Three Very Different Car Markets, Three Different EV Outcomes.
The three biggest car markets (including light vehicles) in the world are China (19.7 million sales in 2020), the USA (14.5 million sales in 2020), and Europe (12 million car sales in 2020). It may come as a shock to some that the Chinese market is so much larger than the other two, but that is what happens when 1.4 billion people reach the position where buying a car becomes possible. The population of Europe (including the UK) is just over 500 million, and the population of the US is about 330 million. Based on the population difference, the lower per capita car ownership and income, and the faster economic growth of China, it would be expected that the Chinese car market would increase the sales gap with the other two markets during this decade. The US and European car markets are also heavily replacement markets as car ownership is relatively saturated and therefore new cars tend to replace current ones. This is not true of China, where even recently up of 85% of new car sales added to the size of the overall fleet. This is a very important fact when considering the effect of new electric vehicle (EV) sales on oil consumption and vehicle greenhouse gas emissions, with US and European sales tending to reduce absolute emissions, while new Chinese EV sales will only tend to reduce the growth rate of emissions until reaching a very high market share.
The Chinese car market was half its current size in 2010, growing rapidly until late in that decade and then stabilizing at about current levels. Chinese car manufacturers have lagged in internal combustion engine (ICE) cars, with domestic sales dominated by Volkswagen and the Japanese manufacturers. At the luxury end of the market, Mercedes Benz, Audi, and BMW have dominated. What happens in the Chinese car market will not just stay in China, it has huge implications for German and Japanese manufacturers. Of the US manufacturers, General Motors has the most significant share of its sales in China. The exposure of these foreign manufacturers is not just to current sales but also that China represents the only one of the top three car markets with the possibility of significant future growth. The EV removes the ICE from the vehicle production and sales equation, allowing the Chinese manufacturers to leapfrog to much greater competitiveness. In addition, electronics may matter more to EV than ICE sales, an area that Chinese manufacturers have much experience with.
The result is that any increase in EV sales may tend to benefit the Chinese manufacturers, increasing their market share against foreign brands. This has been the case in 2021, with the more than doubling of EV sales (over 20% market share in November 2021, with 85% pure electric cars) helping to significantly increase domestic brand share (in August domestic brand market share was 42.1%, from 33.8% a year before). Volkswagen has held its’ own so far and is rushing its EV models to the Chinese market, but the other foreign brands are nowhere to be found in the top ten or even twenty of EV models – with the exception of Tesla of course. With numerous domestic brands and Volkswagen regularly pumping out new EV models, the danger is that the EV horse may have already bolted, especially for the Japanese who have continued to bet on the hydrogen fuel cell horse.
The European car market has also been spring-boarded into the EV era, significantly through EU regulations that have reduced the acceptable level of emissions for new car sales; to levels that can only be met by increasing sales of EVs. In October 2021, plug in vehicles took a 23% share of the European market (with about 60% being pure electric), after rapid market share growth through 2020 and 2021. As many of these will be replacing ICE vehicles, such a level of sales should have a downward effect on EU oil consumption. European car sales are dominated by European manufacturers, with Volkswagen (25%+) and Stellantis (the merged Fiat-Chrysler and French PSA Group: 21%+) accounting for nearly half of car sales and increasing market share in 2021. Renault-Nissan follows with about 12%, and Hyundai-Kia with about 8%. These brands also dominate the pure electric category, together with Tesla, so no immediate challenge to them from increasing EV sales. As in China, the Japanese are significantly at risk; Toyota has a 6% share of the overall car market but is nowhere to be seen in the pure electric segment, the same for Honda and Mazda, and also the Renault-Nissan electric cars are Renaults not Nissans. BMW also seems to be significantly lagging when it comes to pure electric cars.
The US car market is special, but just not in a very good way when it comes to the wave of the future. Europe is densely populated and has a myriad of public transport from subways to trams to high speed rail, and not having its own massive oil fields it taxes the sales of petroleum products heavily; much less “range anxiety” and a high cost per mile for ICE cars. China is a very big country but is still quite densely populated and has a network of high-speed rail greater in size to that of the rest of the world combined. Add to that extensive local public transport, and range anxiety greatly recedes. The heavy dependence on oil imports also leads to quite expensive gasoline. In the US public transport absolutely sucks, no high-speed rail network, public transport mostly consisting of buses that get caught in traffic congestion, badly maintained subways, and trains that make you feel that you could ride your bicycle faster. The result is massive range anxiety as many commuting trips are quite long and can involve much traffic congestion. In addition, with the US self-sufficient in oil local gasoline prices are very low when compared to Europe and China. This has facilitated the US love-affair with huge trucks, SUVs and minivans that have little appeal to the average Chinese and European consumer. Then add the antagonism of many politicians to providing government support to EV’s, as well as insane levels of climate denial, and you get a miserable EV market share; most of which consists of Tesla sales. Only in 2022 will the US EV market show some level of stirring beyond a 2-3% market share (pure electric) and none of the massive leaps of China and Europe should be expected.
Given the massive role that the passenger vehicle market plays in the general manufacturing and industrial space, and the additional impacts that EV’s will make (batteries, electronics, software etc.) the US and its ally Japan are at a significant risk of falling far behind China and Europe. Some may point to Tesla as a sign of US strength, but it is still a relatively small car manufacturer and will be hit with an ever-increasing level of competition from Chinese and European manufacturers – competition that Tesla has not previously experienced. In earlier years when Tesla delayed new models there were no competitors ready to rush in and eat its lunch, but this is no longer the truth. The impact during the next year of the delay shown with the Tesla truck may be instructive of Tesla’s overall future. The other risk is that European and Chinese (and Korean) manufacturers may increasingly enter the US market, a move that any good strategist would approve of; attacking the competitor (Tesla) in its home base and forestalling the other US manufacturers. VW, Hyundai and Kia have already entered the US EV market and it would not be surprising to see the Chinese from 2022 onwards (the same would go for the Chinese entering the European market). Such an entry, which together with the slow waking of Ford and GM and promising new US niche manufacturers (e.g. Rivian), may transform Tesla’s protected US bastion into a hyper-competitive nightmare. The possibility of a rerun of the 1980s Japanese car invasion of the US is possible, especially if oil prices maintain, or even increase beyond, current levels.
Given the scale of the importance of the Chinese market to the German and South Korean car manufacturers, any increase in political tensions between those nations and China would threaten severe problems for a central part of their economy; they may say certain public words to placate the US but not back those words with actions and also privately reassure the Chinese. From this perspective the increasingly aggressive tone that Japan has recently taken toward China (e.g. statements with respect to “protecting” Taiwan) may have very significant economic consequences, exacerbating the extremely exposed position of the Japanese car manufacturers to increases in Chinese EV market share. The US is at risk of losing yet more of its vehicle manufacturing to imports, off-shoring and foreign-owned manufacturing plants, as well as being left behind in areas such as battery storage and vehicle electronics and software. With China already being far ahead with respect to renewable energy, and increasingly nuclear energy, a “green” future may be increasingly dominated by China and to a lesser extent Europe. The result would be a further weakened US; one that is no longer seen as a technological leader to be looked toward for global leadership and global products. Its hold on both global value chains and the psyche of the global population would be significantly weakened. The recent penny-pinching “death by a thousand cuts” of President Biden’s Build Back Better agenda, while US political elites fall over themselves to provide giveaways and tax cuts to large corporations and the wealthy, and waste vast amounts on the US military, is not indicative of a group that understands the urgency and importance of the challenge at hand.
With respect to climate change we must remember that the driver of vehicle based GHG emissions is not the yearly percentage sales share of EV’s but the outstanding fleet of ICE vehicles. If sales of EVs simply add to the overall fleet of cars (EV and ICE) as in China, then emissions will not be reduced. If they reduce the number of ICE car in the fleet, as in Europe and possibly the US, then GHG emissions will fall. In China, EV market share may have to be well beyond 60%+ to start to reduce GHG emissions, a point somewhat reduced if higher mileage vehicles (e.g. taxis, delivery vehicles) are overrepresented. In this respect, the drive of Chinese municipalities to electrify their buses and taxis is a positive. With China importing over 10% of the world’s production of oil, any significant reduction in its’ oil use will have significant geopolitical impacts; reducing the threat of interdiction to Chinese energy supplies and perhaps marking the peak of global oil demand.
This decade will be a fascinating one with respect to the green energy space, and especially the EV space, both from a GHG emissions and a geopolitical viewpoint. I aim to keep my readers fully abreast of all the ongoing machinations.