Opinion: Navigating ‘no mans land’ between early EV adoption and mass uptake

By Charlie Simpson, partner at EY-Parthenon

UK automakers have been under increasing pressure to ramp up electric vehicle (EV) sales since the zero emissions vehicle (ZEV) mandate came into effect at the start of the year, requiring them to ensure at least 22% of their sales are made up of ZEVs.

Flexibilities in the mandate will undoubtedly be crucial to many original equipment manufacturers' (OEMs) chances of being compliant in the early years of the new legislation.

However, challenges continue to accumulate for OEMs. EVs remain costly to produce, meaning profit margins associated with EV sales are stretched.

Meanwhile, although demand for cars is recovering to pre-pandemic levels, interest in EVs has plateaued, particularly in retail, and the further five-year delay to the ban on the sale of internal combustion engine (ICE) vehicles has caused confusion as the timeframes around the ZEV mandate have remained the same.

These issues combined present a complex and difficult landscape for OEMs, and while many of them can only be addressed through the actions of suppliers, policymakers and other key players within the EV ecosystem, there are steps that UK automakers can take to at least limit the effects of ongoing challenges.

Petrol/diesel sales must continue, at least for now

It may seem counterintuitive to the long-term decarbonisation and compliance goals of many automakers, but it is important that OEMs continue to prioritise the sale of ICE vehicles, and particularly plug-in hybrid electric vehicles (PHEVs) as a transition technology.

In the eyes of some consumers, the chance for making a significant ICE purchase is slipping away as the ban draws closer. Therefore, moving on stock in the short term before the ICE sales ban comes into effect, even if the contribution margin is only small, is crucial for healthy balance sheets.

However, it is also key that OEMs view this as a short-term solution, and focus on cash flow related to ICE vehicles, as opposed to reinvesting in them with a longer-term view.

OEMs must look beyond their product offering to provide a compelling EV proposition to consumers

Early adopters of EVs typically needed less persuading to make the switch than the mass market will likely require. Therefore, as OEMs look to transition from early adoption to mass uptake, they must consider how best to support and enable different types of consumers to feasibly make the EV switch.

Automakers have gone to market with a significant and varied range of product offerings for consumers to choose from – but so far, that has not been enough to drive mass uptake.

With charging infrastructure still some way off accommodating wider EV adoption, automakers should analyse how they can contribute towards a better charging experience for consumers. This could include investment in infrastructure or collaboration with charge point operators (CPOs) and even competitors.

Collaboration is a particularly pertinent point for UK and European OEMs, given the growing scale of competition in the market from Chinese OEMs.

Residual values remain a critical challenge

Residual values of EVs are also proving a challenge for OEMs. As well as deterring consumers from making the EV transition, declining residual values also create further profitability challenges for OEMs at the end of lease and personal contract purchase (PCP) deals.

This is a particularly pressing concern given the significant proportion of the EV market accounted for by lease deals and other types of rental.

Indeed, the fleet market, which typically favours rental purchases, continues to play a pivotal role in driving EV sales.

Reducing the price of new EVs is unlikely to be a financially viable solution on a sustainable basis, particularly given significant production costs and already-stretched profit margins.

Intensifying this challenge, it’s unlikely that many UK OEMs would be able to offer lower prices than Chinese competitors, given the latter’s more affordable access to key raw materials and greater production capacity.

Therefore, UK OEMs should prioritise robust valuation models to accurately track residual values and put themselves in the strongest possible position for optimal profitability.