Race is on as Carmakers Shut, Switch or Sell Combustion Engine Factories

Carmakers will increasingly find themselves in a race to shut, switch or sell factories producing vehicles with internal combustion engines to avoid being left with “stranded assets”, as regulators set a course for a decade of electrification to reduce carbon dioxide emissions.

Traditional manufacturers are currently playing a “zero sum game” because growth in electric car sales eats into the value of internal combustion engine factories, which “are effectively stranded assets”, a leading analyst has warned.

Philippe Houchois, an analyst at Jefferies, an investment bank, said carmakers’ share prices will be in large part dependent on their ability to avoid losses on fossil fuel assets. “If you want to be a better valued carmaker you need to find a way to shrink your assets faster than a gradual transition to electric vehicles would suggest,” he said.

The industry has already made significant steps away from fossil fuels. The year 2020 will be seen as key for electric cars because of new EU regulations that mandated a limit on average carbon dioxide emissions of 95g/km across all cars sold. The UK has committed to carrying on its emissions regime at an equivalent or stronger level after the Brexit transition period ends on 1 January 2021.

The regulations have prompted a rapid increase in electric car sales as carmakers scrambled to avoid fines worth hundreds of millions of euros – although Volkswagen has already conceded that it will miss its 2020 target, incurring a fine estimated at around €270m (£248m).

BMW announced on Sunday it would build 250,000 more electric cars than it had previously planned between now and 2023. Oliver Zipse, the company’s chief executive, said he wanted roughly 20% of cars it sells to be electric by 2023, up from 8% this year.

More than 560,000 battery electric cars were sold in the year to November in western Europe, according to figures from Matthias Schmidt, a Berlin-based automotive analyst. Battery electric vehicles accounted for 8.7% of total car sales in November, up from just 2.7% the year before. Despite missing its emissions target, Volkswagen’s ID.3 became Europe’s most popular BEV, with 10,500 sold in October – although that still represented about a third of the sales of the internal combustion bestseller, the Volkswagen Golf.

The EU regulations will become slightly tougher during 2021 but carmakers already have their eye on two key milestones in the next decade. Carmakers will have to cut carbon emissions by 15% between 2021 and 2025, and by 37.5% from 2030, a requirement that will lead to the rapid decline of mass-market internal combustion engines.

However, tougher rules are expected as the EU aims to produce net zero carbon dioxide emissions by 2050. In the autumn EU officials floated halving car emissions within a decade.

Transport & Environment, a Brussels-based campaign group, has called for a final date of 2035 for the sale of all fossil-fuelled cars in the EU, a move that would match the UK’s ban. T&E’s forecasts suggest that the current targets allow carmakers to slow their rollout of electric cars, which the group argues would represent a missed opportunity for Europe to retain its lead over rivals including China.

Julia Poliscanova, T&E’s senior director for vehicles, said: “The current electric momentum risks fizzling out as soon as 2022 unless stricter CO2 rules are put in place.”

David Bailey, a professor of business economics at the University of Birmingham, said the likelihood of even tighter regulations raised the risks of stranded assets particularly for German carmakers, who were paying the price for taking the “wrong path” of investing heavily in diesels. The diesel industry was then rocked by costly emissions-cheating scandals, albeit related to harmful nitrogen oxides rather than carbon dioxide.

“You’re going to see the massive investment by the German makers in EVs, but they’ve got a huge sunk asset in diesels,” he said. “They’re trying to eke out some sort of profit from their existing lineup while investing in new technologies.”

Bailey added that the “big issue” for the car industry and workers will be in the supply chain, among companies who do not have the flexibility to move away easily from making parts for internal combustion engines.

The transition is also likely to cause a painful reshaping of the industry for automotive workers, including in the UK. Union leaders emphasise the need for government support to switch production at factories making internal combustion engines towards electric technologies, or risk thousands of job losses when internal combustion engine technologies are no longer viable.

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December 27, 2020