Automobile Market Charging Up for Major Change

Automobile Market Charging Up for Major Change

Nearly seven million plug-in electric passenger vehicles were sold worldwide between 2015 and 2019 – and this is forecasted to exceed 40 million plug-in electric vehicles by 2025, according to industry and manufacturer sources. There are multiple factors driving this trend including new launches from automobile manufacturers (OEMs), government subsidies for new energy vehicles, regulatory proclamations, and changing consumer preferences.

In this article, we examine the growing trend of electrification in passenger automobiles, OEM announcements, and government externalities such as incentives and regulation and their potential impact on the market.

(Re)Electrifying the Fleet

The history of electric passenger vehicles can be traced to late nineteenth-century electric carriages and wagons demonstrated in the UK, France and the US. The US Department of Energy states that at the turn of the twentieth century, one third of all vehicles on public roads were electric. This popularity held until the 1908 release of the Ford Model T, which sold for substantially less than comparable electric vehicles of the era. Thus there followed a rapid decline of electric and steam vehicles in favor of their internal combustion engine counterparts for the subsequent 100 years.

This decline is now showing signs of reversing with the increasing popularity of hybrid electric and battery electric vehicles, and the expanding array of derivative electrified propulsion. Concurrent with this trend toward re-electrification are three other trends in passenger transportation in the form of connectivity (connected cars), autonomy/ADAS (advanced driver-assistance systems), and sharing (mobility in its many forms).

There is an inherent chicken-egg dynamic between consumer demand for electric vehicles, and the availability and price of the vehicles developed by automotive manufacturers. The General Motors EV1 electric car that launched in 1996 was positively received, but discontinued in 1999 due to high production costs (a result of limited volumes), low range, and lack of widespread charging infrastructure. Twenty years later, the market now counts more than 110 auto manufacturers shipping battery electric and plug-in hybrid vehicles globally.

The largest OEMs have announced ambitious goals for the electrification of their vehicle offerings. Volkswagen Group – the largest OEM parent company by vehicle shipments of its component marques VW, Porsche, Audi, Skoda, Seat, Lamborghini and others – has targeted sales of 1.5 million electric vehicles by 2025, and recently began shipments of the ID.3 subcompact car, the first vehicle to leverage the company’s new Modular Electric Drive Matrix (MEB) architecture.

Toyota Group has plans to ship 5.5 million electric vehicles by 2025, and has stated that every model in its portfolio of Toyota and Lexus brands will have an electric and/or hybrid-electric version. General Motors is more conservative, estimating that it will sell one million electric vehicles per year by 2025. Chinese manufacturers are more aggressive with the development of ‘new energy vehicles,’ with SAIC Motor Corporation planning to have nearly 100 models of new energy vehicles, including battery electric and hydrogen fuel cell vehicles, on the market by 2025.

Consumer Appetite Growing

In the most recent 451 Research Q3 2020 Population Representative survey, 2.4% of all US respondents indicated that they currently drive a battery electric vehicle, up from 0.6% in the same period in 2019. Of those respondents that plan to purchase or lease a vehicle in the next 24 months, 8.2% indicated that they would be purchasing or leasing a battery electric vehicle.

When asked the most important reason for purchasing a new vehicle, 13.4% of respondents indicated they wanted a vehicle with better technology integration, and 12.6% responded they were buying a new vehicle to be more environmentally friendly. In China, new energy vehicle sales grew 67.7% in September 2020 alone.

Policy Shapes Purchasing Behavior

The US has a one-time federal tax credit for the purchase of a plug-in electric vehicle with a cap of the total number of vehicles, incentivizing purchases early in a calendar year before the quota has been met. The $7,500 tax credit has been the source of some marketing controversy because some OEMs incorporated the credit into their total price calculator when presenting the ultimate purchase price of a vehicle.

This federal tax credit is in addition to nearly 100 separate state-level incentives and regulations ranging from use of high-occupancy (HOV) lanes, to rebates, to dedicated parking places. California’s governor also recently pledged to ban all sales of new gasoline-powered vehicles by 2035.

China has set a target for new energy vehicles to comprise a quarter of new vehicle sales by 2025. To incentivize this behavior, it has implemented sales tax exemptions on NEV purchases until the end of 2022, as well as extended previous subsidies on new vehicles. The subsidy, originally introduced in 2009 as the Ten Cities, Thousand Vehicles project, now only applies to passenger cars that retail for less than ¥300,000, or just over $40,000.

The subsidies were originally scheduled to expire in 2020; however, in light of the impact of the COVID crisis on the passenger automobile sector, the Chinese Ministry of Finance instead chose to extend, but gradually twilight, the subsidies by 10% per year through 2022, at the end of which they are currently scheduled to expire. The China Standards 2035 plan reportedly is highly dedicated to not only the adoption of NEVs, but also to strengthening the already strong automotive manufacturing sector in China, in an effort to make it the world leader in electric vehicle production.

In April 2019, the European Union announced two goals to reduce vehicle CO2 emissions by 2030 that would carry substantial penalties if exceeded. This creates a considerable challenge in radically shifting OEM and Tier-1 R&D efforts to alternate propulsion, and away from internal combustion engines (ICE) and diesel. Even plug-in hybrids, frequently a compromise solution for OEMs, have recently come under fire for having the same or worse emissions as ICE vehicles, creating even greater pressure to go full battery electric.

The EU has sanctioned ’emissions pools.’ These are essentially partnerships between more- and less-emitting companies (whether the average emissions of all of the vehicles they ship in a given year are above or below the emissions target set by the EU) to pool their respective emissions, and average them to levels underneath the thresholds dictated by the EU, which may mitigate the short-term pressure of accelerated vehicle development and launches.

The combination of government emissions regulations, consumer incentives and sentiment, and the launch of waves of new electric vehicles will have wide-ranging implications when it comes to the demand for battery components, environmental impact mitigation of decommissioned batteries, battery swaps or charging procedures, and the impact of tens of millions of these new energy consumers on the existing global electric infrastructure.

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