Manufacturers have been scaling back plans for growth. But the long-term trend is still towards electrification

Ed Crooks, Vice-Chair, Americas, Wood Mackenzie

The 1970s and 80s were brutal decades for the big American car companies. Between 1970 and 1990, General Motors, Ford and Chrysler’s combined share of the US car and light truck market fell from 82% to 71%. Over the same period, the combined market share for Toyota, Honda, Nissan, Mazda and Mitsubishi rose from 4% to 22%. 

The US manufacturers were caught with high costs and fuel inefficient models that fell out of favour as gasoline prices soared, and struggled to respond to consumers’ demands. The average fuel economy of light vehicles sold in the US improved from 13.1 miles per gallon in 1975 to 22 MPG in 1987.  

Now questions are being raised about whether the transition to electric vehicles might be a similarly bruising experience for incumbent manufacturers. The big car companies have committed to switching to EVs. General Motors said in 2021 that it had an “aspiration” to eliminate tailpipe emissions from its new light-duty vehicles by 2035. Ford said the same year that it expects 40%-50% of its global vehicle sales to be fully electric by 2030.  

Since then, however, the problems have been piling up for EVs. In their third quarter earnings reports last month, both GM and Ford reported that EV sales had been disappointing. Mary Barra, GM’s chief executive, said in her letter to shareholders that the company was “moderating the acceleration of EV production in North America to protect our pricing, adjust to slower near-term growth in demand, and implement engineering efficiency and other improvements that will make our vehicles less expensive to produce, and more profitable.” 

Ford’s electric vehicle division reported a 44% rise in volume but only a 26% rise in revenues for the third quarter, and an increased loss of US$1.3 billion before interest and tax. The company said: “Many North America customers interested in buying EVs are unwilling to pay premiums for them over gas or hybrid vehicles, sharply compressing EV prices and profitability.”  

Both companies have dropped EV production targets: GM’s of building 400,000 from 2022 to mid-2024, and Ford’s of making 2 million by the end of 2026. 

Other companies are facing similar challenges. Mercedes-Benz chief financial officer Harald Wilhelm last month described the EV market as “pretty brutal”, and the company said it was facing “a subdued market environment marked by intense price competition, particularly in the electric vehicle segment.”  

EV production in the US this year seems to have run ahead of consumer demand. Unsold EVs have been piling up on dealers’ lots, prompting some companies to cut prices. If you are looking to buy or lease an EV in the US, there are some attractive-looking deals available. 

In an echo of the 1970s, US car-makers have just faced their biggest strikes in more than 50 years. Ford reached an agreement with the UAW union last month, followed by GM and Stellantis last week. The deals to end the strike include increases of 25% in base wages through to April 2028, and the reinstatement of benefits lost during the Great Recession, including cost-of-living allowances. 

One of the issues in the strike has been whether workers at the car companies’ battery plants could join the union, and on that point the UAW has scored some successes. The GM deal brings the company’s Ultium joint venture battery factories in the US under the Master Agreement with the UAW. Ford has agreed to offer a “pathway” for workers at its battery and EV subsidiaries to join the union. 

The pay rises will add cost at a time when all EV manufacturers are trying to bring prices down to make the vehicles more appealing to consumers and improve profitability. Carlos Tavares, chief executive of Stellantis, said earlier this year that the company’s costs for making an EV were 40% higher than for an internal combustion engine car. “We can’t just pass those costs on to consumers because we would lose half of our customer base,” he said.  

When Tesla reported third quarter earnings last month, the company confirmed that it was still on track to ship 1.8 million vehicles this year, up from 1.3 million last year, but chief executive Elon Musk raised concerns about the impact of high interest rates on sales. 

Tesla has faced unexpected problems with the lower-cost factory it plans to build in Mexico, and the start-up of the plant could be delayed. “In Mexico we’re laying the groundwork to begin construction and doing all the long lead items,” Musk said. “But I think we want to just get a sense for what the global economy is like before we go full tilt on the Mexico factory.” 

The critical factor, he added, was being able to reduce prices. “That is really the thing that must be solved, is to make the car affordable,” he said. 

The tide is still flowing towards electrification 

The accumulation of these issues underlines the argument that the most optimistic expectations for EV sales are unlikely to be realised. Wood Mackenzie was more cautious than some, and has not yet revised down its forecasts. The Environmental Protection Agency predicted in April that EVs could make up 67% of US light vehicle sales in 2032; we have always seen that projection as unrealistic. 

But while EV sales might not match those elevated expectations, they are still set to grow strongly. In Wood Mackenzie’s base case forecast, what are sometimes called zero emissions vehicles – that is, battery EVs, plug-in hybrids, and a small number of fuel cell EVs – will account for about 10% of passenger car sales in the US this year, rising to about 52% by 2032.  

Vehicle manufacturing requires long-term planning, and companies that have made commitments to shift to EVs would find it difficult to change course. Amidst all the bad news for EVs, Toyota signaled its continuing commitment last week with the announcement of an additional US$8 billion investment in its battery manufacturing plant in North Carolina. Stellantis last week announced a new battery plant in Illinois. 

More affordable EVs will eventually arrive, from Tesla’s Mexico plant when it opens, and from initiatives such as Stellantis’s joint venture with Leapmotor of China, which will make low-cost EVs initially targeted at the European market. 

In the US, probably the biggest threat to EVs will be if control of the presidency and Congress changes in next year’s elections. President Joe Biden has championed the transition to EVs, both through his support of tax incentives in the Inflation Reduction Act, and through the emissions regulations proposed by the Environmental Protection Agency. Both of those policies could change. 

Egor Prokhodtsev, Wood Mackenzie’s senior research analyst for transportation and mobility, said: “If a future administration and Congress decide that they want to cut down Bidenomics completely, that is the biggest risk for EV sales.” 

Ultimately, that threat underlines that the key issue for EVs is cutting costs so they can compete in the marketplace without the tax breaks and regulatory incentives. “If you can survive only on government subsidies, you have a problem,” Prokhodtsev said. 

ExxonMobil closes Denbury deal, transforming CCUS prospects 

ExxonMobil announced the US$4.9 billion acquisition of Denbury Resources back in July, and last week it closed the deal. When the takeover was agreed, Denbury was producing about 47,000 barrels of oil equivalent per day, from a combination of Enhanced Oil Recovery and conventional assets in the Gulf Coast and Rocky Mountains regions 

More importantly, it was one of the leading companies in the US in carbon capture, utilization and storage, with over 1,300 miles of carbon dioxide pipeline infrastructure and ten storage sites.  

Dan Ammann, the president of ExxonMobil’s Low Carbon Solutions division, said the deal was a way to accelerate the company’s progress in carbon capture and storage, giving it control of infrastructure that would have taken much longer to build organically, at a time when interest in CCUS is soaring thanks to government support. Buying Denbury gives ExxonMobil the largest and most developed CCUS transport and storage offering in the US. 

ExxonMobil is already a world leader in CCUS, and has identified the sector as one of its main opportunities for growth in low-carbon energy. Like Chevron, but unlike many of the European oil and gas Majors, it is focusing its lower-carbon investments on “molecules” businesses including CCUS, hydrogen and advanced biofuels, rather than diversifying into the “electrons” operations with renewable power generation.  

“The Denbury deal is a much faster way for us to get to where we need to be in carbon capture and storage,” Ammann said. 

“CCUS is taking a big jump forward. The 45Q tax credit and the Inflation Reduction Act are creating a push to invest in the industry: they are having an effect exactly as they were designed to do.” 

However, he added, for the business and the CCUS industry as a whole to be successful in the longer term, they would have to progress from relying on tax breaks to serving customers that want to reduce their emissions. 

“For the long term, the market needs to take over,” he said. “If the world is to get onto a path to net zero, the market needs to support that. It’s not hard to imagine that, over time, if companies have more customers prepared to pay for low-carbon products, then they are going to want to pay for CCUS.” 

A crucial part of reaching that goal, he added, would be bringing down the cost of CCUS, particularly capture. 

In brief 

The difficulties facing the offshore wind industry have been extensively analysed by Wood Mackenzie, including in our Horizons report, Cross currents: Charting a sustainable course for offshore wind, published last August. Ørsted last week provided the latest assessment of the impact of those problems, reporting an impairment charge of about US$4 billion in its third quarter earnings, mostly related to its offshore wind portfolio in the US. 

Akif Chaudhry, Wood Mackenzie’s research director for corporate strategy and analytics, commented: “This is not a knock-out blow for Ørsted, nor does it spell the end of the offshore wind sector. But Ørsted is undoubtedly badly bruised and bloodied from this bout. The offshore pioneer will be forced to take stock and go back to basics to rebuild its leadership credentials.” 

Another recent Horizons report, Playing by new rules: How the CBAM will change the world, looked at the impact of the EU’s new carbon border adjustment mechanism. One of its key predictions was that the CBAM would push other leading economies towards imposing their own fees on the embedded emissions of imported products. Last week the push to introduce a similar mechanism in the US took a significant step forward, with the launch of new legislation that would impose a fee on products imported from countries with high greenhouse gas emissions. The proposed “foreign pollution fee” is backed by Republicans led by Senator Bill Cassidy of Louisiana. 

Senator Cassidy told Politico: “With the foreign pollution fee, we’re attempting to level the playing field to say, ‘OK, China, if you choose not to enforce environmental regulations, we’re going to levy a fee to compensate our country’.” 

Shell’s chief executive Wael Sawan plans to make the company “leaner” and more selective about how it invests in the energy transition, he told the Financial Times in an interview. 

French scientists who have found one of the world’s largest deposits of geologic hydrogen have been talking about their discovery. Natural or geologic hydrogen, sometimes known as “white hydrogen”, could be an important source of low-emissions fuel.