Unlocking the future of electrification

How changing consumption patterns are driving significant changes in the industry

The global automotive sector is currently navigating a complex landscape marked by recovery from recent disruptions and rapid advancements in technology, particularly electrification.

Speaking during a live webinar organised by Mashreq and MEED, industry experts and analysts discussed the state of the sector, key trends and future expectations, casting light on the challenges and opportunities ahead.

Present scenario

“The market is coming out of a period of recovery,” said Benjamin Asher, global head of automotive at GlobalData.

Although forecasts remain below the peak of 2017, where global light vehicle sales amassed 95 million units, varying economic conditions, consumer preferences and market dynamics continue to drive purchasing decisions.

In terms of performance, North America is back to pre-pandemic levels, with car sales expected to stabilise by 2025. The Asia-Pacific region, led by China, has also returned to a more rationalised and normalised state, while Europe lags behind, struggling with high vehicle prices and economic challenges.

“Overall, total sales volumes are expected to rise to pre-pandemic levels, if not this year, then most likely next,” said Asher. “However, while the markets are gradually recovering, different manufacturers are experiencing varied recovery rates, influenced by the geographical exposure.”

US manufacturers such as General Motors (GM) and Ford have faced significant challenges due to their reliance on the Chinese market.

“GM has lost significant ground to domestic players,” explained Asher. “Pre-pandemic volumes were around 2 million units, dropping to 1 million units in 2023. Recently, they announced a three-month shutdown of their Chinese production facilities due to a 50% decline in sales this year.”

Similarly, Ford Group also recorded a decline in sales, with a weakening European market compounding the company’s challenges.

Among Japanese manufacturers, Toyota Group has maintained a steady rise, while Renault-Nissan-Mitsubishi Group struggles due to its exposure to Europe and China. Of the European manufacturers, Volkswagen continues to feel the effects of its ties to China, with sales significantly dropping from 2018.

Overtaking these plunging sales volumes are Chinese brands, including BYD, Changan Automobile Group and Chery Group, which continue to gain prominence in the market and are filling the gap left by traditional manufacturers, as well as Tesla.

Pace of electrification

While exposure to diverse geographies significantly shapes global demand recovery, various other pivotal market shifts are under way.

“We are in the midst of an electrification transition,” said Asher, predicting that by 2024 volumes of electric vehicles (EV) will exceed diesel vehicles for the first time.

By 2027, it is expected that electrified vehicles, including battery electric vehicles (BEV) and hybrids, will dominate the market.

However, on examining the current state of the global BEV market, Alastair Bedwell, director of global powertrain at GlobalData, highlighted that despite the strong growth, BEV sales have slowed in the recent past.

As of April, BEVs account for one in every eight vehicle sales worldwide, with China leading at 20% penetration, followed by Europe at 13% and the US at 8%.

“Since the launch of the first mainstream BEVs, Mitsubishi’s i-MiEV in 2009 and Nissan’s Leaf in 2010, the market has grown to offer 400 models, 250 of which represent Chinese brands,” highlighted Bedwell.

However, despite these impressive numbers, BEV sales exhibited a sluggish start this year, prompting concerns among original equipment manufacturers (OEMs) about the deviation from anticipated growth trajectories. Germany in particular has seen a decline in growth in its BEV market so far.

Bedwell also revealed that the year-on-year growth in BEVs has been projecting a downward trend for some time.

In mature markets like Europe and the US, there is a noticeable gap between the purchasing power of the mass market and the affordability of BEVs as these markets move towards early maturity.

In China, which is ahead of the curve, the rapid growth rates of BEVs witnessed in the early part of the decade were unsustainable and have had to slowdown, with sales recorded at a just 12%, despite adjustments in pricing.

Globally, the BEV market has expanded by 14% between January and April 2024, which although not catastrophic, represents a significant decline compared to the 32% growth seen during the same period last year.

Shifting consumer purchasing trends

Amid the EV revolution, the focus has shifted from BEVs to a rapidly growing segment of hybrid vehicles, including plug-in hybrids (PHEVs) and extended range vehicles (ERVs).

“These hybrids, while not zero-emissions, help OEMs meet interim carbon dioxide (CO2) compliance targets and are more affordable than BEVs,” added Bedwell. “In Q1 of 2024, a significant growth has been observed in the hybrid sector, with OEM’s such as Toyota Group leading from the front.”

Additionally, PHEVs – chiefly popular in China due to brands like BYD – are also gaining traction in other regions. Meanwhile, range extender technology – a hybrid vehicle that combines an electric motor with a small combustion engine, which was once deemed stagnant – is now experiencing a resurgence, primarily driven by China.

Furthermore, better financial incentives and efficient production have made these hybrids affordable, and have helped to address range anxiety among EV drivers.

In the US in particular, recent emissions revisions by the Environmental Protection Agency have eased the pressure to adopt BEVs and plug-ins, with manufacturers now supporting markets where incentives are reduced.

In China, however, BEV and new energy vehicle (NEV) targets are based on progress in government roadmaps, while Europe’s targets align with CO2 reduction goals for 2025-35.

“Overall, the outlook for global electrified vehicles remains positive,” said Bedwell. “We do not see an obvious tipping point, but the optimism present a few years ago has tempered, resulting in OEM’s delaying vehicle and battery programmes in the sector.”

“While BEVs remain the answer for long-term sustainability targets in the sector, the road maybe bumpy as we move along.”

China dominance

The automotive industry in China has reached a critical juncture.

In 2024, NEV penetration rates surged to around 45%, surpassing 50% in some peak months. This significant shift has profoundly impacted the internal combustion engine market.

“China’s automotive landscape has evolved drastically, leading to significant shifts in market leadership,” said John Zeng, director of Asian forecasting at GlobalData.

German manufacturer Volkswagen, once the market leader with over 20% share, witnessed its market share drop to below 10% over the past six years, with BYD taking the lead.

Similarly, German brands like BMW and Mercedes-Benz recorded a significant decline in the first four months of the year, heavily impacted by new Chinese startups such as NIO and Li Auto.

Other international brands have also struggled against Chinese OEMs. For instance, Hyundai’s market share has dwindled to nearly 1%, despite decent penetration. The market has transformed significantly over the last 15 years, leading to the disappearance of several international and Chinese brands.

“Over the next five to 10 years, it is anticipated that the crowded NEV market will force about 90% of the current 130 brands out, as major players like Huawei and Xiaomi enter the sector, further intensifying competition,” said Zeng.

Huawei, for instance, is planning to launch Level 4 autonomous driving in China by next year and Level 5 by 2030.

“The race for advanced autonomous driving technology will be crucial in determining which brands survive in the fiercely competitive Chinese market over the next decade,” added Zeng.

“Every OEM is focusing on these technologies, which will be the crucial factor determining whether brands can survive in the Chinese market over the next five to 10 years.”

Future outlook

In addition to advances in electrification and new battery technologies, the automotive sector is undergoing a transformation akin to the evolution of smartphones, with a growing focus on connected cars and autonomous vehicle (AV) technologies.

“While fully AV may not be common until the mid-2030s, many related technologies are already entering the market,” said Asher. “Their surge is evident in the increasing number of patents registered in 2022, matching the activity in EV innovations.”

Technologies include Internet of Things networks, vehicle-to-everything (V2X), sensors, automotive augmented and virtual reality and artificial intelligence (AI) for mobility.

The patents cover infrastructure, sensor technologies and AI used for autonomous driving, enhancing safety and driver awareness.

In the last five years, the EV market has seen substantial venture capital investment. However, investments in audio visual (AV) technologies are rapidly increasing and are expected to make their way into the mainstream market in the next three to five years.

Middle East market dynamics

Despite the uncertainties, the UAE automotive market has shown significant growth in the last three years, driven by pent-up demand following the Covid-19 pandemic.

“The market experienced healthy margins driven by strong demand coupled with lagging supply chain restrictions,” said Karim Amer, senior vice president, head of automotive, wholesale and equipment – wholesale and training multinationals at Mashreq.

“With growth starting to normalise during the better part of 2023, we expect to see continuous progress in the sector for the foreseeable future.”

The region is at a crucial point in its push for sustainable fleet management and vehicle electrification, with the government actively encouraging EV adoption and aiming to cut energy consumption from transport by 40% and reduce carbon emissions by 10 million tonnes by 2050.

While the UAE ranks eighth globally in terms of readiness for electric mobility, the adoption rate is still nascent compared to other major markets.

“Last year, EVs accounted for 10.5% of total sales and are projected to increase to 14% in 2024,” said Amer. “Government initiatives are in place to support this shift, including converting 20% of government fleets to EVs and significantly increasing the number of charging stations in the region.”

For instance, Dubai Electricity & Water Authority is deploying green fast and ultra-fast charging stations to expediate EV adoption and is expected to place 1,000 charging stations by the end of 2025.

Despite these efforts, unique challenges in adoption persist. The unprecedented rains in April this year resulted in the loss of approximately 50,000 vehicles, significantly impacting the supply and demand dynamic. Amer said that should a significant portion of these consumers opt for new cars, it could result in a significant surge in demand, potentially accounting for up to 20% of the annual car sales in the UAE.

Geopolitical issues affecting shipping routes in the Red Sea also pose logistical challenges, which disrupt the flow of cars into the UAE, further impacting this dynamic.

Moreover, consumers in the UAE prefer larger vehicles like the SUVs and the limited availability of options – along with range anxiety and insufficient charging infrastructure –cause consumers to think twice before an EV purchase. “In 2021, there was one charging point for every 17 EVs, which worsened to one for every 35 cars in 2022,” said Amer.

Chinese automotive brands are also making a significant impact on the UAE market, becoming the second largest source of imported passenger vehicles, having overtaken the US since 2022.

“The Middle East has become increasingly significant for Chinese OEM exports. In 2018, approximately 30,000 cars were exported to the region, with the figure skyrocketing to over 700,000 in 2023,” said Zeng.

Overall, the industry is making varied progress, with manufacturers having diverse experiences. Technological advancements, particularly in electric and intelligent vehicles, is shaping the future, bringing both challenges and opportunities for the sector.

01 July, 2024 | .By Mrudvi Bakshi