There has been a lot of doom and gloom in the media about the prospects for battery electric vehicle (EV) growth and adoption this year, says Ben Kluftinger (pictured), senior investment analyst at WHEB Asset Management.

After the euphoria of the prior few years, what happened? Are EVs really on a long-term slow burner?

The good times

Figure 1: Number of EVs sold by year and annual growth rate

There were several important reasons behind the rapid growth in past few years. The most important one was subsidies. This should not be surprising as temporary subsidies are a fantastic tool to kickstart new technologies and move it down the cost curve quickly via scale.

There were several important reasons behind the rapid growth in past few years. The most important one was subsidies.

This should not be surprising as temporary subsidies are a fantastic tool to kickstart new technologies and move it down the cost curve quickly via scale.

In terms of EVs, several countries (Norway, Germany and China) put generous subsidies in place to work towards their net zero carbon commitments, triggering healthy demand. There were also headline-grabbing announcements about the phase-out or banning of internal combustion engine (ICE) cars – sending a strong warning signal to the automotive industry.

A second important basis for EV adoption was the spiking of energy and fuel prices following Russia’s invasion of Ukraine. Some EVs were suddenly cheaper than ICE cars. The third reason was driven by early adopters for whom the environmental benefit and owning the latest tech outweighed the often still higher cost of an EV vs its ICE equivalent.

What happened?

The EV boom slowed down during 2023 and almost completely evaporated. With the bearish commentary now dominant, what has caused the rapid slowing in growth in just two years?

Firstly, and most importantly, while the total cost of ownership of an EV is usually lower than an ICE car, the upfront costs tend still to be more expensive. The withdrawal of government subsidies, most prominently in Germany and China, has exacerbated this price difference.

At the same time, price has become much more important. Early adopters have now, for the most part, already purchased an EV. Further growth now requires the more price-conscious mass market to buy EVs. However, the cost-of-living crisis has made this group even more price-sensitive and the withdrawal of government subsidies further eroded the mass market’s appetite to buy EVs.

There are also technical concerns with a perceived lack of charging infrastructure and slow charging times. Tesla firing its entire supercharger team in April 2024 did not improve market sentiment. Safety too has been an issue in some markets, where the word “EV phobia” made it into local media in South Korea.

Car manufacturers (OEMs) including GM, Ford, Mercedes, VW, Jaguar and Aston Martin have stepped back from prior EV expansion commitments pushing them out into the future as their balance sheets were already stretched from years of poor car sales and growing EV inventories.

Lastly, the EU is imposing hefty tariffs on Chinese EV imports due to ‘unfair Chinese subsidies’ on 4 October 2024 – an impactful move which had been in the making for over a year.

What next for EVs?

The question is, where should investors go from here? There are good reasons for investors to assume that 2024 will be the low point and healthy EV unit growth should resume gradually.

For one, the cost-of-living crisis is abating with energy prices having moved well off-peak, inflation dropping back towards normal levels and interest rates coming back down. This should all help to get a steady improvement in consumer confidence.

Some EV subsidies are about to re-appear. For example, Germany decided in September to introduce tax relief measures for EVs. In addition, EV prices are coming down. Tesla made headlines earlier in the year by reducing prices on several occasions, but others will have to follow to re-ignite demand and avoid costly fines due to missing fleet emission targets.

Elsewhere, on 1 July 2025, Euro 7 will come into force in the EU, which mandates reduced overall particle emission numbers from vehicles. In the US, Joe Biden re-instated the annual fleet-wide emission targets. Although slightly watered down in March 2024, they still set a clear pathway to an eventually mostly EV-based car fleet. Some individual States have even tougher standards, such as California. Also the new UK Labour government is considering reinstating the 2030 deadline for an ICE ban which had been pushed out to 2035 by the Conservatives.

The only way OEMs will be able to avoid paying hefty fines is by incentivising consumers to opt increasingly for low/zero emission vehicles through price. Annually declining battery prices help. The OEM’s individual phase-out commitments to end ICE production remain firmly in place.

On the other hand, the EV charging infrastructure certainly requires ample investment in most countries which adds to the anxiety of prospective EV owners. The good news is there is a lot of activity importantly from a regulatory perspective for both the rollout of home and public charging points. In 2023, the public charging stock of fast chargers increased by 55% making up over 35% of public charging points at year end.

Technology is not standing still either. Charging speed is a key adoption hindrance but solutions are in the making.
Lastly, even economic theory is on the side of a more rapid EV adoption. The much quoted “S curve of adoption” introduced by Everett Rogers in his 1962 book “Diffusion of Innovations” shows that EV tipping point for mass adoption is around the 5% level of the sales mix which has been surpassed by more than 31 countries.

Conclusion

For investors, they should be looking to get exposure to the electrification of transport. Portfolio stocks with EV revenue streams include Aptiv (vehicle electrification systems), ATS (EV battery assembly and test automation solutions), Infineon (chips / Integrated boards for EVs / EV batteries), and TE Connectivity (high-voltage connectivity solutions) to name a few.

EV sales have clearly hit a few bumps in the road, but long-term conviction should remain unshaken - the future of driving is electric.

By Ben Kluftinger, senior investment analyst at WHEB Asset Management