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Point of View

The end of the road for diesel cars, but is electric ready to take its place?

 

By Mark Ward – Head of Trading – Sanlam UK

New registrations of passenger vehicles have always been a widely-watched barometer of the health of the general economy and consumer sentiment. So, when new car sales (petrol and diesel) in the UK plunged 15% in March compared to 2017, investors were quick to take notice. But to what extent is this recent fall in car sales a symptom of change and uncertainty within the industry, rather than a gauge of today’s economy? Here are some of the factors at play:

The impact of a change in Government policy

Tax on diesel cars increased on 1st April, with some drivers having to pay an extra £500 a year. Consumers were understandably angry - especially since most modern diesels can be every bit as clean as their petrol counterparts when making longer journeys, and the British government has been incentivising diesel sales for the past two decades (under both Conservative and Labour leaderships).
 
Such changes in policy can have serious knock-on effects. The average used price for a diesel car (according to Motorway.co.uk) fell by 8% in the last three months of 2017, while sales of new diesel cars dropped 37% by March. Indeed, anyone with finance or a loan on a newer diesel car may find themselves owing more to the bank or lender than the car is worth, which can become an issue if the car is written off in an accident and the insurer will only cover the market value of the car.
 
Jobs are also at stake. In April, Vauxhall terminated the franchise contracts of every single UK dealership to cut costs. And in May, Nissan (which produces 500,000 cars per year in Sunderland), announced it will cease all sales of diesel cars in the UK and Europe, while cutting 10% of its UK workforce.
 

The demonization of diesel

Since the 2015 Volkswagen “Dieselgate” emissions scandal in the UK, Europe and the USA, diesel has become the pariah of the liquefied fuel world. Islington council is now charging all diesels, regardless of age or vehicle type, an extra £2 per hour to park in the borough. Westminster Council are penalising all pre-2015 diesels with a new D-Charge. And other councils will be sure to follow suit if it proves to be a significant revenue stream for local constituencies. Across the channel – Paris, Madrid and Athens are implementing outright bans on all diesels in the cities, even though over half of all cars currently on the road in the UK and Europe have diesel engines.
 

The rise of the electric car, but we’re not there yet

The Toyota Prius hybrid has been around for over twenty years and is favoured by the mini-cab industry due to its cheaper long-term running costs. It does take time to recoup this though, as the initial outlay for a Prius is 30-40% more than a comparable vehicle.
 
Tesla is leading the way with the next generation of fully-electric cars, but the only model currently available in the UK is the Model X, with a starting price of more than £70,000. The top model is £102,000. The Model S, starting at £65,000, can be reserved but consumers are waiting years to take delivery.  Meanwhile, Toyota, Kia, Nissan, Hyundai and Renault have released fully electric cars, but they tend to be small, compact vehicles, with the price tag of a luxury car. The South Korean-made KIA Soul EV starts from £32,000, which is the same starting price as a BMW 5 series.  The equivalent petrol Kia (the Picanto) starts from £8,700, so there is still a heavy premium for going “green”.
 
The irony of electric cars is that they need to be charged every day via a power socket. In the UK, only 15% of electricity is from renewable sources. Instead of burning fuel in the car, it is simply being burnt by the National Grid at coal-fired power stations, natural gas and other fossil fuel sources.
 
Another consideration is that electric cars run on extremely heavy, powerful batteries that are made from Lithium and Cobalt. While not ‘rare’ when comparing to platinum, gold and silver, they still need to be mined. Most Lithium comes from South America, and most Cobalt comes from Central Africa and the Congo, and there are constant emerging news stories of child labour and environmental destruction from these activities. Crushing rock for mining, and the toxic waste products produced is simply shifting pollution from one source to another, plus there’s also the issue of the safe disposal of the batteries when depleted.
 

The impact on oil prices

Oil prices in general have not been receptive to the European and UK shifts. Diesel cars never gained a strong foothold in the world’s top consumer market – the USA. Petrol there accounts for most cars, with diesel mainly used for lorries and long-distance freight trains. China and India have made no real moves to ban or discourage diesel use in the near-term, so no significant impact to oil price itself has been attributed to new European measures.
 

Impact on car makers

Volkswagen has largely recovered (financially and reputational) from the Dieselgate scandal, because it is a titan of German industry and a money-making machine, able to absorb the fines and fix the affected cars. Other manufacturers in the US, Japan and Europe are faring relatively well, although this is also due to consolidation in the sector over the previous decade, allowing for lower operating costs. Almost all manufactures are in the process of developing electric cars, and due to modern “just-in-time” manufacturing processes, can adapt quickly to produce new models once design and testing has completed. Tesla has not yet proven to be a major threat to any of the main players and is unlikely to become one anytime soon.
 

What does this mean for investors?

There’s no question that the car industry is evolving, but it’s not going to happen overnight. Car owners are unlikely to ditch the vehicles they already own, or drive any less, because tax and parking costs more. And while the new diesel car market may soon disappear, there is life in the petrol market yet – mainly because the price of electric cars needs to come down significantly, and a huge infrastructure overhaul is required.  After all, how many petrol stations do you see on your daily commute, compared to Electric Charging Ports? And even if every petrol station switched to power banks instead of fuel pumps, a Tesla X takes an hour and a half to fully charge.
 
In the short-term, concerns that this sales downturn could be down to a stalled economy are not unreasonable. And it’s particularly unhelpful at a time when, as a major importer of German and French cars, falling sales could mean Britain has less clout when trying to get the powerful manufacturers and trade unions in Germany on-side for a better trade deal in Brexit negotiations.
 
Over the longer-term, the automotive industry will make huge investments in the future, and those companies which produce cost effective cars, and correctly anticipate consumer’s preferences will reap rewards.  Government policy is supportive, consumers are ready to embrace the new technology, and time will tell if the profits justify the investment. 

Opinions featured in this article are the author’s own and may not necessarily be shared by Sanlam.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.