The evolution of the car industry

Over the past few months, the car industry has “never been far away from the headlines”, says Jon Wallace of the Jupiter Green Investment Trust. The seemingly unstoppable rise of electric cars appears to have hit a speed bump, and governments have rapidly reversed ambitious targets to ban sales of new petrol-powered cars by the end of the decade. Meanwhile, the threat of competition from Chinese car makers has prompted US president Joe Biden to hike tariffs on electric vehicles from the country. Are these problems just a bump in the road on the way to a new future – or something more serious?

Challenges faced by the car industry 

Probably the most immediate challenge facing the industry is the fear that growth in car sales is likely to be much slower in 2024 than it was last year, says Ben Laidler of asset manager eToro. But this was always “inevitable” given that global car sales grew 10% in 2023 as consumers returned to the market after postponing purchases due to the supply-chain disruptions of the past few years. Indeed, the absolute volume of cars sold around the world is still set to expand by around 3%, with any short- or medium-term weakness in developed markets compensated for by stronger growth in emerging markets, “which are set to become the main driver of growth in the future”. 

Adrian Lewis, the chief financial officer of Inchcape, has direct experience of the growth in demand in emerging markets as his company works with major car makers to sell their products to 40 markets in developing and mid-sized economies, outside the major markets of the US, Europe, UK and China. The larger markets, which represent around 20% of the world’s population, currently account for 80% of the world’s vehicle sales, but Lewis thinks that this is “starting to shift” – sales in emerging markets are “structurally growing faster than the global average”, with organic growth rates of around 6% a year. 

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Lewis thinks this sales growth is due to two factors. The first is that the national income of emerging markets is growing faster than that of the world economy. The second is that a much smaller percentage of the population in most emerging markets owns a car than is the case in developed countries, “which gives much bigger headroom for future growth”. Indeed, in some markets, fewer than around 10% of the population own a car; the comparable figure in the US is 70%-80%. In particular, Lewis is seeing “strong” growth in south and central America and “very good growth” in Asia, especially in the Asia-Pacific region. 

Nishita Aggarwal, an analyst at the Economist Intelligence Unit, agrees with Laidler and Lewis about the increasing importance of emerging markets to the wider car industry. She cautions that “factors such as geopolitical risks, elevated living costs and higher interest rates may pose constraints on the growth of car sales”, but nevertheless thinks that a “surge in demand in emerging markets”, especially in Asia and Latin America, will ensure that the overall market continues to grow at a good rate. She estimates that the number of cars per 1,000 population in Asia is expected to rise from 110 in 2019 to an estimated 157 by 2028.

The rise of electric cars 

As well as being optimistic about the continuing rise in the demand for cars, Laidler is bullish about the pace of the move towards electric vehicles (EVs), dismissing recent fears that demand has peaked or hit a stumbling block. In his view, the supposed backlash against EVs – the current UK government has extended the deadline for a ban on new petrol cars from 2030 to 2035, for example – is more a case of “unrealistic expectations being corrected”. After all, “even if global electric car sales are only growing at 25%, rather than 35%, this is still 10 times the rate at which sales of internal combustion engine vehicles are growing at”. 

Similarly, while earlier hopes that petrol cars could be phased out by the end of the decade now appear to be “unrealistic”, focusing on delays to targets, or any of the other of what Laidler calls the industry’s “growing pains”, “misses the scale of the transition that is taking place”. Indeed, a recent report by the International Energy Agency expects EVs to account for half of all new car sales by 2035. Given that EV sales currently account for just 18% of the global market, such a move would be “transformational”. Besides, Laidler has no doubt that, whatever the exact timescale, a complete transition to electric cars at some point is “inevitable”. 

It’s not just government policy that is driving the rise of EVs, but also improved cost competitiveness. The gap in price between EVs and traditional cars has shrunk due to a “dramatic reduction” in the cost of producing EVs over the past few years, says Dominic Vergine, CEO and founder of Monumo, which is using artificial intelligence (AI) to redesign the electric motor. Vergine expects the cost of EVs to come down further, and even fall below those of traditional cars as electric engines “are much simpler in engineering terms than traditional combustion engines”, both to make and operate. 

In any case, the upfront cost of an EV compared with that of a traditional car doesn’t tell the whole story, says Vergine, as EVs are “much more reliable and durable”. Electric motors, for example, “can run for millions of miles, compared with just tens of thousands for combustion engines”. In the longer run, even the need to extract rare-earth metals, one of the few environmental drawbacks of EVs, should become much less of an issue. Manufacturers are starting to develop electric motor designs that aren’t based on the rare-earth permanent magnets that are currently present in virtually all EVs. 

Overall, cost “is no longer the primary concern for potential EV buyers”, and prices are only a short distance away from levels that should trigger “mass adoption”, says Becrom Basu, a partner at L.E.K. Consulting. Contrary to perceptions of a backlash, “public interest in EVs remains high”. Basu notes that UK survey data suggests that the overwhelming majority of EV owners are happy with their purchase and remain committed to the technology. Nearly 30% of those who haven’t owned an EV before are interested in buying one in 2024.

Rising demand for EV charging points 

Electric cars may be on the verge of overtaking their fossil-fuel counterparts, but the transition will rely on improvements in infrastructure, says Basu. Chief among these is better charging facilities. “Range anxiety”, the fear that users of EVs will run out of charge and be left stranded in the middle of their journey, may no longer be a crippling barrier – the median range of EVs is about 340 kilometres, which satisfies 65% of the UK population in terms of the range they would need from a vehicle. A significant number of consumers still think of EVs as “impractical”, however, due to the “perceived inconvenience of finding charging stations and the time-consuming nature of recharging”. 

The need for more charging points is a pressing problem, agrees Dominic Rowles of NTT Data Corporation. The good news for EV owners, or those thinking of making the switch, is that “there has been a lot of investment in this area”. Governments around the world have been trying to increase the number of charging points, with “lots of development in the pipeline”. Rowles expects us to be in a “very different place” by next year, with some estimates suggesting that the number of charging points in the UK will double from current levels by 2025. 

Still, even when the number of charging points goes up, there will still be demand for premium services such as points that allow drivers to charge their cars much more quickly. Rowles notes that there are now companies that help homeowners rent out their EV chargers, and Airbnb is partnering with an electric charger company in an effort to encourage hosts in the US to provide charging points for guests. Despite the competition, Rowles expects the need for charging infrastructure to create a market “where everyone should be able to make money”. 

Wallace is a bit more cautious about the commercial opportunities in providing EV-related infrastructure, at least directly. In his view, the improved vehicle ranges combined with companies’ and governments’ “aggressive capital investment” in charging points means that the infrastructure should rapidly catch up with demand. He also warns that the low barriers to entry in the sector may mean that profits end up being lower than many investors expect. But even if providing charging points doesn’t lead to the expected bonanza, companies that supply the technology to the charging firms should end up doing very well. 

Charging isn’t the only supporting industry that will benefit from the rise of EVs. Andy Brown, an analyst at investment management firm Rowan Dartington, thinks that companies involved in mining the key minerals used in the creation of car batteries are likely to be the longer-term winners. Electrification should also be good news for the semiconductor industry, says Martin Frandsen of Principal Asset Management, as EVs typically require around three times the number of semiconductors found in cars powered by fossil fuel. 

The future of self-driving automobiles 

Beyond EVs, the technology that really caught people’s imagination is self-driving cars. But if you have dreamed of being able to sit back and let the car do the driving while you get on with something more interesting instead, the reality might be disappointing. Such technological advances will not happen overnight. There has been “significant interest in self-driving technology for some time now”, but the legalities surrounding vehicle ownership, personal responsibility and insurance are still to be settled, says Cameron Wade of Keyloop, a car technology provider. The fastest progress is likely to come in “controlled environments”, such as motorways, where self-driving technology “could be adopted relatively quickly”. 

The majority of experts think we won’t see truly autonomous cars on our road until at least 2035, and it could even take as long as 20 years, says Steve McEvoy of Expleo, a consultancy. A more likely scenario is “a gradual increase in autonomy levels before we achieve fully self-driving vehicles”. New models could build on current driver-assistance technologies, in other words, with humans still retaining overall control and responsibility for their vehicles. 

The rise of self-driving vehicles will be more a process of gradual evolution, agrees Mobeen Tahir of asset manager WisdomTree. Cars are already becoming “increasingly autonomous”, with newer releases “adding more and more self-driving features”. Indeed, the software has progressed to the stage where the main barriers to full autonomy are increasingly “psychological, rather than technical”. Tesla’s deal with Baidu, which it hopes will help convince Beijing to offer full self-driving options to its customers later this year, could end up being a “game changer”. Certainly, the size of the Chinese market “means that a successful trial there would make it much easier to persuade regulators in Europe and the US”. 

The increasing number of self-driving features also plays into the rise of connected cars, which use the internet to share data with other devices, including those outside the car. Smartphone company Apple may recently have dropped its plans to make its own car, but Tahir notes that Chinese smartphone manufacturer Xiaomi is looking to fill the gap by launching its own car this year. Tahir thinks that cars could be “on the verge of their iPhone moment, where an ecosystem of applications could be built around the vehicle”, such as apps that give users important real-time data about the performance and health of their vehicles. Companies that fail to keep up with these trends could end up “being left in the dust, just as Blockbuster was by Netflix”. 

Competition from China in the EV industry  

Advances in self-driving and connected cars aren’t the only innovations coming out of China. Felipe Munoz of JATO Dynamics recently came back from a motor show in China and was struck by “how competitive Chinese products are in terms of technology and even design”. Indeed, when he took a look inside some of the latest Chinese models, “it was clear that many of them no longer have any reason to envy the established firms in the West”. Some of the best models “managed to deliver the wow factor in a way that you rarely see any more from the traditional incumbents”. 

As well as drawing level, or even ahead, of their Western rivals when it comes to quality, Chinese firms also have a “big advantage” when it comes to keeping costs low. This is especially the case when it comes to EVs. Despite recent falls in prices, EVs are still priced in the West as “high-end products”, whereas Chinese car makers “have managed to deliver them at prices that ordinary people can afford”. This should make Chinese EVs attractive to those in Europe and elsewhere who can’t afford high-end electric cars. 

Chinese car makers are already seeing signs that consumers’ attitudes are starting to change. “Up until very recently there was a perception among Western car buyers that Chinese cars, like other products, were of low quality,” says Rob Durrant, the head of PR and events in the UK for the Omoda and Jaecoo brands owned by the Chinese car maker Chery. However, consumers in the UK and elsewhere are now starting to realise that Chinese firms are able to make cars that are “both better and cheaper than those produced in the West”. 

Although it is still “early days” for the brands that he is responsible for, Durrant finds it “heartening” that Chery’s rollout in the UK, which is due to take place later this year, has already attracted a lot of interest. Seventy dealers have already signed up, and a number of companies have decided to take Omoda cars for their corporate fleets. He thinks that British (and European) consumers will quickly switch to Chinese cars “just as they did in the 1980s with Japanese and Korean cars”. 

Obstacles for legacy car makers

So, where does this leave the legacy manufacturers? In real trouble, says Russell Burns, an analyst at Finimize. They will have to deal with switching over to electric machine lines and plants that are still geared to petrol engines, and do so while earning the low margins on offer in the car industry. That task will be hard enough, but at the same time they will also have to deal with Chinese rivals, who can make “electric cars at a much lower cost than their European and US rivals, supported by aggressive government subsidies”. As Burns bluntly puts it, “without increased tariffs, China wins”. 

Those tariffs have started to appear – US president Joe Biden has hiked duties on imports of Chinese EVs to the US to 100% – but this may not be enough to save the incumbents. The fact that the legacy car companies have to “keep investing in developing their petrol-based cars at the same time as moving to electric vehicles puts them at a major disadvantage”, says Martin Frandsen of Principal Asset Management. This is not only down to the higher costs legacy firms are lumbered with, but also because they “will have to manage multiple investment cycles, compared with the more focused strategy of newer companies”. Frandsen also sees legacy car businesses having to write off investments in transitional technologies, such as hybrids, which seem to be now in long-term decline. 

The combination of higher operational costs, greater need for capital spending – not to mention a highly uncertain future – may not be a “great cocktail from an investment perspective”, but “things are not as black and white as the market makes out”, Frandsen says. It seems premature to write off all the Western car companies, given that “they still have a long history of manufacturing and technological excellence” and even today “there is significant innovation taking place in legacy companies”. 

Chinese businesses “are definitely well placed” to take on the biggest Western companies, especially those with low margins, even with high tariffs, says Lucy Coutts of JM Finn. Indeed, even Tesla may struggle, as its gigafactories are dwarfed by those of its Eastern competitors. Still, she thinks that some incumbents, especially those who were willing to cut their profits in order to invest in electrical vehicles and AI, may have a chance, as will luxury car makers. Indeed, the latter are particularly well placed as “they tend to have much higher margins and greater customer loyalty than the big car makers”.  

What’s next for the car industry? 

Even if Chinese firms do end up dominating the car industry in the future, there is some hope that they could end up buying the legacy companies, both for their brands and as a way to get around the tariffs that are starting to be imposed by the US and EU. This might lead to a “huge push-back” in some quarters in the US, especially if overall production remains in China, but Coutts notes that the move is already happening – Chinese firm Geely owns a large stake in Swedish firm Volvo, for example. Durrant agrees, noting that Chery’s joint venture with Italian firm DR has helped to win over consumers who would otherwise be reluctant to buy from a Chinese manufacturer. 

In summary, what we are seeing is the continued rise of EVs and related infrastructure, the ongoing progress in the technology behind self-driving cars, and a fight between Chinese entrants and Western incumbents. Keyloop’s Cameron Wade is surely correct when he says that the car industry is facing a “radical transformation within a short time frame”.

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