Research Publication: Electric cars development in Europe likely to see a policy tailwind


26 May 2020

    HONG KONG, 26 May 2020. Pengyuan International has today published a commentary on the automobile sector in response to the European Commission (EC)’s recently proposed exemption of Value-Added Tax (VAT) levied on zero-emission vehicles (ZEV). We believe this measure, if eventually to take effect, will be a strong push for Europe’s adoption of electric vehicle (EV) – a major type of ZEV in the post COVID-19 era. 

    Given our observation that VAT across the majority of European countries is about 21% on average, customers within Europe will be able to save this amount when purchasing a zero-emission car – primarily EV at the current stage – should VAT be waived. Europe is the second-largest market for EV globally – trailing only China – with a compound annual growth rate of 44% in volume from 2014 to 2019. In this report, we also outline some possible EV sales growth trajectories in Europe under three scenarios: “No COVID-19”, “COVID-19”, and “COVID-19 plus VAT exemption”, given the assumption that the majority of European countries would fully implement this VAT exemption.

    We also use a passenger car model – Golf, the best-selling Volkswagen model in Europe – to illustrate the cost difference of owning its electric and gasoline versions in several major European metropolitan cities. The conclusion demonstrates that the possible removal of VAT would be strongly positive to EV consumption growth, as VAT on EV is, in general, far greater than that for conventional fuel-engine vehicles. Moreover, EV penetration in those cities studied is positively correlated to the cost advantage of having the electric Golf version over its gasoline equivalent – the higher the cost advantage of having the electric Golf version, the larger the EV penetration rate in the sampled city.

    Additionally, we point out that the stimulus package to boost EV development taken by Europe looks more sustainable than those adopted by China. This is because Europe’s support policies for EV development focus more on the consumer side by attempting to reduce EV purchase costs, primarily via tax benefits. In contrast, China’s monetary sweetener is mainly offered to EV manufacturers rather than end-users. This resulted in an infamous situation in early 2016 when several automakers exaggerated their EV sales in order to obtain more subsidies from the central government. Since then, China has decided to gradually phase out subsidies granted to EV manufacturers, and is considering a more market-driven approach to support the EV development.

    LG Chem, the No.1 EV battery supplier for European automakers (backlog basis), will be the biggest beneficiary from this proposed policy as the additional consumption on EV spurred by the VAT exemption would further help boost LG Chem’s operating profit margin for its EV battery business to be positive. CATL will also benefit from the possible move by the EC as it is catching up through an extension of its supply footprint in Europe since last year. Overall, we maintain our view that the progression towards electrification will worsen the creditworthiness of EV-related companies in the short run, but will pay off with a higher ROIC in the longer term. (see China set to metamorphosize with the transition towards EV).


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    Tony Tang

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