EV-only future looks closer than ever in Europe

After more than 125 years, the end is in sight for the fossil-fuel powered car. 

A growing number of countries, which together account for around 45 percent of global passenger car sales, have announced target dates when sales of internal combustion engine vehicles will be halted. They are joining some of the world’s largest cities, including London, Paris and Tokyo, that are already phasing out gasoline and diesel vehicles from their centers.

Just last year, countries with a total of nearly 30 million light-vehicle sales have pledged to decarbonize their automotive fleets. In November British Prime Minister Boris Johnson released his "Green Industrial Revolution" plan, which calls for an end to the sale of new gasoline and diesel cars in Europe’s second-largest auto market (2.3 million light vehicle sales in 2019) after 2030, five years earlier than planned.

Johnson’s proposal came as Japan (4.3 million sales in 2019) and the state of California (1.9 million sales in 2019) said they will limit or halt gasoline and diesel engine sales by 2035. Even China, the biggest global market (more than 21 million light vehicle sales in 2019), said in autumn that by 2035 half of all new cars must have full-electric or plug-in hybrid powertrains, with the rest being hybrids.

In nearly all cases, these policies do not have the force of law – but combined with ever-tightening emissions regulations, pressure from asset managers and institutional investors, and changing consumer tastes, they amount to a decisive finger on the scale for zero-emissions vehicles, analysts say. 

Al Bedwell, global powertrain analyst at LMC Automotive, said this is a "virtuous circle" that will lead to EV adoption.

Such government intervention can be decisive in moving the market.

An analysis in November from BloombergNEF estimates that without a ban on fossil-fuel engines and other incentives, EVs would make up 42 percent of new-car sales in the UK in 2030 and 56 percent in 2035 – "and thus simply relying on market forces would mean the country blows past its climate goal" of net-zero emissions by 2050, Bloomberg said, noting that cars are on the road for an average of 14 years in Britain. (See chart, below)

"There is going to be very much of a domino effect going on here," said Peter Wells, professor of business and sustainability and director of the Center for Automotive Industry Research at Cardiff University in Wales. "We are also going to see a significant shift in the industry from saying, ‘Yes, we have got to manage a relatively slow introduction of EVs’ to essentially a race." 

The pace of change has even surprised some experts.

"I wouldn't necessarily have said that 2030 was the end of ICE-only vehicles for Europe a year or so ago," Bedwell said. "But I think that probably is the case now."

Bedwell said LMC has now pulled forward its forecast for the end of gasoline- and diesel-only powertrains in Europe by five years, to 2030. He expects that after that date, nearly all internal combustion engines will be full hybrids or plug-in hybrids, with a few 48-volt mild hybrids. By 2035, only plug-in hybrids will be on the market, and depending on the cost of EVs and the development of the infrastructure around them, they might not last until 2040, he said.

Horst Schneider of Bank of America also foresees a short lifespan for plug-in hybrids.

"I expect regulators will legislate away the generally beneficial treatment of plug-in hybrids, mandating a minimum range of possibly 100 km," he told Automotive News Europe. "This will make them less attractive from a cost perspective versus full-electric vehicles."

"Therefore, I don't see plug-in hybrids surviving in the long term," Schneider added. 

Automakers are reacting by introducing many new electric and electrified vehicles, and also by halting investment in new fossil-fuel drivetrains. Some, such as Bentley and Volvo, already plan an electric-only future.

Others are "offshoring" internal combustion engine production to partners or factories outside their home countries. At the same time, worried about preserving margins in an EV-only world, almost all automakers are exploring new revenue streams from data and connected services.

Europe’s biggest suppliers are also feeling the heat, racing to shift their business models from conventional components to software and computing. Smaller suppliers that specialize in engine or transmission components are bracing for the worst, as they face a shrinking overall market due to the decreased complexity of a battery-electric vehicle.

"Many suppliers that provide components for vehicles powered by internal combustion engines may face a significant threat if they cannot adapt," the consulting firm PwC said in a report late in 2019. PwC said that the share of component suppliers for an EV might be 35 to 40 percent, compared with 50 to 55 percent for an internal combustion car.

"This has become a do-or-die battle for big companies and big suppliers to make this transition as quickly as possible, or the market's going to be taken out from under their feet," Cardiff University's Wells said.

European automakers have moved quickly in the past two years to slow or halt internal combustion engine investment. 

PSA Group CEO Carlos Tavares said in November that the automaker was halting new spending on gasoline or diesel engine programs. PSA is adapting to the potential reality of the EU ending sales of internal combustion engine vehicles no later than 2040, Tavares said at a Reuters automotive summit. "That’s clear," he said. "We are not investing more."

Volvo Cars was an early mover in electrification announcements and the company received a lot of publicity by saying in 2018 that it would electrify its fleet by 2025, with half of sales being EVs.

CEO Hakan Samuelsson doubled down on that promise last year, saying that he envisions the Swedish automaker becoming an electric-only brand by 2030.

He said at a Financial Times event in November that he was in favor of firm deadlines for the end of combustion engine sales rather than cash incentives, much the way seat belt or airbag mandates forced automakers make changes.

"Once you have realized that the petrol and diesel engine are really not part of the future, it’s rather easy to see you have to move fast into the new world," Samuelsson said. He added that Volvo will not wait for policy positions to become law to electrify.

"Volvo will be very careful and deliver only electric engines before anybody has legal requirements for this," Samuelsson said.

Bentley is another automaker that is anticipating regulations. By 2026, the Volkswagen Group ultraluxury brand will offer only plug-in hybrids and full-electric models and it will become electric-only in the following few years. "By 2030, no more combustion engines," CEO Adrian Hallmark said. "The future of Bentley will be fully electric."

Bentley sees the silent operation and generous torque characteristic of EVs as particularly suited for luxury cars.

Daimler shares that view, as it prepares to roll out its Mercedes-Benz EQS full-electric sedan next year, soon after the introduction last autumn of the S-Class, which is about the same size and also aimed at high net worth buyers. 

The EQS is the flagship EV for Mercedes – which was founded by Carl Benz, who patented the first gasoline-powered car in 1886 – as it prepares to spend 70 billion euros ($85 billion) on electrification and digitialization by 2025. Most of that money, announced in a business plan approved in November, will go toward electrifying the Mercedes lineup.

At the same time, Mercedes is ceding control over a portion of its internal combustion engine portfolio to Zhejiang Geely Holding, the Chinese company that controls Volvo and also holds a 10 percent stake in Daimler. Geely and Daimler will develop the next generation of small gasoline engines, which will be built in China and Europe. European engine production will be phased out in favor of electric components.

BMW plans to move engine production outside of Germany. In November, the automaker said it would shift manufacturing of combustion engines to Austria and England, as it reconfigures German factories to build electric cars and components. 

Its factory in Munich, for example, will receive a 400 million euro upgrade to build EVs, BMW said in November.

On the supplier side, Continental said last year that it was cutting investment in internal combustion engine technology in favor of electrification, a move that was accompanied by the closing of several factories. "An electric car has a lower employment density than a conventional car," Ariane Reinhart, the supplier’s director of human resources, told the Financial Times in November. 

The driving force behind the shift in Europe is a tightening net of regulations that address tailpipe emissions of CO2, fine particulates from diesels, and even how companies and big investors must account for efforts to halt global warming.

"It's clear that the green agenda is going to be the foremost focus of the EU for the foreseeable future, in the leadup to 2030 and beyond," said Ruth Knox, a lawyer at the British firm Linklaters, which works with automotive clients on regulatory and M&A issues. 

She said her firm’s clients were "responding proactively" to new regulations. "The automotive sector has seen the writing on the wall," she said, "and they realize they need to adapt to be competitive."

Knox added that some of the pressure on automakers to reduce greenhouse emissions is coming from institutional investors such as BlackRock and State Street, which hold large positions and have been emphasizing corporate social responsibility (CSR) criteria.

The EU recently released its strategy for clean mobility to help the bloc reach its overall goals of cutting greenhouse gas emissions by at least 55 percent by 2030 and carbon neutrality by 2050. Under the plan, emissions from transportation will be cut by 90 percent by 2050, and to get there, the EU has signaled that it will roll back 2030 CO2 emissions levels by at least 50 percent from 2020-21 levels of 95 grams per kilometer. 

That alone will mean an additional 2 million EVs sold in Europe by 2032 compared to the current 2030 cut of 37.5 percent, Bedwell said. He said LMC was also about to add "a lot more" EVs to its China forecast, meaning a potential total of 7 million more sold worldwide that year.

The Volkswagen brand said last autumn that a 50 percent CO2 cut could mean it would be building 300,000 more EVs annually starting in 2030.

The era of the electric car will be heralded by a number of subtle shifts, Wells of Cardiff University said, calling it "death by a thousand cuts." 

"We will see an accumulation of change in the culture of automobility," he said. "It's under way in front of us, and that is why it's such an exciting time. We are actually witnessing the beginnings of a radical transformation of the industry."

Government investment in EV infrastructure will convince fleet owners (who now account for up to half of European light vehicle sales) to switch to electric, Wells said. Service stations will replace fuel pumps with charging ports. E-commerce deliveries, given a huge boost by coronavirus lockdowns, will be made with electric vans in cities that have banned diesels.  

"In 2025 or 2026, we will see a switchover period where there is suddenly a critical mass of EVs that starts to emerge," Wells said. "Then the 2030 (halt to internal combustion engine sales) starts to look reasonable. 

"Right now it kind of looks weird," he added, "because only a tiny fraction of vehicles on the road in the UK are electric. But it will happen, and much faster than we had anticipated."