Overview
Analyst Survey 2025 (full report)
The market is overemphasising the existential risk for legacy carmakers from the electric vehicle (EV) transition.
Instead of crowding the former out, I see market share being split between those legacy auto names and the sole-EV producers, like Tesla and BYD. The market does not share my view, and is fairly consistently pricing the legacy companies to zero over the long term. If I’m right, then investors are overplaying the comparative advantage of the new EV companies and undervaluing their traditional counterparts. It will take some time for the market to adjust, but it could reward those who are willing to endure the ride.
The trouble for legacy names lies in transitioning an entire production line and supply chain network from an internal combustion engine (ICE) model toan EV one. These firms didn’t help themselves by being slow off the mark when EVs first appeared on the scene, ceding an early advantage to companies which channelled all their resources into EVs from the start. EV companies have capitalised on that head start and are now building more advanced software into their cars, much of which is designed in-house.
That said, things aren’t as bad for the legacy companies as they may seem. The conversation around Volkswagen, for example, and the cuts it’s been making recently, arguably is overblown. Every company has had to slash its cost base to keep up with Chinese producers. I expect to see a realignment of legacy business models, with greater emphasis on software development, electronic architecture, battery production, and vertical integration across the supply chain. It is of course likely that some companies will fall by the wayside. But it won’t be the bloodbath the market currently predicts.
It’s not as if sole-EV companies have had it all their way either. The rollout has taken longer than expected, with adoption rates in the US and Europe hovering around 10 and 20 per cent, respectively. There remain concerns over the driving range of current EV models, and it’s proven challenging to build out the required charging infrastructure. They are also still much more expensive than ICE cars because battery costs remain high.
And while there’s plenty of emphasis on high Chinese production rates, these companies have also faced challenges in penetrating the West. Here their upstart status counts against them - consumers remain anxious about the availability of spare parts and long servicing times, for instance. Brand recognition is also an issue.
I think we will see a lot of these competing dynamics come to a head in 2025. There will be plenty of churn. Volkswagen will attract more attention as it continues to cut costs. If it’s successful in doing so, other smaller companies will follow suit. Meanwhile the market will continue to devalue these companies, many of which are already trading on a 40 to 50 per cent discount to their long-term valuation multiples.
At the same time, you’re also seeing Chinese companies become more active in Europe. BYD, for instance, plans to open a factory in Hungary this year, with an intended building capacity of 200,000 cars a year that could ramp up as high as 1 million over the next few years - for context, there were around 13 million cars bought in Europe in 2024.
The car industry could exit 2025 looking a fair bit different from how it entered. But I don’t think investors should be writing off their old holdings just yet - they still have plenty more miles left to run.
