MARKET

PROSPECTS OF
ELECTRIC
PASSENGER
VEHICLES

Electric vehicles are one important pillar of

strategies to reduce GHG emissions from
transport in the long run.

Of the major industries that must adapt and reconfigure

to meet present requirements for sustainable
development, vehicle manufacturing is one of the more
significant.
Market prospects of electric passenger vehicles

Market prospects of
electric passenger
vehicles
E L E C T R I C V E H I C L E S A R E O N E I M P O RTA N T P I L L A R O F
S T R AT E G I E S T O R E D U C E G H G E M I SS I O N S F R O M
T R A N S P O RT I N T H E LO N G R U N .

INTRODUCTION
According to the United Nations Intergovernmental Panel on Climate Change (UN
IPCC), “warming of the climate system is indisputable” and “most of the observed
increase in globally averaged temperatures since the mid-20th century is very likely
due to the observed increase in greenhouse gas (GHG) concentrations”. To limit the
expected future increase of temperature to a maximum of 2°C above the
preindustrial level and avoid irreversible effects, it is necessary to dramatically
decrease GHG emissions from industrialized countries and furthermore to slowdown
emissions from developing nations.

Transport constitutes a significant portion of carbon dioxide (CO2) and therefore

GHG emissions.

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 Market prospects of electric passenger vehicles
Emissions from pollutants are decoupling from a continuously increasing mileage
for the most part due to the ongoing introduction of emission after treatment
systems for vehicles. In contrast, for CO2 emissions there is no clear reversal of
trend observable to date, making it necessary to find solutions for lowering
emissions in the future.

Electric vehicles are one important pillar of strategies to reduce GHG emissions
from transport in the long run. At the local level, they do not emit any pollutants
and in combination with electricity from renewable energy sources they allow
reaching an emission level close to zero even on a well-to-wheel (WTW) basis.

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Market prospects of electric passenger vehicles

THENICAL ASPECTS
BATTERIES AND FUEL CELLS
Key factor for the success of electric vehicles is the technical development of
electric components and batteries and fuel cells. Production costs for high-energy
lithium-ion batteries for vehicles are currently estimated at about $1,000/kWh.
Recent assessments of future costs, considering materials needed and their
chemicals as well as physical properties, conclude that approximately $200–
300/kWh could be a realistic value for mass production volumes. Potential for cost
reduction mainly comes from application of improved materials for electrodes and
conducting salts, optimization of production processes, and higher quantities of raw
materials and pre-products being ordered (economies of scale).

For fuel cells, while decreasing platinum loading and increasing power density
already have contributed to production cost reductions, for achieving a cost level
acceptable for introducing fuel cell vehicles into the market further efforts are
required. This also includes improvements of production processes and upscaling of
production volumes.

DEFINITION OF VEHICLES
It is important to realize that electric vehicles compete with conventional vehicles
dominating the market today. For the upcoming years, advancements of
conventional ICE engines and vehicle technologies are to be expected and future
market prospects of electric vehicles always must be looked at in view of this
general evolution of competing technologies.

In 1900 approximately 40% of all new road vehicles sold in the

United States were powered electrically. Another 40% relied on
steam propulsion and only 20% were based on gasoline fuel.

Furthermore, even within the broad category of electric vehicles, there are
numerous concepts available in principle and most of them are competing with
each other: depending on the daily needs of customers, a plug-in hybrid vehicle
(PHEV) or extended range electric vehicle (EREV) may be sufficient whereas for
others a full battery electric vehicle (BEV) or fuel cell hybrid electric vehicle (FCHEV)
might be a better choice.

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 Market prospects of electric passenger vehicles

ECONOMIES OF SCALE EXPLAINED

Economies of scale is the competitive advantage that large entities have over
smaller ones. The larger the business, non-profit, or government, the lower its per-
unit costs. It can spread fixed costs, like administration, over more units of
production.

Types of Economies of Scale

There are two main types of economies of scale: internal and external. Internal
economies are controllable by management because they are internal to the
company. External economies depend upon external factors. These factors include
the industry, geographic location, or government.

Internal Economies of Scale

Internal economies are a result of the sheer size of the company. It doesn't matter
what industry it's in or market it sells to. For example, large companies have the
ability to buy in bulk. This lowers the cost per unit of the materials they need to
make their products. They can use the savings to increase profits. Or, they can pass
the savings to consumers and compete on price. There are five main types of
internal economies of scale.

Technical economies of scale result from efficiencies in the production process itself.
Manufacturing costs fall 70-90 percent every time the business doubles its output.
Larger companies can take advantage of more efficient equipment.

For example, data mining software allows the firm to target profitable market
niches. Large shipping companies cut costs by using super-tankers. They can use
post-Panamax ships that carry as many as 16 trains. Finally, large companies
achieve technical economies of scale because they learn by doing. They’re far
ahead of their smaller competition on the learning curve.

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Market prospects of electric passenger vehicles
Monopsony power is when a company buys so much of a product that it can reduce
its per unit costs. For example, Wal-Mart's "everyday low prices" are due to its huge
buying power.

Managerial economies of scale occur when large firms can afford specialists. They
more effectively manage particular areas of the company. For example, a seasoned
sales executive has the skill and experience to get the big orders. They demand a
high salary, but they're worth it.

Financial economies of scale mean the company has cheaper access to capital. A
larger company can get funded from the stock market with an initial public offering.
Big firms have higher credit ratings. As a result, they benefit from lower interest
rates on their bonds.

Network economies of scale occur primarily in online businesses. It costs almost

nothing to support each additional customer with existing infrastructure. So, any
revenue from the new customer is all profit for the business. A great example is
eBay.

External Economies of Scale

A company has external economies of scale if its size creates preferential
treatment. That's most often occurs with governments. For example, a state often
reduces taxes to attract the companies that provide the most jobs. Big real estate
developers convince cities to build roads to support their buildings. This saves the
developers from paying those costs. Large companies can also take advantage of
joint research with universities. This lowers research expenses for these companies.

Small companies don't have the leverage to benefit from external economies of
scale. But they can band together. They can cluster similar businesses in a small
area. That allows them to take advantage of geographic economies of scale. For
example, artist lofts, galleries, and restaurants benefit by being together in a
downtown art district.

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 Market prospects of electric passenger vehicles

RELEVANT STAKEHOLDERS
Following the consideration of technical aspects, key stakeholders involved
(customers, vehicle manufacturers, and politics) as well as their possible behavior is
discussed under this heading.

CUSTOMERS
Research indicates that vehicle purchase decision involves a high cognitive effort.
Vehicle size, safety, and price are ranking at top priority of the most important
criteria for customers. Environmental issues are often also considered important,
however, at almost no willingness-to-pay an additional price. For electric vehicles,
many customers today state that they would be willing to buy them, especially with
respect to their image of clean, quiet, and innovative vehicles. However, in
particular for BEVs these statements have to be taken with a grain of salt. Today’s
general expectation of most customers is to have an all-purpose car to be used for
short-distance trips as well as longer trips, for example for annual vacation. But
BEVs are not suitable for meeting these expectations as this would require
enormous amounts of battery capacity to be built into vehicles at very high costs.
On the other hand, analysis shows that daily driving range of a majority of
customers is as low as ∼40 km in Europe and 60 km in the United States. Therefore,
vehicles with a maximum driving range of 100 km would be sufficient for most
customers for daily commuting, even when considering challenging climate

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Market prospects of electric passenger vehicles
conditions with application of heating or air conditioning systems requiring
additional energy. This would allow limiting the daily amount of energy capacity
needed by a vehicle and therefore the size and costs of the necessary battery for
BEVs. Yet, it would imply a dramatic change in customer’s expectations and the
way we use our vehicles.

Less demanding with regard to a change in customer behavior are ideas that are
based on a network of switch stations for batteries for backup purposes when
regular charging is not an option. Another bridging function could be fulfilled by
vehicle concepts combining a battery as a primary source of energy to the electric
motor with an ICE or fuel cell as a range extender to provide additional energy and
to charge the battery when going for longer trips.

VEHICLE MANUFACTURERS
Vehicle manufacturers ensure that there is a selection of different variants of
vehicles available for customers to choose from. An important objective of their
business strategy is maximization of profits. Changing the structure of vehicle
supply and introducing new vehicle technologies may implicate risks for
manufacturers. Investment in research and development (R&D) as well as new
production facilities have to be made and a shift of revenues, for example, from
mechanical engineering toward chemical engineering for batteries and fuel cells,
may occur. Nevertheless, introduction of new technologies might get inevitable for
political reasons or changes in customer demand. In order to minimize risks, vehicle
manufacturers are likely to prefer an evolutionary shift of vehicle technologies
rather than a revolutionary.

Introducing innovative technologies sometimes requires accepting lower or even

negative profit margins for manufacturers for a limited period of time. High initial
investments in R&D as well as production facilities cannot be passed on to
customers in full as otherwise the price of the new technology would be too high for
a significant number of customers deciding to purchase it. After some time has
passed, increasing production volumes and associated learning curve effects result
in lower production costs. This situation finally allows increasing profit margins
while maintaining reasonable prices for customers. An example for such an
approach is the Toyota Prius hybrid car, which supposedly did not contribute to the
company’s earnings until the launch of the third generation of the vehicle.

POLITICS
National as well as local regulations may significantly influence market prospects of
vehicle technologies and fuels. Financial subsidies for specific technologies as well
as penalties for others directly intervene with market development. Also changes of
the taxation structure, for example, by introducing a CO2 component into annual
circulation tax for cars, might have a significant impact on customer purchase
decisions. Manufacturer’s actions can be affected by imposing legislative

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 Market prospects of electric passenger vehicles
regulations, for example, by introducing emission levels for new vehicles, or by
introducing financial instruments, for example, when funding private research
initiatives.

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Market prospects of electric passenger vehicles

THE GLOBAL
ELETRIC VEHICLE
MARKET
Last year, for the first time, global sales of new electric vehicles (EVs)
passed a million units (Exhibit 1), according to McKinsey’s Electric Vehicle Index.
Under the current growth trajectory, EV producers could almost quadruple that
achievement by 2020, moving 4.5 million units, around 5 percent of the overall
global light-vehicle market.

"The development is regionally very different at the moment –

one cannot speak of a uniform global E-car market"
Nicolai Müller

Pure electric vehicles (BEVs) currently make up 66 percent of the global EV market.
BEV sales are growing faster than those of plug-in hybrid vehicles (PHEV). However,
specific markets have very different powertrain preferences, which are influenced
by regulatory actions, customer choice, and the availability of specific models.

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Market prospects of electric passenger vehicles

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Market prospects of electric passenger vehicles
China solidifi es its leadership position in EV sales
The Chinese market expanded by 72 percent over the previous year in 2017,
solidifying China’s leadership position in EV sales. The country now has a larger EV
market—primarily BEVs—than Europe and the United States combined. With a sales
share of around 94 percent, domestic OEMs currently dominate the Chinese EV
market.

In absolute terms, China’s EV-sales performance is quite remarkable. Yet the

adoption rate represents only 2 percent on a national level—a limited number of
large cities (such as Beijing, Hangzhou, Shanghai, Shenzhen, and Tianjin) account
for a majority of EV sales. Nonetheless, China’s positive market performance helped
put the country in a strong, well-balanced position in overall EVI rankings (Exhibit
2): it was outperformed only by Norway in the EVI market score and reinforced its
leading position—ahead of Japan, Germany, and the United States—in the industry
EVI analysis (the “supply” side of the equation). However, given today’s EV-battery
economics, leadership in EVI scores comes at a price: China and Norway have some
of the world’s highest levels of spending on consumer and supply-side subsidies, at
the taxpayers’ expense.

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 Market prospects of electric passenger vehicles

Germany and Norway led growth in the European

Union
Europe’s EV market grew by nearly 40 percent from 2016 to 2017, albeit from a
small sales base. A variety of factors contributed, such as the ongoing headwinds
for diesel technology and increasing customer interest in EVs. Much of the regional
momentum emerged in Germany, where the EV market more than doubled. That
country is now Europe’s second-largest EV market, outperformed only by Norway.

Norway’s EV sales-penetration rate reached 32 percent in 2017, and by December

every second passenger car sold there was an EV. Norway stands largely alone in
its mass-market embrace of electric vehicles, so it provides a real-world picture of
future EV sales proportions that developed markets could experience over the next
five to ten years. Exhibit 4 shows the four stages of a disruptive trend. Having
reached a critical mass of EVs, Norway is clearly ahead of other countries—the EV
disruption is inevitable. Most other countries are still in the first stage, except for
China and Sweden, which have already advanced to the second: disruption is
somewhat clearer, with EVs emerging as a validated model.

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Market prospects of electric passenger vehicles

India
India is new to the EVI this year. Both EV market acceptance and EV industry
dynamics are at an early stage: the EV-adoption rate is less than 1 percent and
domestic OEMs are just starting to launch EV models. Although the government
rolled out a new tax policy to encourage EV adoption, a clear strategic road map is
still missing. Demand comes mainly from commercial owners and the public sector,
and the country has almost no charging infrastructure. Since India’s carbon-dioxide
levels from electricity generation are among the world’s highest, it also needs more
renewable-energy sources for its EVs to achieve true “well-to-wheel” zero-emission
status.

New models (and regulations) to stoke markets

Global automakers will reportedly launch approximately 340 BEV and PHEV models
in the next three years, significantly reducing supply as a barrier to further market
uptake. The OEMs’ increased attention mainly reflects tougher emissions targets,
especially in China and Europe, and announcements that several countries, as well
as cities around the world, will set end dates for the sale of diesel- and gasoline-
powered vehicles. Norway, for example, wants BEVs to account for 100 percent of
its new-car sales by 2025. California, France, and the United Kingdom have
proclaimed that they will end sales of ICEs by 2040.

China too seems to be developing a long-term plan to abandon vehicles powered by

fossil fuels: a new EV policy, which will become effective by 2019, requires
automakers to comply with a mandatory EV credit target. As a result, several
international automakers announced new joint ventures with domestic Chinese
brands to develop and produce numerous EVs together.

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 Market prospects of electric passenger vehicles

Electric vehicles have made meaningful progress in several

regions and countries as they passed the milestone of one
million sales, in 2017. With demand rising and manufacturers
ramping up production capacities, the market will continue to
grow. Looking forward, the confluence of government action,
greater attention by OEMs, rising customer acceptance, and
ingenious suppliers could accelerate the segment’s
profitability until the early to mid-2020s.

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