Cars on the A9 highway in Munich, southern Germany, as Pentecost holidays started on June 7, 2019.SINA SCHULDT/AFP/Getty Images
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
This winter promises to be a cold one for the Western electric-vehicle industry. Disappointed by weaker-than-expected demand, legacy carmakers are scaling back their EV targets and winding down investments. Northvolt AB, a Swedish battery maker and European EV darling, cut an entire fifth of its work force this week, raising questions about the timeline of its planned battery plant in Quebec. Western auto companies have largely themselves to blame; they were hesitant to commit and slow to innovate.
Our governments, to some extent, are already doing their part. Massive subsidies, consumer incentives and walls of tariffs, for better or for worse, will insulate our car manufacturers from Chinese competition for a time. And the West does have an example of early EV success: Tesla Inc. TSLA-Q.
But Tesla is only one company, and it, too, faces major headwinds and now makes more than half its vehicles in China. The greater question is whether legacy carmakers such as Ford Motor Co. F-N, General Motors Co. GM-N and Volkswagen AG VWAGY can take advantage of this brief period of incentives and tariffs to develop their battery technology and manufacturing processes to compete.
Often cited is how EV demand growth has been much weaker than projected, which gives a profit-driven explanation for why EVs are simply not currently feasible in the West. Yet this weak demand is temporary and it’s dependent on decisions the companies themselves are making.
The European Union has mandated that all new cars sold by 2035 must be zero-emission vehicles. The United States has set strict regulations on tailpipe emissions that are projected to make EVs represent more than half of new car purchases between 2030 and 2032. Demand for EVs will rise as a result.
Weak consumer interest in EVs right now is in large part a result of high costs and range limits, which can only be overcome with significant research outlays, risk-taking and long-term vision. A car company aiming to secure its long-term success should not be fixated on milking every last dollar of profit from internal combustion engines (ICEs) in the short run.
But innovation and risk-taking are not impulses that come naturally to legacy carmakers. It is a twin problem: These companies are complacent about their right to exist and they refuse to reinvent themselves as tech companies that build cutting-edge products.
The ever-present impulse to protect manufacturing jobs in the auto industry and historically slow cycles of ICE innovation have allowed carmakers to plod along without disruption for decades. The situation has now changed dramatically, yet that does not seem to have changed their attitude enough.
Legacy carmakers are quick to lobby for weaker emissions regulations and complain about insufficient protectionism, but they waited until nearly 2020 to attempt to build out their own EV business. BYD Auto Co. Ltd., China’s leading EV manufacturer, was founded in 1995 and launched its first battery electric car in 2009. Western companies are now pointing fingers at market headwinds and foreign subsidies, yet they have consistently failed to take their own steps to remain competitive.
Much of the issue is that Western companies seem determined to contort their existing manufacturing and supply-chain methods to EV production. They outsource not-strictly-mechanical inputs such as software to third parties. Their infrastructure is optimized for ICE manufacturing, not EVs. Leading firms such as Tesla and BYD instead see in-house software and battery production as core to their business model and are all-in on electric.
Overly outsourcing is a problem for legacy firms; a car is an integrated product and when competitors are at your doorstep, you need a grip on every input in your supply chain to beat those rivals on small margins. While extensive external sourcing can work in a stagnant industry, in an innovative one, you are left dependent on the ingenuity of your supplier, over whom you have little control. And the distance from your supplier to your engineers makes for a poor feedback process.
This is not meant to trivialize what is clearly a difficult situation for Western carmakers. China has a number of advantages that cannot be dismissed or easily overcome by grit alone. Cheaper labour, domestic processing of critical mineral inputs and a two-decade head start on a co-ordinated EV strategy puts us at a serious disadvantage. The short-term cash flow issues for legacy companies are a real problem.
Western industrial policy and protectionism closes a part of the pricing gap with China, but eliminating the rest depends on building factories for a new purpose, securing and innovating on the supply chain at each point, and committing wholeheartedly to the EV business. It will be necessary to lose money early to close the competitive distance, and hopefully cement a lead some day. This is a matter of survival for Western car manufacturers unless they wish to suckle from corporate welfare indefinitely.