The global transition to sustainable transport offers various benefits, including cost savings for drivers, and thousands of highly skilled clean jobs across battery production, electric motors, power electronics and supply chains. In 2021, the UK automotive manufacturing industry exported £32bn worth of products, accounting for 10% of the UK’s total export goods, according to SMMT. The transition to sustainable transport has the potential to further increase UK exports while reducing reliance on fossil fuels, improving public health and helping to transform the urban realm.
As a result, the transportation industry is undergoing a transformative shift towards sustainable transportation, driven by changing consumer attitudes, global legislation, financial incentives, and technological advancements. This shift provides opportunities for private equity investment, but it is also likely to disrupt legacy industries (e.g., car dealerships) and business models (e.g, third-party car repair and maintenance) in the automotive industry. Close attention to the evolving market environment is necessary for businesses in this fast-changing sector to stay competitive.
In the past three years, the automotive industry has endured and recovered from pandemic-related supply chain and shipping disruptions, as well as parts and semiconductor shortages which shook productivity. Over this period, the UK’s new car market witnessed a significant increase in alternatively powered vehicles, particularly electric vehicles (EVs), as consumers prioritise reducing carbon emissions. In the year to May, UK sales of battery electric vehicles (BEV) soared by 58.7%, representing 16.9% market share, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT). In addition, SMMT data shows sales of plug-in hybrids (PHEVs) rose 23% to reach a 6.2% market share, while hybrids (HEVs) grew 22.2% to comprise 12.3% of all new car registrations. By 2030, annual UK BEV and PHEV sales are expected to reach 2.5 million, representing 93% of the UK’s total vehicle sales, according to forecasts by Eurelectric.
EV adoption is reinforced by trends beyond changing consumer attitudes, such as confidence in infrastructure and aftersales support. Confidence in the ability to undertake longer journey’s is crucial. The UK government has committed to ensure that every motorway service area has six rapid chargers by the end of this year, while some are expected to have 12. Aligned national and global legislation further incentivises EV manufacturers and consumer demand through tax credits, rebates and other financial incentives. The UK has adopted an ambitious approach to decarbonise road transport, with the government introducing a Zero Emission Vehicle (ZEV) Mandate which sets a minimum quota for new battery electric vehicle (BEM) registrations for every automaker. The proposed minimum ZEV targets for new cars sold begin at 22% in 2024, increasing to 80% in 2030, reaching 100% in 2035, according to a government proposal. The proposed minimum ZEV target for new vans sold begins at 10% in 2024 and reaches 70% in 2030, reaching 100% in 2035. The ZEV mandate, due to come into effect next year, will present significant compliance challenges for manufacturers, as it is backed up by the threat of financial penalties. The UK government has also committed to ending the sale of new petrol and diesel cars and vans by 2030 and for all new cars and vans to be fully zero emission at the exhaust by 2035. Similar legislation exists in many countries around the world. Legalisation requires a minimum percentage of manufacturers’ new car and van sales to be zero emission each year from 2024.
Disruption is the cost of progress
Inevitably, some legacy automotive companies (including automakers and car dealerships) are still grappling with the challenges posed by this transition. Those slow to adapt their business to the changing market environment risk losing market share to new entrants. At worst, insolvency is a risk for legacy automakers and car dealerships that fail to adapt.
Traditional car dealerships have long relied on the sales and maintenance of internal combustion engine (ICE) vehicles. The sales dynamics, infrastructure requirements, and consumer expectations for EVs disintermediate many of the service offerings of car traditional dealerships. These companies must now adapt to the challenge of selling electric vehicles, which are increasingly sold by manufacturers who also directly manage after-sales maintenance.
A significant component of the auto retail industry is the sale of replacement automotive parts and accessories to consumers and businesses via the internet and networks of car dealerships. Car dealerships must adapt their business models to stay relevant in the EV era. This involves reviewing their operating model, finding operational efficiencies, and embracing digital, omnichannel operations. This will include investing in EV charging infrastructure, training sales staff on EV features, and ensuring exceptional customer experiences tailored to the service expectations of EV buyers. Car dealerships must offer an integrated, digitalised experience that seamlessly blends online with in-store, as well as sales and aftersales. It is quite clear that new EV manufacturers have risen the bar in consumer expectations which the legacy industry must meet in order to survive. Successful navigation of this transition allows dealerships to differentiate themselves and tap into the expanding market of environmentally conscious consumers.
Brexit hurdles return
Not all legislation is a tailwind that supports of the growth of the EV industry. In 2024, the EU’s post-Brexit ‘rules of origin’ requirements are scheduled to come into effect. These will require 45% of an EVs value to be sourced in the UK or elsewhere in Europe to avoid export tariffs of 10%. However, Germany’s automaking lobby warned the auto industry’s supply chain will not be ready to meet this threshold, which increases further in 2027. Japan’s Nissan Motor has warned that the EU rules of origin requirements may lead to manufacturing cars in the UK becoming too expensive. Stellantis, the global automaker which owns Vauxhall, Peugeot, Citroën and Fiat, also warned: “If the cost of EV manufacturing in the UK becomes uncompetitive and unsustainable, operations will close.” In recent talks with Brussels, UK Prime Minister Rishi Sunak has proposed removing the rules of origin requirements for battery manufacturing. No decision has yet been announced.
The shift towards sustainable transport presents opportunities and challenges that require careful consideration and strategic planning. BTG Advisory can provide support and guidance in reviewing your business model and developing strategies to address the demands of the evolving auto retail sector.
If your business, or portfolio company, is directly impacted by the challenges in this article and would like to discuss your strategic options, do get in touch and let us see how we can assist.