SLOWING DEMAND FOR ELECTRIC VEHICLES RAISES ALARM BELLS

Fri 27 October 2023:

High-interest rates are creating hurdles for climate regulators and automakers aiming to accelerate the transition to electric vehicles (EVs). This concern was underlined by the termination of the GM-Honda partnership and a warning from LG Energy Solution, a South Korean battery maker.

While electric vehicle sales continue to grow, the pace is not aligning with the expectations of companies that have invested heavily in the EV sector. The anticipation of persistently higher interest rates has led to a reevaluation of plans for 2024.

According to Reuters, Lee Chang-sil, the CFO at LG Energy Solution, expressed concern that EV demand next year could fall short of expectations due to global economic uncertainty. This uncertainty is exacerbated by the high-interest rate environment, which could make it more challenging for people to afford EVs. Car purchases often revolve around the monthly payment, and elevated interest rates can deter potential buyers, as pointed out by Tesla CEO Elon Musk.

The termination of a $5 billion partnership between Honda and General Motors, announced just a year ago, highlights the shifting dynamics in the EV market. GM recently emphasised its focus on meeting near-term EV demand rather than specific volume targets, citing the need to enhance profitability. This change in outlook has affected investor sentiment, with self-driving EV and tech-related exchange-traded funds declining significantly over the past three months.

Despite these challenges, EV sales continue to grow. In the United States, over 300,000 EVs were sold in the third quarter, marking a significant milestone. Europe and China also experienced sales increases of 14.3 per cent and 22 per cent, respectively, in September. China, as the world’s largest EV market, continues to drive the global industry forward.

However, the industry is grappling with falling raw material prices, which impact the production of EV batteries. As EV demand slows, raw material prices have softened. For example, lithium prices have decreased by 67 per cent so far this year, and cobalt prices have dropped 20 per cent this year, more than halving since May last year. Car manufacturers, like other industrial firms, hedge against commodity price fluctuations, and the decline in demand has affected the prices of materials used in EV batteries.

Several automakers have expressed caution due to these challenges. Germany’s Volkswagen lowered its profit margin outlook for the year, attributing it to negative effects on raw material hedges in the third quarter, some of which are used in EV batteries. U.S. automaker Ford temporarily reduced production at a plant manufacturing its electric F-150 Lightning pickup truck. Japanese motor manufacturer Nidec expects a loss at its key e-axle business, shifting from a previous profit forecast. Even China’s CATL, the largest battery maker for EVs, faced challenges with a weaker market share in September and increasing competition.

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