Legacy auto makers face disaster

From The Driven

We are currently witnessing a major disruption in the world’s largest car market, that will have massive implications for the biggest carmakers as they seek to manage the switch from fossil fuel vehicles to electric.

Potentially millions of petrol and diesel cars may about to become unsellable in China as the country implements new vehicle emissions standards, and as EV demand booms. With China already experiencing a car inventory crisis, the next three months could spell disaster for some legacy auto companies.

Auto News recently reported that the China Auto Dealers Chamber of Commerce (CADCC) posted an article on March 23 on WeChat saying that dealers could be left with hundreds of thousands of non-compliant unsellable petrol and diesel vehicles once China’s new emission standard is implemented in July.

According to its website, the CADCC had over 8000 auto dealer members as of 2019.

More details on the CADCC March 23 article – now deleted – were given on the Shanghai Metals Market SSM news site on Monday in post titled Industry Association Appeals for Delayed Enforcement of Imminent China VI B Emission Standards to Tackle Huge Inventory Pressure.

The Chinese metals industry publication is justifiably concerned as the inventory crisis will have massive flow on effects for auto industry metals suppliers.

The SSM article says the deleted document stated that the CADCC had “received reports from many auto dealer groups that the upcoming full implementation of the China VI B emission standards will bring enormous pressure to the survival of auto dealers.”SSM reports that in the document the CADCC appealed for three measures on behalf of the majority of auto dealers.

1. Postpone the implementation of the China VI B emission standards to January 1, 2024;
2. Car makers should stop producing new cars that do not meet the China VI B emission standards;
3. Auto OEMs should allocate existing new cars that do not meet the China VI B emission standards to dealers as soon as possible, and launch sales promotions.

China released its rule for stage 6 light-duty vehicle emissions limits in December 2016, so manufacturers have had 7 years to bring their vehicles into line.

The “China 6 standard” is being implemented in two phases. The first phase, 6a took effect on July 1 2020 and the 6b standard will be implemented on July 1 2023.

The China 6 standard applies to light-duty vehicles up to 3,500 kg powered primarily by gasoline or diesel.

The International Council on Clean Transport (ICCT) says the China 6 standard combines best practices from both European and U.S. regulatory requirements in addition to creating its own.

The ICCT says “China 6b further lowers the limits by about one third to half of the magnitude for NOX [nitrogen oxide] , THC [Total hydrocarbons], NMHC [non-methane hydrocarbons] , PM [particulate matter], and CH4 [methane], on top of the China 6a standard.”

While the inventory crises is hitting Chinese dealerships hard, the biggest impacts will be felt by legacy auto companies who have failed to shift to electric vehicles.

The glut of hundreds of thousands of high polluting vehicles sitting in Chinese dealerships comes as Chinese consumers shift rapidly to EVs. Over 25% of all new cars sold in China in 2022 were electric.

According to the China Association of Automobile Manufacturers (CAAM), 27 million vehicles were sold in China in 2022, with almost 7 million being EVs. China accounted for around two-thirds of global sales of EVs last year.

Although the inventory crisis is playing out in China, counterintuitively Chinese car manufacturers may actually benefit while foreign legacy auto companies sales plummet in the world’s largest car market.

This is because electric vehicles make up a much higher proportion of the total production of Chinese automakers like BYD, while foreign companies like Toyota and Volkswagen are manufacturing and selling mostly petrol and diesel cars in China.

So it will be predominantly Japanese, German and US carmakers that are hit the hardest by the inventory crisis while Chinese EV companies as well as Tesla will continue to see demand grow.

This trend is already playing out in 2023.

In the first two months of the year, sales of Japanese brands in China have dropped by 40% year-on-year. German and Korean brands have dropped by around 20% while US brands have dropped 12.5%.

Meanwhile, Chinese brands have held steady with losses of ICE sales being offset with increased EV sales domestically.

And this trend is accelerating rapidly. EV output in China totalled 7 million units in 2022, an increase of 97% on 2021, while sales of electric vehicles rose by 93%.

The imminent implementation of new pollution standard will compound this trend even further.

Meanwhile, the two largest automakers in the world Volkswagen and Toyota aren’t even planning on launching mass produced EV models until 2027, which is still 4 years away.

The German and Japanese car giants are also two of the most indebted companies in the world, both with almost $US200 billion of debt and highly questionable valuations on their internal combustion factory assets.

An inventory glut of unsellable vehicles in the world’s largest car market is the last thing these companies need and with ICE vehicles sales plummeting, it’s difficult to see how they will survive.

In Japan, automotive manufacturers and the industries that support them are estimated to employ over 5 million workers. Around 8% of Japan’s workforce.

Because of Japan’s disastrous national hydrogen strategy (largely promoted by Toyota), the nation produces a trivial number of electric vehicles and as a result its addressable market in China is vanishing before its eyes.

With Chinese automakers largely shielded from the impacts of the new pollution standards because of their early move to EVs, it’s unlikely that the Chinese government will delay its implementation.

Its looking like the next few months will be crunch time for the legacy automotive industry.

The surplus stocks in China are likely to encourage steep price discounting and also greater exports.  The plunge in the lithium price is making EVs cheaper.    Tesla, with the highest margins in the EV business (in fact in the car business) wants to expand its market share, and can afford to cut prices.  BYD, the world's largest EV maker will defend its share and will take the fight into Tesla's court by increasing exports.  Expect the price of EVs to reach parity with the price of ICEVs far, far sooner than the consensus has it as China's auto price war explodes into world markets.   And expect legacy manufacturers to struggle and (prolly) fail.  

Source: The Driven

 

1903 EV charging

EVs were around when the first petrol cars started.  But the lead-acid batteries they had then just didn't have the energy density compared with petrol (gasoline) engines.

From the NY P ublic Library's digital collection
I love the early 'fast charger'

 

This car is a Rauch and Lang EV from 1919.  The Rauch and Lang company has a surprisingly long and complicated history, producing bodywork for other car manufacturers as well as an electric automatic transmission 30 years before the competition, and also inventing the electric forklift.  

The low energy density of the lead-acid battery continued to hold back EVs, with GM's EV1 which used lead-acid batteries, being withdrawn and crushed by the company.  The good news is that GM's piece of spite led to the foundation of Tesla.

The EV1 and Tesla

 In the early days of the automobile, electric drive trains were almost as popular as petrol ones.  The problem was that the batteries then were lead-acid, which are not nearly as energy dense as lithium-ion batteries.

Comparing the two chemistries side-by-side, lithium ion achieves an energy density of 125-600+ Wh/L versus 50-90 Wh/L for lead acid batteries. In other words, if you were to drive the same distance using each type of batteries in an identical vehicle, the lead acid battery could take up to 10 times the volume that the lithium ion would, and it’s also heavier. (Source)

So GM's EV1 was an experiment.   It was powered by lead-acid batteries, and its range was limited to 60-80 miles (100- 130 km).  This video from the BBC gives a brief history of its development, with optimistic videos from the early 1990s.

 

GM stopped selling the EV1 in 1999, and cancelled all the leases after 2002.  Sales had been limited, and the company did not think battery technology was advancing fast enough to justify the extension of the program.  The whole story is complicated; read the Wikipedia article about it.  There were many within GM who opposed its development and extension, and there were many dealerships who were hostile, because EV1 had so few mechanical parts compared to petrol cars.

As Wikipedia says: 

The EV1's discontinuation remains controversial, with electric car enthusiasts, environmental interest groups and former EV1 lessees accusing GM of self-sabotaging its electric car program to avoid potential losses in spare parts sales (sales forced by government regulations), while also blaming the oil industry for conspiring to keep electric cars off the road.  

Critics of GM and proponents of electric vehicles claim that GM feared the emergence of electrical vehicle technology because the cars might cut into their profitable spare parts market, as electric cars have far fewer moving parts than combustion vehicles. Critics further charged that when CARB, in response to the EV1, mandated that electric vehicles make up a certain percentage of all automakers' sales, GM came to fear that the EV1 might encourage unwanted regulation in other states. GM, which was also joined by other automakers, battled against CARB regulations, going as far as to sue CARB in federal court.

Was it a dismal failure?  No.  A noble one.  Because it led the CARB (California Air Resources Board) to mandate electric cars, and this in turn led to Toyota developing the first hybrid, the Prius, in 1997.   Also GM's withdrawal of the EV1 and the rather vindictive crushing of all models, led to the founding of Tesla.  Musk tweeted in 2017:

Few people know that we started Tesla when GM forcibly recalled all electric cars from customers in 2003 & then crushed them in a junkyard.  [This] was done against the will of their owners, who held a candlelight vigil all night to protest the death of their cars. Since big car companies were killing their EV programs, the only chance was to create an EV company, even tho it was almost certain to fail.

Although Musk was extremely influential in its development, Tesla was actually started by two engineers in Silicon Valley who wanted to prove that electric cars could be successful after GM cancelled the EV1 program:

Elon Musk may be the CEO of Tesla but he didn’t actually start the company. Tesla was founded in 2003 by two Silicon Valley engineers, Martin Eberhard and Marc Tarpenning. They wanted to prove that electric cars could be better than gasoline-powered cars. Although Tesla Motors was incorporated on July 1st of 2003, the seeds of the company go back to 1990 when both founders met.

Eberhard’s passion for cars was kindled after he went through a divorce and wanted to buy a sports car but he couldn’t buy a car that only got 18 miles to the gallon. The arguments for global warming were becoming undeniable.

This decision fueled his interest to begin research on high performance electric vehicles which didn’t quite exist at the time. Eberhard went through every power source you can think of. Eberhard soon discovered that electric cars were the most efficient. Further research led him to an electric car hobbyist community where he met AC Propulsion – a boutique electric car maker. What was even more interesting was the fact that the company had a superfast electric sports car called TZero. The TZero proved to Eberhard that an electric car didn’t have to be slow, he invested in the company with the hopes of obtaining a copy of the car. Eberhard even thought of joining forces with the company to build a production level electric car rather than a hobbyist vehicle.

Sadly he soon discovered that his ambitions were not in sync with the culture of the firm. At this point Eberhard considered launching his own company. By 2003 Tarpenning and Eberhard knew that they wanted to start an electric car company, starting with a two-seater sports car with an induction motor and lithium ion batteries. Eberhard wanted to give credit to the man who patented the AC induction motor, Nikola Tesla. Tesla was a 19th century inventor and his work led to the discovery of alternating current which is a primary way of transmitting electricity today.

On July 1st 2003, the company was incorporated and by August they moved into the company’s first office building in Menlo Park, California. By fall of 2003, Eberhard and Tarpenning started refining their idea in a bid to make formal pitches to investors. The first round of funding came from family, friends and a handful of venture capitalists. The investments were small because there was no one to lead the round.

Earlier in 2001 Tarpenning had dragged his friend Eberhard to see PayPal co-founder Elon Musk to speak at a Mars Society conference at Stanford. They introduced themselves and didn’t reach out until late March 2004. Elon was interested in the idea and in April 2004 the paperwork of their partnership was finalized.

Musk went on to lead a $7.5 million round in 2004 and became the chairman of the board. In 2006 the company unveiled the prototype of its Tesla Roadster which entered production in 2008. The Roadster Tesla brought something entirely new to the car industry, the electric car was produced with specs that could meet consumer needs. The first model could travel 250 miles on a single battery, its acceleration and speed were also at par with other consumer level sports cars.The story of Tesla is still being written but it all started with the curiosity of two engineers – Martin Eberhard and Marc Tarpenning.  (Source)

Here's a fascinating video about the founding of  Tesla:

 

As they say, the rest is history.  

I wonder just how much GM  regrets cancelling the EV1.  There wouldn't be a Tesla if they hadn't--there wouldn't be an electric car industry without Tesla, as the second video makes clear--and now Tesla's a formidable competitor, and Musk is a multi-billionaire.