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Europe's electric future and the 50 million cars lost


The successive crises of recent years have hit the automotive industry at a very critical point in time. The transition to electrification has radically changed the sector, and the challenging technological shift has been compounded by the Covid crisis with its supply chain disruption and chip shortages, and later by war in Ukraine and the energy crisis, not to mention the global inflation and other macroeconomic challenges. All these factors have made it very difficult to create accurate forecasts automotive industry in recent years, but now the picture is beginning to clear – although on the downside for Europe unfortunately. This is shown by the latest forecast from Top Tier Consultants, which foresees a combined 50 million fewer cars sold in Europe by 2030 compared to the last forecast before the pandemic.


The picture has changed

After three years of forecasting uncertainty, the future of the European car market is becoming much clearer. Unfortunately, however, the clearer picture has not exactly brought an improvement in the outlook, so much so that the latest forecast in 2023, compared to the last pre-Covid forecast, foresees a total decline of 50 million cars sold in Europe by 2030, according to analysis by Top Tier Consultants.

The 2019 forecast first had to be revised at the beginning of 2020, of course because of Covid-19, but only slightly as demand for cars recovered very quickly after lockdowns were lifted. However, a 'V' shaped recovery unfortunately did not materialize as the chip shortage and supply chain bottlenecks starting in 2021 allowed only fewer cars to be produced, which still dragged on well into 2022. Then came the war in Ukraine, the energy crisis, and macroeconomic problems and a decline in consumer confidence, all of which have already caused a weakening of the demand side for cars in Europe. Yet, compared to other major regions, the European region has seen the largest decline in car sales between 2019 and 2023, by more than 20 percent. By comparison, the US and Japan fell by just 10 percent, while China grew by 3 percent.


The composition of new car sales have changed

The last three years have not only seen a decline in car sales volumes, but also a drastic transformation of the composition of the cars manufactured too. Quite unusually, shortage management due to supply chain constraints has forced car manufacturers to largely limit their production to products that promise higher margins. This was true for both premium and volume manufacturers.

In terms of body type in 2023 SUV sales volumes have already exceed 2019 levels for SUVs, sports cars and pickup trucks, as they can be sold at higher prices and margins than conventional cars and vans, which are the losers of the chip crisis.

In terms of prestige, the premium segment has been able to achieve higher chip penetration, which means that more premium cars will be sold in 2023 than in the base year 2019. It is also worth noting that Tesla, which had above average chip availability, was a major contributor to the growth of the premium segment.

In terms of size, segment winners were not only the high and upper-mid-range cars, to be expected for the above reasons, but also the low-cost cars, because these vehicles require fewer chips, so their production has not been such a problem. The losers from the size-based breakdown were small and lower mid-range cars, especially in developed markets, because they require large quantities of chips to meet emissions and safety standards, while their profit margins are below average for all car manufacturers.


How has this affected the automotive industry?

Two side effects of the above product portfolio shift are worth highlighting. One is that the SME sector suppliers are at a disadvantage compared to the large multinationals that are able to obtain up to date forecasts. Production volume forecasts of smaller suppliers are typically only current when a car manufacturing program is won, but later on the supplier is only informed of decreasing short-term volume demands lacking overview of the updated program demand. This means that, in the absence of up-to-date forecasts, they have less visibility of the likely changes in their capacity utilization and investment needs, not least of the new programs they may seek, which could well be possible given their freed-up production capacity.

Another side effect of the product portfolio shift is market related. As the growing car segments in Western Europe are invariably the larger and heavier products, a consequence is that they also have higher carbon emissions. With tightening emission levels required by EU regulations, car manufacturers will need to sell more zero-emission electric cars, which will lead to faster development of e-mobility.


The greatest challenge

This brings us to the greatest challenge for the medium-term prospects of the European car market, namely that reduced emissions levels that are required can be achieved at a high cost, be it a combustion engine technology car, or an electric car. In addition, rising raw material prices and other factors have contributed to the fact that the production costs of electric cars are not falling as expected. This will lead to more expensive cars in the medium term, which will reduce demand in Europe by 2030, contributing significantly to the 50 million cars lost.

The right side of the slide above shows the component cost of an internal combustion engine (ICE) vehicle powertrain system cost as a function of carbon dioxide emissions. As might be expected, compliance with stricter environmental standards increases the technology content requirements and therefore the cost of the powertrain in terms of engine, transmission, fuel system and exhaust system. In addition, reducing emissions below a certain CO2 level increases costs exponentially and with today's technologies, getting below 75g/km CO2 emissions is cost prohibitive; getting below 70 grams is almost impossible. Moreover, by 2030, the average CO2 emissions level required by the EU is already below 60 grams, which can only be achieved with a significant number of electric cars.

The left-hand side of the slide above shows the year over year price change per kilowatt-hour of the battery, being the most expensive component of electric cars. It can be seen that in the 10 years starting from 2011, the cost of batteries has fallen by more than 20 percent per year in many cases, in 10 years falling to a tenth of the 2001 costs. However, this decline slowed down significantly in 2021, and in 2022 the cost of battery production started to increase. This is a major problem, because in order for the European market to return to its previous sales levels, the average price of electric cars needs to be the same as the price of conventional cars with internal combustion engines. This cost parity is being pushed back from the previously expected 2025 to 2028-30, according to our latest calculations.

The consequence of this is that the world of small and cheap cars in Europe will disappear for at least 5 years, and in the worst case up to 10 years. The Chinese brands will find an entry point into Europe here, but it will also take years for them to build up their sales and service networks, so this is not a short-term solution for car buyers either, says Tamás Rozsa, managing director of Top Tier Consultants (a major threat to European car manufacturers and suppliers).

The good news is that there is light at the end of the tunnel, both technologically and on the cost side too. Car manufacturers are doing everything they can to produce the new generation of batteries cost-effectively. Technologically, progress can be made with a completely new system that does not yet exist in mass production, such as solid-state batteries, for which there are still challenges in mass production.

But progress can also be gradual, such as by increasing the size of the existing cylindrical battery cell, where the technology of cooling has been resolved and mass-produced, and whose energy density is not far behind that of solid-state technology.

Manufacturers have also looked at all the options on the cost side, including battery cell design, cathode material, anode material, integration of the cell into the car and simplification of manufacturing. The efficiency and cost opportunities identified are very significant, as they will bring a 56 percent reduction in battery cost, while the investment will also be reduced very significantly by 69 percent. In addition, the new technologies will deliver a 54 percent increase in the electric range of the car, which will effectively solve the problem of the currently limited usability of electric cars. We therefore expect that there will be a car manufacturer that will announce the mass production of the first car with an electric range of over 1,000 km this year.


Conclusion

In conclusion, Europe's transition to e-mobility is not only irreversible but will also be faster than ever before expected. The clear benefits are that urban air will be cleaner with much lower concentrations of nitrogen oxides and particulate matter (PM) which cause smog. We can also hope that the electricity needed to power electric cars will be generated from renewable sources, so we will also take a big step towards carbon neutrality in transportation. The shift to e-mobility also has a number of downsides, such as contributing to the 50 million cars not sold by 2030, reducing the turnover of car manufacturers and the supplier sector alike, among others. As the process is irreversible, we need to work on how to make the transition in a way that the local manufacturing base in Central and Eastern Europe, which has lower labor costs, can still benefit from it, which is a realistic possibility. We can see the glass as half full rather than empty.

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