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TESLA, INC.

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California's Ban on New Gas Cars Further Upends Auto Industry

09/24/2020 | 02:05pm EDT

By William Boston

California's decision to ban sales of new conventional vehicles starting in 2035 shows how regulators' aggressive emission targets are forcibly reshaping an industry that is struggling to keep its customers on board.

Tighter rules from Europe to the U.S. are accelerating manufacturers' efforts to shrink their carbon footprint, even as they fight to come back from a pandemic slump. Those rules are also drawing investors toward new electric-vehicle startups hoping to replicate the success of Tesla Inc.

Volvo Cars, the Swedish auto maker owned by China's Zhejiang Geely Holding Group, said Thursday that it was preparing to launch a green bond to fund its electric-vehicle program. The news follows similar issues by Volkswagen AG and Daimler AG, which have both sought to tap into growing investor appetite for clean mobility.

California Gov. Gavin Newsom's announcement this week that his state will ban the sale of new gasoline and diesel vehicles, effective in 2035, is just the latest sign that the days of the internal combustion engine might be numbered.

Last week, the European Union signaled that it would tighten its carbon-dioxide car-emission targets for the next decade. The EU's cap of 95 grams per kilometer on carbon-dioxide emissions takes full effect next year. Slashing that target to 47.5 g/km in 2030, as the EU is now considering, would require fully electric vehicles to account for more than 60% of new-car sales in Europe -- up from about 4% now.

China has also been moving quickly through regulation to suppress greenhouse-gas emissions from cars, while developing markets for electric vehicles. For years, Beijing has offered subsidies and tax breaks for consumers to buy electric vehicles, capped new conventional vehicle registrations, and nurtured a homegrown electric-car and battery industry that is challenging Western manufacturers.

"California is not alone," Hakan Samuelsson, chief executive of Volvo Cars, said in an interview. "We have to realistically believe that around 2035 there will be a serious discussion about banning the internal combustion engine, and not just in California."

"Europe and China have woken up to the fact that (the combustion engine) is dead," said Arndt Ellinghorst, automotive analyst at Bernstein Research. "Now, it looks like the U.S. is waking up."

Mr. Newsom's announcement might not be the last word. More likely is that California's ban could end up in court, where the Trump administration is already challenging a 1970 law that gave California the right to set its own emissions standards.

Nevertheless, the car industry is now fully invested in pivoting toward electric vehicles.

After largely dismissing Tesla's launch of the first fully electric premium car a decade ago, Europe's big auto makers have now launched a multiyear investment campaign, spending tens of billions of dollars to develop and market new electric vehicles in an effort to meet tough emissions targets.

In July, BMW Chief Executive Oliver Zipse said he was targeting a 40% reduction in carbon emissions per kilometer driven and putting seven million electric BMW vehicles on the road in the next 10 years.

"The best vehicles in the world are sustainable," he said. "That is why premium and sustainability will be even more inextricably linked in the future."

Yet getting consumers excited about their new clean cars -- or figuring out how the rapid regulatory changes are likely to shape demand -- remains a struggle.

World-wide, sales of new electric cars accounted for just 2.8% of total sales last year, according to LMC Automotive, a research group. Carbon emissions from cars in Europe have actually been rising again because consumers are flocking to sport-utility vehicles, which are approaching 50% of new-car sales in the region's biggest national markets.

Yet analysts are convinced that the auto industry has passed the point of no return on electric cars. By 2035, when California's ban comes into effect, they are expected to account for about half of all new cars sold globally, rising to more than 80% by 2050, Morgan Stanley predicted in a report published last month based on interviews with 30 manufacturers.

Morgan Stanley also predicted that by 2040 Volkswagen would be the leading electric-vehicle manufacturer, selling 11.2 million fully electric vehicles a year, followed by Toyota Motor Corp. with 6.5 million, and Tesla with 4.9 million, and General Motors Co. with 4.1 million.

The California ban and similar actions across 17 countries around the world could mark a tipping point. A combustion-engine ban will limit choices for consumers, automatically boosting demand for electric vehicles, analysts say. That will give manufacturers additional scale, lowering their overall costs overall and boosting profits, the analysts add.

More than 11% of all light vehicles in the U.S. last year were registered in California, according to data firm IHS Markit. And 6.2% of all new cars sold in California were electric, outpacing the total U.S. share of 1.6%.

So far, investors have shown skepticism that the combustion-engine incumbents can manage the transition. This has translated into higher valuations for Tesla and the startups traveling in its wake, while shares in the old guard -- including GM and Volkswagen -- have languished.

"Car companies have received the memo and all have announced variations of aggressive targets for electrification," Morgan Stanley wrote in a report last month. "But investors have seen too little progress, and collective skepticism is evident" in the companies' depressed valuations.

Amid the skepticism surrounding legacy manufacturers, automotive initial public offerings have raised $4.7 billion in the third quarter of this year, according to data provided by Dealogic, the highest level since the third quarter of 2017 when the total hit $3.7 billion. Listings in this year's third quarter included several Chinese electric-vehicle companies, such as XPeng Inc. in August and Lixiang Automotive in July.

Some startups have come to market through reverse acquisitions by special purpose acquisition companies, or SPACs, which are listed for the purpose of acquiring another company. That was the case with Tesla rival Nikola Motor Co., which went public earlier this year, and whose founder and chairman stepped down this week amid allegations of fraud that he has denied.

Still more startups are in the queue, such as Hyliion Inc., a company based in Austin, Texas, that converts large trucks into hybrids. Hyliion is aiming to go public Oct. 5 via a SPAC created by Tortoise Advisors.

Car executives agree that it will take more than a full lineup of electric vehicles -- and in some markets tax incentives -- for consumers to overcome their current reluctance to buy the vehicles. Another key ingredient is a broadly available charging infrastructure.

"Neither mandates nor bans build successful markets," said John Bozzella, president and CEO of the auto-industry group Alliance for Automotive Innovation, which is calling on public authorities to do more to build charging stations and provide more incentives to consumers.

Write to William Boston at william.boston@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
AB VOLVO 1.82% 200.85 Delayed Quote.3.64%
BMW AG 1.39% 87.56 Delayed Quote.21.22%
DAIMLER AG 0.52% 83.65 Delayed Quote.44.75%
GENERAL MOTORS COMPANY 0.54% 58 Delayed Quote.39.29%
MORGAN STANLEY 1.12% 102.14 Delayed Quote.49.04%
TESLA, INC. 3.02% 843.03 Delayed Quote.19.47%
TOYOTA INDUSTRIES CORPORATION 3.64% 9690 End-of-day quote.18.32%
TOYOTA MOTOR CORPORATION 0.40% 1993.5 End-of-day quote.25.27%
VOLKSWAGEN AG 1.33% 198.66 Delayed Quote.30.34%
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Financials (USD)
Sales 2021 50 852 M - -
Net income 2021 4 322 M - -
Net cash 2021 8 844 M - -
P/E ratio 2021 220x
Yield 2021 -
Capitalization 835 B 835 B -
EV / Sales 2021 16,2x
EV / Sales 2022 12,1x
Nbr of Employees 70 757
Free-Float 81,0%
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Last Close Price 843,03 $
Average target price 703,89 $
Spread / Average Target -16,5%
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