Ep88 Why Car Makers Are Oil Companies in Disguise with Ben Scott, Carbon Tracker

Global carmakers are currently hiding a massive 33% carbon gap, effectively operating as oil companies in disguise. Ben Scott from Carbon Tracker joins us to reveal why legacy auto giants face a "Kodak moment" as they lag behind the electric vehicle transition. We explore how China’s EV dominance empowers the Global South to leapfrog fossil fuel dependency for strategic industrial survival. This conversation is essential for those interested in tracking how capital markets will soon reprice these hidden emissions as high-risk energy liabilities.

Reference: Oil Companies in Disguise

ABOUT BEN: Ben Scott is Head of Energy Demand and leads the automotive research at Carbon Tracker, a financial think-tank working to align capital markets with climate reality. Prior to Carbon Tracker, Ben worked at MUFG Bank in London, where he provided financial and industry analysis on the automotive sector to help manage the bank’s credit exposure and risk appetite. He has also worked directly within the automotive industry at Aston Martin Lagonda. Ben began his career at IHS Markit, where he led the E-Mobility research service, focusing on decarbonisation and emissions legislation. Ben holds a degree in Physics from the University of Leeds.

Recommendations:

1. Cleaning Up: A podcast hosted by Michael Liebreich that features insights into the energy transition through interviews with CEOs, politicians, and climate finance experts. Link
2. Capital in Transition: A podcast series produced by Carbon Tracker that focuses on the financial research and analysis surrounding the global energy transition. Link (Spotify) Link (Apple)
3. There Will Be Blood: A film starring Daniel Day-Lewis that depicts an oil tycoon’s ruthless pursuit of wealth and power. Link

HOST, PRODUCTION, ARTWORK: Joseph Jacobelli  |  MUSIC: Ep76 onward excerpts from Vivaldi’s La Follia, played by Luca Jacobelli.

Transcript

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Ep88 Why Car Makers Are Oil Companies in Disguise with Ben Scott, Carbon Tracker

[00:00:00] Ben Scott: For the EV laggards, I liken this to a Kodak moment. Kodak didn't go bankrupt because it didn't have access to digital cameras. It actually invented the first digital camera. It failed because it couldn't distance itself from the profitable film business.

[00:00:19] Narrator: Welcome to Asia Climate Finance, your front row seat to the policies, investments, and actors shaping climate, business and finance across Asia Pacific. Subscribe now so others find this essential guide to Asia's Climate Economy and note the disclaimers at the end. Now over to the host, analyst, investor, and author Joseph Jacobelli.

[00:00:43] Joseph Jacobelli: Good morning, good afternoon, or good evening, wherever you may be listening from. Welcome to Asia Climate Finance, and today's episode 88, a lucky number in Chinese culture. Now, the world's car makers report a fraction of their actual emissions, a 33% gap between what they claim and what's really on the road. Ben Scott from Carbon Tracker joins me to explain why these companies function more like oil producers than vehicle makers. Why a very large company may be approaching its own "Kodak Moment" and how the Global South is quietly moving past the old guard. It may be pointing to something larger, a potential repricing of global capital that's already underway. Send comments or ideas to ACFpod@outlook.com, also at the top of the show notes. Enjoy the discussion. Hello, Ben. It's great to have you on the show. How are you?

[00:01:52] Ben Scott: I'm very well. Thank you, Joseph. How are you?

[00:01:54] Joseph Jacobelli: Very good, very good. Thank you for making it. I appreciate this is at the back of Climate Week, which was a very, very busy time for you guys. So really appreciate you making the time. Ben, if I can just kind of dive right into it. You spent years in the auto trenches from providing industry analysis at major banks like MUFG, to working directly with luxury brands like Aston Martin. Could you tell us maybe a little bit about your journey beyond the bio, which will be, of course, in the show notes?

[00:02:29] Ben Scott: Yes, absolutely. And firstly, thank you for having me on. As you say, I've spent some 15 years or so looking at the automotive sector and still finding it a fascinating subject. After I graduated with a physics degree, I really didn't know what I wanted to do, but I knew I liked data and I liked analysis and I was lucky enough to work for a boutique market research company specialising in semiconductors. And these are obviously the building blocks of various end markets. And by chance, I was placed in the automotive team, gradually leading a research area on e-mobility.

[00:03:10] Joseph Jacobelli: Mm.

[00:03:11] Ben Scott: So from there, I moved on to working with an industry and then onto finance and then eventually to Carbon Tracker, where I lead our energy demand team.

[00:03:19] Joseph Jacobelli: Actually, Ben, for Asian Climate Finance listeners who may not necessarily be familiar with Carbon Tracker, could you tell us a little bit about it in general and also maybe its mission when it comes to the global car market in particular?

[00:03:37] Ben Scott: Yes. So Carbon Tracker is a financial think tank and we're looking to align capital markets with climate reality. So we believe that if we can shift capital away from fossil fuels and towards renewables and electric vehicles, then that's the best way of accelerating the energy transition. We provide research and analysis into the energy transition, highlighting the risks and opportunities to our investor and policymaker audiences. We don't provide financial advice, but we are commentating on the energy transition more broadly. As for the automotive sector, we're trying to accelerate credible electric vehicle strategies—

[00:04:21] Joseph Jacobelli: mm-hmm. ...

[00:04:22] Ben Scott: among the incumbent car makers, enabling survival and transformation rather than simply failure and replacement.

[00:04:31] Joseph Jacobelli: Right. And also that research is openly available to anyone that goes on your website. I want to emphasise and it's really excellent research and I used quite a bit of stuff for my second book as well, so it's a great reference. Moving now to some high level questions. The first is, how do you think the automotive sector is changing as it shifts towards electrification, software, and new mobility models?

[00:05:05] Ben Scott: Yes. The automotive industry is going through massive change as it grapples with four mega trends kind of all happening at the same time and often the acronym CASE is used, so this means connected, autonomous, shared, and electric. So if you're an automaker CEO, you have some real capex and R&D challenges here as you try to balance these four areas.

[00:05:33] Joseph Jacobelli: Mm.

[00:05:33] Ben Scott: But I think of those four areas we're seeing kind of connected and electric as the most advanced in terms of real world deployment.

[00:05:43] Joseph Jacobelli: Right, right, right. The second high level question is broadly speaking, what are the biggest challenges manufacturers and suppliers face during this transition, especially around costs, regulation and supply chains? I know this is a tough question and probably it deserves a podcast all on itself, but I'm just trying to get the broad thinking on this.

[00:06:08] Ben Scott: Yeah, it's a big question, lots to unpack. But maybe I could pick up on three points. The first one is around incumbent automaker transition. So for the incumbents, they essentially have two asset bases. An asset base trying to produce EVs, electric vehicles, and another asset base doing legacy internal combustion engine vehicles and that legacy business. And it's very challenging to try and manage these two asset bases. And as we've seen from the likes of Ford and Stellantis as well, they're making huge write-downs on their balance sheet and this is very reflective of the challenges that they're facing right now and you know, part of that is down to China and that's kind of my second point here: the China challenge. The incumbents face massive challenges from these brand new Chinese electric vehicle makers and they're now bringing affordable, compelling electric vehicles to market. Mm. And this is happening both in the light duty and also the heavy duty vehicle side as well.

Mm-hmm. And as a result of the rise of affordable electric vehicles from China, in a bid to remain price competitive, suppliers and OEMs are facing huge challenges on their margins, massive margin pressure because of these new challenges from China. And then maybe the last point, my third point is on sort of regulation. We have varying emissions and EV legislation around the world.

[00:07:45] Joseph Jacobelli: Right.

[00:07:46] Ben Scott: But the sector needs strong policies to maintain and promote investments. At present, we're seeing dilution of EV mandates, things like flexibilities as well in some of those pieces of legislation. And this is being pushed by the stakeholders who want to maintain the status quo. And that's really the opposite of what we need right now.

[00:08:11] Joseph Jacobelli: Mm-hmm. Just a quick question on China if you could unpack that just a little bit. I think the bulk of our audience, and I'm talking about 60% probably, is based in the Asia-Pacific region. So that portion of the audience would probably have a very good understanding. But for the remainder, I think there's a lot of misconceptions about China, and how China is approaching the automotive industry. The general misunderstanding is that Beijing just pours billions of dollars into all of these automakers and so all automakers in China are ultra, mega subsidised by the centre and therefore they can produce cheap cars which obviously is absolutely not the case, but it's a good narrative for the anti-China EV lobby. So my question is, could you unpack that, China's development, how it got so big and so successful on the EV side and what has been the kind of general reaction of the incumbent automakers? Again, this is another massive question which deserves its own podcast, but just to unpack that and to clarify that a little bit.

[00:09:27] Ben Scott: Yeah, of course. So China and the automotive sector is a fascinating case study really. If you go back say 15 years or so, maybe well, maybe even further actually, China and the government set out an industrial plan or an industrial strategy to really become a dominant player in the automotive sector. For many of the Western automakers China was seen as a massive growth area. More and more people being able to afford vehicles, motorisation rates, so this is the number of vehicles per capita, relatively low, so lots of growth opportunity and the only way that these Western OEMs, these Western automakers could operate in China is by forming joint ventures with Chinese companies. So that gives access to the Western manufacturers into China, huge growth engine for these incumbents, but what China was able to do was really learn how to build cars well. 10, 15 years ago, a Chinese car would have been seen as almost laughable. China could produce a good car and one that's well built and—

[00:10:49] Joseph Jacobelli: And you wouldn't drive one even if it was free, right? 15 years ago.

[00:10:54] Ben Scott: Indeed. Indeed, yeah. They were kind of a joke of the industry and now the complete opposite is true. China has learned how to build compelling electric vehicles and also conventional internal combustion engine vehicles as well. And they're just very good cars and we're starting to see domestic Chinese makers producing cars at scale and ultimately exporting them. So they've just become very good at producing vehicles and it's because of a long-term plan. I don't think that the same is true for some of the Western manufacturers where they're constantly chasing profits on a quarterly or annual basis.

[00:11:42] Joseph Jacobelli: Right. There's no overarching strategy, I suppose, whereas China has seen electrification as a strategic pivot and has become very successful at doing that. China has plans obviously to export those vehicles around the world and as we'll discuss maybe a bit later, Europe, US and other markets have been, I suppose, a little bit worried about these Chinese EVs entering the sector and have essentially asked for protection in the forms of policy and you can see, certainly in the US, the rise of tariffs to block Chinese EV sales in that country and similar things happening in Europe as well. So China has massive vehicle production capacity, and it will sell those vehicles around the world and increasingly we're seeing that in the Global South as well.

[00:12:28] Joseph Jacobelli: Right. And then there's also the fact that there's 110 different brands of cars, EVs, in China and you probably only need I don't know, five, maybe 10 maximum. And so the competition is absolutely monstrous. Good. So I wanted to shift a little bit to some kind of sector specific questions, Ben. In the latest "Oil Companies in Disguise" report you co-authored, you found a massive 33% carbon gap between what automakers say they emit and the reality on the road, excuse the pun. Given that Asian giants like Toyota, Hyundai are pumping out millions of units, how much of their current market value is actually built on these hidden carbon liabilities?

[00:13:25] Ben Scott: Yeah, it's a great question and to answer it, currently very little. And this is what we're trying to warn about in this report, which you can download for free on our website. So in this study, what we're saying is that a dollar invested in the automotive industry is just as carbon intensive as a dollar invested in the oil and gas sector. As you would expect, as the automotive sector is a massive off taker of oil products, right? Of petrol and diesel. It seems obvious to say, but worth mentioning. And in our study, on average, 33% of Scope 3 category 11 emissions—and these are the use phase emissions or the tailpipe emissions—they're unaccounted for. So if a company left one third of its core financial liabilities in its balance sheet, investors and regulators would be rightfully aggrieved. Yet, a discrepancy of that exact scale is currently being overlooked by the market when it comes to corporate emissions reporting. And why do we focus on this? Scope 3 category 11 emissions reporting is a proxy for how well an automotive company is transitioning. A company that is transitioning to electric vehicles and the products of the future should be reducing its emissions, reducing its Scope 3 emissions. So that 33% discrepancy exposes investors to unpriced policy, stranded assets and valuation risks.

[00:14:56] Joseph Jacobelli (2): Let's talk about the elephant in the room, Ben: Toyota. They've got a massive absolute carbon gap and they're still pushing 27 hybrids for every electric vehicle. They call it a multi-pathway strategy, but isn't this just a massive bet on technological obsolescence that could leave investors high and dry as global regulations tighten?

[00:15:22] Ben Scott: Yeah, absolutely. It's a huge bet on a technology that could quickly face obsolescence. So Toyota brought the first commercial hybrid vehicle to market, the Prius, back in the late '90s. Mm-hmm. That's almost 30 years ago, if you can believe it. And at the time Toyota gained some green credentials. This is a vehicle where you could kind of save fuel, you're doing your bit for the environment. So over time, Toyota have become very good at producing these hybrid vehicles and those kinds of sunk costs have been depreciated and amortised over a long period of time. So profit margins for hybrid vehicles are very, very healthy. So whether it's global regulations or simply consumer sentiment wanting to buy an electric vehicle, Toyota finds itself in a risky position. So for the EV laggard, I liken this to a Kodak moment. Kodak didn't go bankrupt because it didn't have access to digital cameras. It actually invented the first digital camera. It failed because it couldn't distance itself from the profitable film business. And I think the same is true here with the EV laggards and they're kind of addicted to those profits from conventional vehicles and therefore find it difficult to transition to electric vehicles, which at the moment don't offer the same margins as we've seen with traditional vehicles.

[00:16:58] Joseph Jacobelli: Right, right. Going back to China that we talked about earlier, China now owns something like maybe 70% of the global electric vehicle market, battery electric vehicle market BEV. As the US and EU slap on huge tariffs, these Chinese OEMs are pivoting hard toward emerging markets like Southeast Asia, Brazil, also Africa, I believe. Is this a genuine leapfrog opportunity for these regions or is China effectively weaponising its supply chain to make the Global South a dumping ground for its excess capacity?

[00:17:40] Ben Scott: Yeah. As I mentioned earlier, Chinese manufacturers do have a lot of electric vehicle manufacturing capacity, but I think the reason that we're seeing large uptake of electric vehicles in emerging economies and the Global South is because these nations are huge importers of petrol and diesel and electric vehicles offer a way to reduce that import dependency. So you have the likes of Ethiopia, Vietnam, Nepal with very high penetration rates of electric vehicles and these countries that aren't automotive giants of the world, these are nations who are concerned about their balance of payments and see electric vehicles as a way to become more energy secure. And I think the recent crisis in the Strait of Hormuz and the impact on fuel price only makes that argument stronger.

[00:18:42] Joseph Jacobelli: Right, right. We're seeing Chinese firms like BYD or Geely move from just exporting to actually building local manufacturing hubs in places like Turkey and Brazil. In the Asian context, does this shift make the transition more about industrial survival and avoiding tariffs than actually hitting net zero targets in your view?

[00:19:09] Ben Scott: Yes. I think reaching net zero or reducing emissions is somewhat of a byproduct for some of these companies. The shift to electric vehicles has lowered the barrier to entry which is why we've seen so many new startup automotive companies from Asia and China specifically as you mentioned, Joseph. So, you know, these are all looking to make EVs and previously you didn't have many new automotive companies wanting to build internal combustion engine vehicles because it's hard to build an engine. It's very capital intensive, requires specific expertise as well. For electric vehicles, still capital intensive, but requires a different set of expertise. And ultimately, electric vehicles are fundamentally simpler machines based on the number of moving parts. So to continue their market expansion, local manufacturing is the cost of entry for global trade essentially.

[00:20:16] Joseph Jacobelli: Still sticking to the report "Oil Companies in Disguise", the report notes that Scope 3 reporting is basically a black box of corporate assumptions, something I 100% agree with, being an analyst and an investor. Interestingly, some major Asian players like BYD and Japan's Suzuki don't even have a validated SBTi status. Why is the reporting so much more opaque in these high growth Asian markets compared to what we see in the EU? And maybe want to mention first something about SBTi and what that actually means.

[00:20:59] Ben Scott: Yeah, it's a great point and investors should be asking for more transparency and alignment with science-based targets. So SBTi is the Science Based Targets initiative. And without these targets, it's very difficult to know how well a company is transitioning. I think the reason for the perhaps regional difference between say Asia and Europe is because in Europe there's kind of more strict and standardised regulations compared with Asia, which is more kind of voluntary based. But of course, even within these frameworks, automakers can game the system as some of the assumptions are up to automaker discretion. And as we highlight in "Oil Companies in Disguise", a good example is the assumed vehicle lifetime mileage as a key factor in all of this. And as we say in the report, having a very simple metric like petrol electric vehicle sales share target should be mandatory in these types of science-based frameworks because you can't game the system, it's very simple and most people can understand that and yeah, I think that's what we should be seeing going forwards.

[00:22:16] Joseph Jacobelli: Right. You've identified a hybrid efficiency gap where companies like Toyota or Hyundai just bolt batteries onto old combustion designs. In Asia where hybrids are often seen as the practical middle way, isn't there a huge risk that these oil companies in disguise are just prolonging a global fuel dependency that they can't afford?

[00:22:44] Ben Scott: Yes, exactly that. And this hybrid efficiency gap as we call it, it's not just a reporting technicality, it's a profound capital allocation problem that masks a multi-decade lock in of global fossil fuel demand. And as we touched on earlier, by framing hybrids as this pragmatic solution for emerging markets, automakers will disincentivise governments from investing in the necessary infrastructure like EV charging infrastructure, and this approach splits capital expenditure across those legacy technologies, leaving the hybrid heavy manufacturers highly vulnerable to stricter emissions regulation and low and zero emission zones. So ultimately, while the strategy protects those short-term margins which we talked about, it exposes investors to severe transition liabilities as these combustion dependent vehicle fleets face premature obsolescence.

[00:23:57] Joseph Jacobelli (2): Moving on to the outlook, Ben. If you look at the big picture, automotive carbon intensity is now starting to rival actual oil majors. Do you think we're on the verge of a fundamental shift where capital markets stop treating car makers as growth tech and start pricing them as high risk legacy energy liabilities?

[00:24:22] Ben Scott: Yes. I mean, to answer your question directly, yes, I think we are at that tipping point. And when you look at the big picture, a dollar invested in the legacy automotive industry carries the exact same carbon intensity as a dollar invested in oil and gas and, ultimately the automotive sector is the biggest off taker of global oil. What we're saying in this report is that capital markets are still kind of blind to this and that's what we're showing in this "Oil Companies in Disguise" report. We covered a massive 33% carbon gap, meaning a third of automakers' real world emissions are completely missing from their balance sheets, and that should be a bit of a wake-up call for the automakers themselves, but also investors who are looking at the sector. And right now, legacy automakers are caught in a bit of a structural trap, trying to manage these two asset bases—one doing internal combustion engine, one doing EVs—whilst also facing growing competition from China. We touched on Toyota very much pushing this multi pathway approach with hybrids looking to protect those short term profit margins, but I really do believe we might be in a Kodak moment where the companies who are making profits from ICE today really risk potentially going out of business because they're not ready for that transition. But, despite some of these incumbents trying to push hybrids, we are seeing more and more EV adoption in the Global South and emerging economies, Ethiopia and Vietnam to name a couple. And it's not because they necessarily really like EVs, it's kind of more of a macroeconomic survival thing. It's more about reducing the imports of oil and being more energy independent. So I think the bottom line is clear: Scope 3 emissions are ultimately a proxy for transition readiness towards EVs and the automakers today, some of them are hiding behind those opaque assumptions. We really need to have that transparency so we can really understand how well these companies are transitioning and capital markets will very soon have to reprice these laggards and start pricing them in as the high risk legacy energy liabilities that they really are.

[00:26:54] Joseph Jacobelli: Which basically means lower valuations. But again, we don't make recommendations in the podcast, neither does Carbon Tracker, but definitely there is a general danger that the sector as a whole could be repriced. Great. Let's move on to something a little bit different. On the lighter side of things, do you have any personal recommendations for our listeners? I mean, it could be books, documentaries, films, reports, studies, podcasts, or anything else that has inspired you or has grabbed your attention recently.

[00:27:28] Ben Scott: Yes. Recently I tried to tune into Michael Liebreich's "Cleaning Up" Podcast. 

[00:27:34] Joseph Jacobelli: That's very good. Yeah. [

00:27:36] Ben Scott: Yeah. It's a really great insight into the energy transition because it brings in so many different stakeholders: corporate CEOs, climate finance experts, academics, politicians, et cetera. So, I am sure your listeners are well aware of that, but if not, then I really encourage you to tune into that. Carbon Tracker, we've actually launched our own podcast called "Capital and Transition". And again, I would encourage listeners to tune into that as well. It's a really, really good series. And yeah, I think, lastly, staying on topic, I'm about halfway through the film, "There Will Be Blood", which stars Daniel Day-Lewis as an oil tycoon and his pursuit for wealth and power. So yeah, as I say, about halfway through that at the moment, but so far very, very good and looking forward to finishing it.

[00:28:28] Joseph Jacobelli: Awesome. Thank you so much for the recommendation. Thanks a lot for your time and all of your insights, Ben. I really appreciate it.

[00:28:38] Ben Scott: Thank you so much for having me.

[00:28:40] Narrator: Please note that the Asia Climate Finance Podcast is provided for educational purposes only and does not constitute investment advice. Any information discussed should not be relied upon for making investment decisions. Listeners should always seek advice from a suitably qualified and authorised investment professional. The views and opinions expressed by guests are their own, and do not necessarily reflect the views of their current or former employers or of the podcast host or producers.

Recommendations:

1.     Cleaning Up: A podcast hosted by Michael Liebreich that features insights into the energy transition through interviews with CEOs, politicians, and climate finance experts. Link

2.     Capital In Transition: A podcast series produced by Carbon Tracker that focuses on the financial research and analysis surrounding the global energy transition. Link (Spotify) 

3.     There Will Be Blood: A film starring Daniel Day-Lewis that depicts an oil tycoon’s ruthless pursuit of wealth and power. Link