2023: A 'moment of truth' for EV sales?

Electric vehicle sales in Europe continued their meteoric rise in the first half of this year, up 45 percent over the same period in 2022 and reaching a market share of about 15 percent. After starting from a low single-digit EV share in 2019, the continent would appear to be well on its way to meeting a 2035 EU deadline to sell only zero-emission vehicles.

And for the first time, an electric car, the Tesla Model Y, was the best-selling model in Europe in a six-month period. 

But a closer look at the numbers reveals that EV adoption remains closely linked to regulations and incentives; that conditions vary greatly from country to country; and that there is a growing divide between wealthy western and northern countries and poorer ones in the south and east. 

At the same time, supply constraints that favored automakers have largely eased, and EVs now face a market that is suddenly much more competitive.

Those factors, along with worries in many countries about inflation, mean that EV sales growth is likely to slow in the coming years, experts told Automotive News Europe.

“The overall market demand for EVs is not going to stall, but the rate of growth probably is going to decrease,” said Pedro Pacheco, an analyst at Gartner.

“One of the trends we defined for 2023 is that this year is going to be the moment of truth for EVs,” Pacheco said, citing the end of key incentives, especially in Germany; rising energy prices; and competition from Tesla and China that is putting pressure on Europe’s legacy automakers to develop better electric cars, or reevaluate their pricing.

Even so, many automakers say they don’t plan to change their plans to transition their lineups to all-electric cars, in some cases more than five years ahead of 2035.

“We are perfectly on track and we will continue to push in that direction,” Stellantis CEO Carlos Tavares said at the end of July about the automaker’s EV strategy. “Everything we see right now is saying we want to go faster, we want to go deeper, so there is no reason to change strategy.” 

Among Stellantis brands, Opel aims to be electric-only by 2028, and Peugeot by 2030, with DS launching only full-electric cars starting next year. Other brands that plan an early switch include Audi (launching only full EVs from 2026), Volvo (electric-only lineup by 2030) and Ford of Europe (an electric-only passenger car lineup by 2030). 

Matthias Schmidt, who tracks the Western Europe electric vehicle market for Schmidt Automotive Research, describes the coming years as the Turbulent '20s. Starting with the second half of this year, he said, the pace of orders is expected to decrease, leading to a more competitive environment -- and potentially more price cuts like those put in place by Tesla.  

In a sign of that uncertainty, Volkswagen Group created a stir in June when reports emerged that it was cutting output at its factory in Emden, Germany, which builds the ID4 electric SUV and is set to build the ID7 sedan, because of flagging demand. 

VW officials say the EV order intake is expected to recover when the ID7 is launched later this year, but some analysts said that the move by Europe’s biggest automaker points to weakness in the overall EV market.

“There is some confusion on the strength of the EV market and overall sales because some of the decline is seasonal,” said Philippe Houchois, an analyst with Jefferies. “July and August are weak months, so this is a soft spot.”

“The question is whether (third quarter) orders are drying up,” Houchois told Automotive News Europe. 

Benjamin Kibies of Dataforce said EV sales in the first half of this year exceeded forecasts, but he too expects a slower second half, with full-year growth of about 25 percent, resulting in a 15 percent market share.  

Dataforce figures show that there were 931,174 full-electric cars sold this year through July, 45 percent more than the same period in 2022, when there were 641,070 sales.

Looking ahead to 2024, he said, “dwindling order backlogs will trigger further price cuts.” 

“We are going into an area where demand is becoming a bottleneck, and there will be more competition between brands,” Kibies said. 

Schmidt is forecasting that EV market share will be essentially flat from 2022-24, going from 15.1 percent to 16 percent. Only after 2025 will the market see the kind of huge jumps it experienced from 2019-23, he said (see chart, below).

Why might this be? Schmidt points to the EU’s fleet CO2 emissions targets as the main reason. The next big step down in emissions comes in 2025 (15 percent below the 2021 target), so automakers have little incentive to push lower-margin electric car sales with the same intensity as they did in 2020-21, when emissions were cut to 95 g/km.

“We don't expect a big push until 2025, when the next CO2 cuts come in the region,” he said. 

Kibies agreed with that assessment. “European (automakers) still earn their money from internal combustion cars, so they must be careful not to go too far” in pushing EVs, he said. But, he cautioned, winning EV market share is also important. 

“You can’t neglect your market share,” he said, noting that financial analysts are watching closely to see if legacy automakers such as VW can transfer their historic leadership positions to EVs.

Government incentives, too, remain key drivers of the EV market, analysts said, but they are expected to decrease as electric car sales rise, adding to competitive pressures.

“We are still some years away from price parity between ICE and EVs,” Kibies said, noting that incentives remained “extremely important” to close that price gap. This year, big changes to incentives in the two largest EV markets, Germany and the U.K., are likely to have an effect on sales. 

One fallout from incentives is that the EV market is heavily skewed toward nonretail channels in many countries (see chart, below).

According to figures from Dataforce, 40 percent of sales in Germany in the first half were to private buyers, with about the same percentage to fleets, and the remaining 20 percent to rentals and dealer/manufacturer registrations. In the U.K. – where EVs have tremendous tax advantages -- the difference is even more stark, with retail EV sales at 24 percent of the total, with fleet sales at 69 percent. Overall, in the five largest European markets (Germany, the U.K., France, Italy and Spain), private buyers accounted for 41 percent of EV sales.

“There are huge differences, particularly in the U.K.,” Kibies said. “Private EV registrations are declining while fleet registrations are going through the roof, and the incentives are the key factor behind it.”

Through July, EV sales to private customers in the U.K. fell by 10 percent -- but fleet EV sales rose by 69 percent. 

Currently in the U.K. zero-emission vehicles have a much lower “benefit in kind” value than internal-combustion cars, meaning employees pay just 2 percent of their value as income taxes. That rate is set to rise in 2025 to 5 percent, but at the moment a typical employee switching to an electric car could pocket an additional 110 pounds ($140) per month, according to a study from RJP, an accounting firm.

Other countries have company car rules that favor EVs:

• Spain offers a 30 percent reduction in benefit in kind taxes for EVs and plug-in hybrids under €40,000;
• Ireland has a 0 percent benefit in kind rate for the first €50,000 spent on an EV;
• Belgium allows company car drivers to deduct EV expenses and has a low benefit in kind tax (4 percent).

Germany is in the process of ending subsidies for full-electric and plug-in models; plug-in hybrid incentives were eliminated as of Dec. 31, 2022, while the EV subsidy has been reduced to €4,500 from €6,000. In 2024 that figure will fall to €3,000. 

At the same time, starting on Sept. 1, business buyers will no longer qualify for purchase incentives. 

The fallout from these changes is likely to be mixed. There was a significant pull forward in December 2022, with EV sales up 115 percent; they fell by 13 percent in January, and some analysts predicted that sales would slow sharply over 2023, while others were optimistic that price cuts, led by Tesla, and the introduction of dozens of new models (many launched first in Germany) would support higher growth rates.

Tesla, for example, anticipated the end of incentives for business buyers with price cuts for those customers in May.

Overall, however, Schmidt said he expects a “big slowdown in the end of the third quarter and the fourth quarter in Germany” following a robust first half of EV sales, especially on the fleet side, where sales increased 72 percent through July, while private EV sales were up just 8.4 percent, according to Dataforce.

Kibies said that cuts to incentives in Germany and in a few other countries have had little effect so far. “Registrations continued to climb and the growth is even faster than I would have expected at the beginning of the year,” he said. “Considering the anticipated purchases in December (2022) and the grant reductions in Germany and other countries, I would have expected slower growth, but we see quite solid growth in most countries.”

Another potential regulatory hurdle for EVs is in Britain, which plans to phase out internal combustion vehicles under the Zero Emissions Vehicle Mandate that would start in 2024, when automakers would have to sell 22 percent EVs. That figure will rise to 80 percent in 2030 and 100 percent in 2035. But just months ahead of the program’s start, Prime Minister Rishi Sunak is reportedly going to put the plan to a parliamentary vote.

EV sales in the U.K. were up by 72 percent in the first half, according to the SMMT industry association, but they could slump in the second half as EV sales are pushed back to 2024 to meet the quota, Schmidt said.

What would the European EV market look like without incentives? Schmidt and others say that electric cars will have to be at least as good, if not better, than comparable internal combustion-engine cars -- at comparable prices, too. 

“If you look at the price of an EV compared to an ICE car in the same class, it’s a €10,000 premium, and private consumers aren’t prepared to pay it, especially in the macroeconomic environment we are in now. It’s just unrealistic,” he said.

The affordability question is even more acute in Southern and Eastern Europe, where EV penetration is in the single digits in many countries. The 18 Western Europe countries account for some 97 percent of EV sales, Schmidt said. 

“Until EVs are affordable, we won’t really see a breakthrough in electrification” in those areas, Kibies said.

Pacheco, of Gartner, said the EV market will become a “survival of the fittest.” 

“What we will see in the future is that the EV market is going to become harder,” he said. “Public incentives and tax exemptions will go away. If after the incentives are removed that same EV costs €10,000 more it is going to hurt.”

“If an automaker is unable to offer an EV that is not just competitive against other EVs but is competitive against any other car in the market," he said, "then it's going to become harder to succeed.”

Douglas A. Bolduc contributed to this report