The hybrid hype has put even Tesla in the back seat

• Cost-conscious customers are picking hybrid cars over EVs, which is weighing on Tesla’s sales and affecting companies dotted along the supply chain.
• The prospect of buying an EV has been made less enticing by sharp declines in second-hand prices, the easing of government emission targets, and the lack of availability of charging infrastructure.
• Toyota Motor still holds the leading position when it comes to hybrid vehicles

We’ve been told that electric vehicles (EVs) could help us save the world. So now, eco-conscious shoppers don’t need to suffer any discomfort to do their bit: they can enjoy the luxuries of air-con and high-tech gadgets while turning the roads green. And yet, folk are increasingly hopping into hybrid vehicles, which run on a combination of traditional fuel and self-generated battery energy. That’s leaving EVs in the showrooms and putting pressure on the likes of Tesla. Here’s what gives.

What happened to the EV market?

Not too long ago, EVs were the talk of the roads and the star of the showrooms. Tesla had built the blueprint for souped-up models with the hype to match, leaving legacy automakers in the US, Europe, and Japan in the dust. It helped, too, that governments were finally taking note of crumbling ice caps, announcing stricter emission regulations that rewarded cleaner, greener cars. If a carmaker presented a well-thought-out EV strategy to investors, they were often met with double-digit share price rallies.

Problem is, those more eco-friendly engines come at a cost. So now that drivers are facing tighter budgets, a result of inflation and higher interest rates, they’re picking cheaper hybrid and traditional cars over more expensive EVs. (According to Goldman Sachs, a hybrid car is $2,000 pricier than a gas guzzler on average, less than the $4,000 difference between an EV and a traditional car.) For stateside brands, it hasn’t helped that China’s carmakers are producing EVs that go for a fraction of the cost that US brands sell theirs for. That explains why in the first quarter of this year, Tesla delivered 8.5% fewer vehicles than the same time last year, way below expectations. And while the EV maker is working on a more budget-friendly model, hopeful that it could win over money-conscious customers around the world, it was reported last week that the launch is being delayed.

Bear in mind, too, that while China’s EV makers are plucking business from Tesla, they’re far from in the clear. China makes up 60% of the global EV market, and even BYD – the market leader with 90% of its sales in China – reported a 42% decline in deliveries in the first quarter of this year versus last year.

The market is clearly putting companies off. Ford announced earlier this year that it’ll cut its EV production plan by nearly 50% until 2030, sparing time and money to focus on hybrids instead. Plus, Hertz paused plans to buy tens of thousands of battery-driven cars from Polestar this year, as well as selling a load of its Tesla cars, partly because they’re so expensive to repair.

Why aren’t customers buying EVs, besides the price?

Lower second-hand prices. The resale value of EVs has been falling sharply in Europe, which could make customers see the vehicles as a financial liability rather than an investment.

Battery performance. EV makers are expected to improve their cars’ battery lives over time, so potential buyers may be holding out for a better product at a potentially lower price. As with most new technologies, the first products have novelty value, but the later models usually work better and are cheaper.

Government policy. The US is easing emissions standards. So now, the environmental targets can be ticked off by plug-in hybrids (PHEVs) and hybrids (HEVs), not just battery electric vehicles (BEVs). At the same time, there’s pushback in Europe against a plan to ban gasoline vehicle sales by 2035, with Volkswagen and BMW both raising the potential of a regulation review. What’s more, with multiple elections taking place around the world this year, several countries could change their policies on incentives and subsidies. So until there’s more certainty, consumers are unwilling to buy and manufacturers are reluctant to invest.

Shortage of charging stations. Norway is leading the charging infrastructure roll-out, and China’s almost keeping up, especially in urban areas. Everywhere else is lagging behind, though, so drivers may be put off by the prospect of being caught short

Excess supply. Chinese companies have taken advantage of aggressive government subsidies to churn out cheaper-than-average cars. That has flooded the market with more cars than customers want to buy, so companies are slashing their prices to shift their stock – and folk might be holding out for even smaller price tags as a result. That’s probably why Tesla has pushed out the date for the launch of its low-cost Model 2: even trying to compete against those shrinking prices is a surefire way to compromise profit margins.

What are the opportunities?

Hybrids are the engine of the moment right now, with drivers drawn to their more manageable prices. While cheaper than EVs, hybrids are more expensive than traditional engines – but because they use fuel more efficiently and cost less to run, they make up the difference within a few years. That’s sending hybrid sales on a steady climb, a trend that seems set to stick for at least a few years

When it comes to hybrid vehicles, Japanese carmakers Toyota Motor and Honda Motor are the market leaders. Toyota is something of a veteran: the company launched its first hybrid model, the Prius, in 1997, and has since developed proprietary technology to improve its performance and reliability. Investors might also be drawn to the fact that Toyota has said profit margins for hybrids are higher than for gasoline cars. Both Toyota and Honda are expected to see their hybrid sales pick up over time. On top of that, the pair benefit financially from the weaker yen and are trading at reasonable valuations despite their strong performances in the stock market.

US carmaker Ford has shifted its strategy more toward investing in hybrids, which should save them some cash since hybrid production methods tend to come cheaper than EV ones. That could keep paying off down the line, too: hybrid technology will likely be used for battery EVs in the future.

Companies that focus mainly on EVs aren’t exactly at their peak. That includes EV makers like BYD, NIO, and Tesla. Yet even though Tesla has had trouble with its share price recently, the company still looks set to lead the autonomous driving sector in the long term. Elon Musk’s recent announcement that the robotaxi will be revealed on August 8th might sound intriguing, but full commercialization is likely to be a much more distant goal. Plus, Tesla’s software and robotics businesses are predicted to contribute more to the bottom line given time, which could make up for any hiccups in the carmaking division.

Businesses along the EV supply chain have had a tough time lately, too, such as the producers of lithium – a key battery component – including Albemarle. That said, demand for EVs is expected to pick back up over time, especially when more advanced battery technologies make the cars cheaper to make and buy. That will benefit not only carmakers, but their suppliers too. In the meantime, the hype behind hybrids will likely keep oil demand higher for longer than some analysts expected. And now that oil prices are on the rise again, it might be worth looking in that direction – Buffett, for example, is a big fan of Chevron.

Russell Burns is an analyst at finimize.

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