The Potential Looming Auto Industry Fiasco

From BOE Report

Terry Etam

Growing up on a farm, an initial mechanical obsession of mine was tractors (don’t laugh until you’ve tried one – think you feel unassailable in a 4×4 F-150? You have no idea), quickly followed by cars. They are so central to everything, and represent freedom, in a sense. The auto industry has been a passion ever since, my head hopelessly stuffed with useless trivia that only gearheads appreciate.

There have been painful episodes along the way, including watching beloved automakers at times make unfathomably stupid decisions. The entire US auto industry ran itself onto the rocks of bankruptcy a decade and a half ago, their smug executives shouting about their respective superiority right up until the infamous day that the three bonehead leaders of the big US auto manufacturers all flew from Detroit to Washington on the same day in separate private jets to beg Washington for bailouts. 

Times change, and these days it’s hard not to feel a bit sorry for that bungling brigade. Consider the tight wire act they’re being forced to walk on, with the only safety net being the precarious support of governments barrelling full speed ahead towards an energy transition strategy that first and foremost burns all the bridges behind. Governmental transition plans with respect to autos will work against some very big odds, or will be a spectacular failure. 

While the Biden administration recently spoke of increasing corporate average fuel economy standards significantly in coming years – a great development, more on that in a minute – the greater winds of change are clearly towards outlawing internal combustion engines (ICE) both in North America and in Europe. Canada and many western European countries have firm deadlines, as does California, and what California does, the rest of the US often follows emissions wise.

Imagine then what it’s like for North American/European auto manufacturers to see news headlines like this: EVs Are Piling Up on Dealer Lots as Supply Outpaces Demand. No more piffle about supply chain woes hindering EV sales, something else is going on. 29dk2902lhttps://boereport.com/29dk2902l.html

On top of that are grim results for those vehicles actually sold. In the second quarter of 2023, Ford lost $72,000 on every EV sold. While the latter is ‘sort of’ normal for new car platforms – and EVs are nothing if not new platforms – what isn’t normal is for highly-touted/media-frenzy revolutionary new autos like the Ford Mustang Mach E EV to be selling under 3,000 units per month in the US as it is in 2023, two years after introduction (US sales peaked over 5,000 units per month shortly after introduction). In the second quarter of 2023, Ford sold 14,843 EVs (out of 513,662 vehicles sold by the company overall), a fairly meagre total considering the capital invested and the marketing campaigns. In the minds of most consumers, it seems an EV means a Tesla, and there is scant interest in anything else no matter the marketing hyperbole.

Problems compound further. Western countries and auto manufacturers are piling into new battery plant investments, trying to emulate Tesla. Well, guess what… many of the materials going into those batteries will have to come from China, who controls most of the world’s critical mineral processing facilities. China is itself, of course, setting out to build as many batteries as possible. Given their home field advantage with raw materials and the cost advantages noted by western automakers, what chance will western automakers have to compete?

And then it gets even worse from there. Think Cuba. 

Cuba and the US have had their differences, as would any neighbourhood where adjoining neighbours are fierce capitalists and fierce communists. While the ideological fervour may be fading – Cuba is no longer as commie as it was, and the US is, well, like an ideological but malfunctioning fireworks show. Regardless, Cuba has not had access to modern automotive technology since the 1960s. As a result, streets still are full of ancient American cars, held together forever.

There is no reason to think that won’t happen in the US, Canada and western Europe when the new-ICE ban comes into effect. Some segments of the population will go with the regulatory-mandated flow, while a great many will hold onto what they know, trust, and love. Short of a miracle battery breakthrough, many will simply not trust EVs in cold weather and/or instances where battery power doesn’t cut it.

Should that happen, it will place a damper on new EV sales, or at minimum remove a potentially significant slice of the new car market. But the luddite old coots (as they will be known) hanging onto their ICE pickup trucks will be but a tiny worry in American automakers’ viewpoint; the central dominating terror in their eyes will be Chinese competition.

Chinese EV auto companies currently enjoy a 25 percent cost advantage in the manufacture of EVs, according to US automakers. Add that fact to the current stranglehold China has on critical minerals processing, and domestic auto manufacturers would be out of their minds not to be at least somewhat frightened.

But it gets even worse from there. North American and European automakers are being forced to abandon further development of ICE vehicles, because they have been assured by western leaders that those are doomed, and to suggest otherwise is to engage in modern blasphemy punishable by the worst of all possible punishments – public shaming and accusations that they don’t care about the planet.

Chinese automakers have no such compunction. They operate in a different universe. They will build what they have to and want to, including EVs and ICE and hamster-drive if they so choose. 

Consider the meaning of Chinese vehicular manufacturing independence. The world currently purchases something like 100 million vehicles per year. The US, formerly the predominant market, is seeing its share slide to something like 15 percent. Europe likewise is shrinking. 

But developing country demand is skyrocketing, and most developing countries have not declared China to be an industrial enemy. China will build what those markets want, and will not give even a fraction of a single hoot about western demands to eliminate gasoline and diesel. There are too many mouths to feed.

Western auto manufacturers that go all-in on EVs, as demanded by their governments, will find that they no longer can even dream of global domination; their home markets will be a money pit of massive proportions.

In case anyone cares, and it doesn’t seem that they do when energy transitions are discussed, this will all work out the absolute worst for lower income people. Ordinarily, the auto market provides options for lower economic classes with vehicles that are no longer in favour. For example, in periods of high gasoline prices, consumers that can afford to switch up will tend to go for more fuel efficient vehicles, and the market can get flooded with inefficient ones – which has the effect of pushing down prices of these out of favour beasts, putting them within reach of poorer people. The fuel costs may be higher, but at least they can buy wheels.

That likely won’t happen this time around, if we see people buy ICE vehicles and then hoard them for as long as they can. In fact, things are terrible already for lower income people looking to buy older used cars – prices have skyrocketed for those as well. 

Used cars are expensive, new cars are hideously more so, and EVs are, thus far, mostly toys of the wealthy with multi-car garages, or well paid urbanites that can afford to use them where they really shine. Again, we can see where China is twelve steps ahead; many popular EVs in China are tiny, cheap EV runabouts that don’t have massive range, but get the job done. No such option is available here in North America, few in Europe, and if they do show up on these shores, it is a safe bet they will be of Chinese origin, because they’re the only ones that can make money at it.

One last bit of drizzle for the day. Recently, Toyota announced that they had made breakthroughs in solid state batteries; by 2026-27 they expect to have EVs on the road that can charge far faster, with batteries that don’t overheat and catch fire, and with more range. It truly is an exciting development (companies have teased us with solid state batteries for years, including one Lamborghini model that incorporated a tiny supplemental one more as a fashion statement than anything). I would be happy to buy a solid state Toyota EV if it lives up to its promise and is cost effective. 

The problem is, if the new Toyota tech is as good as hoped (and Toyota brings much needed credibility to the idea), then what happens to all the existing EVs, to all the existing battery plants now being funded at a cost of hundreds of billions, to all the money being spent on lithium ion battery development/processing/etc.? It is normal for new technology to overtake old and outdated items, but these massive current investments will not have had any chance to recoup the investment. Ford may have lost $72,000 on each EV sold in Q2 2023, but that could be acceptable if they went from selling 14,000 EVs per quarter to a million. 

But what if that is as good as it gets? What if they never see sales of these lithium-ion EVs rise to the levels needed to recoup even a fraction of that investment? What if they build them and no one comes?

In that scenario, there is at least one silver lining – poor people might have an amazing choice of today’s EV crop, at very modest prices indeed. 

In a sane world, automakers would morph first into hybrid vehicle manufacturers, which can make pretty much everyone happy. That’s why Biden’s proposed new fuel efficiency standards would be important; we should be striving for higher mileage, low hanging fruit instead of utterly demolishing the old ICE world. Besides that logical point, hybrids are far, far better for the environment from a materials availability perspective. Toyota calculated that they could make 90 hybrids for the same battery material that goes into a single EV, and that those 90 hybrids over their life could offer electrical motivation of a magnitude no single EV could even hope to. Plus, the energy transition is being hobbled by lack of critical metals/minerals; why not pursue the biggest bang for the buck while the world sorts through exactly what additional resources are available, and where, and when?

But sanity is forbidden in the west. It is EV or nothing. Infrastructure be damned. Investment be damned. Popular demand be damned. 

The only western auto company I’ve seen that is keeping their feet on the ground and their wits about them is Toyota, who is openly stating that there is a future for ICE, a future for hybrids, and that maybe hydrogen fuel cells will be the power of choice. Hats off to them for, if nothing else, courage.

The scenarios above are, of course, possibilities, and maybe probabilities, but not certainties. But the odds of big trouble for western automakers are significant and ignored at our peril. No one wants to see forlorn Big Three auto execs having to climb into those private jets for that humbling ride again.

Energy conversations should be positive and, most of all, grounded in reality. Life depends on it. Find out more in  “The End of Fossil Fuel Insanity” at Amazon.ca, Indigo.ca, or Amazon.com. Thanks!

Read more insightful analysis from Terry Etam here, or email Terry here.