The rapid growth in electric vehicle (EV) sales appears to have stalled – at least temporarily – thanks to the COVID-19 pandemic during the first quarter of 2020, but the blow has been cushioned by rising sales in Europe.

While EV sales rose 65 per cent from 2017 to 2018, the growth rate slowed to just 9 per cent in 2019, before declining by 25 per cent during the first quarter of 2020, according to McKinsey & Co’s Electric Vehicle Index.

But EVs still preformed better than the overall light vehicle market, which dropped by 5 per cent in 2019 and a further 29 per cent in the first quarter of 2020.

Statistics indicate that EV trends varied by region, with EV sales in China increasing by just 3 per cent in 2019 due while US sales fell by 12 per cent.

Meanwhile, in Europe — a car-making juggernaut — sales rose 44 per cent to reach 590,000 units.

The same trends continued in the first quarter of 2020 with US and Chinese EV sales declining by 33 per cent and 57 per cent respectively while the European EV market actually increased by 25 per cent.

Europe remains the bright spot for EV adoption

Unlike other markets, European EV sales increased due to the European Union’s strict new emissions standard that requires that 95 per cent of the fleet must meet the 95 grams of carbon dioxide per kilometre target in 2020.

This standard will increase to 100 per cent of the fleet next year.

Sales were driven by a combination of increased demand for new models, the availability of existing models with larger battery sizes and purchase incentives.

Patrick Schaufuss, a McKinsey associate partner, noted that vehicle manufacturers had invested more than €30bn ($48.6bn) in EVs over the past two years to meet Europe’s upcoming carbon-dioxide regulations.

“In the first quarter of 2020, we saw increased momentum on the consumer side for buying EVs, despite the COVID-19 pandemic,” he added.

“Other signs also suggest that the momentum of EVs will be sustained in Europe—for instance, the creation of additional purchase incentives, the timely creation of EV standard operating procedures, and an infrastructure rollout.”


Chinese EV sales decline but stimulus could drive rapid recovery

The relatively slow growth of China’s EV market in 2019 was a reflection of both the overall decline in light vehicles and significant cuts in EV subsidies, McKinsey said.

However, EV sales could benefit from the raft of measures taken by the central government to boost its economy.

Monetary incentives and purchase tax exemptions were extended through to 2022 while billions of renminbi are being invested into charging infrastructure as part of an economic stimulus program.

McKinsey partner Ting Wu believes that while the moves will probably drive growth in China’s EV market, its goal of achieving 25 per cent sales of NEVs by 2025 would be a challenge and would require additional policy instruments and new business models to spur sufficient consumer demand.


Uncertainty remains for EV adoption in the US

While US EV sales rose by 80 per cent in 2018 following the market launch of the standard version of Tesla’s Model 3, it slowed in 2019 due in part to the gradual phaseout of the federal tax credit in January and July 2019.

While some international manufacturers had strong EV sales, they could not offset the decline of other models.

Looking ahead, McKinsey noted that the federal government’s recent moves to loosen emissions regulations could decelerate the growth of the EV market in the US.

Despite this, Tesla has marked its fourth consecutive quarter of profits, reporting a net profit of $104m in the second quarter on increased sales of 90,650 vehicles over the first quarter sales of 88,000 vehicles and improved operational performance.

This contrasts with the fall in sales that nearly every other leading car manufacturer has reported in the same period.

That’s not enough for the car maker’s maverick boss Elon Musk who has promised to deliver 500,000 vehicles before the end of this year and has selected a site in Austin, Texas for the company’s next Gigafactory to manufacture lithium-ion batteries.


Localising supply chains

McKinsey added that both automakers and suppliers are increasing their global footprints in target markets by localising the production of vehicles and components as interest in supply chain security increases.

European governments are accelerating their financial commitments into battery metals projects.

Germany (over $1bn), France ($700m) and Poland ($130m) have all previously announced big cash injections into their respective battery industries.

And those are just individual government initiatives. The European Union has so far dropped in about $US550m ($865.5m), of a budgeted $US88bn, into battery metals projects, while the European Commission is investing €3.2bn ($5.5bn) in battery research and innovation across Belgium, Finland, France, Germany, Italy, Poland and Sweden.

“The amount of money that Europe is ploughing into this industry eclipses pretty much every other economy, certainly every other western economy,” Keith Coughlan, managing director of lithium explorer European Metals Holdings (ASX:EMH), told Stockhead previously.

Battery manufacturers are also increasing their production capacities in target markets with Chinese company CATL, which has the largest market share in the world, signing new contracts with several international vehicle manufactures and setting up a factory in Germany.

South Korean manufacturers SK innovation and LG Chem are also investing in their respective factories in the US.

This move towards localising supply could also benefit Australian companies that are looking to supply non-Chinese supplies of critical minerals such as cobalt, graphite, lithium and rare earths.

Examples include Alkane Resources (ASX:ALK), Arafura Resources (ASX:ARU), Ionic Rare Earths (ASX:IXR), Mineral Commodities (ASX:MRC), Northern Minerals (ASX:NTU), Pensana Rare Earths (ASX:PM8), RareX (ASX:REE) and Talga Resources (ASX:TLG).