Rising EV Sales May Weaken U.S. Automaker Credit Metrics Over Time
If margins on battery-operated automobiles are slow to improve, increased electric vehicle (EV) penetration may be leveraging for some US automakers over the long term, given the large investment required to grow EV production, says Fitch Ratings.
The auto industry is an important element of the carbon transition with efforts to boost EV sales intensifying in order to cut greenhouse gas emissions. However, operating margins on EVs remain meaningfully lower than those of traditional internal combustion engine (ICE) vehicles and could lead to negative product mix shift as sales increase.
Electrification remains at the forefront of strategies with government spending on charging infrastructure lending support to these efforts. U.S. President Joseph Biden signed an Executive Order to tighten emissions standards and increase sales of zero-emission vehicles to 50% by 2030, compared with currently less than 5%, last year.
Fitch conducted a scenario analysis to consider the potential long-term credit effect of electrification and the carbon transition on US automakers. The analysis uses a mock auto manufacturer to derive a hypothetical estimate of leverage and profitability through 2030. New vehicle sales, EV share, EV profitability and capex intensity are core assumptions.
There is no near-term credit effect for Fitch-rated US automakers, given the multi-year timeframe of the Executive Order and automakers’ long-term targets. EV sales are not yet a key rating driver over our forecast horizon but elevated capex and development costs associated with strategic investments are factored into Fitch’s forecasts.
However, leverage metrics for some manufacturers could weaken over time as EVs become a larger percentage of sales, with the extent of the effects being driven by EV unit-level profitability. EV penetration in the US is still in the early stage with low consumer acceptance due, in large part, to concerns over the relatively high price of EVs, the availability of charging stations, long recharge times and battery replacement costs.