Electric Cars Boost From Rules Curbing Conventional Ones.
“Battery costs remain very high. Battery range remains too small, and batteries are still too heavy”
Car manufacturers are suddenly accelerating plans to build electric cars as the realization dawns that tightening rules on traditional engines will make them uncompetitive quicker than expected.
During the transition though, auto manufacturers’ profits will take a huge hit.
That’s the conclusion of a report by investment banker Morgan Stanley, which has revised its estimate for electric car sales up to between 10 and 15% of the global market by 2025, more than three times the current average of expectations.
“Although many questions over EVs remain, we believe it is the sharply rising cost of regulatory compliance on existing internal combustion engines (ICE) that is pushing (manufacturers) to change their strategy towards EVs, as much as improvements in battery technology,” Morgan Stanley analyst Harald Hendrikse said in a report.
The report said big manufacturers like Volkswagen and Daimler’s Mercedes Benz have recently revealed more ambitious plans for building electric cars, while BMW, General Motors and even Toyota, seemingly eschewing battery only technology for hybrids and fuel cells, are turning to battery power.
“As more (manufacturers) commit to launching more EVs, accessing more consumers, we think EV penetration forecasts could rise to potentially 10 to 15% by 2025, more than three times current forecasts,” Hendrikse said.
The potential success of battery power though is still clouded by doubts, according to Hendrikse.
“Battery costs remain very high. Battery range remains too small, and batteries are still too heavy. Battery charging infrastructure has not been sorted out in many countries. Are EVs actually environmentally friendly given through-life cost and environmental impact?”
“And, consumer demand seems to have been very limited for most EVs launched to date – presumably excluding Tesla. Despite this, we now have a situation where some of the largest (manufacturers) in the world are investing heavily in this technology, and setting aggressive targets for their take-up,” Hendrikse said.
At the Paris Car Show in October Volkswagen and Mercedes showed new battery-powered concept cars, the VW I.D. and Mercedes Generation EQ, which will be launched within 5 years. Other electric vehicles on the launchpad also include the Audi E-tron and Porsche Mission E. BMW has launched its “i” brand cars and is heavy into plugin hybrids.
And leading the way will be the Chevrolet Bolt, with over 200 miles of range and costing under $40,000. Korea’s Hyundai and Kia are also to the fore with all forms of alternative powertrains, the Renault-Nissan alliance and Ford.
“We do not think we can continue to ignore the change in strategy – it changes almost 100 years of automotive development, with significant implications for the current global automotive installed base, its employees, and also the global automotive supply chain,” Hendrikse said.
VW has said its own-name brand would be selling one million electric vehicles a year by 2025, and the whole group targets 30 new EV models by then with annual sales of between two and three million.
In a previous report this year Morgan Stanley pointed out that VW’s target implies EVs will make up around 25% of its sales in 2025. Industry estimates then centred-around just 4%.
Europe has already implemented rues for average vehicle fleet emissions of 130 grams per kilometer of carbon dioxide (CO2) – the equivalent of around 43 miles per U.S. gallon. This will tighten to 95 g/km by 2021 or 57.4 miles per U.S. gallon. The U.S. requires a less aggressive 54.5 mpg by 2025.
Currently, official E.U. fuel economy figures are shockingly inaccurate. The rules allow carmakers to test cars on computers, resulting in claims for economy often more than 30% off target in on-the-road conditions. Next year, so-called “real-world” rules will force automakers to get closer to the truth, and that will entail yet more heavy spending on R&D, and raise the cost of gasoline and diesel engines.
European carmakers face even harsher but as yet unspecified CO2 rules by 2025, and recently some German politicians threatened to ban all internal combustion engine cars by 2030.
As the switch from ICE power to electric gathers pace, so will auto manufacturers’ profits take a hit.
“…. Our group auto EBIT (earnings before interest and tax) margins turn negative in the mid-2020s as a result of ICE price deflation and costs of EV development. Continued deterioration in the ICE business due to lower volumes from EV cannibalization and lower prices offsets the improving EV profitability after 2025, despite our cost restructuring assumptions,” Hendrikse said.
So are there any diversion signs ahead for the vehicle makers, which might signpost a future without this government regulation-induced junking of their traditional profit makers?
Well, an incoming Trump administration might dilute the U.S. fuel consumption requirements for 2025. Perhaps new governments in Germany and France next year might bring in new populist regimes and similarly change the rules. But that is clutching at straws, and the industry around the world is cranking up for the electric revolution.
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