Electric vehicle sales globally have continued to increase as expected with policy continuing to drive changes in market dynamics. Particularly changing the distribution of sales within the wider plugin electric vehicle category.
China’s winding down of its new energy vehicle (NEV) subsidies on top of its dismantling of its Covid-19 containment measures back in January singlehandedly kneecapped the price of lithium salts down to 30% of highs seen last November as NEV demand halved going into the new year. Lithium only began making consistent gains indicating a recovery in the first weeks of this month, really highlighting the importance of the Chinese market to lithium prices. Germany also elected to change its EV subsidization policy to completely exclude plugin-hybrid electric vehicles (PHEV), causing a significant redistribution of demand towards battery electric vehicles (BEV) and full-hybrid electric vehicles (HEV), following a significant forwarding of demand which has left sales figures for this year looking like a regression by comparison.
The planned and public nature of these subsidy changes meant that December 2022’s EV sales figures included a significant degree of demand that was brought forwards from what would have been sales made in Q1 of 2023, artificially deflating demand for the first few months of 2023. These changes were particularly pronounced in the German and Chinese markets, but other shifts in demand were prevalent globally.
US new vehicle sales hit the lowest levels seen since 2011 in 2022, following months of production problems which wreaked havoc on new and used car markets. The easing of production and supply chain bottlenecks should indicate a slight recovery back to higher production levels in the coming years, but with the shift to electric vehicles these bottlenecks are likely to resurface in a more sustained manner, centered around battery and electric drivetrain raw material supply.
US electric vehicle sales have consistently been on an upwards trajectory, but the Inflation Reduction Act (IRA) has brought more attention to it. As more domestic manufacturing is brought online and more vehicle models are released that qualify for the included tax credits, the IRA will have more of an impact in driving electric vehicle sales. The problem with this is that as of the time of writing, just 10 active EVs are eligible for the full $7,500 tax credits, and another 7 are eligible for half credit.
Of those eligible, Tesla is the clear winner with a majority of its vehicle lineup being eligible in at least some capacity. Tesla remained the largest electric vehicle seller in the US, selling over 500,000 vehicles into the US market in 2022. The company’s industry-leading profit margin and its willingness to weaponize it puts Tesla in a strong position to lead going forwards, particularly as competition from incumbent OEMs is only going to fully materialize mid-late decade. It has also just broken ground on a lithium refinery in Texas, which will create lithium eligible for subsidy for the company a few years from now.
In order to comply with IRA subsidies, both production and sales, Tesla and other OEMs will need to source raw materials either from the US or from countries friendly with it. This gives a significant opportunity for raw material producers and processors within the continent since the region still has significant room for sales growth due to its relative infancy.
The US saw 5.8% of its total vehicle sales as plugin electric vehicles in 2022 and this is likely to increase to 7.8% in 2023, totaling around 1.1 million EV sales throughout the year. This will be driven by reductions in vehicle costs through the continued innovation in the battery industry and through companies like Tesla vying for market share through competitive pricing. The US is on track to hit 100% EV sales in 2038 following significant accelerations in EV sales percentages following investments in infrastructure materializing later this decade. This will be led by progressive states like California which tend to lead other progressive states when it comes to environmental policy. It will also be heavily led by the EPA’s increasingly strict emissions regulations making ICE cars more difficult to produce while maintaining regulatory compliance.
Chinese NEV sales have taken a significant hit this year as a result of a combination of factors, China revising its Covid-19 lockdown measures created significant disruption to the country’s industrial markets at the beginning of the year. The country’s announced policy changes frontloaded NEV demand into November and December of 2022, causing NEV demand to crater 50% going into 2023. Sales of 640,000 passenger cars in December turned into 330,000 in January, falling from a record 29% market penetration to 22%. While this looks like a bomb went off somewhere relative to China’s usual statistical dominance, it’s primarily the result of poor policy planning from the Chinese Federal Government and a perfect storm of demand-reducing measures, also partly caused by the Chinese central government.
China sold 5.9 million passenger cars in 2022, up from 3.2 million in 2021. The first few months of this year have been rocky due to policy decisions and it being a historically slow period for the market, this will pick up going later into the year where we will likely see more records being broken including that of annual EV sales. This will be led by the continued increase in sales from Chinese mass-manufacturers like BYD who are increasingly shutting out Western competitors like Ford and Tesla from an incredibly cost-oriented market.
China has a history of announcing that its NEV subsidies will be winding down, which then cripples EV sales before they get reintroduced 2 months later once the effect on sales becomes clear. What this really tells us about the Chinese market is that it is incredibly cost-sensitive, as evidenced by the presence and sales volumes of small electric vehicles like the Wuling Hongguang Mini, battery leasing agreements as a means to lower initial expenditure, and the continued push towards sodium batteries which once mass-produced would allow China’s microcars to become even cheaper.
Since China has a history of reneging on policy decisions concerning NEV subsidies in particular, this factor of frontloading demand towards the end of the year and cratering demand in January is likely to be a pattern. Whereas unless another global pandemic arises it is unlikely that China will get the chance to rip that particular band-aid off again, and so any future forwarding of demand will be limited to the single policy factor, rather than experiencing two simultaneously.
European markets have been grappling with the recovery from Russia’s war in Ukraine sending energy prices through the roof and the associated fallout, this has significantly hurt the region’s wider automotive markets due to its close association with consumer spending power, no major countries in the region are even particularly close to posting sales figures similar to that of 2019. It has also had to deal with subsidy schemes like the IRA at a time when money within the bloc was being spent on keeping the lights on. This March saw the EU allowing its member states to offer subsidies as a means to attract investment and prevent capital flight from the bloc. Factories producing vehicles and batteries within Europe will primarily service the major European markets, so we can expect a jump in domestic production and sales within the region around 2026/2027 when these factories come into operation. Until then Europe will continue to be serviced predominantly by batteries coming from China and wider East Asia.
Germany’s automotive market has been the most interesting in the last few months, as the country continued winding down its EV subsidies, this time eliminating PHEV subsidies altogether in the new year. This situation is very reminiscent of China’s subsidy removal, as the planned subsidy wind down created significant forwarded demand in November and December. German passenger car sales were 55% electric in December, with BEVs taking 33% and PHEVs taking 22% of the market respectively. A colossal jump from a market that averaged closer to 30% for the rest of the year.
December’s sales figures were highly anomalous due to the ending of subsidies, but it does mean that 2023 will see Germany’s EV market share remain comparably stagnant with its record set in 2022. The country will continue on its electrification trajectory hitting 100% new EV sales in 2034, one year ahead of the European Union’s deadline of 2035.
The UK’s automotive market looked similar to that of the rest of Western Europe, with a peak of nearly 40% plugin electric registrations in December and a steep drop in January. 2022 saw 22.8% of new vehicle sales as electric, a small increase on the 18.5% seen in 2021. Volkswagen remains dominant in this market, closely followed by Tesla. The UK’s recovering auto sales has meant that this year has averaged about 22.5% of sales as electric due to rising volumes elsewhere. 2023 is going to see this increase to about 24.5% for the year which puts the UK on a trajectory to follow Germany in hitting 100% new vehicle sales as EVs by 2034.
Italy remains a bit of an anomaly within the electric vehicle market, with sales up until 2021 progressing smoothly and then EV sales largely collapsed and have yet to return in full. Italy’s broader automotive market has recovered significantly, but mostly through the sales of plug-less hybrid electric vehicles (HEVs). This has been in stark contrast to other European countries like the UK, Germany and France which have seed less of a volume-based recovery but with a progressively higher percentage of those sales being electrified in some manner. Italy also remains counter to its European rivals in that it still favors PHEVs over BEVs, despite widespread knowledge that their emissions reductions in use are overstated. It is also one of the only major European markets where Smart had the best-selling vehicle model. We believe that Italy’s automotive manufacturers, primarily Fiat, have to lead the country in getting its act together and shifting towards EVs. Fiat’s lack of action in this regard has left the Italian EV market led by Smart of all people, which at least shows that there is significant latent demand in the market for small electric vehicles if they were available.
Lots of this is going to be politically driven, Italy’s relatively recently elected far-right party led by Giorgia Meloni is still trying to convince the European Union that biofuels should be included in the bloc’s “zero emissions” fuel category as a means to continue using ICE vehicles and delay EV uptake. This is much like Germany’s e-fuel farce only with less backing from other member states. Despite the passing of this law allowing e-fuels, OEMs haven’t fallen into the trap of thinking it’s a way out, at least if you don’t count Porsche or Ferrari whose business model isn’t to manufacture what’s best for the masses anyways. A vast majority of manufacturers including Stellantis and Volkswagen have denounced the passage of this allowance and have committed towards fully electric lineups. The German car market largely ignored the passing of this law, but the Italian market hasn’t, and this is slightly concerning for the country’s future EV ambitions as its domestic manufacturing is also falling behind local competitors like Spain.
The broader pattern seen in the European automotive markets – bar Italy – is that we are going to be waiting a few more years until sales volumes can hit those seen before the Covid-19 pandemic, and there is a number of driving factors that this may not even happen. Western Europe’s population in particular isn’t growing significantly, this will weaken future vehicle demand. There have also been significant shifts towards making cities within much of mainland Europe, and even the UK to a degree, less desirable places to own a personal car. These include the imposition of rules like high emissions zones and congestion charges in certain areas, more bike lanes in place of roadside parking. There’s also the fact that BEVs are widely expected to have a longer lifespan than that of internal combustion engine (ICE) vehicles, this will lower a country’s scrappage rate once EVs are more dominant and this will warrant less new vehicle purchases and an expansion of the used car market and services like battery replacements to extend the lifespan of vehicles to their potential.
Overall Europe’s recovery can only go so far because of these factors, which isn’t good for automotive manufacturers producing significant volumes of ICE vehicles and building up stock for demand that may never truly materialize. Current production volumes of OEMs and factory stoppages will need to be adjusted and explored if manufacturers don’t want warehouses full of ICE vehicles by mid to late decade that they are unable to sell because of imminent ICE vehicle bans and increasingly available and affordable EV infrastructure.
The Indian automotive market remains heavily focused towards 2 and 3-wheelers due to the country’s lack of infrastructure outside of heavily urban areas and its staggering urban population density overloading existing infrastructure already. 2022 saw just over 46,000 4-wheeled EVs sold in the country, increasing significantly on the sub-20,000 sold the year before. Sales were led by Tata Motors with 84% market share, but this is before the entrance of companies like BYD India who entered late that year that can compete on cost and use-case better than Western companies.
India’s 4-wheeled EV sales of 46,000 amounted to a market share of 1.2%, incredibly far behind that of Western countries though this was within expectations. The country’s 2-wheeled market has been electrifying significantly to mitigate the problems caused by this somewhat.
The country’s lackluster commitments towards electrification and getting off of fossil-fuels like coal in particular never gave us the impression that India would be making significant progress on electrifying its 4-wheeled vehicle market. Ultimately this market will become important in the grand scheme of electrification when India shifts from a 2-wheel oriented market to 4-wheels, which will take massive infrastructure investment into the country’s road networks and for this reason, isn’t something central and local governments are going to incentivize. China incentivized the move towards cars as a means to increase domestic demand, allowing companies to gain a foothold in the automotive industry, which has led to the ability for companies like BYD, NIO, Xpeng, and others to export electric vehicles in particular into Western Markets. Now that China has already done this prior and during the shift towards electric vehicles it is almost impossible for anyone to follow in China’s footsteps unless it can compete on cost through scale. This is simply impossible in India due to its infrastructure problems and the lack of a significant middle class within the country to act as the source of domestic demand.
India’s story is going to be similar to a lot of countries within the region, particularly the Asian Tigers of Indonesia, Vietnam, and the Philippines. All of these countries are predominantly 2-wheel focused markets which will need to see significant infrastructure investment if they want to turn into 4-wheel oriented markets. But this doesn’t come without major hurdles as the economic situations of these countries are largely insufficient to enable significant capital expenditure on large infrastructure projects such as road expansion.
The dominant trends here are that developed Western European markets are slowly sliding towards lower 4-wheeled vehicle demand in favor of better public transport and less traveling overall as changed by shifts in consumer behavior since the Covid-19 pandemic. Meanwhile developing countries with high population density in urban areas would probably like to shift to a 4-wheeled market from an industrial and economic perspective as this would mean more skilled jobs and export opportunities, but the investment isn’t there, often as a result of economic and environmental issues. The practical challenges of this shift mean that electrification is better pursued by remaining in the 2-wheeled market and electrifying that first as it is considerably cheaper to do so and putting off entering into the 4-wheeled market through vehicle imports from countries like China.
North America is still going to see increasing vehicle demand as its socioeconomic factors put it on a still expanding population curve relative to Western Europe, but it needs to continue to address the production bottlenecks it has seen since Covid-19. This is a difficult thing to commit to considering the shift to electric vehicles, as while it may be possible for domestic manufacturers to return to full production volumes of ICE vehicles, with the shift to electrification so close it doesn’t make sense to forego capital expenditure on this new market.
What we are also seeing is the consolidation of EV markets away from PHEV demand and towards both BEV markets and HEVs, whether through the impetus of policy in the case of Germany or through personal preference encouraging more consumers to make the jump to one or the other. This shift is likely to continue in Western markets such as Western Europe and North America as either policy changes to exclude PHEVs from subsidy as is the case in Germany, or when consumers accept that their charging need have been fulfilled and they feel comfortable making the jump to BEVs.