Net Zero on the cheap?

Finally we have clarity on the UK's policy regarding the decarbonisation of road transport. Sadly the policy update does little for consumers, distributors or OEMs and appears still to be politicking.

March 2025 saw the highest number of electric vehicles registered since the advent of the Zero Emission Vehicle mandate. Hooray! we all cheered, the UK is well on the way to achieving it’s net zero ambitions by decarbonising the 17% of CO2 emissions that road transport is responsible for - except it’s not is it?

Despite a 43% increase in BEV sales so far in 2025, unit registrations are still well behind the ZEV mandate target - 20% vs 28%. That’s the sort of delta that has led the sector to lobby government for support in stimulating demand for EVs. The government listened, no doubt stung by the closure of manufacturing facilities by Stellantis and threats over other UK factories as OEMs struggle to create a product offering that can persuade the masses that EV is better than ICE. They made supportive noises and commissioned a consultation and review.

Around 3 months later we have the outcome of the consultation and I have to say that it is at best, underwhelming. I’ve argued for some time that it is unreasonable to expect fiscal support for a sector that is not on it’s knees (yet) and to help middle class people buy new electric cars, particularly given the state of the UK economy and it’s impoverished public services. However, the policy clarity we have received is largely inconsequential given the scale of the short and mid term challenge. Without wishing to sound ungrateful for the concessions made to the fine regime associated with ZEV non-compliance, the extension to the PHEV phase out, credit trading flexibilities and the as yet unspecified top up to the already pledged £2.3bn, none of these actions appears to be material given the aforementioned 8% gap between demand and expectation.

Both of the UK’s recent governments are guilty of missing the point regarding the journey to zero emissions. This cannot be done on the cheap and and not at the speed the political ambition suggests. I do not argue that government’s should stay out of market regulation but when they do become involved they are required to fully understand every intricacy of the market function and to remain flexible on tactics that can achieve the aim of the regulation.

I believe in the ZEV mandate. I believe that OEMs need to be pushed hard to market products that deliver zero emission alternatives for consumers. I believe that OEMs who stall or lag innovation in the hope that the mandate goes away should be fined. However I also believe that the government policy should be more nuanced and creative in achieving what is the greatest prize for a generation of drivers, dealers and manufacturers. We are not seeing enough of this.

Instead we have a tinkering around the edges of the previously penned legislation which will do little stimulate EV demand and risks a catastrophic collapse in the financial viability of all stakeholders. A 43% increase in BEV registrations shouldn’t be dismissed but the truth of the matter is that to meet the ZEV mandate in the 2025 the increase needed to be closer to 100%.

I’m confident that every OEM, dealer, leasing company has emerged from the first quarter satisfied that they did everything possible to maximise sales and retain a viable business but their very best efforts are not nearly enough. There simply is not enough demand in this market for EVs.

1. The cars are too expensive.

2. Products are technically short of consumer expectation in terms of range/ease of charging.

3. Cars are still being marketed in the same way as ICE cars always have.

Yes we have seen discounting but my impression is that OEMs held back on sales allowances pending the outcome of the government review. I have no data to support this but my constant scanning of the market saw no dramatic offers in the retail or leasing channels. OEMs like to hit targets and the 8% aggregated miss suggests that quite a few adopted a “keep you powder dry” approach ahead of any potential grants. They will be bitterly disappointed.

With so many new car purchases dependent on drivers/owners funding the depreciation of the asset it is very difficult to make the offers more attractive than they already are without the requirement to make a significant provision for the end of contract point. The fall in residual values is proving difficult to forecast despite greater volumes of BEVs being remarketed each quarter. Whilst Autotrader is correct to champion used car ICE/EV price parity, it is coming at a cost. A cost that is being funded by dealers, leasing companies and some poor consumers who bought vastly overpriced EVs three years ago.

Good news for consumers and would-be EV purchasers is that they can now purchase a 2021, 30,000 mile BMW Ix3 M Sport for almost £5000 less than the equivalent ICE model. The bad news is that the EV version was c£7k more than the petrol variant at launch in 2021 indicating a residual value disconnect even for the brand power of BMW. That £12k delta has to funded by someone and it hurts whoever is left holding the liability.

There is no easy answer to this conundrum when supply outweighs demand but we can expect matters to get more challenging as more and more volume is remarketed at the end of the financed periods. As a prospective buyer of an EV this is potentially great news as greater supply will surely pressure market health and lead to cheaper used EVs but I fear that it is a huge financial liability for the funders/owners of the assets.

The size of this financial hole dwarfs any amount of support that government can offer. Yet some actions that would support stronger demand need not cost the farm (cue inheritance tax jibe).

1. Manufacturers should be warranting their BEV product with much stronger terms than current. I exclude the likes of MG, Kia, Hyundai, BYD who are all underwriting their products with re-assuring terms that can pass between owners. Batteries are being warranted for longer periods and concerns around battery longevity seem to be dissipating but to me it is unacceptable for OEM to only be offering 3 year 60k mile warranty terms.

Extending warranty terms would alleviate the fear of the unknown that exists with any new technology particularly in the Used channel. Drivers want cost of ownership certainty which is partly why leasing and subscription services are so well received. Owning a second hand EV should be relatively advantageous over the equivalent ICE car but not enough customer yet see this benefit.

Of course extending a warranty does have a potential cost but if MG can achieve this on their margins, why can’t larger and more premium manufacturers follow. Set against the alternative of RV freefall, the perils of ageing stock holding costs then the provision required to fully underwrite an EV beyond the initial typical 3 year term should be a compelling business case, especially when you factor in the opportunity to build greater loyalty in both sales and service channels.

Some brands Approved Used remarketing does offer this to an extent but the sales process is not marketed actively and my instinct is that this should be funded as a peace of mind marketing expense to build loyalty and not as a separate revenue stream.

2. Finance terms / ownership cycle

When I worked at an OEM last decade we launched a blanket warranty of up to 7 years/100,000 miles. This was industry leading at the time and very well received by customers. Unfortunately it also coincided with the fullest acceleration of PCP as an ownership model . “5 years 0%” always delivered great affordability particularly on a £7k Corsa but coupled with the extended warranty it discouraged the churn that was driving volumes for other marques. Cars were being cycled at regularly at 24 to 29 months, allowing for a replacement to be registered and collectively the UK OEM’s drove an over supply position to 2.7m units.

A bigger market - brilliant! More volume equals more profits - wrong. More volume equalled more pressure to pre-register stock and more pressure on previously solid RVs yet the industry continued to push for sub 36 month ownership terms despite eroding consumer equity. We managed all this because we were amidst the most benign debt financing climate in history and because no-one in the sector thinks beyond the end of the next quarter - at least until Musk entered the party.

My argument here is that net zero ambition is not only realised by selling more cleaner products but also that true sustainability comes from making less stuff. The stuff you make should be made to last longer, be supported through it’s lifecycle and provide greater opportunity to develop loyalty through exceptional brad aftersales initiatives. Despite the bumper profits of the COVID constrained volumes of 2021 and 2022 no OEM saw this as a chance to strategically re-invent the model and now we are stuck in a position where the volume push is back and with a product that “most” people either don’t want or cannot afford to own.

Short cycling cars was never good for profitability yet it seems that this is still preferrable (possibly from a cash flow perspective) versus longer, more predictable revenues which lock in consumers for a longer relationship with a brand. Longer ownership means more opportunity to build loyalty and sell additional services. It also minimises the risk of that awkward moment when the sales person has to try and explain £000’s of negative equity that either scuppers a sale or dramatically increases the monthly payments.

Locking customers into (electric cars) for longer via stronger transferrable warranties, better in life updates for the things that matter most (tech) and aftersales care (asset protection) could be a way to at least mitigate some of the damage that the EV transition seems destined to inflict. Government has made it clear that it will not bail out the sector - I’m sorry colleagues but a potential war in Europe, global trade wars and the spiralling debt burden mean that the car industry falls well down any priority list. The sector must help itself and it can do that by trying to think a little differently with regard to how cars are owned and financed.

There is an opportunity here. One that seemingly Ford have partly grasped with today’s announcement of an enhanced EV ownership package. However whilst this is welcomed, Ford, like government is tinkering around the edges of a failing model.