Amid a global shift towards electric vehicles, traditional automakers find themselves at a crossroads, grappling with new competitors and a changing focus from mechanical engineering to software. Jesmond Mizzi Financial Advisors chief investment officer Marc El-Lazidi delves into the multifaceted challenges and opportunities presented by the EV evolution.
Recently, electric vehicles (EVs) have been making headlines. What’s driving this surge in news, and are market dynamics shifting in tandem?
MeL: Certainly, the spotlight on EVs is a culmination of several factors. With many European governments pledging to phase out combustion engines by 2030, the clock is ticking, prompting a noticeable shift towards electric. Concurrently, traditional automakers, once hesitant, are now unveiling a plethora of EV models. Additionally, many EV start-ups, now a decade old, are scaling up their operations. Given these developments, the current media buzz is hardly surprising, and I believe it’s just the tip of the iceberg.
Europe has long been an automotive stronghold. How are its traditional car behemoths navigating the EV tide?
MeL: Europe’s automotive giants are at an intriguing juncture. While they’ve historically reigned supreme in the conventional car arena, they now grapple with robust competition, notably from nimble and forward-thinking Chinese firms. Their dual challenge? Accelerating their EV initiatives while fostering innovation. The geopolitical landscape adds another layer of complexity, with claims of Chinese manufacturers exploiting state subsidies to undercut European counterparts. Indeed, the trajectory of EVs will be significantly influenced by the relationship between Beijing and Brussels.
How are the prevailing geopolitical tensions influencing the EV sector?
MeL: The geopolitical context impacts the EV landscape in two primary ways. Firstly, China, a pivotal EV market, has witnessed a remarkable embrace of these vehicles, driven to a large extent by the practical need to reduce air pollution.
Alongside Europe, it’s one of the few regions that has the necessary infrastructure as well as the appetite for the transition to EVs. Presently, Western and Chinese firms compete in a unified market, a scenario beneficial for all stakeholders. However, fragmenting this expansive market could stymie EV growth.
Secondly, the EV supply chain is pivotal. While EVs necessitate fewer components than internal combustion engine vehicles, their reliance on rare materials like lithium and cobalt is pronounced.
Geopolitical tensions could escalate... making international collaboration on green initiatives more challenging
China dominates this supply chain, from raw material processing to battery production. Given this, China could potentially counteract Western semiconductor sanctions by disrupting the green transition.
In a worst-case scenario, if China and the West decouple, what might the repercussions be?
MeL: A complete decoupling would likely bifurcate the EV market. In such a scenario, the global EV landscape would be fragmented into two distinct markets, each with its own set of challenges and opportunities.
Predicting the exact ramifications is challenging, but many EV start-ups, especially those relying on a global supply chain and market, could face significant adversity.
This decoupling would not only disrupt the supply chain but could also lead to reduced innovation, increased costs and limited choices for consumers.
Moreover, the geopolitical tensions could escalate, leading to further trade barriers and making international collaboration on green initiatives more challenging.
How are EVs changing the automotive industry?
MeL: Traditional vehicles powered by internal combustion engines are predominantly influenced by mechanical engineering. In contrast, EVs lean heavily on software. This shift has ushered in a slew of new players, challenging established automotive giants. These traditional powerhouses perhaps underestimated the seismic shift EVs would introduce, especially the escalating significance of technology over engineering.
Could the car industry start to mirror the phone market more as EVs become the dominant automotive force?
MeL: While I foresee growing parallels between the car and phone sectors, especially with the increasing centrality of software, stark differences remain, particularly concerning safety and requisite infrastructure.
However, one thing is clear: EVs have democratised the automotive industry, inviting tech giants and newcomers to challenge the status quo. Huawei’s recent foray into EVs exemplifies this trend. These futuristic vehicles, centred around a digital user experience, are rapidly becoming status symbols in China, posing a significant challenge to European, especially German, automakers.
How likely are the challenges facing Germany’s automotive sector to force a rethink of the country’s economy?
MeL: Last year, I warned that Germany’s economy was in desperate need of modernisation and we’re now seeing German industry experience a massive downturn. Production has continued to fall month after month, driven primarily by a sharp drop in car making.
For decades, Germany did not allocate enough effort to refurbishing its post-World War II economy. We witnessed a similar trajectory for its energy supply chain.
The pandemic and recent geopolitical tensions have pushed this need to the top of the bloc’s priorities and we’re now seeing some efforts to onshore innovation and key technologies, like we saw with the European Chips Act, and other moves intended to make Europe a force in the EV market. The challenges will obviously not go away, but we are seeing positive signs.
This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on 2122 4410, or e-mail info@jesmondmizzi.com.