicles (ZEVs). The state of California and 13 other so-called CARB States that follow its lead are presenting a powerful force for change in one of the world’s largest auto markets. Meanwhile, other countries have begun to take even more draconian measures in recent months.

In June, Norway said it will ban the sale of all fossil fuel-based cars by 2025. In July, France said it will end sales of gasoline and diesel vehicles by 2040, and Great Britain quickly followed suit with a similar announcement. At the city level, the mayors of Paris, Madri, and Mexico City have said they will ban all diesel vehicles in city centers by 2025. At the national, state and local levels, government officials all over the world are lining up behind EVs.

Wall Street has also been playing a role in applying pressure to the international car makers. By treating Tesla to a $58 billion stock market valuation, despite the fact that the company delivered only 76,000 cars last year, investors have sent a clear message as to where they believe the future of the industry lies. Tesla’s valuation stands in sharp contrast to those of the traditional auto makers. For example, the stock market valuation of General Motors (NYSE:GM), which sold 9.6 million vehicles, or more than 100 times the number of units sold by Tesla, in 2016, is actually a few billion dollars lower than that of the industry newcomer.

There are now signs that government and investor pressure is beginning to have an impact. In recent weeks, Daimler AG (DAI.DE) announced a restructuring that effectively separates out its heavy duty truck business, which analysts say is worth eight times Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) from its car business, valued at three times EBITDA. Could Daimler be preparing to divest its heavy duty business to raise cash to fund the development of EVs? Some analysts think so.

The prospect for EVs is also making strange bedfellows. Last month, the Ford Motor Company (NYSE:F) said it is exploring the establishment of a joint venture with a little known Chinese firm, Anhui Zotye Automobile Co., to build electric passenger vehicles in China under a new brand. The new venture will tap into the growing demand for EVs in China and also conform to new policies being established by the Chinese government. China is considering adopting policies, similar to those promoted by CARB, that encourage the production of zero emission vehicles. If not for the EV trend which is picking up speed in the world’s largest auto market, it is unlikely that Ford, one of the largest auto companies in the world, would team up with Zoyte, which sold only about 16,000 vehicles through July.

Even the large components companies are preparing for a new day when EVs replace ICE vehicles. Bosch, the world’s largest auto supplier, is busy selling off mechanical businesses used in ICE vehicles in order to focus on electronic parts and systems used in EVs. In May, Bosch divested its starter and generator business (SG) to a large Chinese firm, despite the fact that SG has a leading global position in that sector. SG has 16 locations in 14 countries, including Germany, China, Brazil, Hungary, India, Mexico, South Africa, Spain and the U.S.

As Bernstein has advised auto companies in its most recent report: “If the policymakers and the capital providers are both telling you to do it (i.e. build EVs)…then you’d better get on and just do it.”

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