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As competition intensifies in the electric vehicle race between China, Europe, and the U.S., the future of autos is likely to be shaped by near-term geopolitical uncertainty, supply chain stability, and pricing pressures.

What We're Watching

Regional divergences in electric vehicle (EV) adoption are growing against the backdrop of countries' ambitious targets to meaningfully increase the number of new EVs sold and on their roads in the race to 2030.

With more than 14 million battery electric and plug-in hybrids light vehicles sold worldwide in 2023, global market share has increased (to 16.7% last year, from 13.6% in 2022 and 2.6% in 2019) but done so unevenly. China saw EV penetration increase to 34% last year, speeding beyond the government's original target of 20% by 2025—while short-term EV fatigue has stagnated Europe's momentum (to 17% in 2024 to date compared to 19% in the previous two years). The U.S. market, still largely dominated by Tesla, lags far behind both (at 9.3% at year-end 2023). Into 2024, momentum in the transition to electric vehicles is decelerating. EV sales growth rates are slowing down across Europe, China, and the U.S., compared to the spike over 2020-2021. We believe slower EV sales should still support legacy automakers' near-term profits, as they will accommodate market demand with less profit-dilutive products.

The balance of risks between accelerating too quickly and pumping the brakes too soon is evident. Legacy automakers that were early electrification entrants have experienced margin dilution on albeit limited volumes, while those who have yet to ramp up their EV efforts risk seeing cash conversion compromised by the need to catch up on investments. Setting up new decentralized supply chains is a key step and solution to securing sustainable EV growth globally.

However, the geopolitical frenzy to establish control over both raw materials and refining capacity is systematically challenging the market's development and dynamics, particularly as the price of lithium has bottomed since its 2022 peak. At the same time, the economic incentive for mining has been disrupted by environmental issues, extreme weather events, regulatory changes, and social unrest—just as market participants with available capital target growing metals and mining markets and invest in minerals critical to EVs, spanning nickel, graphite, lithium, and cobalt.

What We Think And Why

S&P Global Ratings sees electrification as an irreversible long-term trend. By 2025, we expect more than 20% of global vehicle sales will be EVs—with penetration highest in China and the electric models on offer likely to nearly double in the U.S. and Europe.

Asia is set to maintain its position as the world's biggest producer of and market for EVs, EV batteries, and EV battery materials. But with approximately 50 producers offering roughly 90 EV brands and 430 models, we believe many Chinese EV startups will fail or be consolidated as they burn cash with sustained operating losses and high capital spending. The credit standing of large legacy Chinese automakers may also decline as they accelerate on their electrification journeys.

European car manufacturers continue to face fierce competition from Tesla in the higher segments of the market alongside the potential influx of Chinese EVs across the mid-range of the market, with massive investments in vessels marked for vehicle maritime transportation. (There has been no update on the European Commission's initiative to investigate Chinese EV subsidies, which could lead to trade restrictions.) Although demand has stalled, we remain confident that the combination of tightening European Union regulatory emission targets for 2025 and expansion of the range of small and medium models (which account for most European new car sales) will continue to support Europe's EV sales.

Following the U.S.'s revised standards for greenhouse gas reductions, we believe that automakers will take a more measured approach toward EV volume growth to adjust for slower demand and avoid price wars ahead of upcoming launches. We still expect the share of EVs as a percentage of total vehicle sales in the U.S. to continue growing (to 14%-15% by 2025)—supported by subsidies under the Inflation Reduction Act, the launch of new more affordable models, and changes in the EV mix in favor of plug-in hybrids. In our view, these factors will help reduce the U.S.'s EV market share gap with Europe and China beyond 2025.

Overall, we estimate EVs could be cash flow-dilutive worldwide until the second part of this decade. Most legacy automakers will likely not pursue market share gains, but will remain largely focused on improving cost competitiveness and repositioning themselves for new value chains. Aggressive steps to vertically integrate battery technology businesses (mostly through joint venture partnerships) will likely dent cash conversion following mergers and acquisitions for the next two to three years at legacy automakers.

Globally, we believe market participants involved in EVs will increasingly turn to joint ventures and partnerships to protect against technology risks, uncertainty over return on investment, and supply disruptions. We have seen entities directly involved in supply chain management investing in ventures and partnerships to secure sufficient quantities of critical materials, shore up refining capacity, share capital investments, and cascade technical expertise.

What Could Change

The transition to electrification remains a key credit risk for most global automakers and suppliers. This could weigh on both the business strength and financial position of legacy players—testing the ability of original equipment makers and their legacy suppliers to roll out competitive EV models and secure market share amid intensifying competition; ramp up volume, reduce costs, and protect margins; contain leverage, considering their substantial research and development and capex requirements; and set up smooth supply chains protected from potential bottlenecks.

All markets are enduring the strains of slow economic growth and higher-for-longer interest rates on consumers' purchasing power. EV pricing dynamics, the margin dilutive effect of electric powertrains for most legacy original equipment makers, and the market distortive profile of subsidies are prompting pressures. If these factors result in automakers pumping the breaks on pushing EV sales, their market share in Europe and the U.S. could decline—especially as China continues relocating production capacity into or close to these markets, and is set to become a global challenger across all market segments.

Increasing vertical integration along the value chain adds to the unknowns, risks, and opportunities. The complexity and interconnectivity of supply chains can, depending on the severity of the risk of disruptions, impact issuers' credit worthiness (including business risk profile, financial risk profile, and liquidity), broader economic performance, and long-term inflation.

Writer: Molly Mintz