The world needs cheap electric cars. That spells trouble for big carmakers

London (CNN), 1913 -- Henry Ford's moving production line revolutionized car manufacturing. Ford's revolutionary innovation dramatically reduced the time required to assemble a vehicle, enabling mass-production and slashing car prices.

A similar seismic shift is occurring in the car industry more than a hundred years later. Ford Motor Company is now scrambling to keep up with the competition, instead of leading it.

Electric vehicles are a fundamental change in technologies and manufacturing processes, which has made Ford and its rivals Toyota (TM) or Volkswagen the largest car companies on earth.

The established automakers are racing to adapt, at a huge financial cost. However, they still lag behind Tesla (TSLA), and a new crop of Chinese competitors including BYD, and Xpeng, (XPEV).

Electric cars are more affordable than ever before. They will help countries reduce pollution that is causing the planet to heat up. Can automakers in Europe or the United States, where governments have already announced plans to limit or ban the sale of new diesel and gas cars, deliver?

Gene Munster is a managing director at Deepwater Asset Management. He said, "Ultimately, these car companies, which have been the cornerstones of our thinking about cars over the past 100 years, will be a small fraction of their current size."

The gap between the EVs of older carmakers and those from newer competitors is huge. Tesla will deliver 1,31 million battery electric vehicles in 2022. BYD's sales tripled from the year before to more than 900,000. Plug-in hybrid vehicles bring that figure up to nearly 1.86 million.

Stellantis, which manufactures Chrysler and Jeep and is part of the Volkswagen Group (which includes Audi and Porsche), sold 288,000 battery-electric vehicles. Toyota, Ford and General Motors are even more behind.

The new entrants are ahead of the curve in terms of technology, and the Chinese brands that are rising have lower production costs. This allows them to offer lower prices, which is a big advantage, given the fact that affordability has been identified as a major barrier for widespread EV adoption according to a survey conducted by the International Energy Agency (2021) among EV companies.

Falling behind

China is leading the EV race that's reshaping global auto manufacturing. Japan, South Korea and Europe -- the major players for decades -- have fallen behind.

Between 2015 and 2022, the world's largest carmakers -- Volkswagen, General Motors, Toyota, Stellantis, Honda (HMC), the Renault-Nissan-Mitsubishi alliance, Ford, Hyundai-Kia, Geely, Mercedes-Benz and BMW -- saw their share of electric car sales worldwide slip from more than 55% to 40%, according to the IEA.

In the same time period, the combined share of the market by just two companies -- Tesla & BYD -- grew from 20% to 30%.

UBS, a leading investment bank, forecasts that the share of Chinese automakers in the global EV sector could double by 2030 from 17% to 33 %, with European companies suffering the largest loss of market shares.

In a recent report, the bank's analysts noted that 'those global players with high China-exposure are already suffering due to the rise of local rivals, particularly Volkswagen and General Motors'.

Established automakers now spend hundreds of billions and set ambitious targets for EVs sales in order to narrow the dominant lead held by Tesla or Chinese rivals.

Atlas Public Policy, a US data and analytics firm, reports that as of September 30, 2018, car and battery manufacturers in the United States and Europe, excluding China had committed more than $650 Billion to the EV Transition, including battery production and manufacturing facilities.

Uncertainty surrounds whether these investments will be profitable. It's hard to catch up with Tesla or the leading Chinese automakers when legacy [carmakers] speak of catching them up. On a recent conference call, UBS analyst Patrick Hummel said that they simply do not have the necessary skillset.

The industry is also facing a difficult time, as it has been dealing with supply chain problems and shortages of semiconductors for many years. The overall car sales are still well below the pre-pandemic level and the profit margins for EVs from established players remain slim to nonexistent.

Also, there are doubts about whether the consumer demand will increase in tandem with the new supply. Volkswagen will temporarily suspend production in Germany of certain EV models next month, due to weaker consumer demand. A spokesperson from the company said this week to Reuters.

'Traditional Auto will be in the negative when it comes electrification, and they'll continue to stay in the negative... for at least two years', Munster, of Deepwater Asset Management, said on X, formerly Twitter.

Ford is a good example of this. Ford raised its loss forecasts for its EV business in the current financial period to $4.5 billion, up from $3 billion. It also pushed back the target of producing 600,000 EVs a yearly.

China's Advantage

If striking employees at Ford, General Motors, and Stellantis in the United States win better pay deals they may make established automakers even less competitive.

Munster said that the cost per hour for manufacturing labor will get worse as Tesla gains in popularity.

CNN reported that if US automakers gave in to union demands, which include large wage increases and job security guarantees, 'the EV Strategy would essentially die on arrival', Dan Ives, a Senior Analyst at Wedbush Securities.

The concessions will increase the price of an average EV between $3,000 and $5,000. In a research note, he said that passing on these costs increases to consumers would 'torpedo the future business models' of the Big Three.

EVs are more expensive to produce than vehicles with combustion engines, despite the fact that they require less labor. This is because batteries are costly and difficult to obtain. It takes time to refine manufacturing processes and scale production.

China is also the leader in this area. China is the largest EV battery producer in the world and dominates the supply and processing for many of the critical components required to make batteries.

Daniel Roska is the head of EU Automotive Research at Bernstein. He said, "The majority of battery supply chains are in Chinese hands." China... focused on this earlier than anyone else. He told CNN that the gravity center is [there].

Global automakers had no choice but to form joint ventures with Chinese battery and EV manufacturers. As trade tensions increase between China and Western countries, and Western governments strive to reduce their country's dependence on China, cooperation has become more complicated.

Ford announced on Monday that it will halt construction of a $3.5billion factory in Michigan, where it planned to manufacture EV batteries utilizing technology supplied by China's CATL. CATL also supplies Tesla with batteries. Marco Rubio, a Republican senator from Florida, criticized the plan when it was announced in Feburary because of the Chinese connection.

Ford is not ready to accept Chinese electric vehicles

China's protectionist measures on raw materials that are critical for EVs and green energy transition will only consolidate its leadership position. Exports of two minerals that are essential to the manufacturing of semiconductors, which are abundant in EVs, fell to zero after Beijing imposed restrictions on overseas sales citing national safety.

The recent announcement of a probe by the European Union on state support for EVs from China may make things worse. EU legislators have expressed concerns that subsidies from the government allow Chinese EV manufacturers to artificially keep their prices low, causing unfair competition for European competitors.

If the EU imposes higher tariffs than its standard 10% rate for imported cars, this could trigger retaliation by China. This would most likely hurt European automakers who make a significant portion of their profits in China.

Roska said that adding protectionist measures to China was like shooting oneself in the foot.

If Europe is to reduce its carbon dioxide emissions, then it needs cheap EVs. According to a report from research firm Jato Dynamics for 2022, Chinese cars are about 40% cheaper than European equivalents and around 50% cheaper than US counterparts.

As trade barriers increase, Chinese automakers have already begun to set up manufacturing plants in Europe. Import duties on cars in the United States are 27.5%, so it is inevitable that this will also happen.

Bill Ford, chairman of Ford, told CNN's Fareed Zakaaria that they were not present but would come at some future date.

Ford is not ready to compete in America with Chinese electric vehicles, he said.

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