The Daily Update - Shanghai Motor Show and Electric Vehicle Supply and Demand (Part Two)

With the Shanghai Motor Show being a good excuse to talk about the electric car market, yesterday we made some brief comments on EV supply and how it’s possible to see it accelerating over the next few years as a trifactor (at least) of developments approach maturity. Today follows with some brief comments on the demand side of the equation. Projecting demand for EVs into the future is harder with fewer and less reliable leading indicators. But a good starting point is looking into the dynamics which have driven recent demand – notably in China where the most extraordinary boom in this market has occurred – and evaluating drivers that could push it still higher (or be introduced in other markets) alongside potential constraints that could dampen the trend.

One of the clearest examples of policy assisted demand for EVs is the restriction of certain cars in Beijing. Restrictions on combustion engines in the city mean that out-of-town drivers are only allowed in the city with certain number plates: EVs automatically qualify with the alternatives being a bloated price tag or slim chances in a lottery. Recently only 1 in 50,000 out of the 11+ million who entered the Beijing licence plate lottery for non-electric vehicles were successful. Assuming current laws and restrictions remain, one could envisage these as 11 million potential customers for EVs in regions surrounding Beijing alone. Some, of course, will not be able to afford one, but reduced taxes and subsidies (to both manufacturers and customers) typically knock a third off the market price, making them an attractive proposition – above petrol or diesel  – for those in the market for a new car. Londoners may sense some familiarity with such a policy after a new Ultra Low Emission Zone (ULEZ) came into effect last week and will be extended into much of Greater London in a couple of years – with your average non-EV driver facing a £12 daily charge. With city pollution being a common problem expect such policies to become commonplace adding to the many reasons electric cars are more suited for city driving.

Demand will also face headwinds as generous subsidies are set to be curtailed over the next couple of years, in China and in numerous other markets, with the hope that EV production costs will fall in tandem (although many also observe that even if end user costs do fall in-line customers are still typically more incentivised by a sale or a subsidy over simply just a cheap price). Then there is the sustained above average demand for autos across many developed nations in recent years, even as other consumer markets’ demand have dipped. Indeed many have become concerned with auto loan delinquencies in the US which recently have reached five-year highs despite low interest rates. Perhaps lower interest rates have front-loaded buyers into the market ahead of the broader market turning electric. Furthermore, late business cycle assumptions and rate-rise expectations both naturally hamper such big-ticket purchases. So although the market looks surely set for growth, it’s uncertain whether demand will keep up with the potential supply shock. If there aren’t enough environmental millennials with enough savings (after budgeting for avocado-on-sourdough and putting a bloated deposit on a micro-flat) to afford the latest electric vehicle – competition in the EV market could become quite charged.

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