The EV Reset: Automotive Strategy Is Being Rewritten | Future Engineering Bets

Drea & Fred Warner: Hey everyone, I'm Fred, Future Engineering Bets, where we look at what the major OEMs in automotive, motorsport, defence and aerospace may be doing in the future and how it's going to affect you, Hey everyone, I'm Fred, Future Engineering Bets, where we look at what the major OEMs in automotive, motorsport, defence and aerospace may be doing in the future and how it's going to affect you, your investments if you're a capital investor, if you're a private equity firm, if you're an OEM or a tier one, tier two, what are the bets you're going to be making? And today we're going to be talking about the big reset, the big recalibration in the EV market And today we're going to be talking about the big reset, the big recalibration in the EV market in the automotive world. So that's the automotive companies are doing with their EV plans. some massive ⁓ write downs that come into in terms of ⁓ where they've had back out of EV programs already. So you could call it the great recalibration of 2026. The industry has shifted from a compliance at any cost type model that they adopted in around about 2020, 2021 a holy we are running out cash. We've got to generate cash. We cannot afford to just comply with government demands when the consumer doesn't agree with the legislation. You could say that boards aren't being rewarded about how many EV programs they're going to deliver now. They're being rewarded for how much they're protecting cash You could say that boards aren't being rewarded about how many EV programs they're going to deliver now. They're being rewarded for how much they're protecting cash making a flexible approach to the market. When you look at it in terms of the hybrid platforms, the battery electric vehicle platforms, this is now becoming a more flexible approach. And of course, we've all got opinions, on this. We all have we believe is the right way. So we'll talk through some of those that you can form your own opinion on. And also, really from an investment and capital point of view, where would you put your money right now? So if we go back five years, every automaker was pretty much thinking we're going to be having to accelerate rapidly away from internal combustion engines called ICE and even hybrid engines will be a fairly short-lived thing and we're going to be all going EV, particularly for cars. let's put trucks and other things in a separate category for now. The rapid adoption that everybody expected, it didn't quite happen. Where it did happen is in business and everyone often points to business. Will all the business car users have them? Yes, because the given massive benefits to users of company cars. And it's to the point where having a non-electric company car is almost pointless. Will all the business car users have them? Yes, because the given massive tax benefits to users of company cars. And it's to the point where having a non-electric company car is almost pointless. So if you're in business, you buy an electric car. It also so happens those same people that get company cars tend to be more middle class. They have houses where they can easily have a charger installed. So there's a number of aspects here in terms of the actual current market. But if you look outside of business and you look at the private sector, it's... growth has been much smaller it's impacted the program. If we go through the reports of the various automakers, we're looking like there's high risk of stranded assets in EV only plants. If plant is EV only, right now ⁓ you're in worry zone. The ones that have nailed it, more the BMWs where they make sure they can put down different battery or... Hybrid or power trains down a production line means that they continue running and they can flex to the market demands There's a lot more lobbying going on now the OEMs and the groups are pushing on Legislative bodies to say look this isn't working. It isn't quite right We need to consider hybrid and we need to consider sustainable fuels sustainable fuels really in ⁓ mean fuels that don't take oil and turn them into carbon emitting fuels that are releasing new carbon into the atmosphere. A sustainable fuel in theory is only ever releasing carbon that's been taken out of the environment recently. It's like a closed loop. Now of course margins on EV are very important. In order to run a successful business the margins on the cars you make are very important. And then it comes into then the whole market post sale so that then the second owner, third owner, the depreciation of that car, what happens to it. And that will affect whether or not people buy the car in the first place. Now, again, the business owners are much less interested in this when they're leasing, but eventually the leasing companies pay the price when their assets have been written down at a far higher rate than they ever thought. And they're not making the margins that they thought on leasing them to business users. So you go back a few years and private equity and major institutional investors, Vanguard and the Black Rocks they have shifted their valuation models for OEMs. free cash flow, punishing OEMs that sacrifice too much cash flow, or market share for EVs. The preference is more like cash. If that means sticking with hybrids and ICE for right now, let's figure that and use buybacks and other things that we'll cover in a minute. As we've already touched on, dedicated EV factories are now at risk of being slowed down, abandoned in favour of those that can support both EV and hybrid lines. it's favoring a flexible architecture approach to the market. and ultimately de-risking the balance sheet. So investors are encouraging boards to make massive one-time write downs but they've been massive. But they can't be doing that regularly, it'll just destroy the company and the price. So these are one-time, look we're going to take a massive hit, huge capital write downs, EV errors, mistakes in terms of our bets, and we're going to move forwards. And what people are ultimately moving forwards with is flexibility in their powertrains. It's not going to be all EVs. And the reality is it might never be. Genuinely, there's always going to be the potential for hybrid vehicles. And the hybrid is interesting because hybrid can be made of anything. There be a battery and a motor probably in a hybrid, but the actual power source fundamentally that gives it the main power and the range can be hydrogen, diesel, ⁓ petrol, it can be different kinds of engines. So interesting one to watch. So let's talk through some of the things that happened last year in the Ford have done around about 20 billion write down in capital programs, 20 billion. They've scrapped their three-row SUV that was going to be EV. They've scrapped the ⁓ F-150. huge. affecting the whole market going forwards. The big stuff, forget it. They're out of it. Ford have done around about 20 billion write down in capital programs, 20 billion. They've scrapped their three-row SUV that was going to be EV. They've scrapped the ⁓ F-150. huge. affecting the whole market going forwards. The big stuff, forget it. They're out of it. 20 billion is I just think is massive. It's a massive number, but they've really pivoted into either hybrid electric and there's more more talk about range extenders. They're popular in China. The thing I have with range extenders is really you're just using petrol to create electricity to then power a battery. It's a kind of a nonsense of itself, but we'll have to see where they go with that. For me, a really big one was Honda. their first financial loss in 70 years. Incredible. 15.7 billion write down. They cancelled the Zero Series or O Series and another car called the Acura RSX. Honda's plan right now is to dominate in the hybrid engine arena. So that's not meaning they're not going to create EVs and have EVs, but hybrid engines, that's where they see their future. General Motors has done over a 7 billion write down and focused on slowing down their EV vans and being more flexible in their approach. Porsche, Porsche, of all companies, they really bet big on EV and they are paying the price. of all companies, they really bet big on EV and they are paying the price. They've cancelled their KNEV and their flagship SUVs coming up. They've slowed everything down and they're trying to continue their existing internal combustion and hybrid powertrains longer. But that's also hurting them because, for example, the Macan, they've had to stop selling in Europe because it doesn't meet the legislation anymore. And that's due to other reasons, not powertrain related. The architecture wasn't kept up to date. So now it's having a knock on effect because the vehicle they thought they could now switch back to, they can't. Porsche written around 1.8 billion, nearly 2 billion on capital restructuring. It's absolutely vast. Again, Porsche going to maintain now ⁓ a luxury combustion engine focus with hybrid platforms and EV because they recognise they can't afford to go all EV. ⁓ Mercedes a big one. They've abandoned their EV only target by 2030. They've slashed their margin guidance down to between 3 and 5%, down from around and they've written around 1.6 billion off. restructuring for EV. So that's a lot of money written off a lot of firms, isn't it, in the OEM space. And you can imagine how this is trickling down to tier ones, tier twos, and the impact it's having on their R&D programs. And particularly if you're involved in either electric you're going to be impacted. But powertrains in general, it's driving the pressure on development in a different direction. Efficiency is going to be key. and thermal management of batteries is going to be key to get range. So let's look at some of the consumer landscape and the legislation. If we take the EU as block, the 2035 ice ban is being softened. Recently, the mandate shifted from 100 % to 90 % reduction target, effectively legalising hybrid vehicles ongoing and making space for sustainable fuels in the future. Now, a 90 % reduction in carbon emission is massive. a 90 % reduction in carbon emission is massive. and it shouldn't be underestimated. there's a really strong and growing argument that says why are we trying to go from where we're at to zero in around about 10 years? It doesn't actually make any sense. and it shouldn't be underestimated. there's a really strong and growing argument that says why are we trying to go from where we're at to zero in around about 10 years? It doesn't actually make any sense. If we were to go from where we're at to a 90 % reduction, would that not be a massive change? Yes, it would. And if that last 10 % is the hardest to achieve, should we not focus on hitting the 90? that sounds like a sensible option. So that's where the lobbying pressure is coming from the automotive companies saying we're being killed here and we'll come on to Chinese competition in a minute but the legislation has really suited the Chinese competition coming in which is hurting the automotive companies particularly those in the lower price segments such as Stellantis so your Citroens, Peugeots, Fiat's. But people want to include sustainable carbon neutral fuels in the future because that means we can carry on using the engines we've already got and we have sustainable fuels which as I've already said doesn't add any additional carbon into the atmosphere. Now the UK is a little slow and the pressure on the government is that we need to catch up at least with Europe and get in line with things. Now some things have been allowed so OEMs can borrow credits from future years up until 2029 and the penalties have been reduced from 15k per vehicle to 12k per vehicle for not hitting targets. So there's some let off. And there's room to allow hybrids to be sold until 2035. I ⁓ the reality is, regardless of what the politicians think, hybrids are going to be around a long time and all these rules are going to end up changing. So if you're betting on this, you've got to bet on hybrid being there alongside EV. It's not going to be that hybrid gets turned off. And we could well see sustainable fuel really take off in the next 10 or 15 years. We don't know. But the logistical issues that surround the EV for the masses and infrastructure and availability of charging and the price you're paying at industry led metering and the lack of control around that, it's gonna lead to real good potential to sustainable fuels being a long slide. Now take the US, they've taken a slightly different approach. The EV tax credits have expired, high tariffs on Chinese battery components have made EV domestic production not great for mass markets. So people were afraid of range anxiety. Now there's a value anxiety. Resale value of EVs across the markets, you may have seen it in the UK, you may see it anywhere. You take a vehicle, let's take a vehicle that costs £60, £70k new. If that's an internal combustion engine, the depreciation on that will be far slower. than if it's an EV or a hybrid vehicle. They depreciate far quicker. Now if you're a private buyer and you've got anything about you in terms of nounce this starts to come into your purchasing decision because if you buy new, you're going to lose way more money on an EV or a hybrid than you are on a petrol or a diesel engine car. So from a consumer point of view, this isn't being well looked after. Again, businesses take the hit in terms of the tax write down or the benefits to the tax in terms of benefit in kind, but it's not ⁓ overall. I do think there's some real great bargains of EVs out there potentially for those that are all ⁓ When you look at the market, you can get some pretty snazzy cars if you can cope with the range and you don't mind the extra weight of the vehicle. So the key message coming out of the OEMs at the moment is powertrain flexibility. They are not abandoning hybrid. They are not sticking solely on EV. and they are not going to just bend to full compliance with the legislation because at the moment it would destroy their business. So they're going to have to rely on lobbying to influence future rules to stave off their collapse. ⁓ you've seen the rush of Chinese cars coming in, what legislators probably didn't think was that by moving to this EV focused policy that they would enable China to undercut And ⁓ as you've seen the rush of Chinese cars coming in, the legislators probably didn't think was that by moving to this EV focused policy that they would enable China to undercut and pretty much wipe out a huge part of Europe's and the UK's automotive industry, and pretty much wipe out a huge part of Europe's and the UK's automotive industry, which at the current rate of things happening could well happen. China, in the words of many people in the automotive industry, has already off so far ahead, maybe no one's ever going to catch them. So powertrain agility, of, powertrain stop the compliance spending. invest in the consumer experience, in software, in all the infotainments in the cars is a really big push. So if you're in the business and thinking you're in trouble in any way, this is your year to do your big capital write down because in many ways it looks like you've just aligned yourself with the market and the decisions of the big OEMs. And I'm going to keep saying it, the last one I'm going to point out, Jaguar, whilst everybody else is doing massive EV capital write downs and bringing back hybrid flexible powertrain strategies, what on earth is going to happen to Jaguar? I can't see it happening. can't see it working. Sadly, we'll see. So I'm Fred, future engineer of BETS. I'm a strategic operator and advisory in the automotive, motorsport and defence and I work with private equity companies and capital investors, CEOs and boards to make sure the enterprise value ⁓ their bets on future engineering technology is in the right place because I'm a chartered engineer. I've worked in Formula One, aerospace, rail, automotive, EV, hydrogen fuel cell in real life as a leader and this is what I do.