Capital Group held a webinar on the challenges and opportunities facing the implementation of electric vehicles. Although the evolution of sales has been very significant in recent years, it seems that the sector faces a number of challenges to its evolution. But there are also many opportunities, even for companies that are not purely automotive.
Electric Vehicle (EV) penetration in Europe has seen a five-fold increase over the past two years, surging from 4% to 20%.
This acceleration has largely been driven by regulations and incentives. European governments have introduced larger purchasing subsidies on EVs as part of a broader stimulus package to rescue the economy from the pandemic. EVs are also on the threshold of profitability due to battery costs falling and further innovation expected to offset higher raw materials costs.
The buyer base is also broadening as prices come down and the charging infrastructure is improving. However, the key to cracking mass market adoption of EV is for the industry to create an EV that is as affordable and convenient to own and operate as traditional internal combustion engine (ICE) vehicles.
China – the biggest auto market globally both for ICEs and EVs – last year sold more than three million EVs which is around half of all EV units sold globally. While China has been trying to become a successful ICE manufacturer for over three decades, foreign brands make up more than 70% of the Chinese market today. In contrast, Chinese brands have more than 80% of the EV market share, driven by companies like BYD and Shanghai Auto as well as start-ups like NIO. Despite only entering the market two years’ ago, Tesla is the only foreign EV brand in China to make significant headway having sold half a million units in 2021.
Despite the considerable progress, challenges persist. There are concerns that the recent shortage in semiconductors may prove to be the first in a series of bottlenecks as EV makers ramp up production. Automakers have responded to the chip shortage by trying to vertically integrate or secure supply via partnerships. Management of the supply chain and ensuring access to the resources needed will be crucial for car companies in the coming years.
As an increasing number of people own EVs, the demand for EV charging points is also likely to outstrip supply. We need to consider the impact of that additional demand on the electrical supply and the grant capacity. As such, governments need to work closely with utilities and auto manufacturers to create a charging network that is fit for purpose. Utilities need to develop a strategic plan to allow and enable greater electricity supply and distribution, as well as the ability for cars to be charged in different places – for example, we need slower charging points in or near home and work, and faster charging points on the road network.
For traditional auto companies, the transition presents unique tensions. ICEs are extremely complex, but in contrast EVs are mechanically simple with just a battery, electric motor, inverter and a one-speed transmission. This means the fixed cost for producing an EV is much lower than an ICE, making it easier to scale. However, EVs do require investment in software and electronic architecture. Traditional auto manufacturers are having to spend a lot of money on building their software expertise. While they have the advantage of the profits and cash flows that are generated from their ICE business, as well as a long history of automobile construction, over time that may become more of a disadvantage due to the complexity of having to invest in both ICEs and EVs.
Opportunities exist particularly for tech companies to partner with manufacturers where quality software will become a differentiating factor. EVs that can offer a really good experience in a connected vehicle could be very strong monetisation opportunities for manufacturers. As such, there is an increased likelihood of companies, like Apple, Alphabet and Sony entering the EV market as they look to provide the software that underpins EVs. However, given the number of car companies, both ICE and EV, this is an industry structure that is both suboptimal and unlikely to change. Therefore, these tech companies, many of which are used to dominating the industry in which they operate, may also find the auto industry less appealing than their core markets.
EVs are on the threshold of profitability, and investors can expect to see a broad range of investment opportunities across many industries from this transformational shift. Despite this momentum, solving the challenges on the road to mass market adoption remain the industry’s key challenge to meet.