The European Automobile Manufacturers Association (ACEA) counts 298 automobile factories operating across Europe and employing about 2.7 million people. Thousands of other production sites and millions of jobs are in the value chain. The specifics of internal combustion engines (ICEs) — with thousands of parts to produce and transport along the value chain — call for this abundance of producers and suppliers and create the business case for an industry that has been the backbone of industrial economies for decades.
Electric vehicles (EVs) make most of these details redundant, however. Instead of thousands of moving parts, EVs need dozens; instead of thousands of workers, the new generation of highly automated assembly lines needs only hundreds.
After missing the starting gun, legacy original equipment manufacturers (OEMs) are committing to EVs to close the gap with EV-native competitors such as Tesla as electric mobility (e-mobility) gains momentum.
However, they face a delicate transition: while they ‘electrify’ their production base, they have to divest or repurpose existing facilities serving ICE models. Production sites worth billions of dollars risk becoming ‘stranded assets’, whose use case weakens as the uptake of EVs accelerates. The future of these sites is in jeopardy, and will eventually determine how successfully the legacy OEMs transition to EVs.
Risks of stranding
After sending mixed signals to the market for years, major OEMs have publicly embraced the EV revolution as the Covid-19 pandemic gave governments a chance to reset their mobility policies while producers revisited their production plans. The biggest names in the sector have come out with ambitious proposals to ‘electrify’ their offer and production base. None has been as vocal as Volkswagen.
The German powerhouse, whose environmental policies were tainted by the ‘dieselgate’ scandal that hit the group in 2015, made a splash in early 2021 when it announced total investments in e-mobility of €35bn. Its goal is to sell 1m electric vehicles per year by 2025 and 70 all-electric models across the whole group by 2030.
Volkswagen announced that the new e-cars will be built at eight facilities across Europe, China and the US, while six ‘gigafactories’ will produce the batteries needed to power them — though it has made little reference to its existing 118 production plants scattered around the world.
“Over 95% of cars sold are fossil fuel-based [2018 data], and so virtually all production assets are optimised for internal combustion engine car production,” wrote the Stockholm Environment Institute (SEI) in a 2018 report. “To shift these lines to production of a new type of car will require the same type of investment as does every new model launch. However, the difference this time is that the changing market landscape might force the car manufacturers to invest in a new asset base before the current is outdated, leaving equipment, tools and facilities stranded. Some car manufacturers have invested in production lines that are flexible enough to handle several platforms, but many have not.”
The SEI estimates that a chunk of the OEMs’ European production base (plants and equipment) worth €65bn is exposed to “significant risk” of stranding by 2025 in a scenario where mobility models move towards EVs.
OEMs are working to prove these estimates wrong by playing a zero-sum game where they swap ICE models with EV models. Volkswagen, for example, is investing €1.2bn to repurpose its car factory in Zwickau, Germany, to switch local production to EVs. Stellantis’s production site in Tremery, France — considered one of the world’s largest diesel engines plants — has been gradually electrifying so that production of electric powertrains reaches 900,000 units by 2025, from 120,000 units in 2020. Similar transitions are taking place in dozens of other production facilities across the continent.
However, EVs bring a paradigm shift in the way vehicles are produced and assembled, which tilts the balance of this zero-sum game since not all the existing production capacity can find a use case in this transition.
“There will be some stranded assets,” says Philippe Chain, a French engineer with executive-level experience in Renault, Tesla and Audi who is now leading Verkor, the EV battery producer he co-founded in 2020. “One reason for that is just the sheer numbers. Technically speaking, ICE manufacturing plants can be easily repurposed to build EVs.
“The only thing, though, is that EV production is much less complex. At the moment, ICE manufacturing plants are much bigger than EVs’. [As the industry transitions to EVs], it needs smaller plants to produce the same amount of vehicles. The new capacity being built for the production of batteries.”
Employees at production sites across Europe are already feeling the chill (see page 70). The Nuremberg-based Institute for Employment Research (IAB) estimated in 2019 that the electrification of powertrain would result in the German vehicle construction industry losing 83,000 jobs by 2035. These may well be conservative estimates as they assume a share of 23% in electric cars by 2035. Following the pandemic, “our updated forecast predicts that by 2026 electrified vehicles will account for more than half of light vehicles sold globally”, the Boston Consulting Group wrote in April. Going fully electric for new cars and vans by 2035 may be even feasible in all EU countries, Bloomberg NEF wrote in May.
Swimming against the current
However, these estimates are still contentious and the mass deployment of EVs still hinges on numerous elements, including the availability of charging stations in urban areas. Plus, there are notable exceptions among OEMs. Toyota, which spearheaded the development of hybrid vehicles and competes with Volkswagen for global market leadership, takes a more conservative view.
Toyota president Akio Toyoda was quoted by the Wall Street Journal in December 2020 as saying that EVs are overhyped. If the industry rushes to e-mobility, “the current business model of the car industry is going to collapse”, causing the loss of millions of jobs, he said. He added that in countries like Japan, whose power generation matrix leans heavily on coal and natural gas, “the more EVs we build, the worse carbon dioxide gets”.
In the same month, Philippe Houchois, managing director at investment bank Jefferies, wrote in a research note: “All [OEMs] are currently planning to gradually transition from a world of ICE to a combination of EV powertrain without knowing (understandably) the speed of adoption or whether ICE is truly doomed. While it is a responsible approach, it maintains the industry in a zero sum-game which could turn negative if ICE margins fall faster than EVs improve or if the strategy further stretches out the run-way offered to emerging challengers.”
The automotive industry is in flux. Until a few years ago, uptake of EVs had been slow. Now, the success of Tesla, combined with the e-mobility initiatives favoured by policy-makers in the wake of the pandemic, has dramatically changed the dynamics. Add automation and new models of ownership into the mix, and the prospects for legacy OEMs and their wide production base hang in the balance. Some will get stranded, but others will ride a new wave of success.
This article first appeared in the June/July print edition of fDi Intelligence. View a digital edition of the magazine here.