How COVID-19 may supercharge demand for electric vehicles

The COVID-19 crisis has created an extremely challenging environment for the global automotive sector as global lockdown measures saw car dealerships close for several months, leading to a significant drop in vehicle purchases. Sales in the five largest European automotive markets fell by 84% and 60% in April and May respectively.[1] This has unsurprisingly had a devastating effect on the automotive sector and raises questions as to how it may recover.

One silver lining, however, was the continued increase in market share for electric vehicles. The chart below shows that electric vehicles have steadily grown their share of vehicle sales in the five largest European markets, reaching as high as 16.0% in June, more than double their 6.1% share a year ago and ahead of even the most optimistic forecasts for this stage. Battery electric vehicle (BEV) sales have also increased to 4.1% of the market, helped by the UK, where BEV sales in June increased by 262% year-on-year to take a 6.1% market share, up from 1.1% just a year ago.[2]

This impressive development reflects the greater availability of electric vehicles over recent quarters as manufacturers attempt to meet challenging EU environmental targets that require fleet emissions to be reduced to 95 g/km by 2021, with 95% of the fleet required to achieve the standards this year. Recent data show that vehicle emissions rose to 122.4 g/km in 2019[3], demonstrating the size of the task ahead for the industry. Failure by a manufacturer to meet its individual CO2 target will result in penalties that could total several billion euros, as well as long-lasting reputational damage.

Plugged-in policies

Recent interventions in the auto market by European governments are also likely to support the trend towards electric vehicles. As a reaction to the fall in vehicle sales due to COVID-19, the German government announced that it would double its share of purchase incentives for BEVs to €6,000 (reduced to €5,000 for vehicles with a list price over €40,000), with an additional manufacturer contribution of €3,000 (€2,500 over €40,000).

The French government also announced a plan to support sales of plug-in hybrids (PHEVs) and BEVs with incentives of €2,000 and up to €7,000 respectively, as well as an additional temporary bonus of up to €5,000 for purchases of electric cars.

Other European countries that are considering automotive incentives are placing electrification at the heart of any package, while the proposed EU Green Deal also has a heavy emphasis on green mobility. It appears that the COVID-19 crisis has in many ways brought forward the global focus on environmental issues, with governments, companies and consumers believing now is an opportune moment to implement many necessary measures.

In this regard, the increase in market share for electric vehicles is a boost for the automotive sector as it increases the ability of manufacturers to reduce their own fleet emissions and avoid penalties.

The trend is a double-edged sword, though: the acceleration in electric-vehicle take up will also increase pressure on and shorten the remaining lifespan of combustion engine technologies such as diesel and petrol, which are currently more profitable and provide the cash flows that allow auto companies to pay dividends, invest for the future and finance their sizeable debt obligations.

COVID-19 has already had a major impact on the sector, but the resulting policy response may have a more lasting impact in accelerating the adoption of electric vehicles across Europe. The challenges ahead for the European auto sector show no signs of dissipating.

[1] Bloomberg and National Associations data, July 2020

[2] UK SMMT, July 2020

[3] European Environmental Agency - https://www.eea.europa.eu/highlights/average-co2-emissions-from-new-cars-vans-2019 June 2020