New car sales hit 2m, but EV discounts can't go on, warns SMMT

UK new-car registrations reached 2,020,373 in 2025 with battery electric vehicles (BEVs) accounting for 473,340 units (23.4% share), short of the ZEV Mandate headline target of 28%. The SMMT estimates manufacturers absorbed more than £5bn in discounts last year (roughly £11,000 per EV) to hit quotas, and warns such incentives are unsustainable ahead of a tougher 33% target next year; regulatory flexibilities and reduced fines have been extended but industry leaders request an earlier review of the mandate. Government measures include a £1.3bn grant scheme (up to £3,750 per EV) and planned per-mile EV taxation, which the OBR estimates could reduce EV sales by ~440,000 over five years, raising risks to manufacturers' margins and future demand.

Analysis

Market structure: Heavy discounting (£5bn; ~£11k/EV) implies a demand-versus-priced-supply mismatch — winners are low-cost BEV producers, charging-infrastructure operators and second‑hand/lease market platforms; losers are OEMs with weak cost curves and high fixed EV capex who will see margin compression and inventory build. The ZEV flexibilities/credit market blunt immediate fines, preserving near-term sales volumes but shifting pricing power to manufacturers that can monetize surplus credits; expect downward pressure on new‑car ASPs until mandated share growth and consumer willingness-to-pay converge (target 33% this year).

Risk assessment: Tail risks include a sudden regulatory reversal (tightening fines or removal of flexibilities) that forces accelerated compliance costs, or conversely further easing that privileges low-margin rollout and prolongs discounting; energy/raw-material shocks (nickel/lithium price spikes >30%) would immediately raise production costs. Near term (days–months) the dominant risk is margin shock and inventory re‑pricing; medium/long term (12–36 months) is residual value collapse impacting captive finance arms and leasing models.

Trade implications: Favor capital-light exposure to EV adoption (charging, used-car marketplaces) and selective OEMs with strong ICE cash flow; avoid or hedge high‑cash‑burn EV pure‑plays. Options: use puts to limit downside on high‑beta EV equities and call spreads to lever idiosyncratic recovery events (e.g., UK mandate easing). Cross‑asset: longer‑dated corporate spreads for levered OEMs could widen 50–150bps if margins miss; watch lithium/copper for volatility mean reversion.

Contrarian angles: Consensus sees only demand weakness; missing is the fast expansion of the second‑hand EV market which could restore volumes within 12–24 months and tighten battery‑metal markets. Historical parallel: solar panel oversupply followed by consolidation and steep price recovery — a similar consolidation among battery‑material vendors could create outsized asymmetric opportunities for long positions bought after 20–30% price dislocations.

Key Decisions for Investors

• Establish a 2–3% long position in Stellantis (STLA) within 30 days; set a tactical stop at -12% and a target of +20% over 6–12 months, banking on regulatory relief/credit monetization and UK lobbying tailwinds that should protect margins relative to smaller EV pure-plays.
• Initiate a 1–2% short or buy a 3‑month put spread (30–40% OTM) on Rivian (RIVN) to hedge exposure to aggressive discounting and demand softness; reassess after quarterly deliveries or UK policy updates (30–90 days).
• Prepare a conditional trade on battery materials: if lithium/cobalt spot prices fall >15% within 90 days, deploy 1.5–2% in LIT ETF or long calls on a top-tier miner (e.g., LAC) with 6–12 month expiry to capture mean reversion as structural demand resumes.
• Add a 1–2% long in charging infrastructure/used-car platform exposure (e.g., CHPT) via shares or 6‑month call spreads; thesis: second‑hand EV market growth will raise utilization and monetization within 12–24 months—take profits if the UK review is delayed beyond 6 months or per‑mile tax is implemented without offsets.