From Combustion to Electrification
We are now seeing a global transition in the automotive industry from the internal combustion engine to electric vehicles. The UK is at the forefront of the push towards electrification of road transport. By 2030 it is expected that 64% of all new cars bought by UK consumers will be electric vehicles, rising to 95% by 2040.
The global automotive market is going through a period of fundamental disruption, Business models, customers and suppliers are all in a state of flux as demand and supply moves away from the combustion engine to electrification. If the future EV industry replicates the current size of the automotive industry, it is going to remain one of the most important sectors in the UK contributing more than £15 Billion per year and supporting more than 186,000 full time jobs and being SRI compliant.
What we are now seeing with the first EV buyers is very similar to what we witnessed with similar stages of growth in mobile phones, broadband and air travel, Albeit that each had there own particular growth characteristics. The first group of buyers are often thought of as innovators or early adopters, They have a different socio-economic characteristic to the general population and a different consumer preference (for example an interest in technology or greater concern for the environment) As the typical buyer moves from the early adopters to the wider consumer, this is when the product attains mass market appeal and experiences a growth spurt.
In the UK there is policy pressure to move faster. The government has recently agreed to implement the Committee on Climate Change’s recommendation to have a target of net-zero emissions by 2050. Options to ensure decarbonisation by 2050 that are relevant to the EV market include an earlier end to ICE sales than planned, particularly that all non-zero emission vehicles sold before 2035 should only be used on UK roads up to 2050. Successful implementation of these options may mean EV take-up is much higher and reach 100% by 2040 or before.
With upfront costs still high with the purchasing of EV, this is proving to be a major barrier just now. Costs however are reducing quickly and the total cost of ownership including running costs is getting much closer to or lower than ICESs. As the market expands this will also drive prices down substantially over the next decade.
But it is lower battery costs that are likely to have the biggest impact on the affordability of EVs. The cost of the battery represents up to 40% of the upfront costs of a BEV. Average battery costs have fallen by 85% since 2010 and are expected to continue to drop over the next few years. Falling costs on this scale will change the economics of EV ownership and lead to the acceleration of EV purchases from the mid-2020s. A perfect example is Tesla, In July 2019 Tesla posted record deliveries but lost $408M because its top-selling Model 3s sold for less than what they cost to make. Now Tesla has reduced the cost of car batteries, it can actually profit on those Model 3 sales, its posted straight quarters of profit and is expected to report a 5th this month. The battery seems to be the key player in the success of this industry.