Hungarian Conservative

Dilemmas of the Car Industry: Going Green is a Must, But at What Price and How?

Is it a wise move to put all our eggs in the electric basket and expose the whole European car industry to that risk? As opposed to the present monocultural love affair with EVs, the industry, the regulatory environment and subsidies should instead move towards diversification.

The future of mobility has always been a central issue of the car industry, but debate about it has never been more intense than recently, as the push for cleaner alternatives and the reduction of emissions are a priority area in carmakers’ agenda.

The landmark decision of the European Parliament to ban new sales of combustion engine vehicles from 2035 on raises the question whether it is a good call to administratively favour one technology over another. Many have voiced fears that what they see as a climate fundamentalist and overly zealous political decision may compromise the competitiveness of the European car industry, putting half a million jobs at risk, and possibly making it easier for foreign rivals, among them the Chinese, to increase their share of the lucrative European market. According to Oliver Zipse, president of the European automotive industry association Acea and CEO of BMW, ‘the proposed target is simply not viable’.

Since the spectacular rise of Tesla, electric vehicles, with the popular abbreviation EVs, became the anointed technology that is supposed to save our future.

Electrification has become the axiom that no one should question or even raise doubts about.

Electric cars have become the synonym for green and environment-friendly, and have been embraced by climate warriors, and yet it is obvious that EVs are not the most environmental-friendly technology in the car industry. The assembly, disassembly and recycling of batteries require a large amount of electricity. Key materials, mainly lithium and cobalt, used in batteries for electric vehicles, are scarce, and extracting these raw materials requires large quantities of energy and water. Another strange but customary double standard is that while environmentalists and climate fundamentalists are strongly opposed to fracking, they don’t seem to mind the mining, processing, and disposing of metals critical for batteries, all of which can contaminate the drinking water and the soil if done improperly, not to speak of the damage that mining for critical metals does to the environment.

Electric cars seem to have many downsides, and most importantly, it is not the only alternative technology out there to replace the old petrol or diesel engines. To reframe the question, is it a good call to anoint one technology and anathemise another by a decision of a central authority, or would it be better, even for the environment in the long term, to let market mechanisms, including freedom of choice shape the market. Especially as there is no single good solution for all types of mobility from freight transportation and urban mobility to long distance travel. If we move out of the European bubble, we can see that other major automotive nations have many irons in the fire besides investing heavily in electrification.

As far as alternative drives are concerned, Japan and the Japanese car industry has always been a pioneer and often a revolutionary. It was Toyota that invented the hybrid system in 1997 and incorporated it into the famous Prius models. The hybrid Toyota became an instant hit, and Prius became a byword for an eco-car. Despite its sudden success, even Toyota admitted that it considered the hybrid drive system a temporary solution and kept researching future technologies. Nissan, the other major Japanese car maker, was the first to market a mass-produced, fully electric passenger car, the Leaf as early as 2010. The Leaf quickly became the world’s best-selling all-electric car, but Nissan failed to capitalise on its early bird success and maintain the leading edge in the market. To compare: Tesla’s biggest selling Model 3 was unveiled in 2016, almost six years after the Leaf hit the market.

Japan, a country with an advanced and innovative car industry, missed the EV boom, because both the government and Japan Inc. made the big bet on hydrogen.

Hydrogen is a revolutionary fuel and while still very costly, it is probably a key future technology to reduce emission.

It must be mentioned that hydrogen drive in mobility is a generic term and encompasses two different technologies. One is the fuel cell, where liquified hydrogen is stored under high pressure and burned to create electricity that eventually drives the car, thus hydrogen fuel cell vehicles are a type of electric vehicles. The other is the combustion engine powered by hydrogen as a fuel. Hydrogen engines burn hydrogen in an internal combustion engine, in just the same way as petrol is burned. Hydrogen internal combustion engines (Hydrogen ICE) are nearly identical to traditional spark-ignition engines. The bottom line is that hydrogen is a zero-carbon fuel and burning it doesn’t generate harmful emission.

Japan’s obsession with hydrogen dates back to the oil shock in the 1970s when the country, lacking energy resources, realised the need to find alternatives and reduce its dependence on Middle East oil. The green energy initiative known as the Sunshine Project was launched, and all kinds of alternative energy, such as solar, wind power as well as hydrogen were extensively researched.

Since then, the government has been steadily investing in the new technology, spending billions of yen every year on research, on subsidies for hydrogen fuel cell vehicles and building up infrastructure. Hydrogen is a strategic base material for Japan not only with regard to the future of mobility. Hydrogen can contribute to decarbonisation, energy security, as well as the competitiveness of Japan’s economy.

In mobility, Japan, again, has been a pioneer. Just like in the case of the hybrid drive, Toyota was the first to come out with a commercial hydrogen vehicle using the fuel cell technology, the Toyota Mirai (meaning ‘future’ in Japanese). Honda Motor was next in 2016 with their Clarity Fuel Cell. Since then, Toyota has already come out with a refreshed and facelifted version of the Mirai. Fuel cell buses are now a common phenomenon in the streets of Tokyo, where the buses have been hybrid for over a decade now.

Fuel stations are scattered all over Japan, now a total of 159,

and not only in metropolises like Tokyo but at remote places as well, albeit fuel cell cars queuing up at these stations waiting to be refilled is hardly a common occurrence yet. Despite the generous subsidies, the number of hydrogen-powered vehicles on the roads of Japan only reached 3800 last year, and in the same year only 1997 fuel cell cars were sold in a country of 126 million, where about half of the households are car owners. In 2021, hydrogen cars represented 0.0873 per cent of all new car sales in Japan, where the total sale of vehicles including gasoline-powered reached 2,286,589 last year. The main reason is simple: while the average price of the best hybrid vehicles on the domestic market is around 6.5 thousand US dollars, a hydrogen fuel cell passenger vehicle costs four times as much, 28 thousand dollars according to METI. The list price of the new Mirai model ranges between 50 and 60 thousand dollars today. It is therefore no surprise that most of the hydrogen cars running on Japan’s streets are fleet cars of ministries or government-affiliated entities. From the technical and practical point of view, however, FCV vehicles are unbeatable: zero emission (they only emit water), they are clean, silent, powerful and you can fill them up in minutes, without having to camp down at a station waiting for the batteries to recharge, as is the case with EVs. Moreover, they don’t require electricity, thus do not burden the overstretched electric networks at a time of a global energy crisis. But the gap in the price tag and availability remain a huge bottleneck. In Japan’s energy strategy, the aim is to make hydrogen the primary source of energy by the year 2050, with the break-even point even further ahead.

While we are waiting for a breakthrough regarding hydrogen powered vehicles, the world has gone electric, mainly thanks to Tesla and the Chinese carmakers, as well as the lavish subsidies provided by governments in Europe and the United States. The EV boom left Japan standing. The key component of electric cars is the battery that drives them. Battery production is now dominated by Korean and Chinese makers, as Japanese battery manufacturers like GS Yuasa just recently jumped on the EV battery bandwagon. It is very telling that in Hungary the big battery plant investments during the past years were made by SK Innovation and Samsung SDI of Korea and CATL (Contemporary Amperex Technology Limited) of China, the world’s biggest battery maker. The investment projects in Hungary carried out by Japanese makers in the battery business, like the above-mentioned GS Yuasa or Toray and Mektec, are significantly smaller in scale.

While Japan has just begun to speed up the development of its EV sector, in neighbouring China electric isn’t the future, but already the present in the car market. This year, more electric cars will be sold in China than in the rest of the world combined, the growth rate of the domestic EV market is ahead of the global competition and Chinese makers like Xpeng, rapidly expanding after learning from the initial mistakes of Tesla’s business model, Zeekr, Nio or BYD have been producing electric cars of good quality at often very competitive prices.

The accelerated pace of electrification of the Japanese car industry involves risk and threatens to destroy or at least undermine the industry’s classical pyramid structure, but it surely will drastically reshape it. Electric cars don’t have engines or exhaust systems and need different gears.

As engine production is a core part of the Japanese auto sector, the EV race will see many firms shift or downsize production. Companies will go out of business or will be forced to catch up and change profile. According to an estimate by consulting firm Arthur D. Little, the speedy EV shift could make 84,000 jobs of the currently 680,000 bin the industry y 2050.

The importance of the Japanese auto industry cannot be overestimated.

The sector accounts for close to one fifth of Japanese manufacturing, and the value of auto exports amounts to about 18 per cent of total exports. There are 5.5 million people working in the Japanese automotive industry, which is roughly 8 per cent of the nation’s entire workforce.

Many think that the EV shift is now irreversible, and Japan has no choice but to make up for the gap. But as the excellent analysis in the Japan Times shows, this shift could represent a serious problem for Japan, as the auto industry is the backbone of the economy. ‘One of the strengths of Japan’s auto sector is its craftsmanship based on close coordination between carmakers and suppliers, especially with regards to engine-related systems,’ points out one industry representative in the above-mentioned article. The Japanese auto industry has a very solid, pyramid-like structure with top automakers like Nissan or Toyota on the top above several tiers of suppliers, with well-established supply chain relationships that are often long-standing and deep-rooted. A sudden EV shift can lead to the breakup of this sophisticated industry structure built in many-many decades, and if the EV shift goes astray and is not successful, just given the significance of the auto industry, it could be detrimental for the whole Japanese economy. To put it simply: if the Japanese auto industry fails, the whole of Japan fails, because the automotive sector is still the real flagship of the Japanese industry with global leaders like Toyota or Nissan.

But the EV shift faces yet another uphill battle in Japan. The country is huge, populous and rich, with a robust domestic auto market, which is of high importance for Japanese carmakers. But the thing is that electric models are not popular at home. EV models only represent about 1 per cent of the total new car sales in Japan. The primary reason EV models are not selling well in Japan is the long history and the high popularity of hybrid models, which accounted for about 40 per cent of new passenger car sales last year. Further reasons are the practical usage and versatility of hybrid models over EVs and the lack of available models in the Japanese market. Another bottleneck is the scarcity of EV charging stations. Japan is trailing behind many European countries in per capita charging stations that are lacking in rural areas, making the use of electric vehicles not only costly but practically impossible in large parts of the country. The number of charging station even fell in the previous financial year due to lack of utilisation. Although Japan is aiming to increase the number of EV charging stations nationwide to 150,000 by 2030, industry representatives, including Toyoda Akio, head of the Japan Automobile Manufacturers Association (JAMA), the most important auto industry lobby group, as well as the president of the world’s largest car manufacturer Toyota Motor, warned that simply installing charging stations without any feasibility should not be the goal.

But the Japanese car industry is innovative and adaptive, so we can expect a speedy closing up due to efforts by major carmakers. Toyota launched its fully electric crossover model bZ4X, while the other major brand, Nissan’s brand new fully electric minicar, the Sakura, which has become an instant hit partly thanks to its chic design, and has just been chosen the Car of the Year for 2022-2023. Honda and Sony (yes, Sony!) just set up a joint venture called Sony Honda Mobility in September to produce their first electric model for the North American market by 2026.

Sony’s participation shows that the electrification opened the door for new entrants to the car market,

as the cars no longer need engines and other essential parts in standard models, but on the other hand more importance in now attached to software, connectivity, imaging sensors and artificial intelligence. No wonder that in China, Huawei, famous for its mobile phones and mobile network equipment, already has an EV model available in the domestic market.

As it was mentioned above, the core of the Japanese auto industry is engine development and production. Electric cars do not have engines, and they don’t require the level of refinement that can be found in combustion engines or hybrid powered cars, and the manufacturing process is more similar to simple assembling of parts as in electronics products. In electric vehicles, the key component is the battery that contains the electricity that powers the car. The bad news is that batteries are still an immature technology. The car industry is waiting for the next generation of batteries that can be recharged fast, weigh less, and have a longer lifetime. The solution may be just around the corner in Japan: Nissan has been making promising research and is planning to come out with a brand-new next gen dry cell battery by 2025 and plans to build a separate manufacturing plant to manufacture it.

Scepticism over electrical vehicle transition highlights a wider global controversy. The forceful push for electrification has, in fact, many downsides, as it is an immature technology, which has already been proven not to be so green after all, and by far not a universal solution for the future of mobility. It looks more and more obvious that administratively selecting one specific technology as the champion may not be the right call, as it may suppress alternative solutions in the embryonic state. Also, as we can see in the case of Japan, it can pose a huge risk on the whole economy. It crowds out alternative solutions and technologies—mobility should be more colourful and sophisticated than that. The recent decision of the European Parliament and the forced electrification is a good example of a tiny, but powerful, liberal elite living in big cities, obsessed with climate change deciding about the preferred way of mobility and forcing it on everybody else. Albeit electric vehicles will not and cannot be the universal solution for all types of needs, for example in scarcely populated areas without the necessary infrastructure, or in countries like India or large parts of Africa, where even providing electricity for basic needs is a challenge. But even in the US and Europe, new EVs are beyond the reach of most people at today’s prices.

It seems that in the eyes of the ‘progressive’ liberal elites, electric cars are the ultimate solution.

A telling example is that of Pete Buttigieg, the darling of the Democratic Party and transport secretary, who suggested to rural car owners suffering from soaring petrol prices that if they switched to electric cars as he did then they wouldn’t have to worry about gas prices. His comment evoked the famous quote attributed to Marie Antoinette: ‘If they don’t have bread, let them eat cake!’ As a Spectator op-ed paraphrased it, ‘Let them eat Teslas.’

Is it a wise move to put all our eggs in the electric basket and expose the whole European car industry to that risk? As opposed to the present monocultural love affair with EVs, the industry, the regulatory environment and subsidies should instead move towards diversification. The above quoted Toyota Motor president and JAMA chairman Toyoda Akio was rather outspoken for a Japanese business leader at an industry event last September. Toyoda said that Japan should not narrow its focus solely to EVs, but rather ‘search for options that suit Japanese circumstances,’ as reported by Nikkei Asia. That was a rebuff of the official aim of a rapid transition to electric vehicles and an end to sales of new gasoline-only vehicles by 2035. ‘In carbon neutrality, our enemy is carbon—not the internal combustion engine,’ Toyoda added. The Toyota chief made a strong point here as both he and representatives of the German car industry highlighted that the internal combustion engine does not necessarily mean diesel or gasoline. On the contrary, there is intensive research into alternative fuels, where hydrogen, similarly to the fuel cell technology, can again play an important part. Leading automakers like Toyota and BMW have been making promising research in the field of hydrogen combustion engine technology.

As we can see from the examples of the Japanese and Chinese car industries, it is not necessarily the best idea for politicians to make radical decisions on the future of the auto industry and single out one technical solution, while basically ban others. The EU is the only entity to have decided on a tech ban, others haven’t yet followed suit. The question is whether it is worth sacrificing the European car industry for the sake of dubious climate goals by favouring a technology that may ultimately prove not be the future of mobility. Europe needs a strong and competitive car industry, and the vigour and competitiveness of the German automotive industry matter far beyond Germany’s borders. As German car makers have been intensively investing in the Visegrad Four countries, the fate of Central European economies is also closely linked to the future of the German automotive sector.

Is it a wise move to put all our eggs in the electric basket and expose the whole European car industry to that risk? As opposed to the present monocultural love affair with EVs, the industry, the regulatory environment and subsidies should instead move towards diversification.