Legacy auto faces unsellable car disaster in China as pollution crunch looms

"Ford's Model e business generated operating profit margins of roughly negative 40% in 2022, according to the company."

I don't see how those companies survive.

I don't think people realize what a shock wave is coming for the auto industry.

1. The transition is expensive. VW is spending $200B. $200B of debt in this high interest rate environment is going to make profitability tough.

2. High interest rates make cars a lot more expensive, suppressing demand.

3. The inventories on dealership lots have been rebuilt over the last 6 months, hiding a drop in consumer demand.

4. EV's take much less labor to manufacture than combustion engines. Take a look at the regularity of an EV compared to a combustion vehicle. That regularity makes robotic assembly more feasible. Firing workers kills morale in a company.

5. The bulk of the transition is going to happen faster than most expect. Most are expecting a linear progression, but you all know what an S curve looks like. Right now we're in the low slope bleeding edge phase. Very soon we'll transition to the high slope mass-market phase. The low slope laggard phase will sustain a few niche manufacturers but won't be enough for those who depend on volume for profits.

6. The transition is creating a large group of hesitant buyers. Many people are unsure what their next vehicle purchase should be, so they delay the decision. They keep maintaining their current vehicle, purchase a used car as a stop gap, or keep relying on their current alternative -- bus, Uber, mooching rides off friends, whatever.

In other words, demand for combustion engines will drop faster than demand for EV's will rise.

7. The other points mean that manufacturing capacity is higher than demand, which means lower prices. Which means shrinking of already low profit margins, perhaps even into the negative.

8. And EV's won't be a panacea. Their price is dropping too. Tesla will be blamed for leading the price drops, but it's really the Chinese leading that charge. BYD has an €8200 vehicle coming soon, the Seagull. It's not a golf cart, it meets full Euro safety specs. Geely has a stable of European brands (Volvo, Polestar, MG and Lotus) that it can and will use to sell Chinese cars at Chinese prices without the Chinese stigma. (cf MG4).

The Chinese have been ignoring overseas markets for a while now since they could sell everything they make domestically, but now that prices are cratering in China they're going to look to export to keep profits up. Most Chinese manufacturers will fail, but there are >100 of them, and even if a couple succeed it'll be massive.

9. Look up the "Altman Z score", and then take a look at this: https://cleantechnica.com/files/2023/03/Graph-Tony.png A score below 3 predicts upcoming bankruptcy. People complain that Tesla is over-priced, but IMO it's that the others are underpriced -- their price includes a significant bankruptcy risk. Not all of them will go bankrupt: once the survivors lose the bankruptcy risk discount, their value should go up.

10. The usual risks of large companies riding a significant technology change, coupled with significant supply chain challenges.

11. HN is highly skeptical about autonomous driving, but if it does happen it will have a significant unpredictable change on the market.

12. The uncertainty of the Inflation Reduction Act. Manufacturers are betting heavily on the subsidies in the IRA, but the chances of a rug pull in 2024 are high. OTOH, those not betting on the subsidies will lose heavily if the rug isn't pulled.

13. 80% of Lithium refining is done in China, and the odds of a trade war with China seem high.

14. Many legacy manufacturers make a surprising proportion of their volume and profit selling into China. That's vulnerable.

15. Carmakers have a lot of debt backed by consumer leases. High interest rates make that a lot more expensive.

I'm sure I'm wrong about some of those points, but even just a few could be devastating to a low margin business like automotive manufacturing.

The Euro 6 Norm was declared years before it became a reality and so is going again with the announcement of Euro 7.

If they can't complain with regulations, bribing until the last seconds, it's not a regulatory fault.

So.. its switching from petrol to coal? Unless they really ramp up nuclear and solar. Which they did not so far..

And dont forget, the first 100.000 kilometers of energy are already spent driving of the lot, building a new car. So fading away old cars as slow as possible is the most energy efficient strategy?

If manufacturers knowingly create stranded assets why would they need to be bailed out?

They aren't going to scrap those cars.

For one thing, like all EV-biased articles, facts are thin. The article says "millions", then "hundreds of thousands" cars would fall foul of the new legislation. Whichever it is, at those numbers I can all but guarantee that those cars will be sold at a profit.

I assure you, no government is going to willingly kill off 8000[1] domestic businesses just to make a point on behalf of foreign interests, especially not China who is well known for prioritising their economy over almost everything else.

Those cars are going to get sold, and will be driven for a normal lifetime.

This site will conveniently omit reporting that, though.

[1] From the article.

What are the standards in the US?