Economics of BEVs don’t stack up

2 July 2019

By Dr. Sarah Walkley, Chief Research Officer

Electrification will not only change the nature of the cars on the road, it will result in a major shake-up of the automotive industry, according to Tony Whitehorn, the former President and CEO of Hyundai UK. Gaining access to battery electric vehicle (BEV) technology was a key driver in FCA’s (Fiat Chrysler Automobiles) bid for Renault. And while that merger may be off the cards – for now at least – it is unlikely to be an isolated example. OEMs will need to join forces with each other and technology suppliers to make the economics of BEV development work.

It may appear to the outside world as if OEMs are ′dragging their heels’ on the development of electric cars. However, the cost of development is a major inhibitor, Whitehorn told the Autovista Group Daily Brief. If OEMs saw a clear opportunity to bring BEVs to the market profitably, then the pace of activity in the market would begin to pick up significantly. But for now, only a handful of OEMs can afford the scale of investment needed; the remainder will need to merge or join consortia of manufacturers to get to the size and scale required to invest in BEV development.

Getting the fundamentals right

BEVs cannot be built on existing model floorplans. While this offers significant opportunities to redesign models; the smaller engine capacity of a BEV means that much more of the floorplan can be given over to interior passenger space, making the vehicle ′much more liveable’, according to Whitehorn. However, such a fundamental redesign comes at a cost.

As does the overhaul of production facilities to build new models and engines. Without a clear sense of the outlook for hydrogen fuel cell vehicles, the motivation to make that change is lacking in some quarters. Historically, any upgrade to production facilities has been amortised over a 20 year lifetime. Hydrogen is not currently a viable technology, but if it were to advance significantly over the next 10 years, then OEMs could be facing another massive overhaul of product before really seeing the full benefit of the first investment. Faced with that choice, then the tendency is to wait and see how the market pans out.

Other senior figures – including Whitehorn and Thomas Ulbrich, Member of the Board of Management of Volkswagen – have been very clear that hydrogen will not be viable in the foreseeable future. It is also impossible to invest in the infrastructure to support both BEV and hydrogen development in parallel, so whatever the business challenges, the focus has to clearly be on BEV development.

Speaking at the recent FT Future of the Car Summit, Ulbrich outlined the company’s ambitious plans for 70 new BEV models over the next decade. This is only achievable because the company can deploy the same floorplan across multiple models and multiple brands. But it is also necessary if the company is to reach its target of 1 million BEVs by 2025 and is able to start to generate economies of scale. Ulbrich commented that the company would also consider licensing its MEB platform to smaller OEMs to reach the necessary scale for BEVs to become profitable.

Powering developments

Volvo is another company with ambitious plans, underpinned by the investment it gets from Geely. CEO Håkan Samuelsson told delegates at the FT event that, by 2025, 50% of all Volvos sold will be electric; the rest will be hybrid. The company has signed 10 year deals with CATL and LG Chem to secure its supply of batteries and to be able to meet its volume targets. With battery costs expected to fall in coming years, Samuelsson was quizzed as to whether signing a deal now would mean the company would end up paying over the odds for battery units in the future. However, he predicted that by 2025, the company would need as many batteries as are currently consumed by the entire automotive industry today. And when you factor in that other OEMs are increasing their demand by the same amount, security of supply becomes a much more important consideration than price.

The deals may be a much wiser move on Volvo’s part than they currently appear. It is also looking increasingly unlikely that battery costs will come down as far and as fast as many have predicted. Demand is already outstripping supply and the situation is only likely to get worse. Batteries are made of a number of precious metals; they are ′precious’ because they are in scarce supply, Whitehorn points out. High demand for scarce elements quickly translates to escalating costs. Another reason why the cost equation of BEVs does not stack up for OEMs at the moment.

Getting clever with finance

Whitehorn commented that the industry has a great track record of making a £30,000 (€33,500) vehicle accessible to consumers through clever finance packages. Instead of waiting for BEVs to achieve price parity with traditional internal combustion engine (ICE) cars, they need to tap into that creativity and find new ways to package BEVs. And this is where new mobility models come in.

Traditional ICE cars have been sold on differences in performance and driving experience. The BEV models on the market each offer similar levels of acceleration and driving dynamics. These factors can no longer be a differentiator. But neither do they need to be. Performance is less important to the car user of the future, Whitehorn points out. As business models shift from ownership to usage, users are less likely to choose a vehicle based on how it drives, they will be looking to brands for the service that they offer. Ultimately, that is why BEVs are the ideal shared vehicle. OEMs will have to invest a lot more in building connectivity features and service offerings that reflect their brand values.

′OEMs will absolutely strive to keep their brand at the forefront of consumers’ minds,’ Whitehorn commented, ′because a premium brand has always translated to better margins and increased profit.’ But how that brand value manifests itself will have to change and you cannot blame the industry for sinking into a ′preservation pit’, he concluded. The automotive sector has always been ′a great place to make money. They have been selling a commodity, but it happens to be a very expensive one and one that everyone wants. And from a profit perspective, it makes no sense to change from that.’

With emissions legislation only set to get tougher, making the economics of BEVs stack up is a challenge that OEMs will continue to have to grapple with. The solution, Whitehorn predicts, is greater consolidation, though it may come from some unusual directions. The industry should prepare itself for tie-ups between OEMs and technology players to capitalise on the opportunities in connected services.