Brussels and China will shape Israel's electric car market

Electric Volkswagen / Photo: PR

New EU regulations and car industry changes in China are brewing a storm that will blow hard in Israel.

In previous articles in the series on the future of electric cars in Israel, I dealt with the large obstacles in the way of mass adoption of private electric cars in the Israeli market. I surveyed the problems of usage and price, and the need for an extensive public charging infrastructure as a condition for mass adoption, and the way in which the Ministry of Finance ties green regulation to its supreme aim - maintaining tax revenue from fuel sales.

These obstacles are indeed likely to slow the rate of penetration of electric vehicles into Israel, but there are also external factors in the background that will tend to compel vehicle importers and their customers in Israel to join the revolution and raise the rate of adoption of electric vehicles in the medium to long term, despite all the obstacles. Far from Israel's borders, regulatory and commercial changes are taking place that will affect the mix of vehicles that will arrive here in the not-too-distant future.

Revolution in Europe

The first arena is European Union green regulation. For many years, EU regulators have lived in wonderful harmony with the motor industry. The important contribution of vehicle manufacturers to employment and to tax revenues in many EU countries lent them great political power in Brussels corridors, and their lobby was considered invincible. In this way, the manufacturers were able for decades to keep environmental regulation favorable to their businesses, to delay reforms, and to fix emissions standards at outdated, irrelevant levels.

The breaking point in relations between the EU and the motor industry was the Dieselgate affair, in which it emerged that Volkswagen, and apparently other vehicle makers as well, had for years used electronic methods of foxing the EU's antiquated emissions tests in order to obtain impressive emissions figures and green credits. This didn't surprise anyone familiar with the industry, but the public outcry that arose as a result of the affair, and the public eye that began to follow closely what was happening in Brussels in environmental matters, forced the EU's institutions to adopt a more assertive environmental approach to the vehicle manufacturers.

The first outcome was the replacement of the old, lenient NDEC emissions tests with a new and much more stringent set of tests, WLTP, which simulate actual driving conditions more realistically. The new tests have caused uproar in the motor industry in the past two years, and forced vehicle manufacturers to introduce wide-ranging and costly changes in their production lines.

This, however, was just the opening shot. In April this year, after a long battle with the motor lobby, the EU announced new requirements for reducing average emissions by new vehicles sold in Europe. The requirements will start to come into force in January 2020, and will be fully implemented in 2021. The main provision is an average emissions limit of 95 grams of CO? per kilometer, 20% lower than the previous limit.

This is a bombshell for the motor industry. It's no longer a matter of a moderate and gradual lowering of emissions targets, giving the industry years to adapt, as was customary until now, but a sudden, sharp blow of the axe. Nor is the term "average emissions" theoretical; it is calculated according to the number of new vehicles actually sold by each manufacturer in the EU from January 2020.

As though that were not enough, it was also stipulated that any excess of one gram per kilometer over the average limit would incur a fine of 95 euros per vehicle. For manufacturers who sell millions of vehicles annually, this means potential fines of hundreds of millions, even billions, of euros a year. The regulations do leave some relaxations for niche manufacturers, and they allow clean manufacturers with average emissions below the limit to trade green credits with other manufacturers, but the bottom line is a clear threat.

Since it is almost impossible, engineering-wise, to achieve such a dramatic reduction in CO? emissions of conventional gasoline and diesel engines in such a short time, the manufacturers were left with just one magic solution for avoiding huge fines, namely accelerated electrification of their model ranges.

This means extensive launching of models with self-charging hybrid power plants, plug-in hybrids, and of course pure electric vehicles with zero CO? emissions. This is also the simplest solution for fast implementation from an engineering point of view.

EU vehicle makers cannot, however, make do with just producing electric-powered vehicles and ceasing production of polluting models. They also have to sell quantities of the low-emission products to customers in Europe, starting in January 2020.

Counter currents

Israel is not a member of the EU, but this development is already having, and will continue to have, marked and contrary effects on the mix of vehicles offered here and on the rate at which Israelis adopt electric vehicles. The effects can be divided according to time range.

In the short to medium term, the next year or two, these developments in Europe will actually slow the spread of electric cars in Israel. The reason is simple: every electric or semi-electric vehicle that the manufacturers sell within the borders of the EU will indirectly be worth thousands of euros to them from the reduction in the fines they will be liable to pay, which will not be the case for such vehicles sold outside the EU.

Since the resources available for producing electric vehicles, particularly the batteries, are limited, the official allocation to Israel of electric cars made under European standards will presumably be tiny in the next two years, and their prices will be high and inflexible. Meanwhile, large surpluses will arise in Europe of polluting vehicles, with traditional diesel and gasoline engines, which will be offered to all comers outside the EU at substantial discounts, and Israel is an ideal dumping ground for these stocks. The result will be that availability of European-made electric vehicles in Israel will decline, and the price gap in favor of gasoline/diesel-fueled vehicles will widen.

In the longer term, once the European vehicle market stabilizes after reaching the first emissions reduction target, things will change. Several manufacturers estimate that almost two-thirds of new vehicle offerings in Europe will be fully or partially electric, and of these, about half of the models will be pure electric. In other words, people faithful to diesel and gasoline cars will find themselves facing a shrinking offering of vehicles meeting European standards, and will be diverted towards electric cars whether they like it or not, and even if the tax break on electric cars is cut, which of course will make the Ministry of Finance very happy. On the EU's horizon are even more aggressive CO? emissions reduction targets, which will only accelerate the trend.

Perfect storm

The second external trend, which is already starting to have an impact on the market, is the change taking place in the Chinese vehicle market, especially in respect of exports to the West. Up until two years ago, the Chinese vehicle makers were finding it difficult to satisfy local demand, which was growing at a double-digit annual rate, and so investment in vehicles that would meet European standards was low in their order of priorities.

This situation started to change in 2018 because of several external and internal processes. The first is the trade war with the US, which has led to a halt in growth, and even a shrinking, of the entire Chinese vehicle market in the past eighteen months. The trade war is also causing a switch in the export efforts of the Chinese vehicle makers from the US to Europe.

Another factor is the decision by the Chinese government to reduce substantially the subsidy for alternative energy vehicles from April this year, which caused an immediate price rise, in the thousands of dollars, of electric and hybrid vehicles for Chinese consumers, choking off demand for these vehicles, which represented the last segment of the Chinese vehicle market that was still growing in any significant way.

Add to that new, strict emissions regulation, China 6, which will come into force next year and is already compelling all the Chinese vehicle makers to raise investment in clean engines and to come into line with European standards; and also the heavy pressure that the Chinese government is bringing to bear on the dozens of privately-held startups for electric vehicles that have sprung up in the past few years to make them meet the production and sales quotas that they committed to when they received their production licenses, or to lose the licenses, and you have a perfect storm, one that is pushing the Chinese manufacturers to export electric vehicles to Europe - and to Israel.

Israel is directly in the storm's path. Until not many years ago, the tiny Israeli market was very far from being a priority for Chinese vehicle makers, and most of them were not aware of the market's characteristics. This has changed in recent years, with the advent of Mobileye and the rest of the burgeoning Israeli autotech sector, which created a business bridge to the Chinese vehicle industry, resulting in representatives of all the Chinese manufacturers flocking to Israel. Some of them have even established representative offices here.

In addition, Israel plays an important role in the Chinese New Silk Road project, aimed at creating sea and land trade routes between China and Europe while expanding Chinese economic and political influence in the region. The integration of Israel into the Chinese program, which will be headlined by the operation of the new Haifa seaport by a Chinese government company for the next 25 years, will turn Israel into a focus of seaborne trade with China, and even into a potential sea-land hub for exports of Chinese vehicles, both to the local market and to the region.

I do not ignore the fact that Israel is also an excellent testing ground for Chinese manufacturers gearing up to penetrate the greater European market: a tough, competitive Western-style market, with standards and service at European levels, and well developed vehicle fleets, but, importantly, isolated from the European press and media, which strongly protect local products. If market penetration efforts in Israel prove disastrous, this can be brushed under the carpet more easily than it could if such a disaster were to happen in Germany or France.

The winds presaging the storm are already being felt. A first electric SUV from Chinese manufacturer SAIC is already starting to be marketed in Israel. Next year will see the official landing here of more electric models from major manufacturer GAC, and behind the scenes determined efforts are going on to import more electric models, in various market niches, that should come to fruition in 2020-2021. This is alongside Chinese-made electric buses that are already running on Israel's roads and of which we shall more in the future.

It is too early to tell whether and how these vehicles will be absorbed by the Israeli market, especially given the fact that most of the brands behind them are still almost completely unknown to Israeli consumers, and whether they will hold their value is a gamble. But the formation of a spearhead of an electric car offering, with aggressive pricing and generous manufacturer's accessory and service packages, could give a substantial push to the Israeli electric car market in the coming years - and the Chinese are long-term players.

Green cars will cost us more

The Israeli government tends to adopt a green public stance and to encourage the adoption of electric vehicles, and the Ministry of National Infrastructures, Energy and Water Resources has even declared that imports of gasoline and diesel-fueled cards will be prohibited by 2030, but its actual behavior on the ground is very different. This January, new green taxation rules will come into effect, substantially lowering the purchase tax benefit ceiling for plug-in hybrid and pure electric cars. The ceiling is set at NIS 60,000 for 2020 and NIS 45,000 for 2021. This still sounds like a lot, but in practice, most of the sales in these segments so far have been of premium vehicles, and with much higher allowable values for the purposes of purchase tax benefit.

The immediate effect, which will be felt in January's price lists, will be rises of tens of percentage points in the list prices of prestige plug-in cars, which have become a hot-selling item in recent years. Since these cars are anyway more expensive than the equivalent gasoline and diesel-fueled cars, by as much as 25%, because of the cost of their batteries, the electric motors, and other hardware, the prices of the electric versions of these models will now be higher than those of the more polluting versions, and imports of some plug-in hybrid models may stop altogether because of a lack of demand.

When it comes to prestige pure electric cars, the price rise will be even steeper. The Audi e tron and the Jaguar i pace will become dearer by more than NIS 100,000. Porsche's new luxury sports model, the Taycan, which is meant to compete head-to-head with Tesla, will arrive in Israel with a price tag in excess of NIS 800,000, when it was originally expected to be around NIS 600,000.

Most Tesla models, if they ever arrive here, will be between tens and hundreds of thousands of shekels dearer than was projected before the revision of the green taxation provisions, certainly if their advent is delayed to 2022. It could be argued that the Ministry of Finance has no interest in turning electric cars into tax havens for the wealthy, but in the vehicle industry they say that prestige vehicles have always been fashion leaders. The best example of that is Tesla in the US, which brought about a huge change in the market with a price tag of $100,000, and opened up the way for many models costing half of that.

Published by Globes, Israel business news - en.globes.co.il - on November 5, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Electric Volkswagen / Photo: PR
Electric Volkswagen / Photo: PR
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