Europe Pulls Back From EV Shift as Consumers Snub Pricey Models

(Bloomberg) -- Europe is stalling for time in the electric-car race as the region’s automakers struggle with the transition and politicians become wary of fueling voter frustrations. 

Volkswagen AG and Volvo Car AB this week scaled back grand ambitions to challenge Tesla Inc. and new Chinese rivals. The reasons for the setbacks are twofold: there aren’t enough affordable models to move past early adopters and the wealthy, and reduced government incentives have further sapped customer interest. 

The result has been a sharp decline in sales. In July, deliveries of battery-powered cars fell more than 10% across the region, mainly due to a 37% plunge in Germany — the region’s biggest market. The development caught manufacturers off guard and led to a mismatch between investment plans and market realities. 

The strategic shifts risk setting Europe back in the global battle for the future of the auto industry. While the path might be bumpy, there’s broad consensus that personal transport needs to shift away from fossil fuels to stem the worst effects of climate change. 

“In Europe, we’re losing cost advantages ever faster,” said Ferdinand Dudenhöffer, director of the CAR-Center Automotive Research in Bochum. “The effect will be that China will continue to expand its natural competitive advantages in EVs and the cost structures in Europe will continue to fall behind.”

The slowdown in EV demand comes as the region’s auto market remains nearly a fifth below pre-pandemic levels, sapping profitability for conventional vehicles as well. With the European market looking like it’s past its peak, Volkswagen embarked on a confrontation course with unions. Executives this week said slumping sales left the company with about two factories too many.

On Wednesday, Volvo Cars then scrapped a plan to sell only fully electric cars by 2030 after disappointing demand for its EV lineup. The automaker, owned by China’s Geely, now aims for plug-in hybrid and battery-only models to account for at least 90% of its sales at the end of the decade. 

Volkswagen and Volvo are among the last to change tack. Mercedes-Benz Group AG has also raised concerns over the pace of market developments. After initially pledging to go all-electric by 2030, Mercedes-Benz CEO Ola Källenius told a shareholder meeting in May that the company will likely offer combustion engine models well into the next decade, noting that the “the transformation might take longer than expected.”

European manufacturers have struggled to produce a mass-market EV. High-end models like the €107,000 Porsche Taycan and the €116,000 BMW i7 cater to elite consumers, but inexpensive alternatives remain scarce. The electric version of the Fiat 500, traditionally a symbol of affordable mobility, costs nearly €35,000 — double the price of its combustion-engine counterpart.

“When setting EV goals, carmakers didn’t didn’t sufficiently consider what prices people would be prepared to pay for EVs and they didn’t sufficiently ensure they’d be profitable,” said Wolfgang Bernhart, a senior partner at Roland Berger consultancy, noting that government bans on new combustion engine vehicles could be pushed back. 

Chinese automakers are capitalizing on Europe’s slow transition, putting on sales offensives with competitively priced EVs like the €33,000 BYD Dolphin, compared with a starting price of €37,000 for the VW ID.3. The Wolfsburg, Germany-based auto giant has pledged to introduce a budget-friendly electric car, but its high production costs are a hurdle.

Pricing has become even more important in recent months. Russia’s invasion of Ukraine in 2022 contributed to an inflation wave that’s battered household budgets and put new vehicles out of reach for many. Central bank interest rate hikes have further added to the cost of financing vehicles, raising the bar for consumers.

Governments have also taken steps back from the quickest path to all-electric driving. German officials last year successfully pushed for an exemption to so-called e-fuels from a planned European Union ban on new sales of combustion-engine cars from 2035. Citing unfair competition from China, the bloc earlier this year introduced punitive tariffs on imports of Made in China electric vehicles.

Europe’s next climbdown from ambitious climate goals looks to be already in the works. The EU’s combustion-car ban can be reevaluated in 2026 and discussions behind the scenes among industry and government representatives have intensified in recent months to water down the target.  

“The transition to electromobility is a huge challenge for German car manufacturers,” said Reinhard Houben, chairman of the economy committee in the lower house of German parliament and member of the co-ruling Free Democrats. “In retrospect, Volkswagen was too quick to abandon the combustion engine. This mistake must now be corrected, even if it comes at a high price.”

Led by Volkswagen, European carmakers aggressively pursued electric vehicles to meet emissions regulations and to close a yawning gap with Tesla. The US carmaker’s early lead in EV technology has made it worth 12 times the value of Europe’s largest carmaker. 

Populist movements across Europe have seized on economic pain to sow discontent with climate policies. In Germany, there was a widespread backlash over a heating reform, but autos are even more emotive for a country that views unrestricted Autobahn speeds as a civil right. Right-wing parties in countries like Italy and France are also increasingly critical of climate regulations that they claim harm working-class families. 

European politicians are more sensitive to concerns around job cuts, and the region’s auto industry continued to prop up high-cost plants after the global financial crisis. 

“Politicians need to provide solutions so that normal households with normal incomes can afford an EV,” said Thorsten Gröger, a negotiator with German industrial union IG Metall. 

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