"Fitch Ratings: EMEA Carmakers Catching Up with Tesla"

(14 March 2019)

Fitch Ratings - Barcelona / London - 14 March 2019: European carmakers are refocusing their strategy towards electric vehicles (EVs) and catching up with specialised manufacturers, Fitch Ratings says. Carmakers have increased investments in plug-in-hybrids (PHEVs) and battery electric vehicles (BEVs) with numerous model launches expected in the next 12 to 24 months. The revenue implications are limited due to a still low share of EVs in overall car output, while the impact of investments on credit metrics can be accommodated within the current ratings.

Carmakers' investments and development costs, as well as higher fixed costs, are unlikely to lead to material deterioration of credit metrics in the short to medium term, therefore the rating impact remains limited. Some manufacturers, including Volkswagen (BBB+/Stable), have also announced an acceleration of cost-cutting efforts, including redundancies, partly to support upcoming investments in electrification and partly because EV production is about 30% less labour-intensive than that of internal combustion engines. We believe that manufacturers' electrification strategies will drive their competitiveness and ultimately credit profiles over the next decade.

Strong growth momentum in global EV sales in 2018 was supported by tighter emission regulations, especially in Europe from 2020-2021, that will not be met with the current powertrain mix and given falling diesel sales. It was also supported by consumer incentives for buying EVs in some countries. A massive effort in electrification will be required to reach these targets and avoid fines. 

A boost in product offering from leading manufacturers, increasing consumer acceptance and higher affordability due to declining battery costs and maturing technology, are other important factors in EV growth. The EV sales still remain small with just 2%-3% in key markets and only a tiny fraction of the global existing car fleet.

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We believe that early adopters, such as the alliance between Renault (BBB/Stable) and Nissan, and Tesla, will reach breakeven points and then profits earlier than late joiners. Early entrants also benefit from valuable experience built beyond EV manufacturing, notably in vehicle sale, financing, after-sales management and recycling. 

Nonetheless, we believe incumbent carmakers have the ability to catch up with specialised EV manufacturers, thanks to their capacity to invest and their robust record in product management. Larger manufacturers, including Daimler (A-/Stable) and Volkswagen, are investing substantial amounts to accelerate the development of EVs and we believe their experience will help them gain a foothold in the segment. Volkswagen has announced plans to launch close to 70 EV models in the next decade, accounting for more than 22 million vehicles. 

Other companies, such as Peugeot and FCA (both BBB-/Stable), have adopted a strategy of fast-followers, but we believe they should be able to eventually close the gap with larger groups, thanks to more recently announced investment plans and a gradual market convergence towards electrification. 

We expect EV profitability to accelerate for carmakers once unit sales increase as this will drive better fixed cost absorption, while large production footprints will make introducing bolt-on models with electric drivetrains relatively easy. This contrasts with operational challenges of smaller producers, exemplified by Tesla's manufacturing bottleneck in 2018 that could be addressed only gradually.

Tesla has a competitive market lead and experienced a pivotal year in 2018, increasing EV deliveries 113% to 245,000, thanks to the Model 3 production ramp. BMW consolidated its position as the largest European EV manufacturer benefitting from continued growth of its i3 model launched in 2013, while Volkswagen capitalised on strong demand for its e-Golf. Even manufacturers that have joined electrification later are accelerating their product offering. Volvo Cars will launch its first BEV in 2019 and Daimler, which historically sold hybrids (B class and smart), will introduce its first full electric Mercedes Benz model (EQC) in 2019.

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Source:  https://www.fitchratings.com/site/pr/10066366