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The global electric vehicle industry has encountered a "headwind" at the beginning of the year.

In the Red Sea, Houthi rebels have been frequently attacking merchant ships, disrupting trade between Europe and Asia and causing supply chains.

Tesla has been hit by a shortage of parts due to the increased risk of shipping in the Red Sea, and has announced that it will suspend most car production at its factory near Berlin. It is the first automaker to announce a production suspension due to the tensions in the Red Sea. Volvo's Ghent plant in Belgium also announced a three-day shutdown.

Ritika Kapoor, head of market intelligence at container platform Container xChange, told NBD that the automotive industry is highly dependent on global supply chains and that automakers typically use a "just-in-time" production model. Therefore, any delays in the supply chain can disrupt production schedules.

In addition to the impact of the Red Sea tensions, the electric vehicle industry is also facing a cold spell due to weak market demand. A recent survey conducted by Wedbush Securities in the United States showed that consumers still have many concerns when buying electric vehicles, including the price of the car itself, the cost of driving and maintenance, and whether government subsidies will be available.

The "Butterfly Effect" of the Red Sea Crisis

The electric vehicle industry faced its first headwind of 2024 in the Middle East's Red Sea. Since November 2023, Houthi rebels in Yemen have used drones and missiles to attack ships in the Red Sea linked to Israel, prompting several international shipping companies to suspend Red Sea routes and detour around the southern tip of Africa. On January 22, the United States and Britain carried out their eighth airstrike on Houthi targets in two weeks, but the Houthis vowed "no surrender" and said their attacks would continue until Israel stopped its military strikes on the Gaza Strip.

The Red Sea has the Suez Canal in Egypt at its northern end, leading to the Mediterranean, and the narrow Bab al-Mandeb Strait at its southern end, leading to the Gulf of Aden. It is a major artery for global trade.

Tesla recently announced that it would suspend production at its Grünheide factory near Berlin, Germany, from January 29 to February 11 due to "armed conflict in the Red Sea and changes in shipping routes from Europe to Asia." It is the first automaker to announce a production suspension due to tensions in the Red Sea. Volvo also said that "readjustment of shipping routs" had delayed the delivery of transmissions, and its Ghent plant in Belgium shut down for three days from January 15.

Ritika Kapoor, Market Intelligence & Brand Lead at container platform Container xChange, told NBD that the automotive sector relies heavily on global supply chains for the timely delivery of components and parts. Disruptions in the Red Sea is leading to delays in shipping, affecting the availability of key components needed for vehicle manufacturing.

Automakers often operate on just-in-time manufacturing processes, where components are delivered as needed. Any delays in the supply chain can disrupt production schedules, leading to delays in the assembly of vehicles. This could impact the ability of automotive companies to meet customer demand and fulfill orders.

If ships to avia the Mediterranean sea, they will have to travel an additional 6,400 kilometers around the Cape of Good Hope in Africa, adding 10 days to the voyage and increasing costs. "These additional costs are likely to be passed on to consumers or reduce automakers' profit margins, which will affect their competitiveness in the global market," Kapoor said.

Tesla profits down in 7 years

As the leader of global electric vehicles, the current situation of Tesla may also give us a glimpse of the development of the current electric vehicle market.

On January 24, local time, Tesla released its financial report for the fourth quarter and full year of 2023. The report showed that although the total revenue in 2023 hit a new high, both revenue and earnings per share missed expectations, and Tesla reported its first annual profit decline since 2017 in 2023: Non-GAAP net income attributable to common shareholders was $10.882 billion, a year-on-year decrease of 23%.

Affected by the price reduction of models, Tesla's gross profit margin continued to decline in the fourth quarter of 2023, from 17.9% in the third quarter of 2023 to 17.6%, lower than the market expectation of 18.3% and down by more than 6.2 percentage points compared with 23.8% in the same period of 2022. In 2023, Tesla's gross profit margin was 18.2%, a decrease of 7.35 percentage points compared with 2022.

What's more noteworthy is that Tesla bluntly stated that its production, delivery and delivery growth rates in 2024 may be significantly lower than those in 2023, and the company also did not announce its delivery target for 2024. For a long time, Tesla has set its average annual growth rate at 50%.

This financial report obviously disappointed the market. On January 25, when the US stock market closed, Tesla's stock price plummeted by more than 12%, and its market value evaporated by $80 billion in a single day.

Even analysts who have been bullish on Tesla for a long time can't help but criticize Tesla and Musk. Dan Ives, managing director of Wedbush Securities, said "We were dead wrong expecting Musk and team to step up like adults in the room on the call and give a strategic and financial overview of the ongoing price cuts, margin structure, and flucuating demand....instead we got a high level Tesla long term view with another train wreck conference call." We maintain our OUTPERFORM rating while lowering our price target from $350 to $315 reflecting reduced estimates. Our near-term confidence in the story is shaken, but we remain firm on a long term bull thesis around Tesla and the broader AI story set to take hold. This is a pivotal period for Musk to get Tesla through that will help shape (or haunt) its EV future.

EV market faces dramatic changes?

The growth of electric vehicle (EV) sales appears to be slowing down.

On January 20, Ford announced that it was cutting production of its F-150 Lightning electric pickup truck due to weaker-than-expected demand. Ford said it still expects global EV sales to grow in 2024, but at a slower pace than previously forecast. The company cited consumer reluctance to pay more for EVs than for gasoline-powered vehicles.

On January 11, rental car giant Hertz announced that it would be selling off about 20,000 of its EVs. Hertz said the decision was made due to the high cost of maintaining EVs and their lower resale value.

These developments come as a number of other automakers have also scaled back their EV plans. In December, General Motors delayed a $400 million investment to convert an electric truck factory. And in January, Toyota CEO Akio Toyoda predicted that EVs would only ever account for 30% of the global auto market.

A recent survey by Wedbush Securities found that about half of U.S. consumers are considering buying an EV for their next car. However, the survey also found that many consumers are still concerned about the cost of EVs, as well as the availability of charging stations and the range of EVs.

Despite the recent slowdown in EV sales, analysts still believe that the long-term trend is towards EVs. Bloomberg New Energy Finance (BNEF) predicts that global EV sales will grow by 21% in 2024, to 16.7 million units. That would be down from 33% growth in 2023.

China is expected to remain the world's largest EV market in 2024, with sales of about 10 million units. Europe is expected to be the second-largest market, with sales of about 3.4 million units.

The U.S. market is more difficult to predict. On the one hand, Ford and GM have warned of slowing EV demand. On the other hand, Tesla continues to see strong sales, and Hyundai and Kia are also growing their EV market share. In addition, the outcome of the 2024 U.S. presidential election could have a major impact on EV policy. BNEF is forecasting U.S. EV sales of 1.9 million units in 2024.

“Leading Republican candidates have made their intention to scrap the US$7,500 federal EV subsidy and add an EV tax explicitly clear,” Prateek Biswas, analyst of transport and materials at Wood Mackenzie, stated. “A rollback of the 2027-32 emission and fuel economy standards, combined with removed purchase subsidies, would not only pull back EV investments by the legacy auto sector but also dent the profitability and future investment potential of global EV leaders like Tesla,” Biswas said.