The electric vehicle (EV) growing pains

The electric vehicle (EV) industry is experiencing a difficult period. Amid a backdrop of fluctuating demand projections, automakers and suppliers must navigate high interest rates, dwindling subsidies, production plant disruptions, and the persistent issue of range anxiety, exacerbated by perceived gaps in charging infrastructure.

Despite these hurdles, the sector’s long-term outlook remains bright, with global sales forecast for a significant leap from 6.5 million units in sales in 2021 to an estimated 40 million by 2030. But the near-term is more challenging. 

In the past year, the pace of growth has visibly moderated. Data from Rho Motion indicates a 31% increase in sales of fully electric and plug-in hybrid vehicles (PHEVs), a sharp decline from the 60% growth rate witnessed in 2022, as reported by Reuters. This trend is expected to continue, with sales growth projections adjusting to a more conservative 25–30% in 2024. This shift underscores the pressing need for EV manufacturers to broaden their appeal to a more price-sensitive demographic, particularly as the industry grapples with profitability and margin pressures. Smaller firms and start-ups often feel the brunt of these challenges as they are less resilient to falling revenues and cash flows, at a time when inflationary pressures are at risk of nudging back up and curtailing near-term rate cut expectations.

Alarm bells: from waning demand to price wars and production disruptions

Market leader Tesla first rang the warning bell for waning demand last October when CEO Elon Musk said higher borrowing costs were creating a demand slowdown, and put plans for its next factory in Mexico on hold. This caution was echoed by GM and Ford, with the two automakers reducing production strategies in light of flattening demand. GM delayed production of two electric pickup trucks while Ford slowed its EV ramp-up. In late January, Musk’s October warning was confirmed when Tesla reported EV sales growth “may be notably lower” in 2024. The risk of production outstripping demand triggered Tesla to initiate an aggressive price war, forcing peers to follow suit and squeezing margins across the sector, at a time when government subsidies were running off in Europe and China. In early 2024, VW; BYD, the Chinese EV market leader; and Dacia all slashed the prices of their top-selling vehicles across Europe in a strategic pivot to sustain sales momentum amidst tightening margins and the phased withdrawal of government subsidies. Margin erosion was partially offset by declining battery prices, according to Rho Motion, although competition from Chinese manufacturers, capable of producing more cost-effective models, intensified pressure on European EV automakers. In China, Tesla reportedly reduced car production at its Shanghai facility in mid-March. In the US, the Tesla-ignited price war also hurt demand for second-hand EVs. Hertz, the second-hand car dealership and rental firm, U-turned on its big bet on EVs when it announced plans to sell one-third – about 20,000 – of its global EV fleet to fund the purchase of internal combustion engine (ICE) cars, for which demand was more resilient and repair costs are cheaper. The sales of its Tesla cars crystallised a loss of $245m in the fourth quarter of 2023. In mid-March, Hertz announced CEO Stephen Scherr, a 30-year Goldman Sachs veteran, was leaving the company. 

Geopolitical tensions have also impacted EV production pants. Tesla and Volvo Car suspended some production in Europe due to a shortage of components, attributed to disruptions to important international shipping routes through the Red Sea after the Israel–Hamas conflict broadened out in January. AP reported Tesla as stating that the geopolitical flare-up in the Red Sea had affected production in Grünheide. “The significantly longer transport times create a gap in the supply chains”, a spokesperson reportedly told AP. Tesla’s factory near Berlin paused from January 29 to February 11. Then, in early March, Tesla’s Berlin factory was forced to halt production again after a nearby electric pylon was damaged in a suspected arson attack, linked to environmental protests over the factory’s proposed expansion.

Impact on EV suppliers and start-ups

The ripple effects of these industry-wide challenges extend to suppliers and start-ups. Suppliers face reduced orders as automakers scale back production, while start-ups like Rivian, Lucid Motors and Fisker struggle with the financial and operational demands of scaling production. Battery makers are also suffering from falling prices of essential materials and metals, while EV start-ups are struggling to a greater extent under the weight of the intense demand of early-stage investment, falling demand, high interest rates, intense competition and regulatory compliance, as well as less resilient balance sheets than their more mature peers. In Asia, China’s CATL, the world’s largest EV battery maker, along with BYD and Korea’s LG Energy Solution are all experiencing slowing growth amid challenges from smaller rivals and softening demand in China. Albemarle, the world’s largest lithium producer, announced plans to cut jobs and defer spending on a US refinery project, due to the falling price of lithium, an essential metal used to make EV batteries. Battery manufacturers require large-scale early-stage investments which can put smaller suppliers under acute pressure when market conditions sour. SK Innovation, another South Korean battery maker, received a credit rating downgrade to junk by S&P Global Ratings, due to a slowdown in demand for EV batteries, lower metal prices, and high capital expenditures.

EV start-ups Rivian and Lucid Motors have both suffered and struggled with funding the necessary large-scale, early-stage investment to transition to mass production. Rivian, which is yet to turn a profit, suspended plans to build a new production factory in Georgia, in an effort to cut costs ahead of the launch of a lower-priced EV. Fortune reported Tesla’s Musk as saying that the “actual hard part of making a car company work is achieving volume production with positive cash flow”. Lucid, the luxury EV maker, is backed by Saudi Arabia’s Ayar Third Investment, an affiliate of the Saudi’s Public Investment Fund (PIF). The company has struggled due to supply-chain disruptions which have slowed early production of their only model while slashing prices to stay competitive. Lucid has raised an additional $1bn in an equity private placement from PIF in late March, according to a regulatory filing, to finance its luxury electric sedan roll-out. Speaking before the latest capital raise, Lucid Motors’ CEO Peter Rawlinson told the Financial Times he “was “looking at every aspect of cost” as the start-up EV manufacturer strives to reduce manufacturing costs and accelerate production output at its Arizona factory. Lucid expects to make 9,000 cars this year, against a factory annual capacity of around 90,000. Planned cost-cutting measures include consolidating logistics under one roof to reduce operating costs and other overheads, trying to source more competitively priced materials, as well as “looking at reducing anything that is variable”, reports the FT.

Fisker, another EV start-up, paused production in mid-March for six weeks as the manufacturer seeks to stave off the risk of reportedly having to file for bankruptcy. The company failed to make a required interest payment of about $8.4m last week on its unsecured convertible notes due in 2026, according to a regulatory filing. In the filing, Fisker warned the company needs significant near-term additional funding to execute its business plan and to continue operations. If capital raising, or a business sale, is unsuccessful, Fisker said it “may not be able to satisfy our debt service obligations and could need to seek protection under applicable bankruptcy laws”.

Bankruptcies, scrapped IPOs and de-listing

In Europe and the UK, IPOs have been scrapped and one Nasdaq-listed UK EV manufacturer has fallen into administration. France’s Renault ditched plans to list Ampere, its EV software business, citing suboptimal equity market conditions. The IPO was estimated to value the company at €10bn. Elsewhere, Arrival, the UK EV manufacturer which makes vans, buses and cars, fell into administration in early February after failing to secure long-term funding to support its business. The firm was delisted from the Nasdaq due to its failure to file annual financial statements and hold an annual meeting of shareholders. Administrators are exploring options for the sale of the business (a joint stock company governed by Luxembourg law) and company assets including the electric vehicle platform, software, intellectual property and R&D assets to compensate creditors.

Brighter longer-term outlook

The EV market is undeniably facing growing pains, but adoption has far from stalled. These challenges are temporary hurdles on the path to broad-based and sustainable EV adoption. Global EV sales in the first two months of 2024 were up 32% year-on-year, indicating continued growth potential. Long-term forecasts also remain optimistic, with projections suggesting the global electric car fleet could reach 30% to 66% of the total car market by 2030. China, Europe, and the US will continue to drive this growth. Innovation, cost reductions, and an expansion of charging infrastructure are critical for the EV market to navigate these near-term obstacles and achieve its long-term potential.

How BTG Advisory can help

At BTG Advisory, we are your trusted partner in managing these challenges. We work with automotive companies, their supply chain and funders across the business and economic cycle. Leveraging our experience in working with automotive original equipment manufacturers (OEMs) and suppliers worldwide, we identify operational inefficiencies, streamline processes, and unlock cost savings to enhance profitability and cash flows. We assess financial health, devise strategies to mitigate supply chain and geopolitical risks and ensure long-term financial stability. We are also experienced in navigating complex and new regulations, as well as identifying and remedying financial discrepancies. We can provide independent balance sheet assessments, ensuring sufficient financial resources to support your growth ambitions.

Our team can also help companies integrate sustainability and digitalisation into their strategy and business model, improving ESG sustainability and leveraging digital technologies to improve supply chain visibility, manufacturing efficiency, and enriched customer experiences while navigating the complexities of data management and cybersecurity. Finally, BTG Advisory can support growth companies seeking to expand through M&A and strategic partnerships to secure innovative capabilities and open up new markets. Whether your company is struggling under current headwinds or is in a position to capitalise on the window of stress, do not hesitate to get in touch with our team today and let us help you reach your ambitions.