The ZEV Mandate Is Putting Automotive at Risk | Future Engineering Bets

Fred: Meanwhile, having this kind of very aggressive, pure EV, mandate that says you have to have a battery electric vehicle, it basically swaps dependency on oil to depending on China because China have nearly 90% control of the raw mineral processing of the elements that go into batteries. And this is a massive point. But from my point of view, it's built on a flawed premise because what we're doing is legislating what people will buy without accounting for the structural constraints on consumer demand, domestic energy, economics, geopolitical trade tensions. and the industrial supply chain challenges. We also need to look at the 100 percent target and be more realistic. If we had an 80 percent reduction in emissions. That would be historic and it would be magnificent. Aiming for 100 % creates an unreal situation that doesn't account for a plethora of niche applications that just don't fit the standard cycle of somebody going to work and back. I know some people believe in setting unrealistic targets to create change, but it creates losses. It's creating an automotive industry that is in challenge and could cease to exist in Europe. I don't see how that's a positive outcome for anybody other than non-European companies. Hello and welcome to another episode of Future Engineering Bets. My name is Fred Warner and we talk about advanced engineering and capital allocation, particularly in the automotive, electrification, defence and aerospace sectors. And today I'm going to be talking about the zero emission vehicle mandate in the UK, which is currently under review that kicked off in August and it's due to conclude on the 23rd of October. Now be aware that you can put your views forward on the ZEV mandate and whether it should change. You go to the gov.uk and look for ZEV mandate review. if you don't know, we are at a very difficult transitionary point in the EV and the ZEV transition. We have many factors that I'm going to be discussing coming up related to geopolitical dependency on China for battery mineral resourcing European automotive companies have not faced challenges like they're facing today for decades and the impact on them and the current write downs in capital and losses is significant and their future is questionable. UK's legislated zero emission mandate talks about scaling from 33 % in 2026 to 80 % by 2030 and then 100 % by 2035. But from my point of view, it's built on a flawed premise because what we're doing is legislating what people will buy without accounting for the structural constraints on consumer demand, domestic energy, economics, geopolitical trade tensions. and the industrial supply chain challenges. so whilst the government consultation considers lowering that 2030 headline target, possibly to 50 or 60%, even these revised figures rely on an impossible linear growth. And I'm getting to why. The ZEV transition has hit what's called like an S-curve saturation wall. company car buyers are now near full penetration. 78 % of company car purchases are now EV. And that's because of the massive benefit in kind advantage. But that leaves only 22 % of private buyers making up the rest of the EV sales. So that means getting up to 50, 60, 70, 80 % onwards is reliant on taking the private market into EV. And that is a challenge that hasn't really been recognised or solved Private buyers are locked out by vehicle price premiums, concerns over long-term depreciation, and what we call the driveway divide between those that have access to cheap charging and those that have no access to cheap charging and pay often 10 times the rate at public charges in an unregulated market. At the same time, our automotive OEMs, particularly Western ones, European and the US, they're absorbing unprecedented capital losses. Tens of billions of pounds have been written down within the last couple of years. Cancelled vehicles, EV architectures that have been parked and written off, job cuts, factory closures across the UK and Europe. Meanwhile, having this kind of very aggressive, pure EV, mandate that says you have to have a battery electric vehicle, it basically swaps dependency on oil to depending on China because China have nearly 90% control of the raw mineral processing of the elements that go into batteries. And this is a massive point. We are swapping dependency on oil for dependency on China. That needs serious consideration. to prevent what I'd call the deindustrialisation of Europe and UK automotive sectors. And that means losing those industries altogether and all the skills and all the jobs and all the economic gain that comes from it and making sure we have a consumer transition that is equitable and fair. What we need from the government, in my opinion, is to recalibrate that target. I think having a target in 2030 of much more than around 40 to 45 percent is not going to be hit because as I've said, we're moving into the private market with a number of challenges that haven't been resolved. And we're in 2026. We don't have long to turn it around. We also need to look at the 100 percent target and be more realistic. If we had an 80 percent reduction in emissions. That would be historic and it would be magnificent. Aiming for 100 % creates an unreal situation that doesn't account for a plethora of niche applications that just don't fit the standard cycle of somebody going to work and back. And that includes all kinds of non-standard vehicles, which I won't go into here. but when you set long-term emission targets down to 80 or 90% instead of 100, What it does is it allows the legalising of things like plug-in hybrids, hybrid electric vehicles, range extenders, the use of synthetic fuels, e-fuels, hydrogen fuels, and allowing for specialised rural construction, long range, heavy duty vehicle uses that simply won't be solved by battery electric vehicles in a way that will work for a performing... productive and cost effective economy. So dismantling the FEV loophole misconception. There is a bit of a stigma around the FEV and when I say FEV that's the plug plug in hybrid electric vehicle. Recognising that they come with a series of significant improvements over a standard internal combustion engine. We have regenerative braking. We have slow traffic engine off efficiency. There's overnight home charging available and most people that have a FEV, they do charge them because they get the benefit of cheap electricity to get the range out of the car. So there is no reason to not charge a FEV if you have one. We also need to look at things like taxation. Now, many of you may know that public charges have 20 % VAT on them, whereas at home the tax is lower at 5%. So we need to look at ways to get rid of the VAT on public charging networks and bring it down to either zero or 5% to really stimulate people. I think the vehicle excise duty that is going to be changed over the next few years to bring that into being a pay-per-mile and then the subsequent excuses that will be used to try and get black boxes into people's cars that will subsequently be used to negate our freedom of movement. and our privacy and our individual rights. I don't think that is a plan. Pay for the car you use, you already pay on the fuel. Let's figure it out from there. the 48 month mathematical trap. Government forecasting has conflated tax incentivised corporate purchases with genuine mass market consumer demand. The market has basically hit a plateau that price discounting can't fix. the way that the car companies are borrowing and trading their credits and not being fined currently is they're borrowing against future targets, but also they've been heavily discounting EVs. point where they're not making any margin at the same time as they're making billions of write downs in capital. That's not really appreciated by the EV charging infrastructure people who blame the OEMs for all of the issues in the industry and don't realise that it's far more complicated than simply saying they've not paid any fines yet. So I've talked about the imbalance between the corporate and the private retail. Currently 78%. We're at saturation point. So we really need to think about how we drive the incentives to maintain that. But as they reach 100 % or 90 plus percent, you're then into a standard replacement cycle. in the UK, the current sales of BEV, battery electric vehicles, are around 24-25%. And that has been done through the corporate network, as we've seen. 78 % of purchases are corporate. Now, trying to get that up to 80 % by 2030 by using private brings us into a difficult time. Because as we've said, that means we have to have a huge change in the private buying network, which simply... isn't realistic given the constraints and the concerns people have. My solution is that the passenger car trajectory must be aligned with the 40 % target that currently is being considered for commercial vans as well. Let's establish a realistic ramp. What's the point in setting targets that we fail on? I know some people believe in setting unrealistic targets to create change, but it creates losses. It's creating an automotive industry that is in challenge and could cease to exist in Europe. I don't see how that's a positive outcome for anybody other than non-European companies. Now, the charging poverty premium and the driveway divide, the EV transition functions well for people with suburban homes in the US terms, or people with driveways, and it breaks down entirely for the working class population who are relying on on-street parking. there's a lot of debate around this, but roughly 40 % of UK households do not have access to off-street parking. And that's assuming that everyone that has access to off-street parking can get an EV charger. But what we've not included in this to date is how many people with off-street parking are renting and can't get an EV charger easily installed in their home due to restrictions with landlords. But ignoring that, 40 % of people don't have access to off-street parking. Now, I've seen an argument that says, well, most of them are poor, so they probably don't have cars anyway. Or at least maybe 15, 20 % of them don't have cars. don't think that's a fair argument. I don't think it's reflective of caring about the people in our society and the cost of living to just simply discount people and say, let's allow the poorest people to charge 10 times what other people are charging. If you charge your car at home, you can be saving 85 % compared to petrol. That's great. Now there is a new levy framework that's coming out and that will limit in places. the kilowatt hour to 54p which is around about 14 to 15p a mile. will have a cost parity with petrol. But the commercial public rapid charges, which make up the majority currently out there, are often between 80 to 90 plus pence, which is significantly higher than running a diesel or a petrol car. So we're penalising people that don't have access to home charging. And if you're on road and you're travelling, you're also being penalised versus people using petrol. Now I did have a gentleman contact me and point out that the new levy fund, the locally electric vehicle infrastructure fund is going to change everything. And whilst it has been a bit delayed, it's going to solve everything. Now let's just give you some context. Levy targets the installation of approximately 100,000 on street charging sockets. But forecast say if we want 80 % of vehicles to be on the road with EVs by 2030, we're gonna need 300,000 charges. So that means at best, assuming that the levy fund gets going and delivers a huge number of charges over the next four years, which is unlikely to happen given the rate of progress to date, caveat. That means even if in a perfect world they did it, two thirds of people will still be charging. at a public charger, not under the levy fund and paying 10 times the price at home. So at best, one third of people will get access to more affordable charges and the other two thirds won't. And the one third that will be cheaper because it's under the levy fund will be oversubscribed. Whilst everybody tries to avoid going to the public ones, you can imagine the kind of pickles that come from that. So that two thirds, they remain unregulated. The private entities install hardware based on a return on investment only. So they'll only focus on high footfall areas, high motorway service areas. They won't be thinking about spatial equity, making sure they're installed in a reasonable range of places to help people in all ways and means. But let's face it, Local authorities I've really struggled with the public procurement rules, the state aid compliance, the national grid connection queues. Two years after launch, fewer than 2,000 levy funded charges are operational, but we need 100,000 by 2030. I leave that with you. So even when the levy contracts cap CPO margins, that's still six times higher than what you pay at home. So even though people are using the levy as the, it's great, it's fine, it's on a cost parity with petrol, there's no savings, there's no motivation, there's no reason to move across. So if I'm a low-income household, I have to worry about huge depreciation on an EV, potential long-term warranty issues once I've passed certain points, and I don't save any money. What's in it for me? Now I've referred to the FEV loophole, the engineering reality versus ideology. Irregulators and environmental NGOs frequently label plug-in hybrids as a sort of compliance loophole. And there's a lot of negativity around the FEV and I don't think it's fair. It totally ignores mechanical and operational engineering truths. FEVs are fundamentally different from a conventional internal combustion engine because even if you don't plug it in at night, It's still doing kinetic energy harvesting. Regenerative braking means that instead of like an internal combustion engine car where all of the braking is dissipated as heat through the brakes, in a FEV it's always capturing that kinetic energy. So when you're decelerating, braking, going downhill, you're generating energy And putting it into your high voltage battery pack, which you can then use later. Then in the stop and start in cities, if you've ever owned a FEV or a hybrid electric vehicle, the lack of the stop start on the car, the rolling around in slow traffic often up to 30 miles an hour, moving around with no tailpipe emissions is a significant change compared to internal combustion engine. And the fact that you're really mostly using the engine at speed on the longer journeys when the FEV and the ICE, the internal combustion engine is at its most efficient. It seems like a no brainer. I think the argument that most people that with plug-in hybrids don't charge them doesn't make sense. If you can get 30 to 80 miles of electric range and you can get that because you can charge it at night and the saving on that takes you down from sort of 15 pence a mile to around two or three pence a mile, that's a significant saving. People do do it. And when you're doing commuter miles, it's often enough. Now, one area I'm going to say that I support is disallowing diesel hybrids in light vehicles, cars and light vans. I don't think diesel vehicles should carry on in that respect. However, I do think diesel hybrids should be considered for heavy duty applications and niche vehicle applications whilst more suitable alternatives are found without destroying our economy and our chance to have a reasonable cost of living. and jobs. Now forcing the OEMs to allocate 100 % of their capital expenditure into battery electric vehicles and forcing them to do that ahead of the consumer demanding that has led to the largest destruction of automotive enterprise value since 2008 financial crisis. So if we look at some of the companies involved, Ford Motor Company, $19.5 billion write down, 35 billion cumulative operating losses, since 2022. They cancelled their three-row electric SUV platform, they cancelled the European electric commercial van platform, they terminated the first gen F-150 Lightning production line, they delayed the next gen T3 electric truck platform. They've abandoned large frame consumer bevs pivoting capital towards extended range vehicles and affordable hybrids because this is what the market's telling them they want. And don't forget automotive companies as I'll go into are a global operation. They don't just think about one little country, like little old UK says no, so we're going a different way. Honda Motor Company. There's been quite a bit of feedback to say that the Japanese companies are to blame for their losses, but Honda have had their largest write down in history. only and first annual loss, they wrote down 15.8 billion because they canceled the Honda Zero Series. They've cancelled the Acura RSX electric crossover. They have dissolved their Sony Honda mobility program and they are looking at scaling back and focusing on hybrids because there isn't the demand for the electric vehicles. Volkswagen, multi-billion euro platform impairment and capital write downs, high volume scalable systems platform. The SSPs pushed back to later in the decade. The mass market electric golf, the ID Golf has been delayed past 2030 and they've canceled their dedicated 2 billion Trinity EV Greenfield factory in Wolfsburg. That's huge. Again, Mercedes. Multi-billion euros have been written off on R&D on EV programmes. Their large platform architecture, destined for the next-gen EQE and EQS sedans and SUVs. Gone. They've formally scrapped their EV only where market conditions allow by 2030 and they're reinvesting in high margin internal combustion engines and FEV platforms. Porsche, they've got around two billion of write downs and margin compression. They've shelved their 2030s luxury all electric flagship SUV, their K1 program, and they've pivoted to launch that with either ICE or FEV powertrains. That's how much it's affecting. the automotive companies trying to hit the ZEV mandate. Extending production lives of ICE and hybrid Panamera and KM modules into the 2030s just so that they can stay in business defending their operating margins. Now I know that the Macan and some of their other models have had to come out of service and production because of other mandates that they're not going to meet going forwards. In the UK, Lotus, owned by Gili, They've had to do significant capital restructuring. They cancelled their dedicated pure electric type 135 platform. They're scrapping their pure BEV sports car plans and they're now moving to a hybridized V8. And this is to protect them against both tariff wars and also the lack of demand for battery electric sports vehicles. Now there's a frequent comment coming from the EV infrastructure community that no automotive companies have yet paid fines and it is a technically correct statement, but it's not showing the complexity of the issue that they're facing. To hit mandatory ZEV ratios without the audience, without the consumer wanting it, the UK carmakers have engaged in a high margin destroying retail discounting policy across all of their estate and all their EVs, they're cross-subsidizing and they are selling these things often at a loss in order to drive up the percentages. Their salesmen in the sales rooms are told to make sure they try and get anybody that walks through the door to buy an EV. That's not customer choice, by the way, for those that say everybody gets to choose. Now, that has led to around about 10 billion in industry losses in the automotive sector. to avoid the theoretical 12,000 per car fines, 10 billion in losses. Now for those that say there hasn't been any fines, true, 10 billion in losses is significant and is as a direct result of the threat of the 12,000 pounds per car fine. Next, we come on to the job cuts crisis. The rigid focus on this accelerated EV timetable whilst the Chinese competition has destabilised our whole market leaves Europe with a capacity of their factories down between 40 to 60%, depending on the factory. That means that the factories are producing less than half the cars that they could be producing. OEMs are shedding now tens of thousands of jobs. You've seen Volkswagen has taken their 50,000 jobs up to 100,000 jobs. It's incredible. And it means that there are significant changes coming through. There's assembly sites and production sites that are going to be earmarked for foreclosure whilst others, people try and look to how they can utilise it in the future. Stellantis has been actively reducing its workforce since 2021 with around 17,000 positions gone. and they shut their Luton commercial van plant with 1100 jobs lost not too long ago. Now you recently had Jaguar announcing 4,000 jobs gone, Ford Europe is cutting 4,000 jobs across Germany and the UK. You've got BMW, Mercedes, BMW is getting rid of 8,000 white collar engineering and management positions. Mercedes getting rid of jobs. Where does it stop? Commercial vehicle realities. let's talk about geopolitical, know, supply chain exposure. I want to talk about swapping oil dependency for Chinese monopoly a little bit more. So the current regulations have forced us into a Chinese dependency that we didn't foresee. The Chinese have been very strategic over a long period of time and fair play to them, but it's not going to enable Europe to sustain a performing economic growth output that it needs to. By focusing on zero emissions at the tailpipe, they've massively ignored the broader geopolitical value chain. China controls 70 % of the global battery cell manufacturing and over 90 % of the global graphite processing and chemical refinement for battery grade lithium, cobalt and nickel. If that doesn't make any sense to you, don't worry, but that's huge. China control the battery supply chain. By moving to EV, we're moving to dependency on China. At the same time, the automotive OEMs in Europe and the US have faced a massive double squeeze because China was previously a highly profitable market for European and automotive car companies. But the European premium companies have massively lost their market share in China to the upcoming brands of BYD and Geely. At the same time, not only have they lost China, but they're losing market share in Europe as Chinese automakers exporting cheaper vehicles into Europe. And those cheaper vehicles are made with lower energy costs, state subsidies. The workforces do not have to work to the health and safety that the European workforces get. I think if you were to see inside some of those factories, you would see that people are not being treated or have the provisions for safety and wellbeing that you would expect to see to produce a car. So having a forced 100 % BEV mandate is trading our dependency on oil, which we had some control over to electric vehicles. and battery minerals that we don't really have control over. And that for me is a massive concern for the future and will be giving people a real headache. At the same time, we've got this whole tariff war going on. Now, it's all very well thinking about things in a isolationist position that some people like to and keep everybody else out or just do their own thing. But the whole automotive supply chain, along with many others in the world, is set up to be global. It's designed to be global. In order to create the cars that they do at the prices they do and to take some profit, they have to sell a lot of vehicles. And currently with tariff wars and everything else, where would you allocate a factory? How do you sell into one market knowing that if you produce it there, you might not be able to make profit anymore because the tariffs will take the profits away. But you really need to be able to serve other markets that if you put it over there, you'll get the same thing back. It creates a real headache. automotive OEMs and at this time forcing them into mandates does not seem to be the right path. Another area I'd like to discuss for the mandate is looking at the weight of battery electric vehicles. Battery electric vehicles are 20 to 30 % heavier than their internal combustion engine or hybrid equivalents. And that's leading to a lot of modern SUVs being two and a half to three tonnes now, even upwards. Now, some of the people's arguments I've seen are saying, this is because everyone's gone to SUVs, not because of battery electric vehicles. SUVs and battery electric vehicles are two different things. Yes, SUVs weigh more than non-SUVs, but the battery electric vehicle weighs 20, 30% more. That added mass accelerates road wear, degradation, building fatigue, multi-storey parking issues. It doesn't end just because you've got a zero emission vehicle when the vehicle is significantly heavier than none. And I do think we should have some regulation around vehicle weight because it has exploded. 20, 30 years ago, a family car would weigh 12 to 1400 kilograms. It's now weighing between two and a half to three tons in some cases. And... That seems excessive. Now, I'm not going to go into all of the other mandates that other countries have, such as Germany, Japan, US on this one. But my point will be that we need to align and we need to look at what others are doing rather than think the UK is going to go off on its own path and leave our markets totally out of alignment with Europe, US, Japan, everywhere else, and also destroy everything that we currently have as a result of it. We'll end up being frozen out by the automotive OEMs. because our market's not big enough to make them choose us on a single path of our own. thank you for listening to Future Engineering Bets and this discussion around zero emission vehicle mandate. Let me just sum up the things I've been saying to you. So we're looking at lowering the 2030 passenger car target for BEVs to around 40 to 45 % because 80 % is unviable when considering the private. retail needed to get them there. We should be replacing the long-term 100 % target with near 80 % target to allow a more viable niche applications to be worked out and not be subject to this restrictive framework. We should be legally recognising the advantages of FEVs and range extending vehicles diesel hybrids in passenger cars is fine but allowing for petrol FEVs, potential fuel cell FEVs and other potential fuels including E-fuels, sustainable fuels in a closed carbon loop for those that understand what that means is a very practical and realistic way forwards. We need to equalise the public charging VAT with home VAT. We need to take that down to 5%. I don't think it needs much discussion. We need to implement improved price transparency at the roadside. It's all very well saying it's available, you can see it before you charge, you can. But it's not easy. At a petrol station, you can pull up and you can see it in great big letters in the sky and think, I'm not going to go there because it's too expensive and drive on to the next one. It's not available with EVs. We need to make sure that the public charging hubs are regulated. They're currently not and it needs regulating. We need to incentivise vehicle weight and system efficiency. There is no incentive for making an efficient vehicle or a low weight vehicle currently. It can use as much electricity as you want it to. So it doesn't really matter. It's like having the most fuel inefficient vehicle on the earth whilst saying, well, it's zero emissions at tail power. It's OK. How is that OK? I think that about sums me up there. My name is Fred Warner. Thank you so much for listening to this episode of Future Engineering Bets. We talk about capital allocation and advanced engineering combined. Please like and share it with your friends and I'll see you in the future.