Synopsis: The challenge of profitably from making EVs will change the landscape.
EVs represent a disruption not just to the automotive landscape, but even to society. Automotive brands that survive the disruption will be those that can transition to profitability during the disruption. This is a look at the challenges, with a look at who will survive and who will flourish.
Until recently, there were repeated claims that only Tesla is making a profit from EVs. Most have now also conceded that BYD is clearly also making a profit from EVs. But it is easy to forget that even Tesla did not make a profit at all until the final 3 months of 2019, so companies making a loss on EVs are not doomed to forever be making a loss on EVs.
It turns out that everyone makes a loss for EVs for an initial period, and the question is just if and when that will turn around. The secret is being able to produce price-parity vehciels within segments.
It may seem crazy that established brands like Toyota or VW would have difficulty making EVs at profit, but on further examination, it becomes clear the very clear that the nature of the market segments of these companies are ones where vehicles need to reach a high production volume per year to make a profit. Getting EVs production to these levels is a big step.
The more mainstream the market segment, the more vehicles must be produced per year in order to be profitable. Only Tesla and BYD are clearly over the threshold for high volume segments for their EVs, with some other brands over the threshold for more niche segments.
As explored in the section below, this does not mean each vehicle produced will result in an increased loss, and instead each extra vehicle can bring the brand closer to the volume needed for profitability. The question for other brands becomes, how long before they can reach profitability from EVs, and what are the challenges they face in getting there.
Seba says internal combustion cars have some 2000 moving parts, whereas EVs have something closer to 20.IEEE Spectrum.
This dramatic reduction in moving parts changes the balance for skills with less mechanical engineering, and more electronics and software engineering. Changing the balance of skills requires a transition of the culture organisations needed to succeed.
Eberhard said he wanted to build “a car manufacturer that is also a technology company”, with its core technologies as “the battery, the computer software, and the proprietary motor”.Tesla: A Carmaker With Silicon Valley Spark
Tesla, BYD and other EV specific companies are all more technology companies than images of traditional ICE vehicle brands or mechanical engineering companies with sophisticated engine technology.
The transition to becoming the mix of being a car maker and a technology company needed by an EV brand, also results in a reduction of the value of many of the assets traditional brands have on their balance sheets.
Then there is the question of volume. Companies like VW and Toyota have many models in segments where a competitive unit cost is requires a very high volume of sales and bringing EV manufacture to that that high volume takes time. And there are even the questions as to whether companies such as Toyota and EV could ever transition their workforce and be viable as EV brands.
Research by Xiaomi, the youngest on the Fortune global 500 and the 3rd largest phone maker globally, concluded “when the EV industry will reach ‘maturity’, there will be 5 brands holding 80% of the market share“.
Note that currently, the top five automotive brands from 2021 combined hold less than 40% of the market and their share ifs falling, and as of 2022, the top two EV brands hold almost 50% of the EV market, and their share is rising.
Of current EV products, it is very likely only Tesla and BYD have high volume profitable models, but SAIC and Geely must be close. There are other lower volume EVs most likely already making a profit, including those from Porsche, some form Mercedes, as well as from the aforementioned Chinese brands SAIC (owner of MG) and Geely (the owner of Volvo and Lotus).
If this analysis is correct, the top four would most likely be Tesla, BYD, SAIC, Geely. Xiaomi believes it has a chance of being number 5, but the analysis would have 5 already, setting the bar for Xiaomi to enter the top 5. Further, it was not made clear if the report identified the top 5, and, of course, it is just a report. However, I feel analysis funded by Xiaomi for the purpose deciding on whether to commit to an investment of 10s of billions of dollars, cannot be taken lightly.
I started researching the possible outcomes of current leading automobile brands for the paper “tracking legacy car brands fall as EVs rise”, back in early 2022. Now, just over 6 months later, I see the impact as being far more profound than I originally imagined.
Who at the other contenders for this top 5? I do think Toyota and VW are going to drop from the top 5, but that leaves Hyundai/Kia, GM, Stellantis, Honda, Nissan, Ford and Renault as the next block of brands in terms of volume. I feel Honda and Nissan are out.
Really, for volume, GM, Stellantis, Ford and Renault must be possibilities, but overall, it becomes easy to see why the automotive industry sensed they had created a monster, and some even tried to “kill the electric car“.
EVs were initially seen as only suitable as ‘city cars’, and as a small part of the ‘zero emission’ future, but already they have become seen as desirable by consumers, and a nightmare for car brands. The table of sales by brand below, shows a picture in 2021/2002, with far more even spread of sales across brands than the report for Xiaomi predicts. If the report is at all accurate, then most brands will see sales numbers collapse.
Back in March 2022 I suggested 50% of all sales could be lost to new EV brands, this November 2022 paper is suggesting perhaps 90% of all sales will be transfer to new EV brands including Tesla and BYD.
So, who does make a profit from EVs?
Yes, BYD and Tesla are profitable so far, but SAIC and Geely may be very close, and other brands most likely have profitable products.
Several brands will manage to make niche vehicles at a profit, because matching the scale of competitors within the niche requires relatively small volumes. The challenge is making mass market EVs at a profit, where the volume required to be more competitive are far more significant.
Who will make a profit from EVs, and who could make that top 5?
Very few legacy brands. Mercedes, Porsche, and perhaps BMW from the premium brands. Even lower volume brands are more brands than companies and could change owners.
As for the top 5? Hyundai, Stellantis, GM and Renault all will probably give it a serious try. Toyota is less likely, and VW without Herbert Diess may not really try either. Of all of them, at this point only Hyundai/Kia seems to have a real chance for the top 5.
Who needs profits from EVs, and when? All car makers, by 2030.
It’s 2023, and some EVs have already moved to or beyond ICE vehicle price parity.
In early 2023 BYD is already the top selling brand in China, showing that EVs can already reach sales parity with the market leaders. The Tesla Model 3 and Model Y are sales leaders in their segment globally. All this is quite remarkable considering the importance of market share product pricing. If some EVs can already achieve parity, then it stands to reason if the market share percentages were reversed, ICEVs would have great difficult remaining profitable.
Yes, it is irrefutable that EV market share is rising, and thus ICEV market share is falling. It is almost certain that within a few years, soon, and at some point, these market share percentages will be reversed, and it will become almost impossible ICEVs to remain competitive in most market segments.
By 2030, the new vehicle market will almost entirely be an EV marketplace, which means brands that are not competitive in EVs by that time either fail or become small niche brands.
The importance of niche markets in getting started.
It is very difficult to be competitive as a brand if you can’t match the scale of competitors. A solution for those without scale, is to position products within a niche market where all products will be produced at a smaller scale.
For this reason, when entering the market, many new startup EV companies have so far targeted niche markets, and in far the entire EV segment has at least up until 2020, in perhaps all but Norway, been a niche market. There may come a time when ICEVs also specialise in niche markets as their market share falls.
Even the “3rd world” will move to EVs and not to “hand me down” fossil fuelled vehicles.
I have seen several quotes from CEOs and other automotive industry spokespeople about how companies will still need to make ICE vehicles for “South America, in India, in South Korea, in North Africa and other countries where the electrification trajectory will be slower” from Renault, VW and others.
This sounds almost like a “colonial mentality” and holding a belief that other nations will not be sophisticated enough or be able to afford EVs. When mobile phones were considered expensive technology, some made the same assumption that developing nations would still be customers for landlines, but the reality was those countries went directly to mobiles.
Anyone planning on finding new markets for ICE vehicles in less devolved countries and Africa is either really clutching at straws or trying to provide hope for any shareholders or supporters not on board with the move to EVs. Hopefully the later.
Realistically, even though many EVs are still more expensive than equivalent ICE vehicles, there are already EVs that break this pattern. Building an EV is inherently less expensive than building by nature fare more complex ICE vehicles, and there are now EVs at a lower price then ICEV, particularly those for developing markets, with scale of low-cost vehicles already proven in China with the Wuling Mini EV.
Japan and some states of the USA may be a preserve for ICE vehicles for political reasons, and there will be enthusiasts with sufficient wealth to pay extra to have an ICE vehicle.
Just as now there are now virtually no places on Earth left where owning a horse still costs less than owning some form of motor vehicle, there will soon be few places left where owning an ICE vehicle still costs less than owning an EV.
Any strategy based around still being able to sell fossil fuelled vehicles to less developed countries is just desperation.
EV Profitability Strategies.
Go for it! The race to surpass ‘Pre-profit’.
‘Go for it’ is my label for, sell as many as you can’ on a quest for profitability.
Even if making an overall loss on one or more EV models today, a manufacturer with a ‘go-for-it ‘ strategy, is working to a plan that with sufficient sales volume, each of the two goals of profitability will eventually be met:
- Make some profit per vehicle.
- Make enough vehicles to cover ‘fixed costs’.
This strategy is simply about making and selling as many vehicles as possible and is only working for the company if EV numbers are rising, and/or the EV activity is already profitable.
The idea is that if there is no ‘per vehicle’ profit initially, then cost per vehicle can fall with volume until the point where there will be profit per vehicle.
But how many vehicles will be sufficient to cover fixed costs?
The answer depends on the segment.
A challenge is having a competitively priced product, which normally means keeping profits per vehicle similar to competitors. Sounds easy, but if your competitor is making a million cars per year of their model, does that means you will also need to be making 1 million cars per year?
This challenge of matching competitors scale, results in many EV products targeting the premium segments, where volumes are lower.
The fact that in mainstream segments, EVs must also compete with high volume ICE products, is why high-volume segments will be some of the last to have price parity EVs.
Limit sales for compliance Only: ICEVs are where we make our money.
The next strategy is to consider any EVs made and sold part of the cost of being an ICEV automobile manufacturer.
With this strategy, EV sales will always be insignificant relative to ICEV sales. Vehicles will either be priced to sell only in low volumes, or supplies will be otherwise limited.
If there is a vehicle selling in high volumes with customer demand being met, the company has moved past this strategy for that vehicle.
On hold: Ready vehicles but limit sales until conditions allow profits.
This is a strategy where a manufacture limits production, for a time, with the intent of switching to ‘go for it’ once cost are reduced by some means other than by scale. For an EV, this could be waiting for a new, lower cost, battery.
Now consider the Ioniq 5 and Kia EV6. Award winning cars, but available only in limited supply. The message from the company is that supplies are limited because of semi-conductor or other supply constraints, but sales numbers are flat, suggesting the company is for now deliberately limiting production, until supply of something becomes less expensive.
Or the VW ID.3, ID.4 and ID.5, where sales have plateaued for over 18 months. Maybe there no more demand, but if not, why not?
Consider this: battery prices decrease as new batteries become available. What if both VW and Hyundai/Kia have vehicles that currently do not make a per vehicle profit, but will become profitable as soon as a promised new battery from a supplier is available?
While the battery explanation is possible, there are also other possible reasons why a company has a model ‘on hold’ until some change will make production more profitable.
Limited production is often blamed on ‘supply problems’, but supply problems need not mean supplies are unavailable, it can mean the cost is too high to ‘go for it’ right now.
Value, volume and scale greatly determine profitability and pricing.
Total production volume fundamentally dictates price.
Henry Ford made more than one breakthrough. Taking the production line to the next level is given credit as a key breakthrough, but the simpler and more fundamental breakthrough was realisation that if cars are made in sufficient volume, the unit price is less, which in turn increases the market for the cars.
The greater the production volume, the better the value the product can provide.
Every product has both fixed costs, and per-unit-production costs. For a car, fixed costs include the cost of designing the car, which can be spread across all cars with the same design, while per-unit-production costs are those such as the cost of the steel used in each car. If a company makes twice as many cars of the same design, those of design per car is halved. However, the company makes twice as many cars, it needs twice as much steel, and while may get a discount for buying more steel, the cost of steel is unlikely to be halved.
There savings reach beyond spreading fixed costs like design over more cars and volume discounts such as for more steel when more cars are made. More efficient production techniques such as the moving assembly line with allowed Ford to reduce the production time from 12 hours per vehicle to 93 minutes.
The volume that enabled the use of the production line, reduced the cost of each car by 10 hours labour. This enabled a lower product price, which then enabled more volume discounts and other savings, further reducing costs.
Value and reliance on volume.
New manufacturing techniques introduced much later than the Model T have resulted in even more reasons costs decrease with volume. For example, a key part of modern manufacturing is injection moulding:
Injection moulding is used to create many things such as wire spools, packaging, bottle caps, automotive parts and components, toys, pocket combs, some musical instruments (and parts of them), one-piece chairs and small tables, storage containers, mechanical parts (including gears), and most other plastic products available today. Injection moulding is the most common modern method of manufacturing plastic parts; it is ideal for producing high volumes of the same objectWikipedia: Injection moulding.
Note the key words “high volume”.
High volume is required because a mould is required for each part, and it is common for a part with a ‘per-unit-production’ cost of $1 to require a mould that costs $10,000 to produce. If a ‘widget’ has these mould and per-unit-production costs, then the total overall cost per widget would be as follows:
- $10,001 per widget for 1 widget.
- $1,001 per widget for 10 widgets.
- $101 per widget for 100 widgets.
- $11 per widget for 1,000 widgets.
- $2 per widget for 10,000 widgets.
- $1.10 per widget for 100,000 widgets.
There is a limit, as the mould will eventually need replacing, but even then, a second identical mould will cost less than the first, and a mould that will last 10x longer may only cost double the original.
So, what price should a company selling widgets ask from their customers?
They could ask a price of $5 per widget as long as they are confident, they can sell 10,000 or more. If they sell only 1,000 widgets, then they would make a loss. Simplistic critics would claim “they lose money on every widget they make”. But every extra widget only costs them $1, in reality, it is not that simple. Their problem that they did not sell enough.
Yes, if they only ever sell, 1,000 it could be said that they lost $6 on each widget, but if sales continue, they will not continue to lose $6 on each widget, and if they reach 10,000 widgets, they will have made $3 on every widget they ever made.
Product lifetime is integral to product volume.
Fixed costs such as design engineering and tooling are spread over the lifetime of the product. Halve the lifetime and the contribution of fixed costs per unit doubles, so a short life product lifetime will increase the product price. However, new technologies can reduce product costs and products become dated and eventually are seen by customers as dated or ‘old’, so a long product lifetime will result in product that is less desirable. The goal is to strike a balance, and currently the car industry has mostly adopted a 7-year product life cycle, with one ‘mid-life update.
EVs add new volume factors.
Giga castings and volume.
Quite recently Telsa and some other manufactures have introduced ‘giga-castings‘ using a giga-press. A giga-press is like a huge injection moulding system for metal car parts. Each part produced is more normally valuable than a widget from the example above, but the costs associated with a mould are also far, far higher. Tesla first introduced a giga casting for a rear assembly of the Model Y that replaced 70 parts with 2 parts, reducing production costs for the Model Y.
But don’t expect Tesla to do the same for the Model S or the Model X, because they do not produce enough of these cars. The Tesla Model Y is currently vying to be the world best-selling car. In recent years, the best-selling vehicle has been the Toyota Corolla, but this is both a hatch, a sedan, and now even an SUV all under the same, which means the number of vehicles of each body type of Corolla is likely already less than for the with the Model Y.
Giga castings are yet another high-volume cost saving mechanism that is only feasible when producing a very large number of vehicles using the exact same parts.
Software: EVs are a blend of technology product and car.
Cars were already increasingly becoming part software product, and EVs accelerate that trend.
Software can cost millions and even tens of millions to develop, and then almost nothing to reproduce as many times as desired. Software is effectively another, larger than ever before, fixed cost. Yet another step in providing further price/value advantages to whoever produces the highest volume.
The impact of production volume on EVs: China is now critical.
Every vehicle category has a potential sales volume, with manufacturers all vying for a share of that volume. Once one brand secures a strong lead in any given segment, it can become very difficult for a competitor with a lower sales volume to ever match the value offered by the product of the segment leader. The the possible solutions are:
- Bring a significant innovation to market before competitors can follow.
- Find a smaller niche that requires product difference not offered by the higher volume competitors.
- Be brave and make the investments that allow lowest per-unit-production costs allowing a high value product and gamble that the sales will follow.
Telsa took the steps that led to high volume with the Model 3, including entering the market in China, the world’s largest market for EVs. The reality has become that for any vehicle competing in a market that is significant in China, without the volume from strong sales in China, reaching a sufficient sales volume to be competitive is now going to become very difficult.
The smaller the volume of sales of the market leader, the easier it is to enter the market segment. This means supercars and hyper-car companies can be competitive with very low volumes, because no one in that segment has high volumes. It is also why Tesla and many other new EV companies start with premium segment vehicles: the required volumes are lower. A complication has become that even very low volume segments can require technology that can be amortised over a brands higher volume models, which is why Rolls Royce is not part of BMW and Bugatti, Bentley and Lamborghini part of the VW group.
Do only Tesla and BYD make a profit on EVs?
Only high-volume market segment EVs, yes. But others, including Mercedes and Porsche, may make a profit on their much higher priced EVs, but even Mercedes is almost certainly making a loss on most of their EV models so far. Geely and SAIC are likely close to being at a profit already but is unlikely anyone else is really making a profit yet.
As explained in this section, making a profit required good sales volumes for the segment. Remember Tesla did not make a profit at all until the final 3 months of 2019.
By brand, no one is currently close to being able to compete with Tesla or BYD.
To compete in the same market segments as BYD and Tesla, and be profitable, it is necessary to have a somewhat similar volume of sales in those segments.
Telsa is logically the most profitable, as even BYD does not match the sales per model of the Tesla Model 3 and Model Y, as BYD sales are spread across more models.
Those models from BYD share platforms, and the sheer number of sales sets a high bar for others to match.
Some other automotive groups may be doing better than the brand comparison suggests, because automotive group contain multiple brands, and as the brands share platforms, there can be an effective increase in scale for components of individuals model, even if the individual models do not fully benefit.
The data here from Clean Technica for automotive groups make VW group look much stronger, but the data does not include the last quarter data not yet available by group, when VW group did not sell well and fell much further behind the top 2.
Also, as Volkswagen group sales are, like BYD for both EVs and PHEVs, there is an even higher number of models and platforms within the VW sales numbers than with BYD. It is difficult to see VW group yet making a profit on EVs overall, but they have also been producing EVs in volume for less time than Tesla or BYD, and over time, even the current product portfolio could become profitable, but it would probably take some significant improvements in production costs. Note that ‘SAIC’ group also include SGMW, LDV and MG sales, and Geely group includes Volvo and Polestar.
The Necessity for Many EV brands to focus on niche Markets.
As discussed previously, when a company is unable to launch into the market at a competitive scale, one solution is to find a more niche market where competitors also will have less scale due to the smaller market.
This is the reason Tesla had their “master plan” of first a niche sports car, then a less niche luxury large sports sedan, followed each steep by a more volume model.
Rivian began with a high-end pick-up, Lucid with a luxury sports salon even more high end than Tesla. Chines brands Nio and XPeng also began at the high end, but the real challenge for a successful EV brand is to break into the markets that are less niche, because on then can they access the volumes needed to cover the costs such as software development.
Why make vehicles at a loss?
Below Profit and Pre-profit Vehicles.
The most common reason a vehicle to be ‘loss making’, lack of sales, and the solution is to sell more vehicles. As covered in ‘value and reliance on volume’ above, a vehicle always initially makes a loss until reaching the volume required to make a profit. Step 1 of the vehicle production life cycle is: ‘pre profit’.
There are articles making statements like: “Xyz company is making a loss on EVs, that means it is selling each vehicle at a loss.” and again the correct interpretation is covered in ‘value and reliance on volume’.
In reality, you just can’t take the profit or loss from an activity, divide it by the number of vehicles sold so far and calculate the profit of loss on each individual vehicle, because there are ‘fixed costs’ which are incurred even if zero vehicles are made, which need to be amortized over the entire production run including future production.
Fixed costs associated with making a car a significant, and profit per car is usually relatively small, which means even though there may be a profit per car, until a target number of cars is being sold, profit per car times the number of cars, will still be less than the fixed costs, and there will be an overall loss.
Until enough cars are being made, even a potentially highly profitable vehicle will be ‘pre profit’.
Tesla started selling the Model S in 2012, and Tesla did not make a profit at all until the final 3 months of 2019. This does not mean every Tesla Model S was made at a loss. What it means is that sales of the Model S were insufficient for Tesla to be profitable. The Tesla Model 3 was launched in mid 2017, which means for over two years, Tesla was making a loss despite revenue for Model 3 sales. This means the type of claim quoted at the top of this section could have been made about Tesla and the Model 3. The “Tesla makes a loss on every Model 3 they sell” type of claim would have for some years sounded true, despite it now being recognised that the Model 3 is a highly profitable model for Tesla.
Here is a hypothetical example. These fixed costs are unrelated to the number of vehicles sold, and those costs remain even if no vehicles are sold at all. So, if Ford’s EV division was in one year to make a loss of 100 million dollars and sell 100,000 vehicles, it would not mean they were incurring a loss of 1,000 dollars on every vehicle sold. Ford could have built a new factory that year, have spent millions on the design of the vehicle not yet on sale, and could have millions to pay as interest on loans. These are all ‘fixed costs’, which do not change with the number of vehicles sold. If Ford was making 1,000 dollars on each vehicle, then without selling the 100,000 that year, they would have had a loss of 200 million dollars. That also means that if Ford had sold 200,000 vehicles, there would have been no loss that year.
The reality is that most times a vehicle manufacturer makes a loss, the loss is not because each individual vehicle is produced/sold at a loss, but because the total profit from all vehicles sold is insufficient to cover the companies’ fixed costs.
This is the same for EVs. Until production and sales reach a target volume, that model will be loss making. A difference with EVs, is part of a future strategy, a model may be building towards profitability for a future model, as was the case with the Tesla Model S. The reality is that most times a vehicle manufacturer makes a loss on EVs, the loss is not because there is a loss on each EV, but because the total profit from all EVs sold is insufficient to cover the companies’ fixed costs.
However, if a company is making a loss overall on EVs because they are ‘pre-profit’, then it would be expected that company would be doing all it can to ramp up production and/or increase sales.
In the end, whether the company makes a profit or loss does not indicate whether products are potentially profitable. For many companies not yet making a profit from EVs, it could be just like those first two years of the Model 3, and even the Model S phase and the company just needs to keep going in order to reach profitability for EVs.
So, how can you tell if a vehicle is ‘pre-profit’ or ‘below-profit’, or intentionally produced at a loss per vehicle?
There are two reasons for a company is to be making a loss on a product line:
- There are not yet enough sales, and the company must either find a way to increase sales or replace that model.
- The company has an ‘ulterior motive’, and the vehicle model in question will help sell other vehicles at a greater profit.
- As with “compliance cars“, the model in question may help company profits without itself being profitable.
Any mass vehicle can have numbers fall below the level required for profitability as a result of a slump in sales or in production. The sales of the very first vehicle will never recover the cost of vehicle design, setting up production lines and building the tooling for production etc. Of course, that does not mean the first car is considered to have been sold at a loss. When a model is introduced, there is a plan to plan is always to spread those initial over a planned number of cars, thus allowing a calculated “unit cost” lower than the sale price. If production or sales are below the is needed to reach the number of cars as planned, the company will make a loss unless production or sales can improve. This is the company intending to make a profit but failing. Since the intention is to make a profit, the only indication is that sales are significantly below those of rival, comparable vehicles.
However, a company may have an ulterior motive. When reason 2 applies and the vehicle is intentionally sold at a loss, the indications the product is being sold at a loss are clearer: sales are restricted in some way. The company places some limit on sales. Normally, the more cars sold, the lower the ‘unit cost‘, and thus the better for the manufacturer. But with vehicles intentionally sold at a loss, even the variable cost is too high, and more sales will always mean more losses.
Why deliberately produce vehicles at a loss?
The common theme: limited editions and restricted sales.
While there are different types of cars produced for a motive other than the profits from that model of car, such as concept cars, compliance cars, halo cars, etc., they all have in common that the goal is only to produce a limited number.
There are two main ways to produce only a limited number:
- Declare that there will only be a limited number available.
- Price the vehicles so only a limited number of people would want the vehicles, then offer special discounts to reach the target number of sales.
The first strategy can make the vehicles highly desirable and use the vehicles to improve brand image; the second strategy is best if the company does not want the market pleading for more of what are currently loss-making vehicles.
A concept car (also known as a concept vehicle, show vehicle or prototype) is a car made to showcase new styling and/or new technology. They are often exhibited at motor shows to gauge customer reaction to new and radical designs which may or may not be mass-produced. General Motors designer Harley Earl is generally credited with inventing the concept car, and did much to popularize it through its traveling Motorama shows of the 1950s.Concept car.
The concept car is perhaps the original type of vehicle deliberately produced at a loss. Some are just ‘mock-ups’, but others, such as the Mercedes Vision EQXX are showcased being driven long distances and may even become production models. The entire goal is to create a desire in the market for vehicles similar to the concept, and to improve brand image.
A good concept car can generate publicity that would otherwise require a significant advertising budget and extremely well-funded publicity campaign.
Normally, sales are limited to zero.
A compliance car is a vehicle sold in order to comply with requirements for the sale of other cars.
A compliance car is an alternative fuel vehicle that is explicitly designed to meet tightening government regulations for low-emission vehicle sales, while the automobile manufacturer restricts sales to specific jurisdictions to meet the rules, or limits production, or both. While the introduction of compliance cars by the largest car manufacturers is sometimes explained by the companies arguing that they could not manufacture electric cars profitably and sell them for more than their cost to produce them, another mechanism could be behind the auto companies practice of releasing EVs only in limited quantities and in limited markets. Since Tesla has shown profitability producing electric vehicles—with four consecutive quarters of company profitability as of July 2020—the large legacy manufacturers could also be facing the dilemma of the Osborne Effect.Wikipedia: Compliance cars.
Some brands try to use compliance cars as halo cars, creating publicity and possible demand for a profitable zero emissions future, while other brands can even want the compliance cars to be negatively perceived by the buying public.
California led in the world declaring that in order to continue to be able to sell vehicles in California, manufacturers would need to sell a specified minimum number of zero emissions vehicles. This also led to the story behind the movie ‘who killed the electric car’, which is also consistent with the ideas expresses in the quote from Wikipedia above.
More widespread are ‘fuel efficiency standards’, which require vehicle manufacturers to achieve an average emissions target across all vehicles sold by each manufacturer. The easiest way for a brand to lower the average, is to sell a target number of zero emissions vehicles. Sell a sufficient number of zero emission vehicles, and the brand become ‘in compliance’ with the ‘fuel efficiency standard’. This means that there is an incentive to accept either a lower profit, or even a loss on sales of whatever number of EVs are required to bring the brand into ‘compliance’.
Some vehicles have some traits of compliance vehicles but go beyond. VW launched the electric ID.3, ID.4 and ID.5 not only for compliance, but to restore brand reputation in the wake of ‘dieselgate‘. Unlike typical compliance cars, sales numbers were at one time so high that VW became the second biggest seller of EVs globally by early 2021. It may seem that the losses from these sales might be like those of Tesla in the first years of Model 3 sales, but it seems more than just volume would be needed, and VW replaced the CEO behind the strategy and sales have stalled.
In 2021, VW Australia had no launch date for the ID.3 or ID.4 models, reportedly because of lack of fuel efficiency standards in Australia. Although officially that was because demand was so high in other markets, it seems strange given VW sales have been flat over the past 18 months, that some production capacity could not be found if sales of VW electric models would be profitable. Data from ‘ev-volumes’ shows VW had zero growth in EVs from H1 2021 to h1 2022, being one of only 3 brands in the top 30 to have no growth in EVs in that period.
Halo Cars, Brand Image Cars and ‘semi-compliance cars’.
A ‘halo car’ is a car produced at less than typical profit, or even a loss, with the goal of brand promotion that will improve overall profitability.
While manufactures may be reluctant to produce compliance cars, others make them halo cars.
Despite the example with the VW ID.3, whether that car is a true compliance car, or rather simply a lower profit margin car than other models in the VW range is somewhat blurred. The ID.3 is not offered in all markets, but there is not clear limit to how many are available, and perhaps there are other reasons that VW slipped to 3rd last of the top 30 in EV sales growth.
The Hyundai/Kia Ioniq 5/EV6 provide another example of the same mixed message. It is like Hyundai and Kia decided to bring concept cars to market, but in limited numbers because there are not yet true production cars. It has been enough to win world car of the year, and numerous national awards, but not enough to rise in sales numbers following the initial launch, because for some reason, Hyundai is unable to increase production to match demand.
Both cars were heavily promoted prior to going on sale and continue to have a high profile in Hyundai and Kia advertising campaigns, despite being available in extremely low numbers.
For example, in Australia, the Ioniq 5 is not even available to order outside times windows less than 5 minutes every few months. Rather than place an order with Hyundai, the website enables signing up to be notified in advance of the opening of window to place an order. The order window has been known to have been fully allocated within 60 seconds. Why? Because despite comparisons the Ioniq 5 the ‘normal’ production Hyundai Kona electric always concluding the former is a vehicle from a completely different class, the price difference is small.
In layman’s terms – a “homologation special” is a road legal car, produced in limited series by a manufacturer, to meet a race sanctioning body requirement.What is a Homologation Special?
Sometimes there is a requirement that a manufacturer sell a specific number of specific vehicles to comply with regulations. Various categories of car racing exist which are only open to ‘production vehicles’. To classify as a ‘production vehicle’, brands must produce and sell a stated number of vehicles with the same specification as the race car.
The Aston Martin Cygnet was a product of fleet emissions standards regulations that give rise to compliance cars, but instead of being a regular compliance car priced to sell the required number, it was so overpriced that the entire exercise failed.
In reality, it was an utterly extortionate, £31k, rebadged Toyota iQ with a leathery interior that only lasted two years before being swept under the carpet. Quite right, too. It was one of the biggest jokes in motoring history.Top Gear on Aston Martin Cygnet.
The jury is still out on the Toyota BZ4x, now that it is back on sale. Withdrawn from sale due to the wheels literally falling off, many industry commentators have speculated that it is clear Toyota as produced a car they do not want to sell. At least, not yet. There are reports Toyota realised it is currently not able to match rivals in productions costs and is looking at a strategy to solve this problem.
The only constant, is that things always change.
Vehicles Keep Changing.
The first vehicle in 1837 was steam powered, with many EVs as far back as the 1880s, and gasoline coming later. Many hoped the next evolution would be hydrogen vehicles, as they provided hope for complex vehicle production, for fossil fuel companies and other economic opportunities to profit from consumers.
History Doesn’t Repeat: Batteries Surpass Hydrogen Which Sends Shock Waves.
The 21st century was set to be repeat of history, and between the 1990s to 2010 the thinking was that battery EVs that were real cars, were as far in the future as flying cars. Just like in the 1800s, when the better range of internal combustion engine cars allowed them to relegate electric cars to a novelty, it was thought electric cars would remain ‘toys’ cars in the 21st century and hydrogen would power the any real cars that ran without fossil fuel.
The thought was, batteries were for niche vehicles, for example little cars very much like the first version of the Wuling mini-EV. The thinking was that the only practical solution to a replacement for fossil fuels vehicles was hydrogen. Getting Hydrogen cars right would take decades, and in the end the cars would not be so different.
The Nissan Leaf, first released in 2010 with a 21kW battery, was at the time considered a revolution and state of the art. This is what an electric car was good for, just over 100km (67 miles) of range if driven carefully and the motors were not powerful. Factor in that most people would want at least of 30km (18 miles) of range in reserve when they recharge, even if only driving in the city. At that time, electric cars did not look like a technology that could take over. Fast forward to 2022, and there are electric cars with over 500 miles/800km (Lucid Air), 600 miles/ 1,000 km (Aion LX, Neta S) even over 1,000 miles/ 1,600 (Aptera) of range, and the world is turned upside down. That always superior technology of the electric motor, suddenly, can now be used for real cars, and well before the industry was expecting such a change.
History of Auto Companies by Country.
See also: Wikipedia: Automotive industry by country.
Companies, and countries, have been through cycles of ascendancy and decline through the history of the automobile. At one time, England was the largest exporter of cars worldwide. Only Italy and England made ‘supercars’.
By country, it is a complex picture, but in a too brief oversimplification: Today, Italy still has a role in ‘supercars’ as does England, but now so too does Germany.
The mass market is divided into:
- the premium, dominated by Germany.
- the ‘mainstream’ dominated by Japan.
- While Korea looking to step across from budget to mainstream.
But it was not always that way. Despite the US and even the UK being major players internationally up until and for the years immediately following the 2nd world war, the influence of both internationally began to wane post war. In contrast, countries ont he losing side in WWII countries losing theTheose who lost the
, dominated by , who also rules the world of the ‘premium’ car. The ‘mass market’ is very much the territory of Japan owning the mass market in many countries, sharing with VW from Germany, as well as France and Italy, although theses are falling back but still play a role in Europe, or with US brands in varying degrees around the world. Korea rose to emerge as potential ‘new Japan’, and European brands such as Jaguar, Land Rover and Volvo are in partnerships with India or China, despite no global brands yet emerging from China or India.
China, the worlds largest car market, has local manufacturers partnered global brands in joint ventures. The result is the world has not really heard much of the actual Chinese partners.
As an alternative to company valuations, here is a history of sales in units by brand.
Don’t Believe the Rhetoric: All Brands Know the internal combustion engine is dead.
Some brands have been in denial, but all know we are seeing the end of an era. But where you hear statements that have been made by Ford, General Motors and others that 50% of their vehicles will be electric by 2030, it should be understood that they are not saying what you think they are saying. The 50% they are still making will all be electric.
Legislation to end fossil fuel vehicles (bans).
Strangely, Norway started it all back in 1990, and it was very much triggered by the band ‘A-Ha’ and this, and other information on the bans of ICE vehicles and their progress is available here.
The Global Car Market: 60..80 Million Per Year, But No Longer Growing.
The graph from iea.org and data are both downloadable from their website. The data is clear, the volume peaked in 2017, and has since started to fall. There are so many factors affecting the longer term that it would be worthy of an entire separate discussion, but in the next ten year, growth of over 10% from 2017 levels would appear optimistic, and a market growing sufficiently to absorb all the new players, is just not realistic. Either some existing companies will cease to exist, or will scale back in volume, or a mix of the two.
Car sales by country are available in more detail here.
2030 Market Mix Predictions And Manufacturer Targets.
This is not my predictions (which can be found in the fall of legacy), but those put forward by brands themselves..
Most car makers have predictions of the percentage of their fleet that will be electric by 2030. Since eventually sales of anything other than EVs will only occur in fringe niche markets, and most will need to be on a 100% electric strategy before 2030, to some extent this about what brands are prepared to say publicly. Reality is these percentage figures are continually revised upwards, but with 8 years remaining, there is a limit to what can be achieved.
I will update this table as I find new data.
|50%(21-05)||100%(21-05)||50%(70%in EU 21-06)||100%(21-03)|
The Panda in the room, the role of China.
China represents 1/3 or the world car market as of 2021, and until recently, the market in China was dominated by these top 15 legacy brands.
For most brands, if they lost the Chinese market, they would lose around 30% of their sales volumes. It turns out, most brands are likely to lose most of that 30%. Fortunately, the impact on profits is less than would be expected, as prior to Tesla, every brand was required to set up a joint venture partnership in order to sell into China, which meant sharing around 50% of profits in China with a local partner.
However, China is rapidly shifting from a market for the foreign auto industry in partnership will local suppliers, to a market more like Germany, where foreign companies can operate, but they must compete with the locals.
Just a few years ago the idea of a Chinese company being a major player in the domestic market seemed far-fetched, yet in just 3 years, BYD has risen from a minnow, to become the largest player in China, overtaking previous leader: Volkswagen.
SHANGHAI — BYD was the top-selling car brand in China in the first four weeks of November, brokerage data showed, outperforming the Volkswagen brand in a reversal that highlights the pressure on legacy brands in the world’s largest auto market.
Retail sales for BYD rose by 83 percent to 152,863 vehicles from Nov. 1 to Nov. 27 compared to the same period a year earlier, according to data from China Merchants Bank International (CMBI).
BYD’s tally was higher than VW’s retail sales of 143,602 and Toyota’s, which were 0.3 percent and 0.5 percent lower, respectively.BYD passes VW as China’s top-selling brand in November
All legacy automotive brands have been overtaken by a Chinese plug-in car only brand.
The good news for legacy brands is that their factories outside China will not suddenly become idle, as all their China market vehicles are made in China, but their share of factory assets in China will likely be lost.
Previously, there were no imports to China, and originally no exports, although tin the past 5 years, exports have grown. As China exports to countries with their own auto industry, there will be a requirement for China to move to also accepting imports under a similar tariff arrangement to that China’s exports enjoy.
Stellantis said that shareholders of its loss-making joint venture producing Jeep vehicles in China have approved it to file for bankruptcy.
The European carmaker said in a statement it had fully impaired the value of its investment in the venture in its results for the first half of 2022, adding that it will continue to provide services to existing and future Jeep brand customers in China.Stellantis’ joint venture in China is filing for bankruptcy
It is likely others will follow, as the era of the joint ventures comes to an end with that maturation of the Chinese auto industry as a player on the global stage.
The Market: Numbers by Brand.
The list shown above uses data from the website factorywarrantylist.com, and a video of older data can be found here. Note that data for Suzuki, was initially without 2021 data, but then reviewed down for 2019 from 2,851,598 to 1,563,297 and for 2020 from 2,571,207 to 1,457,861 when the 2021 numbers were added as 1,652,653 despite Suzuki’s own reports stating 2,865,652. The change appears to reflect a move to reporting only the Indian operation Maruti Suzuki.
Toyota and VW via for top place, and the top 5 produce half of the world’s new cars each year.
There is one major point to note, exception of Changan, numbers include sales cars by subsidiaries that are joint ventures for the Chinese market, but not actually produced by the parent company. Cars for the Chinese market are produced by joint venture partnerships, with a Chinese partner making the cars, and the brand credited with all the sales only getting normally at most 50% of the profit from the sales, in return for transferring manufacturing expertise to China.
Also note, that by 2030, Tesla alone plans to produce 20 million cars per year, which is more cars than Toyota and VW combined currently produce and represent almost 1/3 of all the above sales.
The barriers for legacy automotive brands.
Market Disruption: Will New players steal market share?
Tesla, Chinese Other New EV will Take 50% of the New Car Market by 2030.
In fact, according to the latest extremely well-funded research, over 80% by 2035.
These are not facts, just estimates, but by 2030, BYD will be the world’s largest car maker. Tesla may be a larger company, but behind BYD in cars, and perhaps focusing more on Robots than cars. Tech phone companies Sony, Apple, Huweii, Xiaomi combined with other new entrants to the global car market such as Rivian, Lucid, Fischer, Vinfast, XPeng, GWM, SAIC, Li Auto, and others to claim much of the rest of the market.
The existing companies will be squeezed out. They either will sell far less vehicles, or close down.
There Is Insufficient Global Car Market Growth to Maintain Current Sales for Legacy Brands.
It is simple maths. If new players come and take over a slice of the market, then market share of the existing companies falls. So, either all these new players fail, or the exiting companies.
The world population for those under 30 had already stabilised.
Electric engines have always had advantages over combustion engines, in terms of efficiency, maintenance, reliability and power. Consider street cars and suburban trains, where there has been access to electricity supply, internal combustion power. But until recently, lack of sufficient battery technology limited electric power to vehicles that could access power while on the move.
Now there is battery technology, and it is advancing rapidly. A hundred years of internal combustion technology has been leapfrogged in just over 10 years, with EVs now clearly superior as demonstrated by Lucid, Rivian, Tesla and Rimac. Where there is appropriate battery technology or other power, the internal combustion engine cannot compete. While it is easier to manage batteries for cars and consumer vehicles than for freight trucks, large ships and airplanes, but all seem headed down the path of electrification.
The amount invested in internal combustion engine technology has been enormous, but it looks like it must all be written off as a dead end. Bringing electric vehicles to mass production is still a huge hurdle, but, as Tesla has shown, the payback from overcoming the hurdle is huge.
This leaves companies with all those billions in internal combustion engine technology with a dilemma. When is the right time to make the switch.
Manufacturing Disruption: Less Labour Means Problems for Legacy Car Makers.
Tesla is swiftly improving built quality and looks set to achieve a production time of just 10 hours per car at its Gruenheide plant, Diess said Thursday in a prepared speech at a staff meeting in Wolfsburg. VW’s main electric-car factory in Zwickau needs more than 30 hours per vehicle, which should be reduced to 20 hours next year.Diess to VW workers: ‘I’m worried about Wolfsburg’
Seba says internal combustion cars have some 2000 moving parts, whereas EVs have something closer to 20.IEEE Spectrum.
With far less parts to be assembled in an electric vehicle, automakers have to rethink how they put cars together. A huge problem is that with 1/3 of the labour per car, they either need to build 3x as many cars, or they would need only 1/3 of the workers. Even if the carmaker does not lose market share and as a result produces less cars, there is still around 2/3 of the factory workers to be made redundant.
Revenue Disruption: The Pain of Moving to Less Revenue Per Vehicle with EVs.
Less Revenue Per Car, But Profit Lower Costs Too, So No Problem If Sales Increase.
One of the highest value parts of an internal combustion engine car is the engine. With an Electric vehicle, the battery and electric motors take over that role. However, only BYD makes their own batteries. Carmakers are simply making less of the car/battery/engines overall package, so they keep less of the profits. In the end selling 100 EVs is the same as selling perhaps 60 or 70 internal combustion engine vehicles. The profit can be strong, as the labour is less, and there are so many less parts, that once the market reaches a similar scale as is no longer dealing with the costs that occur during ramp while demand is rising rapidly leading to supply shortages, the costs will be lower.
The Problem Is Almost No one but The New ‘Start-ups’ Will See Sales Increase.
For a ‘legacy’ automaker to increase sales, when new start-ups take 50% of the market, on average these brands will each see a loss of 50%. But some could lose all of their market, while others lose none. However, ever legacy company that retains more the 50% of their market, means others must lose even more of their market share.
Can any legacy maker be a winner? It is possible, but less than half of the market can be winners, and even that half would require all the rest to fail completely. So far, VW and Hyundai and perhaps Mercedes are potential winners, but the Chinese have not really hit international markets yet. If there is sufficient international tension, the Chinese impact could be reduced.
Asset And Finance Disruption.
Engine families are in production for decades, and all these assets must be written off. Even factories designed around internal combustions cars need to be largely written off as assets.
- A ‘start up’ EV maker gets investors to fund new factories and IP that will generate new revenue streams providing a return on the new investment.
- A ‘legacy’ car maker has to fund replacement factories and IP which will still result in less revenue than before.
Service Industry disruption.
The same factors the result in manufacturing disruption, also disrupt the service industry. Unlike manufacturing, which affects a select group of countries, every country has a service industry. That reduction to around 1/3 the labour to build an EV, also results in around 1/3 the labour and parts to service an EV. Either this industry, globally, sheds around 2/3 or all jobs, or the service industry will see
Electric vehicles have become desirable “real” cars much sooner than most legacy brands expected. We are in a time of disruption by electrification as planes, trains and automobiles, as well as shipping, all move to electric power, but it is the car industry that will be most disrupted. New players such as Tesla, Rivian, Lucid and others, combined with the globalisation of the EV centric Chinese car industry, will take around 50% of the market. So, what happens to the existing big brands of the legacy car industry? Either half die out, all halve in size, or some combination of both.
From legacy brands, it is very likely that only premium niche brand automakers will survive the transition to EVs unscathed with the help of government bailouts.
As far a volume bands go, there is the Xiaomi funded research, where 5 brands would have 80% of the market, and all other brands share that remaining 20%. Tesla and BYD are currently leading contenders for position #1 and #2, so who are the next 3? Xiaomi plan to be one of them, leaving only two spots vacant. Hyundai/Kia are the only contender form legacy brands as things stand, but could something emerge out of Japan or Germany?
- 2023 January 09 th: Value, Volume and Profit.
- 2022 November 25: Became a separate page to ‘tracking legacy brands fall….‘.
- 2022, July 11: added overview and list of government bans.
- Improve flow from synopsis.
- Update history for rise of ICE and hydrogen history to reflect ‘killing of electric car’.
- Targets/predictions table to link to manufacturer event log data below.