The week of September 16, 2024: Africa, Rent Control, Canada and more.
The week of September 16, 2024: Africa, Rent Control, Canada and more.
Sooner or later there comes a moment when central planners’ spreadsheets and targets run into reality. And it is rarely a happy moment. Some years ago, officials in the EU, UK, California, and other dim-bulb jurisdictions came up with the idea of imposing a quota system on automakers. The idea was to encourage them to switch more rapidly to electric vehicle (EV) production. The authorities would stipulate that a certain (increasing) percentage of a carmaker’s sales must be made up of EVs by certain dates. If a carmaker did not satisfy its EV quota in any given year, then it would pay a “fine” for every conventional car it sold above the ceiling that was the flip side of the quota. To oversimplify, if sales of EVs were required to be 20 percent of sales, but only accounted for 18 percent of those actually sold, the car company would pay a fine on every traditional car it sold beyond the “ceiling” that would have kept EVs at 20 percent of the total
Buyers have proved to be interested in EVs, just not in the numbers that the planners had assumed, partly because of cost, partly because of their intrinsic flaws, and partly because the infrastructure was not in place to support EVs at the pace they were supposed to be rolled out. With bottom-up EV growth, the supporting infrastructure (notably charging) would have (as with gas stations in the 1920s) developed organically. In this case, EV sales were driven by top-down pressure, meaning that, even at lower-than-expected sales, the infrastructure was not ready. Talk of charging problems then hit sales…
The central planners had not planned for that.
And then in the EU and UK, something else happened. Sales of Chinese EVs have been taking market share. This will make it more difficult for European manufacturers to fill their EV sales quotas.
The central planners had not planned for that.
Then there’s another twist. Traditional carmakers have been funding their investments in EV production, at least in part, with the profits from traditional car sales. If those sales are capped (and the cap keeps falling), how are they going to pay for the investment in EV production if consumers continue to disappoint the planners by not buying enough EVs?
The early signs from the UK, where car buyers have not been doing their duty and where a similar regime has begun to bite, are that automakers will reduce the supply of traditional cars in order to avoid running into quota problems. That may persuade some buyers to go electric, or it may push even more toward the used (conventional) car market where prices ought to move up strongly. It will also make sense for automakers to increase the price of the conventional cars they can sell, in order to make up for the lost revenue that would have come from those that they were not allowed to sell. Additionally, they would probably want to take advantage of the shortage created by the regulations to hike prices.
Greenflation, it’s a thing.
Renault’s CEO has recently sounded the alarm, warning that similar rules in the EU in 2025 could mean that the EU auto sector might have to suspend production of two million cars (that won’t have pleasant implications for employment) or face fines of €15 billion.
On September 19, ACEA (the European Automobile Manufacturers Association) reported that:
[I]n August 2024, new EU car registrations saw a sharp decrease (-18.3%) with negative results across the region’s four major markets: double-digit losses were witnessed in Germany (-27.8%), France (-24.3%), and Italy (-13.4%), with the Spanish market declining by 6.5%.
Battery-electric vehicles (BEVS, “full” electric vehicles) saw their market share drop from around 21 percent in August 2023 to 14.4 percent in August 2024. Sales dropped from 165,000 to 92,000. This decline was above all driven by massive falls in Germany and France. Germany abruptly ended its subsidy program in December owing to a budgetary crunch (long story), France reduced its subsidy for higher income purchasers in February. Clearly, the cut in subsidies played a major role in the drop, but what does that say about the real demand for EVs?
U.S. taxpayers should pay attention. Just how long are the subsidies payable under the Inflation Reduction Act going to have to stay in place in order to encourage consumers to buy EVs in sufficient numbers? And what will that cost?
The drop in EV sales in August was the fourth consecutive monthly decline. In ACEA’s view, the latest EU car registration data confirmed that the electric car market is now on a “continual downward trajectory.”
To read more of the ACEA statement is to see a picture in microcosm of the sort of mess that central planning creates:
We are missing crucial conditions to reach the necessary boost in production and adoption of zero-emission vehicles: charging and hydrogen refilling infrastructure, as well as a competitive manufacturing environment, affordable green energy, purchase and tax incentives, and a secure supply of raw materials, hydrogen and batteries. Economic growth, consumer acceptance, and trust in infrastructure have not developed sufficiently either.
The “transition” to EVs was a modern variant of traditional central planning. But, however modern it was, it was always likely to run into trouble for two main reasons. The first was that the planners had been working on assumptions and targets unmoored from market signals (meaning that they were, to no small extent, flying blind). The second was the sheer number of “moving parts” involved in this transition. To anticipate them all was next to impossible. As for then ensuring that they were dealt with in a timely and coordinated fashion, well… To believe that this should even have been attempted was an act of colossal hubris, for which the full bill is far from being paid.
Thierry Breton, the now former EU internal market commissioner (he was the individual who had the spats with Elon Musk over X, although that’s not why he quit) is someone else who has been warning of trouble. Earlier this month, he was quoted as saying that, so far as the EU’s EV manufacturers were concerned, the picture was “not rosy.” EU EV production was expected to decline in 2024 versus 2023. The Financial Times reported EU officials as saying that the bloc’s trade deficit with China on EVs had already reached €8.8bn. European manufacturers are moving production to China to manufacture cheaper (€20,000 or less) models, a familiar pattern — green jobs are created in China(see solar and wind) — and ominous news for those working in (or supplying) the EU auto sector. According to those same EU officials, some 13 million jobs in that area are at risk. Think for a moment what that would mean for the EU’s social and political stability if those jobs were to start disappearing. Oh yes, if EVs were to be bought by drivers on the planners’ schedule they would account for 13.5 per cent of total electricity demand by 2035. According to the Financial Times, that would involve investing €800 billion in transmission grids alone. Chump change!
So far as the challenge from China is concerned, one response could be U.S.-style tariffs. It is estimated that it would take a tariff of at least 50 percent on Chinese EVs imported into the EU to have any sort of effect on demand for them. Tariffs operate (whatever their defenders may say) as a tax on the citizens of the state imposing the tariff, and, as such are not something to applaud. But when it comes to China, not only a mercantilist state, but a hostile one, different considerations apply, at least so far as anything so crucial as the auto sector is concerned (it accounts for about 7 percent of EU GDP), as Adam Smith would almost certainly have understood. Of course, if such tariffs were to be imposed, the EU’s EV mandates should be removed (as they should be anyway): Compelling people living in the EU to buy EVs, but then stipulating that they cannot buy affordable models would surely be too inequitable even for Brussels. The same ought to be true in the U.S.
The problem for the EU, however, is that its trade is inextricably bound up with China. The consequences of that are going to be increasingly tricky, whatever the EU decides on EV tariffs, but higher tariffs will make them trickier still particularly given the vulnerability of leading EU member-states such as France and, even more so, Germany to China. Under the circumstances, EV tariffs high enough to make a difference may prove a hard sell. What’s more, China is confident that EVs “finished” in the European Union will be able to side-step higher EU tariffs. A fight to secure Chinese investment in European production is already well underway.
Meanwhile, Italy’s government is calling for a rethink on the transition. Echoing Toyota’s Mr. Toyoda, it argues that there ought to be more one than one route to electrification. The country’s industry minister is talking about the danger that the European auto industry could collapse. Germany’s opposition leader Friedrich Merz is going further. He argues that the EU’s de facto ban on sales of new internal combustion engine cars, which is set for 2035, should be scrapped. He’s right, and as things currently stand, he’s most likely to be Germany’s new chancellor after next year’s election.
At the company level, the news continues to be bad. I wrote a summary describing some of those facing difficulty in an August Capital Letter, and nothing seems to have improved. Mercedes recently came out with a profit warning due to declining sales in China as consumers switch to EVs away from Mercedes’ high-end cars. Its own EVs are not doing well there either (Mercedes was also hit by the deteriorating market in Europe). For China, a hugely significant market for German auto manufacturers, to go wrong would be very bad news.
According to a Bloomberg News analysis of Just Auto data, “nearly a third of major passenger-car plants from Europe’s five largest automakers — BMW, Mercedes-Benz, Stellantis, Renault, and VW — were underutilized last year, producing fewer than half the vehicles they have the capacity to make.” Operating at 50 percent capacity is not a good look.
On Monday, Germany’s economy minister, Robert Habeck, held a virtual summit with some of the key players in the German auto sector. It’s not clear what, if anything, came out of it, but he is now supporting calls for a review of the EU’s 2025 targets (with, presumably, the aim of making them less onerous).
In recent days there has been talk of some sort of financial help for VW. Habeck, however, has been saying that VW will have to sort itself out. That this sort of talk is even floating around is an indicator of the depth of the difficulties beginning to surround VW, despite an operating profit of over €20 billion last year. And as the damage caused by the botched, reckless, and coercive transition to EVs deepens, this will not be the last time that there will be bailout talk about one company or another.
Sooner or later, there’s every chance it will be more than talk.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 188th episode, David is joined by Barry Rowan, former CFO at GoGo, Vonage, and Nextel (amongst others), author of The Spiritual Art of Business, and committed advocate of a life of integration. Barry is a leader in the faith and work movement, a renowned turnaround specialist, and a respected corporate leader. More importantly, he is a man of great wisdom and experience regarding the spiritual journey that is understanding our calling, our vocational duties, and this thing called life. Inspiring and challenging all at once!
The Capital Matters week that was . . .
Class
It’s hard to nail down what “middle class” means in the United States. Between lower, middle, and upper, “middle class” is the only label that most Americans want to describe them. Nobody wants to be poor, and most people who are upper class pretend to be middle class to avoid sounding pretentious (only 2 percent of Americans self-identify as “upper class”). It’s also not always clear whether labels such as “middle class” only refer to income or include other values and lifestyle characteristics that could be held or practiced by people of any income…
Income
Sometimes people look at general income data and wonder, “How could people raise a family on that?” The answer in many cases is, “They don’t.” …
Cuba
Cuba has cut its citizens’ bread ration from 80 grams to 60 grams per day.
That is not news from 50 years ago. It is from today…
Rent Control
There is no campaign exception to the Constitution. The pledges made by candidates receive no special deference from the Supreme Court.
Congress needs to keep this reality in mind when it comes time to weigh moving forward on Vice President Kamala Harris’s rent-control plan…
Labor
The Teamsters promised “the most inclusive, democratic, and transparent Presidential endorsement process in the history of our 121-year-old organization.” Yet, after Donald Trump won not one, but two polls of Teamsters membership with 59.6 percent and 58 percent of the vote, the Teamsters announced that they will not be endorsing anyone for president…
Africa
People don’t want to leave their homes. Magatte Wade understands this well. Born in Senegal, she grew up in France with her parents. When her grandmother died, she wasn’t able to go back to Senegal for her funeral. Like countless immigrants around the world, she left her native culture, her native language, and her family — the closest ties that bind humans to one another — because her native country did not provide opportunities to prosper…
Credit-Card Caps
Donald Trump said during his rally in New York on Wednesday that if elected president he would put a “temporary cap on credit-card interest rates” of “around 10 percent.” He said, “We can’t let them make 25 or 30 percent.”
The vilification of lenders tends to be more Elizabeth Warren’s thing, but Trump is simply all over the place on policy…
Degrowth
One of the rules of understanding climate fundamentalism (and other forms of environmentalist fundamentalism) is that, as is the case for most fundamentalisms, the quest for purity never stops.
“Degrowth” is one example of this. Its central proposition is that humanity should turn away from economic growth, and, at least in the West, be prepared to reduce the size of our economies in (supposedly) the interests of the planet. What that would mean in practice can vary, but can we see in this tweet by Aashis Joshi a sign that one day the war against gas stoves might be overtaken by the war against kitchens?…
Canada
Trevor Tombe, an economics professor at the University of Calgary, has written a piece for the Hub about the gap in economic performance between the U.S. and Canada. America’s much-discussed growth slowdown is very real, but the picture north of the border is even worse…
Rent Controls
Kamala Harris wants rent controls (or a version of them) imposed on “corporate” landlords (owners of more than 50 units). If this is a reiteration of the original Biden-Harris plan (it seems to be), this regime would “include an exception for new construction and substantial renovation or rehabilitation.” But, as I noted here, singling out “corporate” landlords sends a signal to such landlords that they are designated bad guys in the Democratic narrative. That’s not an incentive to invest in the sector or to believe that any exemptions in respect of new construction will last for very long…
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