Global impact of tougher electric car targets in the EU and US

Key points

• Regulatory developments put about 30% of Toyota’s global sales at risk. 
• Other East Asian carmakers, such as Hyundai-Kia, are more exposed.
• US carmakers, particularly Ford, are also at risk from inaction. 

On July 14th, the European Commission announced more stringent regulations to fully phase out petrol and diesel vehicles, as part of its “Fit for 55” package. The Commission’s legislation effectively requires carmakers to eliminate their carbon emissions from new cars by 2035. 

The Commission intends to accomplish this primarily by progressively adopting stricter emissions standards and building out more charging infrastructure across the EU. The required level of vehicle emissions reduction by 2030 is likely to increase from 37.5% to 60%. Reports indicate that the Commission also might increase its target for charging stations. There are currently more than 300,000 public charging stations across the EU, according to BNEF data, and the existing policy targets one million by 2025.

The EU became the world’s largest electric vehicle market in 2020 after the bloc’s 2020/2021 CO₂ standards resulted in a spectacular increase in electric vehicle (EV) sales. Sales of light-duty electric vehicles increased 149% year-on-year in 2020, jumping from 3.4% of total car sales in 2019 to 11% in 2020, as automakers rushed to meet their targets. Europe will continue to be the world’s largest EV market until 2025 when China retakes the crown, BNEF projects. Existing CO₂ standards will continue to drive growing levels of EV adoption and by the end of the decade, 51% of passenger vehicles sales will be all-electric in Europe, and 85% by 2035, according to BNEF.^[1]All-electric vehicles are powered entirely by batteries, otherwise referred to as a Battery Electric Vehicle

If it adopts the proposed target, the EU would accelerate its transition to electric vehicles. A 2035 phase-out target would mean that the world’s third largest automotive market is throwing its full weight behind electrification. It also aligns with the UK’s own phase-out date of 2030 for petrol and diesel cars, and 2035 for hybrids. Together, the EU and the UK account for just under 20% of global vehicle sales, behind China (33%) and the US (21%).^[2]Data taken from Bloomberg Intelligence, accessed between 20 June – 6 July 2021

The eight largest car markets in the EU, including the UK, are particularly important, because they represent 86% of sales in Europe and over 18% of global sales (see Figure 1).^[3]These are Germany, France, the United Kingdom, Italy, Spain, Poland, Belgium and the Netherlands. These eight markets are all in the top 20 car markets worldwide.^[4]Data are from 2019, before Brexit came into force Of these, four countries have already announced zero emissions vehicle sales targets, and electric vehicles have at least a 10% market share in these countries.

Figure 1: The global share of European automotive markets

Source: Bloomberg 

The US has followed suit, laying out a future with a more electrified vehicle fleet. President Biden has signed an executive order, which sets a target of having 50% of all new cars sales in the US be electric by 2030. Though many of the major carmakers have already announced electrification targets that align with Biden’s new target, this executive order will put further pressure on them to transition to EVs. In addition, the President has tightened fuel emissions standards for vehicles, which will require 26% of all car sales in the US to be electric by 2026, according to a BNEF analysis.^[5]BNEF, “Biden’s Goal of a 50% EV Market Share Gets A CAFE Boost”, 12 August 2021. Accessed via Bloomberg Network 

Biden’s new regulation will reinvigorate the transition to EVs in the US. The country is the world’s second largest car market and typically accounts for over a fifth of all new car sales globally. However, when it comes to EV sales it lags behind the likes of the European Union and China – it sold about 320,000 EVs, representing approximately 10% of global sales in 2020.^[6]BNEF, “Long-Term Electric Vehicle Outlook 2021”, 9 June 2021. Accessed via Bloomberg network

The following analysis looks at the exposure of the largest carmakers to European markets and the US.

The EU’s and US’s regulatory shift will affect car exporters

The US and Europe (the EU27+ the UK) are significant markets for Japanese, South Korea, US and European carmakers. These car companies stand to lose their market share in Europe and the US if they do not expand electric vehicle production in time to meet new regulatory targets.

• US automakers are at risk from inaction, with European markets accounting for almost 8% of their combined global market share. The most exposed US company is Ford, for which European markets account for 21% of global sales. The EU accounts for 19% of total US car exports.

• In sales volume, Japanese car companies – mainly Toyota, and to a lesser extent Suzuki and Mazda – sell more vehicles in Europe than carmakers from any other non-EU country. Of all EU car imports, close to 19% come from Japan. This trade is valued at EUR 9 billion, worth 7% of Japan’s global car exports.^[7]The value of Japan’s global exports is over EUR 120 billion. Of that, European markets account for EUR 9 billion. In addition, the US is a highly lucrative market for Japan’s car industry – total car exports in 2019 were valued at USD 38 billion.^[8]This statistic was taken from Trade Map

• South Korea’s automotive exports to the EU account for about 13% of the bloc’s total car imports. The value of these imports constitutes 22% of South Korea’s global car exports, worth just under EUR 8 billion ^[9]South Korea’s global exports amount to roughly EUR 35 billion, of which close to EUR 8 billion goes to EU markets. The US is a similarly lucrative market for South Korea’s car industry. The value of car exports to the US in 2019 came in at just under USD 16 billion.^[10]This statistic was taken from Trade Map

Companies that do not adapt will be pushed out of the market

The car companies most exposed to the EV transition have already enacted the most ambitious electrification strategies.

• As over 35% of its sales are in European and US markets, Volkswagen has embarked on arguably the most ambitious push into EVs (see Figure 2). It wants 60% of its sales in Europe to be fully electric by 2030 as part of a USD 86 billion electrification strategy. 

• The two regions account for close to 70% of Ford’s total sales, and it has read the writing on the wall. The carmaker will spend USD 30 billion on electrification and plans for all-electric vehicles to account for 100% of its sales in Europe by 2030.

• Even the Hyundai Kia Automotive Group, which has been slow to see the merits of electrification, aims to have all-electric vehicles represent 25% of its sales by the end of the decade. It will spend upwards of USD 45 billion on electrification.^[11]This figure combines Hyundai’s and Kia’s investment strategies 

• However, Toyota remains a laggard with its modest electrification strategy. It intends to invest USD 13.5 billion over the next decade, mainly focusing on batteries, and will release 15 new all-electric models. Yet its overarching strategy prioritises hybrid vehicles – the company intends to release 55 new hybrid models, and aims to sell six million hybrids annually by 2030, compared to fewer than two million all-electric cars by the same date. With the direction of travel moving beyond hybrids and towards full electrification, Toyota is putting its European and a significant portion of its US sales, which together constitute about 30% of its global sales, at risk if it does not switch more decisively to battery-electric vehicles.

Figure 2: The new regulation will impact the world’s largest automakers

Source: Marklines and annual reports [12]Data taken from Marklines, accessed between 20-29 June 2021.