What happens when an industry survives not by producing products consumers desire, but by producing products governments desire? You get what I call a “pet industry” — a sector that is shaped more by political mandates than by market demand. From Europe’s steelmakers to global EV producers, these industries rely on state support to survive, but as political winds shift, their future looks increasingly fragile.
Investors, beware: pets can be expensive to keep. In nature, species evolve through natural selection, or survival of the fittest. But humans learned long ago how to override that process. Through selective breeding, we’ve engineered animals to suit our needs. In this setup, it is the handler — not nature — deciding which traits are “fit.” This is “artificial selection” in a controlled environment.
As I have argued before, consumer selection is to commerce what natural selection is to biology. A species of industry is adapted to the demands of its market via consumer selection. Here, too, we learned how to hijack the evolutionary process. The state, not consumers, decides which traits are “fit” and coerces accordingly. This, too, is artificial selection in a controlled environment.
Whether biological or commercial, artificial selection often leads to maladaptations. Traits that might not survive in the wild are preserved and even encouraged. Over time, the species — or industry — loses its ability to survive in the natural environment and becomes dependent on the one created by its handler. When a scenario like this exists in commerce, companies begin to evolve in ways that make them less competitive and more reliant on government support to survive.
This is the essence of a pet industry: one that has been reshaped by state intervention to the point where it can’t survive without it. A pet industry is not simply protected by regulation; its products and, thus, the firms producing those products have been fundamentally reshaped by state intervention. And like any pet, it survives only as long as its handler stays committed. That puts them — and investors — in a risky position.
The Nature of Pet Industries
The justification for commercial artificial selection usually starts with the idea that consumers are getting it wrong. Perhaps consumers don’t value carbon emissions enough when selecting autos, so the state may intervene. Left alone, the thinking goes, the market would evolve in the wrong direction.
To intervene, the state alters consumer selection by promoting desirable traits and penalizing undesirable traits regardless of the value consumers attach to those traits. The state’s goal is to alter the most fundamental unit of commerce, or what we call a preme: product traits and the industrial processes that produce them. Moreover, the state alters financial selection, which is the commercial equivalent of sexual selection, by subsidizing favored firms and penalizing disfavored firms. Eventually, the industry’s products and processes are no longer aligned with the market’s demands; the industry is instead aligned with the State’s demands. It is then a pet industry dependent on the state as its handler.
I am not opining on whether such interventions are good or bad. We are sure, however, that such interventions are risky. The state is promoting traits that would not be selected on their own. Intervention would, by definition, be unnecessary otherwise. Yet, state handlers are fickle, especially in democracies, and controlling global markets is a notoriously difficult task.
How do Pet Industries Behave
Rather than adapting to market demands, a pet industry relies on the state to adapt the market to its demands. This creates some unusual dynamics. When a pet industry suffers, its leaders blame their handlers (the state) for not controlling the market. Rarely do they blame themselves or even mention consumer demands. Two recent examples illustrate this clearly: Europe’s steel industry and the global auto industry.
European Steel
The European Union has mandated net zero emissions by 2050[1] and, thus, mandated a “low emissions” preme into EU steel. To comply, steelmakers must invest in new technologies, raising costs and making them less competitive in global markets. To control the pet industry’s market, EU states subsidize the EU steel industry and use carbon tariffs to protect the industry.[2]
Despite the EU’s efforts, the EU’s steel industry is in distress.[3] Accordingly, the executive chairman of ArcelorMittal, an EU steel firm, recently argued,
“[T]o maintain a domestic [steel] industry, the combined policy landscape must . . . form a supportive environment that enables European steelmaking to decarbonize and thrive. . .. Intervention is required so that European steel is better protected . . . .”[4] (emphasis added)
Rather than ask the EU to relax its net-zero mandate so his firm can adapt to the market’s demands, ArcelorMittal’s chairman urged for the EU to tighten its control of the market. The pet industry’s handlers listened: soon after Germany’s then-Chancellor Olaf Scholz called for additional subsidies and a direct investment by the state in Thyssenkrupp, a key domestic steel producer.[5]
Global Autos
In the United States, the EPA’s emissions rules mandate that EVs account for 56% of new car sales by 2032.[6] California has plans to altogether ban the sale of gas-powered vehicles by 2035.[7] The European Union has adopted similar mandates.[8] These policies effectively mandate an “electric powertrain” preme for the global auto industry. Meanwhile, the state is heavily subsidizing every facet of the pet industry’s transition to EVs.
Automakers invested heavily to satisfy the state’s demands, but consumer demand hasn’t kept up. EVs are sitting unsold on dealer lots while new and used EV prices have collapsed.[9] As a result, losses in automaker’s EV businesses are enormous and growing, not shrinking, in many cases.[10] Some early-stage producers, including the Swedish battery maker Northvolt, have already gone bankrupt.[11]
Northvolt’s former CEO blamed the failure on “hesitation and questions on the speed of the [EV] transition from carmakers, from policymakers, and from the investment community.”[12] A competitor added, “You will not . . . hav[e] a [EU] battery sector if you let private investors purely take financial decisions not based on political goals.”[13] Neither felt consumer demand was even worth mentioning.
In short, they didn’t blame the market or themselves, they blamed their state handlers. And the handlers agreed. EU officials said further support was necessary to “to ensure Northvolt ‘could be a company that survives this tough insolvency period . . . .’”[14] Otherwise, the handler continues, “a viable competitive situation” is in doubt.[15] Put differently, the state has created a pet industry, and it has a duty to ensure the industry’s survival.
Key Takeaways
State handlers are reluctant to let their pet industries fail. Accordingly, the state’s rationale for aid will adapt to the evolving political landscape. As Holman Jenkins of the Wall Street Journal notes,
“[The justification for interventions propping up the EV investments of US auto makers] went from ‘Americans must buy EVs to save the planet’ to ‘Americans must be prevented from buying cheap, high-quality Chinese EVs to preserve the government-created domestic boondoggle.’”[16]
The political calculus changes, however, when the state’s political handlers are voted out of office. Political newcomers care less about the pet industries of their predecessors. The newcomers prefer to cultivate their own pet industries. Recent examples include the Trump Administration’s attempt to dismantle EV subsidies while creating a crypto currency reserve.[17]
Ultimately, capital withers away without income to nourish it, and ultimate source of income in a natural environment is consumer demand. By definition, the state promotes traits that consumers undervalue — otherwise intervention wouldn’t be necessary. In Germany, for example, EV sales fell 27% in 2024 after consumer subsidies were removed.[18]
Today’s pet industries are in a risky position unless one of two things happens: (a) their original state handlers remain in power or (b) they manage to win over political newcomers. If they fail, they will have to refocus on consumer demands, not the state’s demands. This will be a painful adaptation process for pet industries and, in turn, their investors.
[1] 2050 Long-Term Strategy, European Commission, available at: https://climate.ec.europa.eu/eu-action/climate-strategies-targets/2050-long-term-strategy_en.
[2] See, e.g., Andrii Tarasenko, European Countries Granted €14.6 Bln for Decarbonization of the Steel Sector, GMK Center (Dec. 2024), available at: https://gmk.center/en/infographic/european-countries-granted-e14-6-bln-for-decarbonization-of-the-steel-sector/, and Carbon Border Adjustment Mechanism, European Commission (Jan. 2025), available at: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en.
[3] Annalisa Villa, EU Steel Sector Requests Emergency Summit, Tariffs Amid Import Surge, S&P Global (Dec. 2024), available at: https://www.spglobal.com/commodity-insights/en/news-research/latest-news/metals/120924-eu-steel-sector-requests-emergency-summit-tariffs-amid-import-surge.
[4] Lakshmi Mittal, Europe Must Make a Choice on The Steel Industry, Financial Times (Dec. 2024), available at: https://www.ft.com/content/98fd2771-ef07-4f3f-ab0f-e5bb7e52a588.
[5] Michael Nienaber, Germany’s Scholz Calls for More EU Protection on Steel Imports, Bloomberg (Dec. 2024), available at: https://www.bloomberg.com/news/articles/2024-12-07/germany-s-scholz-calls-for-more-eu-protection-on-steel-imports.
[6] Matthew Daly and Tom Krisher, EPA Issues New Auto Rules Aimed at Cutting Carbon Emissions, Boosting Electric Vehicles and Hybrids, Associated Press (Mar. 2024), available at: https://apnews.com/article/epa-electric-vehicles-emissions-limits-climate-biden-e6d581324af51294048df24269b5d20a.
[7] Laura Klivans and A. Martinez, Biden Administration Approves California Plans to Ban Sale of Gas-Only Vehicles, NPR (Dec. 2024), available at: https://www.npr.org/2024/12/19/nx-s1-5230628/biden-administration-approves-california-plans-to-ban-sale-of-gas-only-vehicles.
[8] Deal Confirms Zero-Emissions Target for New Cars and Vans in 2035, European Parliament (Mar. 2022), available at: https://www.europarl.europa.eu/news/en/press-room/20221024IPR45734/deal-confirms-zero-emissions-target-for-new-cars-and-vans-in-2035.
[9] See, e.g., EV Euphoria is Dead, CNBC (Mar. 2024), available at: https://www.cnbc.com/2024/03/13/ev-euphoria-is-dead-automakers-trumpet-consumer-choice-in-us.html (noting “The available inventory of EVs in the U.S., measured in days’ supply, has ballooned to 136 days, according to Cox. That compares to the overall U.S. industry at a 78 days’ supply of new vehicles.”) and Sean McLain, Used EVs Sell for Bargain Prices Now, Putting Owners and Dealers in a Bind, The Wall Street Journal (Oct. 2024), available at: https://www.wsj.com/business/autos/used-evs-sell-for-bargain-prices-now-putting-owners-and-dealers-in-a-bind-a44e1718.
[10] The Editorial Board, Biden Tosses Rivian a $6 Billion Lifeline, The Wall Street Journal (Nov. 2024), available at: https://www.wsj.com/opinion/biden-tosses-rivian-a-6-billion-lifeline-dfdce139; See also, Ford Q4 2024 Earnings Release (Feb. 5, 2025), available at: https://s201.q4cdn.com/693218008/files/doc_financials/2024/q4/Ford-Q4-2024-Earnings-Press-Release.pdf. (noting that in 2024 revenue at Ford’s EV business fell 35% to $3.9bb and losses rose to $5.1bb, or a stunning 132% of revenue, and Ford expects another $5.0-5.5bb of EV losses in 2025.).
[11] See, e.g., Northvolt Goes from Europe Battery Promise to Crisis, Reuters (Nov. 2024), available at: https://www.reuters.com/technology/northvolt-goes-europe-battery-promise-crisis-2024-11-21/.
[12] Richard Milne et. al., Northvolt Chief Warns of Faltering Green Transition After Battery Maker’s Bankruptcy, Financial Times (Nov. 2024), available at: https://www.ft.com/content/773f143b-ea31-42fd-ba4d-e4b20f4050c3.
[13] Richard Maline, Boss of Bankrupt Northvolt Urges Europe to Invest in Homegrown Battery Sector, Financial Times (Mar. 2025), available at: https://www.ft.com/content/0d999693-c6a1-441b-8718-6eff07b9cab6.
[14] Kate Abnett, EU Support Could Help Northvolt Attract New Owner, Sweden Says, Reuters (Mar. 2025), available at: https://www.reuters.com/business/autos-transportation/eu-support-could-help-northvolt-attract-new-owner-sweden-says-2025-03-17/.
[15] Id.
[16] Holman Jenkins, The Global EV Calamity, The Wall Street Journal (Jan. 2025), available at: https://www.wsj.com/opinion/the-global-ev-calamity-5a5d9f74?page=1.
[17] See, e.g., Ryan Felton, House Bill Would Scrap EV Tax Credit, The Wall Street Journal (May 2025), available at: https://www.wsj.com/business/autos/house-bill-would-scrap-ev-tax-credit-00245f9d, and Amrith Ramkumar, Trump Signs Executive Order Officially Establishing Crypto Reserve, The Wall Street Journal (Mar. 2025), available at: https://www.wsj.com/finance/currencies/trump-signs-executive-order-officially-establishing-crypto-reserve-b90af540?mod=Searchresults_pos1&page=1.
[18] Kana Inagaki and Ian Johnston, European Carmakers Braced for Tough 2025 Despite ‘Firework’ of Launches, Financial Times (Jan. 2025), available at: https://www.ft.com/content/c6423ebf-3b26-4445-aef0-1ed9d25ddb99?FTCamp=engage%2FCAPI%2Fapp%2FChannel_Refinitiv%2F%2FB2B.
