This report does not constitute a rating action.

The transition of the global light vehicle fleet (the car parc) from cars with internal-combustion-engines (ICE) to pure electric vehicles (EVs) is accelerating rapidly. Just how rapidly is largely being determined by the level of government support for policies that reduce CO2 emissions to combat climate change and enhance energy security. Governments, of course, can mandate changes in emissions standards, but if they are to bring about mass adoption then they also need to play a role in making EVs more attractive in terms of economics and performance--which many governments are doing, with the aid of large private sector investments in EV chargers and charging infrastructure. Automakers, and to a lesser extent suppliers, will continue to ramp up investing to increase their EV scale and vertical integration capabilities.

Here, S&P Global Ratings presents the most frequently asked questions from investors about the present shape of the EV revolution on the credit quality of global auto issuers.

Frequently Asked Questions

What is our global outlook for EVs? 

We have revised upwards our market penetration assumptions for EVs globally. We now forecast electric and plug-in hybrids (or PHEVs) to approach 22% of global light vehicles by 2025, from approximately 10%-12% in 2022, helped by improved battery efficiency and software capabilities, extended range, higher gas prices, and tax incentives.

In Europe, the transition has had regulatory tailwinds; for example, increasingly punitive regulations testing average emissions of CO2 per km of the fleet of passenger cars registered in the region year over year. Since 2020, the region has had a more cohesive stance on the transition through the EC's European Green Deal. This has benefited most of the countries (with the possible of exceptions of Belgium, Poland, Czech Republic, Slovakia, Bulgaria, and Denmark) whether in the form of tax rebates, bonus payments, or premiums. In some major European markets, governments have recently increased subsidies on EVs with the aim to support the low- to mid-range of the market where EV penetration is still relatively low. Public support will be key in achieving the penetration rate we forecast for 2025 in the region (about 30% of the market). The European EV market is dominated by legacy auto manufacturers Volkswagen AG and Stellantis (together 40% market share), with increasing competitive pressure from non-European original equipment manufacturers (OEMs) like Hyundai and Tesla.

For China, which accounts for about half of the global EV sales, we estimate penetration will rise to about 40% by 2025 from 14% last year and about 25% this year. We believe domestic brands will continue to dominate China’s EV market for at least the next one to two years, with wide product offerings across different sub-segments. Tesla is the only foreign brand that made it to the top 5 sellers list. Over time, however, these market leaders may face more intense competition from foreign brands (including Chinese/international joint-venture brands).

In the U.S., EV sales (including PHEVs) could approach 18%-23% of light vehicle sales by 2025 (versus around 7%-8% in 2022). Positive trends for electric and plug-in hybrid vehicles will persist as their combined market share continues to surpass expectations despite high battery costs. As the Biden administration's plans to reach 50% BEV penetration by 2030 takes shape, we’ve seen good momentum thus far with the subsidies and incentives under the Inflation Reduction Act (IRA). Additionally, the U.S. Department of Transportation recently approved plans for all 50 American states to build charging stations along the nation’s highways. As a result, we expect market share losses in ICE, hybrid, and other alternative-fuel vehicles as new electric model launches challenge incumbents.

Table 1 

Electrification Scenario--Share of BEV And PHEV As % Of Total Sales
	2019	2020	2021	2025e
Europe	2.7	10.0	14.0	>30
China	4.7	5.5	14.3	~35-40
U.S.	2.0	2.0	4.5	18-23
Global	2.5	4.2	8.3	17-22
BEV--Battery electric vehicle. PHEV--Plug-in hybrid electric vehicle. e--Estimated.

Chart 1 

What will be the impact of macro slowdown on our forward-looking views? 

We see limited downside risks to our forecast on EV adoption globally due to weaker macroeconomic conditions. This is mostly because of government policies to support growth, such as the IRA in the U.S. and similar schemes in Europe that offer tax incentives to EV buyers. When the IRA takes effect in January 2023, General Motors (GM) and Tesla vehicles will no longer be subject to the 200,000 limit cap in the U.S. Several automakers, including Tesla, GM, and Ford could qualify for three large sources of subsidies: tax credits to EV buyers (up to $7,500 per vehicle), subsidies to EV battery cell producers in the U.S. ($35/kWh), and subsidies to U.S. producers of battery modules and packs ($10/kWh). Foreign automakers are less likely to qualify for these subsidies at the outset, as they may need to adjust their production plans to fit the final assembly provisions in the IRA, some of which need further clarifications. Overall, the IRA could support price declines over time, leading to increased adoption for EVs through 2025, though profit pressure will intensify due to rising costs for battery components.

In Europe (Europe 10, comprising Germany, France, U.K., Spain, Italy, Netherlands, Sweden, Norway, Switzerland, and Belgium ), EV sales expanded 6.0% in the first eight months of 2022 compared with the same period in 2021 versus a 12.3% decline for all passenger cars, bringing the EV share to 21.5% of the light-vehicle fleet (source: EV Volume). Compared to last year, growth moderated substantially, and it is unclear whether the slowdown is demand-driven or reflects the semiconductor shortage--likely a combination of the two. We assume EV growth could be slower in 2023 and 2024 than in other regions, due to high energy prices and rising interest rates, but we don't expect this will reverse the trend of increasing penetration that we continue to see at about 30% by 2025.

How do we incorporate the risks of lower profitability from EVs into our business risk profile assessments on OEMS? 

While assessing the impact on business risk, in general we focus on the following factors:

• The adequacy of investments towards vertical integration and for building capacity necessary to leverage scale and ultimately reduce costs.
• Market acceptance of the products and ability to command pricing premiums.
• Cost reductions on battery components and energy efficiency, and manufacturing efficiency through reduced cost per unit.

Margin pressure will intensify with continued growth in sales volumes for EVs, which typically have lower gross margins than their ICE counterparts, particularly in the mass-market or volume segments. In regions such as EMEA the higher adoption rates of PHEVs may be a mitigant as these vehicles tend to be less profit-dilutive compared to battery-powered electric vehicles (BEVs). In our understanding, the production cost of a BEV is roughly 50% higher than the equivalent ICE version, with the bulk of this extra cost represented by the cost of the battery itself. For some premium/luxury automakers, EV margins are close to par with ICE, but for most others, the higher manufacturing cost offsets much of the higher pricing for EVs.

Prices remain quite high for EVs--the average transaction price in the U.S. during the first half of 2022 was $64,000, according to Kelly Blue Book, and USD 48,000 in Europe for 2021 according to the International Energy Association--but we do not believe this will persist as such high prices will limit adoption from the next wave of buyers. Ongoing investments in global capacity, partnerships, and vertical integration all aim to enable automakers to launch more-affordable models. Battery costs rose substantially in 2022--the prices of cathode materials alone, which represent at least 30%-40% of battery costs, more than doubled over the 12 months up to March 2022-- and the Russia-Ukraine conflict has exacerbated the supply-chain disruptions and materials shortages. And all of this was against the backdrop of COVID-19 outbreak. Lithium prices will stay at record highs in 2022 but are likely to soften next year on increasing supply, whereas nickel prices have weakened in the past few months. This leads us to believe battery pricing should resume its downward trend, but overall cost parity (EV vs. ICE) could be pushed out further to the second half of this decade when lithium price is likely to soften.

We do not necessarily view the higher costs of EVs and batteries as credit negative; they represent the cost of doing business in an industry facing massive technology risk and product replacement needs. Our focus is more on the ability maintain overall EBITDA margins in line with our established ranges (for instance, our threshold average EBITDA margin is 6%-10% for existing ratings), through a combination of higher margins from legacy products, cost reduction, and better manufacturing efficiency to offset the cost pressures from higher electrification.

Chart 2 

Chart 3 

Gwh - Gigawatt hours

How are the global automakers positioned with respect to credit downside risks due to higher electrification? 

North America: In our view, GM and Ford have adequately invested in electrifying their fleets with new launches and vertical integration (including securing battery capacity). However, a higher-than-expected adoption rate for EVs is likely to dampen profitability and cash flow 2023-2025, especially if it cannibalizes market share from legacy high-margin ICE-trucks. In our projections for both automakers, we incorporate the additional pressure on profits and cash flow at least for the next 5-7 years, until more automakers achieve the combined benefits of scale and vertical integration. We expect Tesla to continue to dominate most mid- to high-priced EV segments globally through the next two years, with limited credit downside for now. To sustain recent strong growth, hold its first-mover advantage, and improve market share, Tesla will need to make EV ownership more affordable, including insurance and service costs. The timing of its improving the affordability of its vehicles will be an important consideration for our market share assumptions and for potential improvements in its competitive advantage beyond 2024.

EMEA: In the eurozone, Fit for 55, the EU’s plan for a green transition, imposes on automakers an accelerated path to electrification, the cost of which is a loss of earnings from higher-margin legacy products. We observe momentum in the EV penetration at all our rated automakers. Volvo cars stand out for the highest EV mix (35-40%) globally, characterized by an overwhelming share of PHEVs. Similarly, BMW and Mercedes follow with a dominance of PHEVs. We observe lower but still increasing EV mix at Volkswagen, Stellantis, and Renault, albeit for these OEMs the BEV component is driving over PHEVs. We see Jaguar Land Rover Automotive lagging behind its industry peers in the electrification of its product line-up and also in terms of the scale of absolute capex investment that it is able to commit in the race to electrification. EMEA-based automakers have different supply chain strategies ranging from mainly contract-based battery supply agreements to a mixed portfolio approach, including supply contracts and joint and/or fully controlled stages of the EV value chain, the latter being more capital intensive and at the same time more critical for large volume manufacturers. We believe premium and luxury manufacturers that are better equipped to mitigate the downside credit risk linked to the transition to electric mobility, and OEMs able to access markets where legacy products continue to be dominant, will overperform competitors.

APAC: Among rated APAC carmakers, Geely Automobile Holdings Ltd. has been advancing most rapidly in electrification. Its EV penetration reached 18% in the first half of 2022 and 22% in the first nine months. Increasing EV sales weighed on its margin, together with pandemic-related disruption and chip shortages. The company’s EBITDA margin contracted to 5.9% in the first half of this year, from 8.3% in 2021. We expect its margin to improve gradually on higher sales volume and subsiding pandemic impact. Leverage pressure is less material though, given its low debt level. Despite continuous research and development (R&D) and capital expenditure (capex) needs for electrification, we believe the company will remain in net cash position over the next 24 months.

The other Chinese auto OEMs, including China FAW Group Co. Ltd. and Beijing Automotive Group Co. Ltd., are still ramping up their EV offerings. Apart from leveraging the R&D capability of their joint venture partners, they’ve also launched proprietary brands. However, their EV sales have been advancing slowly. The ability to roll out competitive products in the EV segment will be increasingly important for their competitive position in the medium to long term.

Japanese auto OEMs, including Toyota Motor Corp.,Honda Motor Co. Ltd., and Nissan Motor Co. Ltd. are also accelerating investments in electrification. They are trying to rein in their financial burden by utilizing the technology for hybrid vehicles and lowering development expenses for conventional products. In addition, strategic alliances are also set up to share the cost burden. These includes the cooperation between Nissan Motor,Mitsubishi Motors Corp., and Renault, and that between Honda Motor and GM. These measures could help them to maintain positive free operating cash flow (FOCF) and net cash position.

Korean automakers Hyundai Motor Co. and Kia Corp. are also aggressively expanding EV product line-ups. The company developed an EV platform and is expanding various green vehicles sales (EV, hydrogen vehicles, PHEV, hybrid). The group was ranked the world's top 5 player in terms of sales volume in the first half of 2022.

How are auto supplier ratings positioned with respect to increased electrification? 

Suppliers will be a key part of the transition to electric vehicles, particularly for new parts where they can provide benefits of scale across various OEM customers and geographies. Increased electrification will present both opportunities for more content but also risks given the displacement of legacy ICE products, which are more mature and generally carry higher margins.

Below is a table outlining suppliers that face a credit impact from increased electrification.

Table 2 

Credit Impact	Risk	Company
Negative	Greater displacement risk given exposure to powertrain and uncertainty of product transition and potential greater OEM insourcing	American Axle & Manufacturing Holdings Inc., Tenneco Inc., Garrett Motion Inc.
Moderately Negative	Transition risk in the near term could pressure margins and increase R&D and capex but potential for increased content opportunities longer term	Cooper-Standard Holdings Inc., Dana Inc., Magna International Inc., Meritor Inc., Stoneridge Inc., TI Fluid Systems plc, Iochpe-Maxion S.A., Metalsa S.A. de C.V., Nemak S.A.B. de C.V., Randon S.A. Implementos E Participacoes, Tupy S.A., GKN Holdings Ltd., Kongsberg Automotive ASA, Robert Bosch GmbH, Schaeffler AG, Aisin Corp., Nexteer Automotive Group Ltd., Hyundai Mobis Co. Ltd.
Positive	Strong readiness to handle electrification during the ongoing energy transition in the auto industry.	Contemporary Amperex Technology Co. Ltd.

Over the next few years, we could envision some ratings pressure for suppliers that engage in aggressive R&D and capex to fund new products and technology internally but without a clear path to profitable returns on investment. Equally, suppliers that depend meaningfully on sales of ICE-powered light vehicles and that fail to offer new cutting-edge products and technology will likely weaken their competitive position, thereby leading ultimately to rating pressure.

North America: American Axle and Tenneco face greater transition risks. American Axle faces displacement risk from electrification, and its ability to offset potential losses in its engine and transmission-related business largely depends on higher content per vehicle in its differential and axle electrification businesses. Though the company has developed solutions to cater to different automaker drivetrain strategies, there is somewhat limited visibility on the success relative to their traditional products. Tenneco also faces risks as a relatively large percentage of Tenneco’s parts focus on traditional combustion engines for cars and trucks. Given the planned acquisition by Apollo, the company’s long-term strategy to address electrification is more uncertain. While Tenneco will likely have lower investment needs in R&D and capex, which could help margins in the near term, longer term its scale, efficiencies, and consequently margins could be challenged as volumes fall with lower volumes of ICE transmissions.

Other companies face risks to their products and margins but have products in development to replace ICE parts and/or a lower overall exposure to the combustion engine. These would include Cooper-Standard (25% of sales exposed to fuel delivery systems) and TI Fluid (40% of sales connect to fuel tank and delivery systems). Dana has similar risks as American Axle in the light vehicle market but we think the company is more advanced in providing electric products in the commercial and heavy vehicle markets, which are more fragmented and have products that are electrifying more rapidly. Borgwarner faces risks as well, but the company has a very strong plan in place to reduce combustion products and a strong backlog for its new electric products, though the company could have issues selling its targeted legacy ICE assets given current low market multiples and volatility. Longer term, we think that as electrification increases, it will drive more mergers and acquisitions (M&A). Public companies will continue to focus on repositioning their portfolios to increase exposure to electrification, as illustrated by Aptiv’s recent purchase of Intercable Automotive Solutions. Private equity could emerge as an increasing acquirer of ICE assets (for example, Tenneco being acquired by Apollo), especially as valuations for companies have come down in the last few months. We also expect that there could be further M&A to enhance scale across both electric and ICE parts.

EMEA:  Garrett Motion (GMI) faces a negative transition risk for EVs. As a manufacturer of turbochargers for diesel and gasoline vehicles, GMI is more exposed to environmental risk than other auto suppliers, in our view. The company has developed a product offering for hybrid and fuel cell technologies, but we think a more rapid increase in the share of battery electric in the powertrain mix for light vehicles would be detrimental to its credit quality.

Other European suppliers that face more moderately negative transition risks are Robert Bosch, Schaeffler, and GKN. Robert Bosch has exposure to fuel injection systems (more than one-fourth of Mobility Solutions revenue and a materially higher share of operating profit, as per our estimates). We think the company has the scale and innovative strength to refocus its product portfolio toward electric drivetrain and fuel cell solutions. However, margins on these products will remain slim in the next few years, pressuring profitability and requiring significant restructuring programs. Schaeffler also has significant powertrain exposure (40%-45% of revenue in 2021). Although the company's product portfolio is well positioned to offer better fuel efficiency for ICE technology, we expect Schaeffler will need to carefully balance necessary investments to enhance and broaden its product offering in e-mobility. We expect the shift to organically build up this product offering will weaken margins. Lastly, GKN has a large exposure to automotive drivetrain products (41% of 2020 revenue). We expect GKN will need to carefully balance necessary investments to enhance and broaden its product offering for electrification.

APAC: In APAC, we don’t see material downside risk in relation to electrification for most of the suppliers. Companies like Yanfeng, which focuses on interior decoration, is less affected by the electrification trend. Suppliers including Johnson Electric,Denso, and Toyota Industries have been shifting their product portfolio in line with EV demand increase in the market. Their margins are relatively resilient due to competitive products and leading market position. This is especially the case for Denso, given that its electrification products command higher margin than its parts for ICE vehicles. For Aisin, which has higher exposure to the powertrain business, we think its creditworthiness is supported by strong competitiveness in its core products. However, the ability to shift products to be compatible with EV needs will be important for its business strength and financial performance over the mid-long run.

For battery suppliers, we expect CATL and LG Energy Solutions to remain the top two players globally over the next 24 months. However, CATL’s market position may be hampered if the company is not able to penetrate the U.S. market under the IRA. On the other hand, the IRA could help LG to strength its position in the ex-China market and improve margin.

What supply chain risks related to electrification do we incorporate in our base-case for automaker ratings? 

Localizing battery supply chain will be a key focus area for most automakers in the next decade. For instance, several battery makers and automakers have announced plans (including joint ventures) to invest in the U.S. and Europe as part of an industry trend to meet the expected growth for EVs and reduce dependence on production in China, to benefit from the subsidies in the IRA as well as to manage future supply chain bottlenecks. Though we see reasonable visibility through 2025 around the supply arrangements--including public announced by Tesla, GM, Ford, VW, and Hyundai Kia--we expect more bottlenecks to emerge in the latter half of this decade. At this point, we incorporate potential bottlenecks by building varying levels of haircuts in our volume and profitability assumptions compared with automaker targets.

The following materials could represent the biggest bottlenecks.

• Lithium: Lithium supply represents a risk, as lithium carbonate prices have surged in recent periods. EV manufacturers are increasingly partnering with mining companies and refining facilities to insulate themselves from lithium price volatility and ensure consistent supply of the metal. Though lithium is abundantly available across the globe (with a large majority sourced from Australia, Chile, and China), refining constraints limit the availability of supply battery-grade lithium. Lithium mining capacity can ramp-up faster than copper, nickel, and cobalt mines that are multi-billion dollar investments requiring specialty drilling equipment compared with lithium that is less capital intensive. The ramp-up of new refineries is a slow process with regulatory, environmental, and residential considerations. We expect more automakers to pursue lithium refining as a way to ensure more supply visibility. In China, extreme weather and power shortage led to production disruption to lithium refiners in Sichuan province in August and drove up the lithium price. The province contributes almost 20%-30% of lithium compound production in the country. While refiners’ operations have gradually normalized, any similar events could put lithium supply under pressure. That would squeeze the margin of downstream manufacturers, such as lithium battery and electric vehicle makers.
• Cobalt: Cobalt faces significant supply chain risk for EVs as EV batteries can have up to 20 kg of cobalt in each 100 kilowatt-hour (kWh) pack. Currently, cobalt comprises up to 20% of the weight of the cathode in lithium-ion EV batteries and most automakers are looking to reduce reliance on cobalt towards newer cathode materials.
• Semiconductor chips: Since EVs tend to have a higher reliance on semiconductor chips, this continues to be a near-term risk. We believe auto chip supply will remain tight in the next few quarters, but we see easing signs. As the demand for chips is weakening in the consumer sector, there will be more excess foundry chip processing capacity. For example, Vanguard International Semiconductor Corp. mentioned that its capacity utilization in the third quarter will drop to 80%-85% from the current 100%. We believe these companies will switch capacity to auto chip production, which could moderate the auto chip shortages. EV producers are facing the same supply-chain headaches as traditional auto OEMs are, and are taking various measures to cope with the challenge, including sourcing alternative supplies or reducing the number of chips installed per car (lowering the configuration of the cars). They are also adopting some temporary workarounds such as delivering cars without first installing certain non-critical components; then arranging installation of the components later when the chips become available. Some of the more vertically integrated EV producers, like China's BYD (not rated), also produce chips. Moreover, auto OEMs have been raising prices of popular car models to partially pass through the impact from supply constraints and cost inflation. For Chinese auto OEMs, the ability to secure high-end chips will be crucial for their development over the mid-long term, especially in relation to autonomous driving. While details are not fully disclosed, the U.S. Bureau of Industry and Security has stepped up the restriction on the sales of advanced chips to Chinese companies. The recently announced U.S. Department of Commerce export controls restrictions, including the sale of semiconductors to limit China's ability to purchase and manufacture advanced chips used in military applications, came at an inopportune time for U.S. chipmakers. Based on how broadly the U.S. enforces the restrictions, the impact could over time extend beyond semiconductor and technology into sectors such as auto, aerospace and defense, energy, and others.

Chart 4 

How will vertical integration and joint ventures (JVs)/partnerships impact our assessment of creditworthiness? 

Vertical integration allows players along the EV industry chain to better secure raw material supply and control costs. Automakers will likely incur higher spending on battery supply chains, but we don't view this as a credit negative now since it allows them to lift production through improved vertical integration. Faced with the limited supply and increasing cost of raw materials, vertical integration with upstream players will become more common. Global automakers such as Volkswagen, Stellantis, GM, and Ford among others are following Tesla’s lead in entering the supply chain to secure what they need for production. By cutting out intermediaries, automakers can better control the stability of material supply and cut costs at the same time. Their exposure to the supply chain may not only be limited to securing long-term procurement contracts. We would view vertical integration as a credit positive, as in the case for Tesla, if combined with scale and manufacturing efficiencies, we see sustained prospects for higher profitability relative to peers.

Another option OEMs are resorting to is the formation of JVs for vertical integration with upstream suppliers. For example, Great Wall Motor Co. Ltd. (not rated) acquired a minority stake in a lithium mining company in Australia back in 2017. CATL announced a joint venture with an Indonesian partner to invest in nickel mining in April 2022. BYD is looking to acquire lithium mines in Africa, according to recent media reports. In our view, backward integration will likely become more common in the EV industry for the next 12-24 months.

Vertical integration also enables companies to capture new business opportunities, strengthen supply chain relationships, and share costs. In Korea, steelmaker Posco Holdings Inc. diversified into EV battery cathode materials via its subsidiary Posco Chemical Co. Ltd. (not rated), and it is investing to secure key battery materials such as lithium and nickel. The battery production arms of LG Chem (LG Energy Solution) and SK Innovation Co. Ltd. (SK On Co. Ltd. (not rated)) are forming a number of JVs with automakers to strengthen their footprint in the EV space while easing investment burdens. CATL is also building JVs with auto OEMs including Geely Automobile Holdings Ltd.

We believe more automakers will opt for EV tie-ups to achieve economies of scale. Small-scale production is a key reason for the low profitability of EV businesses. To improve production efficiency, more automakers are sharing their EV production platforms. For instance, over 2023-2028, Ford plans to produce two EV models, with a projected volume of up to 1.2 million units, for the European market based on Volkswagen's modular electric toolkit platform. Renault and Nissan will increase the sharing of platforms. GM and Honda announced in April 2022 to jointly develop affordable compact EVs, which are expected to go on sale in North America from 2027.

Table 3 

Recent Initiatives Between OEMs, Battery Suppliers And Upstream Suppliers
Region	Automaker	Initiative
Americas	Stellantis N.V.	Stellantis formed joint ventures together with LG Energy Solution and Samsung SDI for battery production since 2024 and 2025, respectively.
	Ford Motor Co.	Ford has added battery chemistries and secured contracts delivering 60 GWh of annual battery capacity to deliver global 600,000 EV run rate by late 2023. The company has already sourced 70% of battery capacity to support 2 million+ annual EV global run rate by 2026; plans to localize 40 GWh per year of lithium iron phosphate capacity in N.A. in 2026; new deal with CATL on strategic cooperation for global battery supply; and direct-sourcing battery raw materials in U.S., Australia, Indonesia--and more.
	GM	Ultium Cells LLC, a joint venture between LG Energy Solution and GM, has announced a plan to build its second battery cell manufacturing plant.
	Honda Motor Co. Ltd.	Honda and LG Energy Solution are planning to set up a battery plant with 40GWh annual capacity for an estimated production of 600,000 EVs.
	Mercedes-Benz	Mercedes-Benz has partnered with Envision AESC to secure battery cell modules for its EQ line up of EVs by 2025.
	Tesla Inc.	With its current relationships with Panasonic, we expect Tesla produce over 2 million vehicles in 2023, including increased production of its new larger-format 4680 battery.
Europe	Stellantis N.V.	Automotive Cell Company (a joint venture with Saft) was formed for the development and manufacture of EV batteries.
	BMW AG	BMW is sourcing its batteries from CATL, Samsung SDI, and Northvolt AB for its EV production and it is also directly sourcing cobalt from Glencore.
	VW	VW is cooperating with Northvolt AB on the production of battery cells in Skelleftea, Sweden.
	Mercedes-Benz	Mercedes-Benz acquired 33% stake of ACC to secure battery supplies.
	Renault	Agreement with Managem for the supply of low carbon cobalt in Morocco (annual battery production capacity of approx. 15GWh), partnership with Verkor for the production of battery module in France, and JV creation with Minth for battery casings in France by 2025.
	Volvo Car	JV with Northvolt for the production of battery cells (50 Gwh capacity, supplying 0.5m cars per year)
China	VW	Volkswagen acquired a 26% stake of Gotion High-Tech Co Ltd. to expand its battery capacity. It has also announced its intention to form joint ventures with Huayou Cobalt and Tsingshan Group for nickel and cobalt supplies in Indonesia and China.
	China FAW Group Co. Ltd.	BYD and FAW are forming a joint venture for a battery plant with an annual production capacity of 45GWh.
	Geely Automobile Holdings Ltd.	The company has formed joint venture with CATL and LG Energy Solution for enhancing battery production capacities.
The information contained in this table is not exhaustive. OEM--Original equipment manufacturer. EV--Electric vehicle. GWh--Gigawatt hours. CATL--Contemporary Amperex Technology Co. Ltd. Source: S&P Global Mobility, company announcement.

What is the risk to auto retailers with the advent of more online sales with increased electrification? 

While electric vehicles are not likely to be a majority of the vehicles sold until 2030, this segment of the market represents a longer-term risk to auto retailers in few ways. First, automakers are experimenting with selling their newer electric models direct to consumers, though so far volumes are quite low (outside of Tesla). In addition, electric cars require less parts and service maintenance, which is a key profit center for dealers, though each servicing on average is more expensive. There is also the risk that vehicles sold online do not translate into as much finance and insurance business or parts and service business if the customer is less attached to the physical dealership. These are the most profitable parts of a dealership business model. We think the effects of this transition will be limited for now, as electric and fully hybrid vehicles constitute only about 7% of automotive sales in North America in 2022. Additionally, we think the larger dealership networks should be better positioned to invest in the equipment to service electric vehicles and partner with the OEMs as they transition their sales to electric.

What is our outlook on alternate fuels? 

We expect hydrogen to play a limited role in decarbonizing global light-vehicle mobility this decade and it is unlikely to influence auto manufacturers' credit quality. Despite concerns about their range and durability, BEVs currently offer far superior energy efficiency than hydrogen fuel cell electric vehicles (FCEVs). A strong argument in favor of batteries over hydrogen fuel cells for vehicles lies in well-to-wheel efficiency. Battery EV technology trumps both FCEV and ICE-powered vehicles in terms of efficient energy use, offering 70%-80% efficiency saving compared to just 20%-30% for green hydrogen-based fuel cells. From a sustainability perspective, therefore, a mobility decarbonization strategy based on BEVs offers a better payoff.

Beyond 2030, the phase-out of combustion engines, scarcity of materials for battery manufacture, and government policies could support hydrogen as an alternative decarbonization technology for light vehicles.

Hydrogen may, however, have prospects for heavy trucks and commercial vehicles this decade given weight and range considerations and tightening CO2 emission targets in the EU from 2025. Some manufacturers have cautiously established exploratory joint ventures and partnerships. For more details, please refer to "The Hydrogen Economy: For Light Vehicles, Hydrogen Is Not For this Decade," published April 22, 2021.

Related Research

• U.S. Chips On A New Block With Expanded China Restrictions, Oct 19, 2022
• Auto Sales Recovery Stalls Amid Weaker Economic Outlook, Oct. 14, 2022
• Scenario Analysis: Energy Rationing Could Hit The Brakes On European Auto Production, Sept. 30, 2022
• Credit FAQ: A Look At Who's Jostling For Position In Electric Vehicle Markets, Sept. 7, 2022
• China's Summer Struggle: Drought, Food Inflation, And Shortages, Aug. 30, 2022
• U.S. Auto Companies Face A Tough Road Ahead With Persistent Supply Challenges And Weakening Macro Conditions, July 19, 2022
• Battery Suppliers, Automakers To Take Charge As Prices Rise, May 17, 2022
• The Hydrogen Economy: For Light Vehicles, Hydrogen Is Not For this Decade, April 22, 2021

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