Europe has been quicker to adapt to EVs than the US but doesn't have billions of consumers like China. It remains a pivotal battleground for the global transition to EV fleets and will be a microcosm of whats to come for other nations.
According to Energy Intelligence Group, China now accounts for over 50% of new EV sales globally. It is currently the world's most pivotal player in the EV market. Easily, the next most contentious battleground for EV sales is Europe. Supported by green legislation, many nations have already mandated a switch to electric vehicles and have further red tape on emissions. China should be able to secure healthy sales on the mainland. Competing for the next generational fleet of common road vehicles against legacy automakers can seem like a daunting task. The transition will likely come with enough friction for new competitors to assert themselves on the global stage. Will China be able to utilize its advantages?
Chinese buyers took home 3.3 million new electric cars last year, while Europeans bought 2.3 million according to Bloomberg NEF. China has hundreds of millions of more people. Even though demand is picking up in both regions, last year, EV’s proportion of all new car sales hit 15% in China and 20% in Europe. Both are hitting inflection points on the S curve for adaptation of this new technology. Europe recently has been catching up proportionally faster than China though. The home of luxurious German engineering and sporty Italian super vehicles can’t be one-upped by amateurs in selling cars.
European Legacy Competition
Volkswagen led all automotive groups in sales by taking a 24% share in the EV market. Stellantis, Daimler, BMW group, and Tesla all came behind in the top 5 according to EV Volumes data. With Bloomberg NEF expecting EV sales to grow by 4 million in 2022, Europe will be a very large chunk of those sales. VW has committed to spending more than USD 100 billion over the next five years to electrify its fleet and keep up with demand. Their lead in sales may be short lived as Tesla plans to accelerate production and sales in Europe with the opening of Giga Berlin. Several Chinese companies like Nio, Xpeng, and others are hiking exports to China this year.
To keep up with the sudden influx of Chinese competition and Tesla’s inevitable invasion, European automakers' biggest hurdle will not only be accelerating production but maintaining healthy margins. Transitioning already existing supply chains focused on ICE vehicles to batteries will hurt profitability and attractiveness to investors. It is expected that organic demand will play a bigger role in consumer decision making rather than legislative guidance this year and going forward. Growing demand puts more pressure on already strained supply chains. In the short run at least, I would expect profitability for legacy automakers in transition to hurt. VW and other European OEMs are already losing ground to foriegn competition. Because of these factors, it could be argued that investors should be bearish on European car makers. VW may have been one of the better prepared legacy companies who oriented capital to R&D for hybrid vehicles, efficient vehicles and technology earlier on. However, many others were still similarly not in an absolutely optimal position to succeed. VW may drown but only slower than its fellow European competitors. American legacy automakers meet a similar fate in that in order to compete with Tesla, they must slash margins and try to make the bare minimum cheapest EVs possible. Many were much too late to the game. You can’t realize that you’re in a race after your opponent has already started running. No matter how much faster these companies try to run, there will be no catching Tesla.
Tesla the elephant in the room
Tesla has been one of the hottest stocks of the century. The turn of the decade has only confirmed the hype. Not only was the Model 3 the best selling EV in Europe for 2021, it was also top 20 in all cars sold. It has shattered a glass ceiling in societal technological progress. Just like the Ford Model T, this car should continue to take the world by storm. It was the first BEV to even make it onto the top 50 in Europe. With these achievements being acknowledged, Tesla should be expected to surpass VW at the top very soon. Not only that, but eventually they could realistically outpace all other European EV sales combined.
It’s tough to predict how the nature of car sales will change. Tesla may not enjoy the dominant hegemony that Apple does with smartphones. It isn’t too far-fetched to assume that Tesla will be able to absorb a notable share of legacy customer loyalists. Even the fastest horses were replaced with the most primitive ICE vehicles. Tesla can and will rise to prominence in Europe as consumers have had great taste for generations. There isn’t wiggle room in people's wallets to cut corners for the right product.
Soon Tesla will scale up in Europe with production starting at Giga Berlin aiming to produce as many as 500,000 cars a year. Tesla has stellar revenue and eye-catching rapid growth. It isn’t a matter of how soon Tesla catches up in raw volume but how soon can they do it. Going forward, expect Tesla to set a whole new standard of popular cars. Aside from the EV industry, the company is dynamic, talented, profitable, and ready to take over the world.
China’s captains of the industry
Tesla enjoys today's hype while legacy automakers enjoyed yesterday's hype. The future looks to be Tesla’s to lose and their reasonably closest competitors are in China. The numbers for Chinese EV companies are currently smaller on volume and a bit more fragmented than their European counterparts. While Tesla is surpassing European manufacturers globally and is currently moving past them in Europe, Chinese manufacturers are very very fast as well. BYD EV sales surged 218% in 2021 in China. NIO, Xpeng, and others intend on hitting Europe's markets this year by targeting Norway first.
Chinese EVs are the biggest threats to Tesla’s advantageous momentum. They enjoy the benefit of government support in China as well as input advantages from domestic mineral resources and battery assembly. China has a significant global presence with rare earth minerals and others essential to EV battery production. Because of that, Chinese companies get to the front of the line during supply chain crunches like the current one and will continue to enjoy these margins for the foreseeable future. The Chinese have been ahead of the curve on EVs nationally and have reaped the benefits of this foreshadowing. Chinese cars have the technology that differentiate buyers from ICEs. They have cheaper inputs and importantly have the quality necessary to appeal to European consumers. If Tesla’s success in Europe is a sign of things to come, then Chinese EVs should be able to squeeze out the local competition as well.
Win win situation
In the end, Chinese companies benefit the most from these sales. Consumer demand has driven manufacturers to grow demand for batteries and essential components to EV manufacturing specifically. China will continue to produce for the world and trailblaze innovation with EVs as a big component of their sustainability R&D. Competitors will keep lining up for Chinese resources or pay the steep costs of trying to get a hold on their own. While nations like the US and Australia continue to try and prepare mineral supply chains, China will sustain and expand their own responsibly. BMW, Tesla, GM, and all competing brands have one thing in common, Chinese upstream production.
Overall, Tesla will remain the global benchmark while European legacy automakers will live off their currently advantageous volumes. Chinese car companies will catch up sooner than people expect and will start popping up not only in European cities and roadways but maybe even the USA. In the long run, legacy companies will struggle to be as profitable. Even if all nations involved try to bankroll their champions, Tesla will remain on top. Chinese companies are nonetheless in the best position to grow and scale up for global exports. Investors will notice the delivery growth and revenue numbers and should take what China has to offer. These are next-gen champs in the making.