The Six Months That Short-Circuited the Electric-Vehicle Revolution - Kanebridge News
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The Six Months That Short-Circuited the Electric-Vehicle Revolution

By MIKE COLIAS
Thu, Feb 15, 2024 8:52amGrey Clock 7 min

The Michigan plant where the F-150 Lightning electric truck is built used to vibrate with excitement.

President Biden visited in 2021 and test drove the blazing-fast pickup. Before the first ones even started rolling off the assembly line in the spring of 2022, Ford said it would expand the factory to quadruple the number it could build.

That energy is rapidly fading. Ford is cutting the plant’s output by half, and workers are relocating to other facilities, mostly those making gas-powered pickups and SUVs.

The sudden change “was a little bit of a shocker,” said Matthew Schulte, who inspects trucks at the factory in suburban Detroit. “Reality has set in.”

As recently as a year ago, automakers were struggling to meet the hot demand for electric vehicles. In a span of months, though, the dynamic flipped, leaving them hitting the brakes on what for many had been an all-out push toward an electric transformation.

A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese EV makers , and Tesla ’s stock valuation , which, at roughly $600 billion, still towers over the legacy car companies.

But the push overlooked an important constituency: the consumer.

Last summer, dealers began warning of unsold electric vehicles clogging their lots. Ford, General Motors , Volkswagen and others shifted from frenetic spending on EVs to delaying or downsizing some projects. Dealers who had been begging automakers to ship more EVs faster are now turning them down .

Even Tesla Chief Executive Elon Musk warned of “notably lower” growth in vehicle deliveries for the company in 2024.

“This has been a seismic change in the last six months of last year that will rapidly sort out winners and losers in our industry,” said Ford Chief Executive Jim Farley on an earnings call in early February.

EV sales continue to grow, and auto executives say they remain committed to the technology. But many are recalibrating their plans.

Ford has pulled back on EV investment and could delay some vehicle launches, while increasing production of hybrids , which run on both gasoline and electricity. It lost a staggering $4.7 billion last year on its battery-powered car business and projects an even bigger loss this year, in the range of $5 billion to $5.5 billion.

Some auto executives acknowledge they got ahead of the market with overzealous demand projections. Pandemic-era supply-chain shocks and a resulting car shortage created long waiting lists and early buzz for EVs, making the industry overly optimistic.

Only later, as a barrage of new EVs hit the market, did executives realize that car buyers were more discerning than they expected. Many were hesitant to pay a premium for a vehicle that came with compromises.

Farley and other industry CEOs are still confident that EVs will eventually take off, albeit at a slower pace than initially envisioned. But for now, the massive miscalculation has left the industry in a bind, facing a potential glut of EVs and half-empty factories while still having to meet stricter environmental regulations globally.

“Ultimately, we will follow the customer,” GM Chief Executive Mary Barra told analysts this month.

In 2020, as the car market unexpectedly heated up during pandemic lockdowns, traditional automakers shifted from dabbling in electric cars to launching an all-out blitz. They outlined plans to build dozens of battery factories, EV assembly plants and vehicle models, pledging more than a half-trillion dollars of investment in the technology through 2026, according to consulting firm AlixPartners.

The rapid rise of Elon Musk’s Tesla added to the urgency. Over just a few years, its market value rocketed past those of legacy car companies. Wall Street cheered strategic moves toward electrics and bid up shares of EV startups.

Tougher auto-emissions restrictions in Europe and China gave car companies little choice but to add more EVs or risk penalties. The Biden administration steered the industry toward more environmentally friendly cars, earmarking hundreds of billions in subsidies for battery production, consumer tax breaks and EV chargers.

At the start of 2023, car executives were expecting to cash in on their EV bets.

GM’s Barra had been among the earliest and most vocal industry advocates of shifting to EVs. The Detroit automaker set a goal of phasing out nearly all gas-engine vehicles by 2035.

“This is a breakout year,” Barra said on GM’s January 2023 earnings call . GM was finally making its own batteries and said it was ready to start cranking out EVs to satisfy pent-up demand for a new electric Cadillac SUV and Hummer pickup truck.

Ford, emboldened by swelling orders for the F-150 Lightning, increased prices for the pickups by as much as $20,000 over the original sticker. Elsewhere, car executives were talking up their plans to accelerate EV factory work.

Trouble ahead

Then warning signs began to appear. In mid-January of last year, Tesla slashed prices on some models by more than 20%, triggering a chain reaction.

Used-car dealers who had Tesla Model 3s and Model Ys in stock saw their values plummet by thousands of dollars. Customers who had bought Teslas at higher prices were furious.

“Why cut EV prices when demand is greater than supply?” Bank of America analyst John Murphy wondered.

Musk insisted that there was no demand problem. The company was trying to broaden appeal by making its cars more affordable, he told analysts.

Inside Ford, staffers analysed what Tesla’s cuts might mean for its own EV sales. About two weeks later , Ford reduced prices on some versions of its Mustang Mach-E SUVs by nearly 9%.

Speaking to analysts in May, Farley largely shrugged off the pricing pressures, saying they weren’t reflective of broader interest in EVs. He remained upbeat about Ford’s outlook, reiterating plans to expand Lightning output.

Around that time, car dealer Mickey Anderson began noticing that EVs were accumulating on his lots in Kansas, Nebraska and Colorado.

At first, Anderson and other retailers thought the slower sales were a fluke. At meetings with manufacturers in the late spring and summer, the dealers compared notes.

“We were worried,” Anderson recalled. “We went from wait lists to six months of supply, seemingly in a matter of weeks.”

As car companies entered the summer-selling season, there were other worrying signs. U.S. EV sales for the first half of 2023 rose 50% from a year earlier, down from a 71% increase in the first half of 2022.

The wave of early EV adopters willing to splurge had receded, and the next round of potential customers was proving more hesitant. They had more questions about how far a car could go on a single charge , and the life expectancy of batteries. They worried about charging times, repair costs, and not having enough places to plug in, according to dealers and surveys.

Interest rates were rising, pushing up monthly payments on EVs, which already were selling, on average, for about $14,000 more per vehicle than gas-engine models, according to research firm J.D. Power.

Lyndsey Grover, a Dallas-based paediatric anaesthesiologist, said her husband was pushing her last year to replace her hybrid Volvo with an all-electric version, for environmental reasons.

She looked at a Rivian SUV, Tesla Model Y and an electric Mercedes, but ended up with another Volvo—a plug-in hybrid that could travel some distance on battery power before switching to traditional hybrid mode.

Her husband already had a Tesla Model S. She said it often requires a full night of charging at home, and even then, its range on a single charge often fell below estimates displayed by the vehicle. She felt the family needed at least one gas-powered vehicle.

GM was having trouble processing battery cells , a bottleneck that was preventing it from getting EVs to showrooms. Manufacturing delays left buyers waiting for delivery of models such as the Cadillac SUV and Hummer pickup truck.

Late last July, GM’s Barra told analysts plenty of consumers still wanted the company’s EVs. “These vehicles are getting to the dealers’ lots, and if they’re not already sold, they’ve got a list of people who are waiting for them,” she said.

Two days later, Ford’s Farley struck a different tone . “The paradigm has shifted,” he told analysts. Although consumers were still buying EVs, Ford’s pricing power was deteriorating compared with gas-engine models, he said, and the market for EVs would remain volatile.

Jefferies analyst Philippe Houchois asked Farley what had changed. “A few weeks ago when we saw you in Detroit…it’s like you had religion” on EVs, he told the CEO.

Farley replied that Ford was responding to market realities.

A Ford spokesman said that producing significant numbers of electric pickups before its rivals enabled the company to become an EV truck leader and to attract customers from other brands. Learning about the habits of EV buyers, he said, would benefit future vehicle development.

Late last summer, Ford dealer Ed Jolliffe saw on his store’s computer system that the factory planned to ship him about a dozen Lightnings. That worried him.

Earlier, his Detroit-area dealership had been receiving one or two Lightnings at a time, and his salespeople had had no trouble finding buyers. More recently, prospective customers seemed more hung up on the monthly payment of nearly $1,000.

Jolliffe had spent a half-million dollars installing EV fast chargers. He was getting ready to rent a billboard along the nearby interstate declaring: “Fastest Chargers Downriver!”

“We were all-in,” he said. So he swallowed hard and agreed to take the trucks.

Changing plans

The unraveling came swiftly. In a single month last fall, the average interest rate on an electric-car purchase jumped from 4.9% to 7%, making monthly payments even less affordable for some shoppers, said Tyson Jominy, vice president of data and analytics for J.D. Power.

Suddenly, once-long waiting lists for EVs shrank and buyers dropped reservations.

Over a 10-day span in October, the tone of automakers in Detroit and beyond turned gloomier. GM said it would delay by one year a $4 billion overhaul of a suburban Detroit factory to build new electric pickup trucks, citing “evolving EV demand.”

The next day, Elon Musk said that not as many people could afford a Tesla given higher interest rates and tougher economic conditions. Affordability was keeping a lid on demand, he said during a call to discuss third-quarter results.

A week later, on GM’s quarterly call , Barra described the transition to EVs as “bumpy,” and said the company wouldn’t meet a self-imposed goal of producing 400,000 EVs over a two-year period through mid-2024.

Two days later, Ford said it would defer $12 billion in electric-vehicle investments and focus on increasing hybrid production, citing the need to better match demand.

By late last year, it was becoming clear that sales of hybrids—once dismissed by some automakers as an unnecessary half-measure—were taking off and would outsell EVs in 2023.

“People are finally seeing reality,” said Toyota Motor   Chairman Akio Toyoda . For years, Toyota and other EV-cautious carmakers had been touting hybrids as a consumer-friendly way to reduce carbon emissions.

In November, thousands of U.S. dealers signed a letter urging Biden to ease proposed regulations that would push the industry to sell more battery-powered cars. “Last year, there was a lot of hope and hype about EVs,” the dealers wrote. “But that enthusiasm has stalled.”

Some auto retailers say that they are now selling EVs at a loss to clear unwanted inventory.

Jolliffe, whose car dealership is a 25-minute drive from the Lightning plant, is struggling to understand what happened. On a recent weekday, he peeked out his window at eight Lightnings and four Mach-Es.

“Nobody’s opening the door” to check them out, he said. “There just seems to be this hesitancy that is hitting hard.”



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Some chocolatiers and coffee makers say they will have to pass on the extra cost to consumers

By JOSEPH HOPPE
Sun, Apr 14, 2024 4 min

Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities.

Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.

“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.

The spikes in prices are a threat to coffee and chocolate makers across the globe.

Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.

Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.

Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.

Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.

In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.

Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.

The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.

“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavourable weather conditions and diseases,” the organisation said.

While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.

The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.

The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.

Neither regulator responded to a request for comment.

Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.

The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.

“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.

Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.

Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.

“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.

“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”

The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.

At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.

“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.