Thinking the Unthinkable: Net Zero Emissions
In spring 2019 most of us saw the lobbying and direct action of environmental campaigners trying to both raise and speed-up their government’s targets to limit global warming. The ‘School Strike’ movement, launched in 2015 with strikes by 50,000 parents and kids, had grown to 1.4 million child strikers across 130 countries by April 2019. The Climate Emergency lobby group, who also want the target timelines speeded up, reported in early May 2019 that 59 UK councils had declared a climate emergency and set various timelines for policy action between 2030 and 2050. This followed a week of protects by direct action protest organization, Extinction Rebellion, who demand net zero emissions by 2025.
Is that all they want? Speed up the timelines to get global emissions under control? Yes. But, depending on the pace and ambition of the targets, there could be profound implications for car makers and retailers of all sizes, brands and locations. Implicit in the achievement of emissions targets is the switch to electric vehicles (EV’s). There remain many unresolved technical, production and infrastructure issues, outside the control of governments, that will determine whether and how emissions targets can be reached using EV’s. For example, even if battery recharging points were in place, the electricity generation network in many countries does not have the capacity to recharge the cars. In the UK, it’s forecast that by 2035, the current national grid could experience frequent ‘brown-out’s’ due to home re-charging of EV’s. Germany could see electricity blackouts even earlier, from 2032. Consumer response to the technical constraints of EV’s shouldn’t be minimised, either. Even with high subsidies for electric vehicles in China, consumers there have been reluctant to switch from conventional engines due to their limited range and the risk of high replacement battery costs.
Complex Emissions Targets
Targeting emissions reductions is complex. Depending on the details, targets could have profound consequences for consumers and industry.
Emissions targets are multi-faceted but most suggestions have two principal aspects. The first is, which emissions are to be included? Many targets focus on reducing Carbon Dioxide (CO2) emissions using the ‘pathway’ of ‘carbon neutrality. That is when CO2 emissions no longer increase because any emissions are balanced by carbon capture. This does not stop global warming, however, because other ‘greenhouse gases’ are not included. ‘Net zero emissions’ targets add in all these other gases – such as nitrous oxide, methane, HFC’s and particulates – so that greenhouse gases are totally limited. The second aspect is, what’s the overall timeline, warming target and baseline? The Paris 2015 target is to limit global warming “to well below 2ºC above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5ºC above pre-industrial levels”. The pathway to that target requires reducing emissions between 70% – 90% by 2050, limiting global warming to around 2% above 1990 levels. The UK Parliament is lobbying the UK Government to reduce emissions by 100% by 2045, based on the recent notion of a ‘climate emergency’. That’s a notch up but possibly achievable… if battery innovations, battery production and charging point infrastructure can keep up while acquisition and operating costs for the consumer are reduced. Those alone will not be easy to achieve. On top, somehow, governments have to move the tax burden away from petrol and diesel and onto electricity usage. If not, where will the cash come from to maintain the roads?
How significant are car emissions?
How fast are Battery and Plug-In Hybrid vehicle sales growing?
According to EV.Volumes.com, 2.1MN units were sold
in 2018, up by 64% compared to 2017. Most of the growth is from China which accounts for 56% of global sales. The total global Electric Vehicle (EV) fleet is around 6MN units (5.4MN cars and 0.6MN CV’s, including both Battery and Plug-In Hybrid EV’s). McKinsey estimates that the EV share is still a long way from the 10% of global sales threshold that it would take to become ‘mainstream’. That would be 10MN units a year or 5 times the current volume.
The Initial Challenges Facing Car Retailers
Today – 2019, getting customers to transition to electric passenger cars is the immediate challenge facing car retailers. There are plenty of benefits to sell. If electric power generation is from renewables, electric vehicles could be zero-emissions during their life, not just zero emissions at the tailpipe. But, an additional prize – lower pollution in cities – would occur as well. That too is rising up the political agenda. Electric engines have better low-end torque. Drivers will experience faster, smoother acceleration and a significant reduction in noise levels, both inside and outside their vehicle. But, switching customers to electric vehicles will be a task in itself for retailers. The first obstacle is Price. The “Catch 22” is volume vs.price. While EV volumes are low, their price is high. While the price is high, the volumes will remain low. According to McKinsey, electric vehicles will be more expensive to make than their conventional engine counterpart by several thousand dollars each for at least a decade and the charging infrastructure for them is not yet in place. While the ‘cost of ownership’ gap between electric and conventional cars can be reduced through government subsidies, the tax burden on non-car owning taxpayers would be significant. Paying some consumers a government hand-out from the pockets of people queing for public transport willnot be an easy idea to sell. Furthermore, the industry is not
tooled up to mass-produce EV’s either. To put the scale in perspective, there are presently 2BN passenger cars on the globe’s roads and around 6MN EV’s. The International Energy Authority (IEA) forecast only 280MN EV’s in use by 2040. At that level of use, the emissions reductions will be insignificant compared to the rise in emissions from growth in use of commercial vehicles, aviation and marine. Second is residual value. Battery technology is changing very fast. So too will electric vehicle operating systems and apps. That could mean sharper depreciation rates for electric cars compared to existing conventional ones. Unless car makers provide low-cost technology updates on their older models, used electric cars will present a significant residual value risk for their owners. Third comes lower convenience. Charging infrastructure is limited. Servicing facilities are even less available. And, the owner cannot jump-start an electric car, either. In fact, apart from changing tyres, users will have to rely on bought-in services. Consumers who have grown used to having their needs met instantly may find electric vehicles much less flexible to use. Fourth comes After Sales. Electric engines have far fewer parts. Around 20 compared to 1,200 in a conventional engine. No oil hydraulics, no brake systems, reduced, on board ICE, no petrol storage and delivery to name just a few. Electric vehicles have a reduced service content and longer service intervals. Added together, this will reduce dealership revenues and, more importantly, dealership profit streams, by between 15% and 40%, depending on their franchise and their geographic location. At the very least, dealers will need to develop new business models. In the worst case, dealer networks will shrink. Extend these issues to the independent motor trade and the extent of change will be even greater over time: Falling oil and filter changes. Falling exhaust repair. Falling brake pad changes. Fewer petrol stations. Falling MOT’s or Emissions Testing.
Mid-Term Challenges for Car Retailers
On its own, substituting electric vehicles for conventional engine vehicles will not make a dent in global emissions levels. However, coupling EV’s with widespread adoption of a ‘net zero’ policy will. How quickly depends on the timeline set by public policymakers. The deadline of 2025 set by Extinction Rebellion would be disruptive. There will be no widely available alternatives to trucks, aviation, heavy industry and shipping by that date. The deadline of 2060 proposed by the IEA can probably be coped with – but by significant adjustment. A critical success factor will be the rate of economic growth. Currrent growth forecasts show an increase in primary energy demand equivalent to the current consumption of India and China combined. It’s hard to visualize that level of growth co-existing with Net Zero emissions. More likely is a scenario in which the EU and China adopt EV’s more quickly, while the USA, Africa, India and South America transition more slowly. In that event ‘Net Zero’ would be a regional, not global aspiration.
But, car retailers might want to contemplate the specific impacts on their business, if EV’s become significant in their region. To begin with, according to the US consultancy Oliver Wyman, the biggest producers of EV’s are
Chinese manufacturers. They produce over 50% of all the EV’s made globally and sell 90% of all those registered in China and they have the support of a $16BN government-inspired strategy, “Made in China 2025” (MIC2025), to export high tech products, including EV’s to the world. Four Chinese auto companies dominate: Geely (Volvo in Rest of World), FAW (Audi, Toyota and GM joint ventures), SAIC (Partnered with VW and GM) and BYD. Given their existing technical and production advances, none of these should not be under-estimated. If successful, existing global players may lose share, just as they did to Toyota and Nissan in the 1970’s.
Second, consider how existing global players, from BMW to VW, may need to reconfigure their supply chains over the next decade? The UK, a peripheral production centre with mostly foreign owners, has already seen effects as automakers try to switch to electric vehicles. Ford signalled its closure of the Bridgend engine plant in South Wales (Announced June 2019 for closure in Autumn 2020) as a direct consequence of the shift to electric engines and the end of diesel engine production for Jaguar Land Rover (JLR). That followed a cut of 4,500 staff and production for JLR at Solihull (January 2019) as sales of their conventional vehicles slumped world-wide . Honda decided to close its Swindon plant to relocate production closer to its key markets – Japan, China and Asia with the loss of 3,500 jobs (May 2019). Nissan too has decided to relocate future models back to Japan (February 2019). The consistent factor in all these decisions is that conventional engine and gearbox production will be replaced by batteries, electric motors and transmissions. These will likely be centred in Asia. So, existing industrial centres will shrink – similar to what happened to Detroit – and new ones will emerge elsewhere. If your dealership grew on the back of the supply chain, ask yourself if that will continue.
Finally, ask yourself, which brands have a strategic advantage in electric vehicles? BYD, the largest EV manufacturer, also has in-house divisions making solar panels, batteries and charging systems, as well as vehicles. Daimler has depth of experience in hydrogen fuel cell technology. Tesla has joint ventures with Panasonic for battery production. But, by and large, automakers have little of the know-how themselves for components in electric cars. So, VW and Ford are investing over $80BN and Toyota, Suzuki, Mazda, Honda and Subaru are engaged in an EV joint venture. Keep in mind that automaker brands face two strategic choices. The first is, what do they make and what do they buy. If they buy in batteries, electric motors and transmissions, much of their profit potential and unique selling proposition drifts out of their control. If they try to make these components, they need to buy in the expertise from elsewhere. The second is, do they make purpose-built EV’s or convert existing models. If, the former, up-front development and re-structuring costs are higher but they have a product that can have unparalleled USP’s; if the latter, their vehicle is compromised and potentially performs less well in the market but is less expensive to produce.
As always, the automotive retail business faces some tough challenges.