The drive to roll out Electric Vehicles (EVs) is set to be as revolutionary as what Henry Ford did for automotive production over 100 years ago.

But the impact of switching to EVs is going to be much more disruptive than just changing how cars are produced. This blog explores how EVs will change the automotive sector, the impact for wider infrastructure and what to consider when analysing the future prospects for auto and related companies.

Why are we switching to EVs?

Tackling climate change has become a global priority with the UK being one of the almost 200 Parties who signed up to the Paris Agreement. This treaty sets a goal of limiting global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. Since this treaty came into force in 2016, the UK has taken further steps to reduce its climate impact by passing legislation committing to reduce net Greenhouse gas (GHG) emissions by 100% by 2050 - making the UK a ‘Net Zero’ emitter.

Latest GHG emissions data suggests road transport makes up around a fifth of the UKs total GHG emissions and transport is the single largest emitting sector in the UK. As the power sectors decarbonise road transport can also decarbonise by switching to using electricity instead of burning petrol or diesel. With power generation forecast to become ‘net negative’ in the 2030s this will remove a significant amount of GHGs currently released today, making EVs and other electrified road transport green.

Latest regulation on petrol and diesel car sales

The Government has put a number of regulations in place to speed up rolling out EVs and the infrastructure needed to enable this. The main regulations include:

• End the sale of all new petrol and diesel cars and vans by 2030
  • All vehicles required to have a significant zero emissions capability (including plug-in and full hybrids) from 2030
  • Zero emission vehicles only from 2035
• £2.8bn earmarked for public investment
  • £1.3 billion will be used to accelerate the necessary EV charging infrastructure
  • £582 million to fund grants for consumers until 2022-23
  • £500 million towards developing batteries at scale in “Gigafactories”
  • a further £500 million earmarked for future investment

Banning the sale of petrol and diesel cars isn’t limited to just the UK. For example, Norway, Denmark, Japan and Spain as well as several cities have also announced bans. Other countries are also looking at targets with more announcements expected in the future.

How are different companies reacting?

When you think about EVs you immediately think of Tesla – the company was founded in 2003 with the purpose of producing EVs and they’ve gone from strength to strength with a share price now eclipsing many of the world’s largest car brands. Other companies have realised that they need to adapt if they want to remain competitive and are now integrating decarbonisation commitments into their decision-making processes.

Every company has a risk register where they track changes to policy, regulation and market trends to ensure they can identify and mitigate potential changes that could impact their business model. Climate change as a risk will have been on those registers for a long time but many established companies in the automotive sector have to a large extent been caught asleep at the wheel. EV production and charging infrastructure has largely been the domain of start-ups – only recently have these been bought up such as when BP purchased Chargemaster and EDF bought Pod Point.

We’ve seen a similar story in the power sector over the past decade. Renewables were only producing 6.8% of the UK’s power in 2010 but by last year this had risen to 42%. Over the same period nearly every coal fired power station has closed due to carbon pricing and government regulations banning their use (sound familiar?). The first movers in the renewable energy transition now make up some of the largest power companies in Europe, with the majority of other big utilities now looking at either increasing renewable capacity or specialising in other low carbon technologies.

Understanding a company’s ability to pivot

When looking at a company’s ability to adapt to new markets it’s important to look at its existing structure and commitments. Does the company have good cash flow to invest in R&D and CAPEX for new manufacturing facilities? Is it keeping up with its pension scheme contributions? Does it have sufficient resources to be able to weather difficult trading conditions and restructure? With the market set to change so quickly in the coming years it’s essential that companies can pivot to develop low carbon transport and maintain a competitive edge. When advising auto companies on their employer covenant strength, these considerations are key in our assessment of forward-looking prospects.

The whole economy is now shifting its focus to delivering Net Zero. It’s clear that companies that aren’t taking climate seriously are likely to face shareholder criticism or find themselves being left behind.