EV Pinball

Earlier this week, ICDP was invited by the British Vehicle Rental and Leasing Association (BVRLA) to facilitate a workshop with their members on the subject of meeting the so-called ZEV Mandate in the UK.  This is legislation specific to the UK which mandates a given percentage of sales of zero electric vehicles (ZEVs), which in practice means battery electric vehicles (BEVs) between now and 2030.  In 2024 the requirements are for 22% ZEV mix for cars and 10% mix for LCVS.  These numbers increase progressively to 80% and 70% respectively at 2030.  Heavy fines apply for any units sold in excess of this target.  My colleague, Ben Waller, spent a few long nights going through all the detail in order for us to then consider the ways in which manufacturers in different positions with respect to their BEV offer, would try to meet the targets and avoid paying any fines.

I'm not going to go into the intricacies of the mandate which are only relevant in the UK (and even then, not currently in Northern Ireland) but some of the pressures will still be felt in the EU, as the 2035 target of 100% zero CO2 emissions is preceded by a requirement for a 55% reduction in CO2 fleet averages by 2030 for cars and 50% reduction for LCVs, both relative to a 2021 baseline.  Manufacturers face fines based on the extent to which the average CO2 emissions of their actual sales exceeds the target for 2025-2029 and a substantially lower target for the period 2030-2034.  Although not as complex as the UK, there is a system of pooling and credits that allow some room for manoeuvre.

The 2035 deadline, the need to follow this glidepath to zero and the imperative for manufacturers to keep their BEV production lines and supply chains running, all place real pressure on the OEMs, even if the risk of fines is lower than in the UK.  It is unthinkable after the billions that have been spent on development and establishing supply chains to meet ambitious volumes, that the OEMs will allow actual production to be driven by natural demand for BEVs.  Across Europe - with the notable exception of Norway - the demand from retail customers in the absence of any government incentives remains low and demand from business customers is driven by the tax benefits that apply to companies and their employees and for some by the need to follow a CSR agenda demonstrating a positive trend on environmental performance.  Actual BEV market share for cars in 2023 was 14.6% according to ACEA data, in the UK it was slightly higher than the EU average at 16.5%.

The pressure to be legally compliant and to drive a minimum volume through their BEV supply chain will force manufacturers to navigate a tricky path between production push, customer demand, regulatory requirements and OEM and dealer profitability.  Much like in the pinball machine illustration above, there is not a single direct route to the goal, but a likelihood that different considerations will force changes of direction, and some unintended consequences.  I commented in a previous blog about the need for a specific strategy on the part of the manufacturers to build the sales volume for BEVs with a lifecycle approach that generates sufficient new sales without damaging residual values (RVs) and creating a feedback loop into new car funding.

That remains a critical need, but what the UK workshop highlighted was the uncertainties created for those customers who are basing their purchase decisions not only on the up-front offer, but also the residual value in three to four years’ time.  That obviously includes most professional buyers such as leasing companies, but indirectly it affects retail customers to whom the retail offer will be driven by these same considerations in the background.  Predicting RVs has always been as much an art as a science, even though the complex price guides with detail expressed down to very precise specifications and vehicle conditions gives the impression of some mighty algorithms crunching the numbers in the background.  We are now in an era where Elon Musk can (and has) moved the whole EV used car market with one decision about hitting his own quarter end sales ambitions.  We also have the unknown of how Chinese manufacturers will respond to sales that are lower in many cases than their original ambitious targets.  Will they reduce their targets for Europe, or risk the intervention of the European Commission by cutting prices to create an even bigger advantage over the established brands?

Where manufacturers are trying to navigate their way through the combined market and regulatory influences, they will face challenging tactical questions.  Is it better to pay a fine or buy credits from another higher-performing manufacturer, but not damage the price positioning of their BEVs, or to apply discounts, incentives and forced registrations to BEVs that allow them to meet their new car sales targets, but damage RVs?  The conclusion they come to will directly affect their customers and their networks.  However, although they control the game in one sense, you never quite know where the flippers will send the ball next, and whether you’re going to get the bonus points or see the ball rolling back down the outlane.