This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
It is hard to feel too sorry for Elon Musk. A few days ago he was ranked as No 2 in the global rich list published by Forbes magazine, just behind Bernard Arnault and family, who control the French luxury empire LVMH. Now, while he is still worth nearly $200bn, thanks to the fall in the value of his shareholding in Tesla he has been pipped by Jeff Bezos at Amazon, and is down to No 3.
There are two stories here. One is what is happening to Tesla. The other is what is happening to the transition to electric cars more generally, and in particular the rise of China as the dominant producer of them.
A bad start to the year
For Tesla, the first quarter of this year has been a disaster. Sales fell sharply despite price cuts, and its share price declined by more than 5 per cent to push it down by one third so far this year. The company explained that the problem was partly disruption to production following attacks by Houthi rebels on ships in the Red Sea which started last October, and partly because it is retooling for a revised version of its popular Model 3. But behind this is a wider concern that Teslas are no longer special. There are lots of other electric cars on the market, and the demand for its two bestsellers, the Model Y and the Model 3, is becoming saturated.
There may also – and this is impossible to pin down – be a reluctance by some potential buyers to support Musk personally, given his outspoken views on many political issues. He clearly rubs a lot of people up the wrong way – though in fairness I should record that the only time I have met him, at a dinner in London just before the pandemic, he was most courteous to everybody at our table.
The saturation point is the key one. Tesla, despite the fall in its share price, is still worth more than $520bn. That makes it by far the most valuable car manufacturer in the world, way ahead of Toyota, worth $388bn. Yet the Toyota group last year made 11.2 million cars, while Tesla made 1.85 million. So you see the heady valuation the markets put on Tesla is based on hopes of further growth. You cannot justify its present share price on what it is producing at the moment. And while Tesla shares are down by a third this year, Toyota shares are up by one third. That is a pretty blistering message about the shift in the markets’ expectations for the car industry as a whole. Tesla only makes electric cars. Toyota makes relatively few of them, specialising instead in hybrids.
The future for electric vehicles
That is the other story. On a long view, the transition away from the internal combustion engine and towards pure electric cars seems certain. This is not simply because governments in Europe and the UK are legislating for that to happen, with the UK ban on new petrol and diesel cars now pushed back to 2035. It is because electric vehicles are inherently a much simpler technology, and are still at an early stage of development. Petrol and diesel cars, by contrast, have had nearly 140 years to reach their present level of sophistication. Carl Benz applied for his patent for “a vehicle powered by a gas engine” in 1886. At some stage, maybe quite soon, electric cars will be cheaper and have a longer range than petrol ones. When that happens there will be no need for financial incentives to sell them. Buyers will beat a path to their door.
But we are not there yet. Right now what is happening seems to be quite the reverse. Quite aside from the slowdown in Tesla sales, in the US both Ford and General Motors are cutting back their electric vehicle production plans. In China, the world’s largest electric vehicles market, there is a price war as manufacturers desperately try to clear unsold stocks. Here in the UK there has been a sudden fall in the price of second-hand electric cars, though that decline does seem to have levelled off.
China stands to benefit
In all probability what we are seeing now is simply a pause in the pace of the transition. Actually, in the UK, the proportion of sales of pure battery cars (as opposed to hybrids and plug-in hybrids) in the first two months of 2024 was up slightly on last year: 15.8 per cent of the total, as opposed to 14.3 per cent. We don’t yet have figures for March, but if that proportion continues to nudge up, that should confirm the view of the optimists that the switch is still under way.
If that switch speeds up, much will depend on China. It is not only the largest producer of electric cars; it can make them more cheaply than anyone else. There have been a string of stories about how it will dominate the UK market, currently the largest for Chinese cars in Europe. The MG4 is second only to Tesla in sales here, and though MG currently makes all its cars in China, there is a possibility that it may start to manufacture them in the UK. The Chinese state-owned company Chery, which has a controlling interest in Lotus and makes the iconic London black cabs, has also said it is considering setting up a plant here.
All this is bad news for Tesla. It had the first-mover advantage and nothing can take away from Musk’s achievement in propelling an entire global industry into a faster transition to electric vehicles than would otherwise have happened. But it will be a bumpy ride ahead.
Need to know
I am intrigued by the possibility that the UK could repeat the job it did with Japan in becoming the main base in Europe to assemble Chinese cars. Currently, we import more Chinese cars than anywhere else in Europe, about one third of the total, led by MG (which was founded in Oxford before its acquisition by Chinese company SAIC Motor in 2007). So from a consumer point of view, there does not seem to be any resistance to buying Chinese, and in that regard, we are different from France or Germany, where domestic producers are preferred. In France, French brands account for 62 per cent of the car fleet there. And as for Germany, well, since it produces around 60 per cent of the world’s premium cars it is not hard to see why Chinese manufacturers will struggle to gain a foothold there.
It is hard now to remember how important Nissan’s arrival in Sunderland back in 1984 was to Britain. The domestic motor producers were in turmoil, with the Rootes Group long sold to Chrysler, and British Leyland in its long decline. Yet Nissan proved that it could build cars in the UK and make a success of it. Other Japanese manufacturers including Honda and Toyota followed. Had the UK remained in the EU, there is a very good chance that Chinese companies might have made the same choice.
Opportunities for the UK
The big question now is whether that pass is sold. In theory, the UK has full access to the EU market under the Brexit deal. In practice, there is some political risk. If you are building a car plant you have to think 20 years ahead, so while Nissan is quite content at continuing to invest here, building a new plant from scratch is another matter. In any case, UK relations with China are not particularly good at the moment, arguably worse than those of Germany or Spain. But, and this is the point made by Chery above, the UK is a big enough market, with some exports outside of Europe, to justify an assembly plant.
So we will see. My view is that this is a huge opportunity that we should try to seize. Of course, relations with China will continue to be tricky for the next few years, but looking further ahead to the 2030s and beyond, it is a bit of a no-brainer that we should offer to China what we offered to Japan.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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