Article

Winning & Losing in Emerging EV Wars

Posted September 20, 2022 | Industry | Amplify
EV wars
In this issue:

 AMPLIFY  VOL. 35, NO. 8
  
ABSTRACT

Cutter Fellow Robert Charette takes an in-depth look at the electric vehicle (EV) market in the next decade. Currently, automakers are focused on dethroning Tesla, which disrupted the auto ecosystem with its skateboard battery and advanced autonomous driving capabilities. Where charging will take place and how the world can produce enough EV batteries are major considerations in this initial skirmish. But the real battle begins around 2025, when EV makers shift their focus to production efficiencies and lifecycle sustainability as they battle against ICE vehicles for market share. Around 2030, the winners will emerge into a world of new technological competitive threats.

 

The “Age of Electric Vehicles” is finally upon us. Interest in electric vehicles (EVs) is at an all-time high. Surveys indicate that more than half of interested car buyers globally are seriously considering purchasing a battery electric (BEV), plug-in hybrid electric (PHEV), or hybrid electric (HEV) as their next vehicle. Even in the US, where the appeal of owning EVs has been lukewarm at best, interest in buying an electric-only vehicle has more than tripled, rising from 4% in 2020 to 14% in 2022.1

One obvious reason is the belief that recent elevated gasoline prices represent a long-term norm. Perhaps more motivating is the fact that automakers other than Tesla are beginning to deliver zero- or near-zero-emission vehicles that offer compelling performance outside the luxury, high-performance sports car market. Ford Motor Company’s BEV version of its F-150 pickup truck that began delivery this May is a case in point. Priced similarly to its F-150 internal combustion engine (ICE) version, the best-selling pickup in the US for 40 years, the F-150 Lightning represents a solidly mainstream customer offering. Ford quickly sold out its initial production run of 200,000 and now plans to produce at least 150,000 Lightnings annually by 2024.

A tidal wave of new EV models will soon be hitting the market, offering consumers a wide range of choices. At least 30 legacy automakers along with EV startups have committed more than US $500 billion over the next decade to building new EV and battery factories for millions of new vehicles.2 By 2025, around 100 new BEV and PHEV models spanning all automotive market segments will be available for sale in the US, along with scores of HEV models. Hundreds of EV models will be introduced by 2030, along with an increasing number of hydrogen fuel cell vehicle (FCV) models.

With so many EV models becoming available, and ICE vehicles still preferred over EVs, the question is whether the market can support them all. EVs have much slimmer profit margins than their ICE counterparts, making low-volume EV production runs unprofitable. Attaining production efficiencies and large-volume sales are critically important for an EV model’s survivability. With EV sales in 2025 projected to be around 3.2 million for BEVs and PHEVs in the US and about six times larger in the rest of the world, clearly not every EV model introduced will be a winner.3

Ford CEO Jim Farley says that given the immense capital investment needed to produce EVs, the ever-increasing costs of the basic materials required, and the need for a return on the massive investments being made, he expects a major consolidation of legacy automakers in the next few years.4 “The old OEMs [original equipment manufacturers] absolutely will get consolidated,” he says. “There’ll be some big winners. Some people who transition, some won’t.” Farley expects many auto suppliers and EV-only startups to begin falling by the wayside as well, as they have no ICE vehicle revenue to fall back on if their offerings stumble.

Some of what Farley predicted is already occurring. In the first quarter of 2022, 35 deals involving $6.4 billion in US automotive supplier-related M&As were announced.5 In June of this year, EV startup Electric Last Mile Solutions declared bankruptcy because it could not secure the investment needed to complete production of its preorder for 45,000 EV delivery vans. Last year, the EV startup was valued at over $1.4 billion.6 Another startup, Canoo, itself valued at $2.4 billion in 2020, says it is barely holding on.7 How many of the more than 80 EV startups will survive to 2025 is an open question. However, each one that fails undercuts future investment support for the remainder that manage to carry on.

Even Ford is experiencing EV-related punishment. Introduced in late 2020, its electric Mustang Mach-E is no longer profitable because of the rising costs of raw materials, even after Ford raised its price. Paradoxically, it has become a highly popular model, forcing Ford to use it as an unintended EV loss leader. Other EV makers have had to raise their prices, too, to protect profitability.

The effect of EV price increases on customer interest is uncertain. Current US EV buyers are generally more affluent than average American wage earners, but for EVs to evolve into a mass-market purchase, they’ll need to be priced below the average EV price tag of $65,000 and closer to the ICE vehicle average of $46,500.8 Even with high petrol prices, ICE vehicles are still more affordable to a larger and more diverse demographic of car buyers than EVs.

Inflation is only one of the many risks and uncertainties legacy and emerging automakers making the transition to EVs face. The effects on the auto supply chain from the ongoing computer chip shortage and the Ukraine conflict are two in a long list that characterizes a dynamic and highly competitive EV risk environment. Making it even more fraught is that many of the risks, like the ability of the electric grid to support EV charging, are outside the direct control of the auto industry.

Winning, or more likely, not losing, in this complex risk ecology will require an automaker to survive the flood tide of EV introductions over the next three years and stay alive until the EV market becomes more predictable — likely around 2030.

Battleground 2023–2025: The First Great Shakeout

Nearly every automaker seems to have one objective: topple Tesla in 2025. Ford is making moves to increase capacity in its attempts to dethrone Tesla in EV sales in the US by 2025.9 Mary Barra, GM’s chief executive, is bolder, promising that GM will sell more EVs than Tesla in the US that year.10 Herbert Diess, the outgoing CEO of the Volkswagen (VW) Group, believes the German automaker could sell more EVs than Tesla worldwide by 2025.11 Stellantis, BMW, and Hyundai, among others, are also planning to entice potential Tesla buyers away. Chinese auto manufacturers will have a lot to say about who will be the EV market share leader as well. Tesla, meanwhile, hopes to produce upward of 4 million EVs globally by 2025, a number that may be hard for its competitors to match.12

Why is everyone gunning for Tesla? Because, as VW’s Diess has acknowledged, “Tesla sets the new benchmarks” for automakers to measure themselves against.13 Tesla proved to a highly skeptical automotive industry that EVs with acceptable range, high performance, increased safety, and strong consumer appeal could be produced and sold. More importantly, Tesla proved such a vehicle could be made profitably.

Tesla permanently disrupted the entire automotive ecosystem with its novel “skateboard” battery design, innovative software-defined system architecture, provision of over-the-air (OTA) updates to its vehicles for both recall fixes and functionality increases, and advanced autonomous driving capability. Tesla also led the way by creating a strategic infrastructure to support its vehicles’ production and support, including building its own giga-battery factories and EV charging station network.

Tesla’s disruptive power can be seen in its July 2022 market capitalization, which is equal to the eight top global automakers’ capitalizations combined.14 Tesla’s success has strongly influenced policy makers around the world and encouraged them to move aggressively to ban the sales of ICE vehicles in the next 15 years or less. Tesla, being an EV-only manufacturer, only benefits from these policies, unlike legacy automakers that must both produce new EVs and continue to support legacy ICE vehicles.

Both legacy and EV entrants are moving as quickly as they can to duplicate Tesla’s recipe for success in one form or another. Most have moved to some form of skateboard battery pack design and are trying to create a software-defined EV. Doing so means bringing in new skill sets in both battery and computing technologies; the latter is proving especially difficult. Tesla’s competitors are also trying to secure adequate supplies of batteries, either by building their own factories or partnering with battery providers. GM, for instance, is spending $2.6 billion to build a battery plant in Lansing, Michigan, USA, one of four it’s constructing in the US.15

Securing raw materials and refining capacity are major obstacles to producing enough batteries. Stellantis CEO Carlos Tavares says he expects an EV battery shortage to emerge in 2024 or 2025 and predicts a shortage of raw materials for batteries by 2027 or 2028.16 There are a limited number of mines and refineries to produce the minerals EVs need, a mere handful of which are in the US. EVs use about six times more minerals than ICE vehicles. Even Tesla is worried about not having enough batteries to support its future production plans.

Another issue out of the direct control of automakers is the assurance that all EVs produced can be charged. Although the majority of EV charging will take place at home, a network of fast chargers will be needed to give consumers confidence that EVs can be quickly charged on long trips. Tesla has created a network of 1,300 charging stations, which it will soon open to other EV models, and automakers like Ford and GM are trying to create their own networks of chargers. Moreover, the US government is investing $5 billion to help create 500,000 charging ports along major highways, but that network will not be complete before 2028. If the public believes there are not enough EV chargers available to support the estimated 7 million EVs on the road by 2025, a Massachusetts Institute of Technology (MIT) study indicates that EV sales could rapid ly drop off soon afterward.17

Tesla is certainly the one to beat in 2025, but the company does have some vulnerabilities. CEO Elon Musk has long promised an affordable EV for the mass market, but that does not look like it will happen soon. The company’s promised Cybertruck, which was supposed to come out last year, may be offered in late 2023 but with a much higher price than the originally advertised $39,000. Tesla will also face stiff competition in the EV luxury class market it has thus far owned. Luxury class vehicles are highly profitable, which is why nearly every legacy automaker, and many EV startups, will have some type of offering in this category by 2025.

In addition, Tesla’s software reliability is beginning to be questioned. Poor software and electronics reliability is a major consumer turnoff, and it’s a core reason 25% of BEV owners purchase ICE vehicles for their next car.18 A “saving grace” for Tesla may be that nearly every EV being introduced by Tesla’s competitors is having software problems, too. For example, VW is delaying several new EV models because of vexing software issues. Indeed, EVs are rated as having the lowest reliability of all vehicle types, in large part due to poor-performing software features and electronics. Sales may stall if EVs gain a reputation for unreliability.

A wild card in the mix is whether or not the 2025 predictions of EV sales for the US and globally are accurate. These projections are much higher than those made last year, which were themselves raised from years previous. More interesting is that even a cursory look into the number of EV sales that established brands and startups are publicly announcing for 2025 exceeds this upwardly revised projected demand.

However, both automaker EV plans and analysts’ EV sales projections are based on the assumption that there will be major governmental incentives and/or rebates to EV buyers. With these incentives looking constrained, at least in the US, and ICE vehicles still retaining their price advantages, EV sales may not be nearly as robust as the current predictions.

If this happens, automaker investments in battery and manufacturing plants (“cash furnaces,” as Musk calls them) will become major financial burdens, especially to EV startups. This happened in China, where numerous EV factories were built to meet a demand that never materialized.19 In that case, consolidation and bankruptcies may be even more severe than Ford’s Farley predicts.

The more imbalances among the various factors affecting production and supply, the greater the knock-on effects, placing both legacy automakers and EV startups in precarious competitive and financial positions. The EV shakedown cruise in the next three years will indicate who will be strong enough financially to go to the next round of competition.

Battleground 2025–2030: Staying Alive

“We are in the Darwinian world,” says Stellantis’s Tavares.20 Given the expected raw material resource constraints, “The guys who survive are the guys that adapt,” he says.

Adaptation will especially be needed between 2025 and 2030. Whereas 2023–2025 will be an EV-versus-ICE fight for market share, this period will see the competitive shift to a bruising EV-versus-EV market share knife fight. A new tsunami of EV model introductions is expected during this period. Stellantis alone promises to introduce at least 75 BEV models worldwide, with 25 BEV models for North America. Toyota promises at least 30 BEV models globally, and Nissan plans another 15 BEV models. These will join the hundreds already on the market by then.

One can expect this period to be competitively brutal, much more so than the initial EV shakeout period, even if one generously assumes that the EV raw material/refining/chip-shortage issues are reduced, EV production and demand generally become balanced, EV charging and battery range become minor issues, EV incentives are available, and EV price parity with ICE vehicles is achieved. If any one of these assumptions, let alone several, does not hold, the competitive environment will be even fiercer.

The 2025–2030 period will shift the focus to production efficiencies and lifecycle sustainability, improved software-driven capability and services, customer service, and pricing and profitability. Lowering EV prices will be a high priority. Ford’s Farley thinks they can be reduced to around $25,000, which he predicts will spark a “huge price war,” not only among EVs but remaining ICE vehicle models on the market.21

This can be done, Farley believes, with increased production efficiencies made possible by the simpler designs and fewer parts EVs need in comparison to ICE vehicles. There will also be significant manufacturing and supply chain learning curve gains, along with major cost savings from reducing unnecessary personnel management overhead related to ICE vehicle production.

The focus on EV software will be strong during this period and will focus on the 3Ps: performance, performance, performance. Automakers are looking at a software-as-a-service model, in which certain EV features and capabilities would be paid for by subscription. For example, VW is proposing that self-driving capabilities could be paid on an hourly rate. Automakers think they can make billions of dollars in EV software subscriptions. Of course, that would require rock-solid, invisible performance — a world away from today’s EV software.

Another focus area will be improving customer service to maintain owner loyalty. EV repairs, especially after accidents, will come to the fore during this period. Whether or not there will be enough EV-trained mechanics to support EV volumes and model varieties (including different battery systems and motors) is a legitimate concern. Automakers acknowledge that this area must be addressed to prevent alienating future customers.

Social issues are also a major emphasis for automakers. As government deadlines to eliminate ICE vehicles grow nearer, political pressure on automakers to move away from them will increase. This will push legacy automakers to decide which ICE vehicles will no longer be sold and the date after which they will not be supported. These decisions will have a major impact on ICE owners and their support network, from dealers to mechanics to parts suppliers. If a legacy automaker is not careful about how it makes these decisions, it risks losing future EV customers to other brands.

Finally, automakers will need to ensure that the millions of used EV batteries are either being recycled or repurposed as batteries for the grid. They will also have to ensure EV owners can replace EV batteries at an acceptable price. Recycling/replacement of EV batteries promise to be major environmental and consumer issues that automakers will need to confront by 2027 at the latest. 

2030 & Beyond

Surviving into the early 2030s will not be easy for today’s legacy automakers and EV-only startups. Those that do are likely to face new technological competitive threats. Billions of dollars are being poured into battery technology, automated driving capabilities, and alternative fuels such as hydrogen FCVs. Breakthroughs in any of these areas could radically change the competitive landscape.

Another challenge will be convincing families to buy two EVs rather than an EV for short trips and an ICE vehicle for longer ones. Overcoming this challenge will mean designing and making affordable EVs that meet a wide range of family, work, and leisure needs.

Furthermore, a critical issue during this period will be disposing of tens of millions of ICE vehicles in a sustainable and economically feasible manner. Abandoned service stations may also become an environmental concern.

Conclusion

The next five to seven years are going to be the most interesting — and fraught — transition of the automotive industry in 125 years. Historians will be writing books about the winners and losers during this period, including the mistakes made and the fortunes created. By 2030, the EV market should be becoming mature, and most of the problems will (we hope) be worked out. It will be a precarious ride, but it is one we all must take.

References

1    Bartlett, Jeff S. “More Americans Would Buy an Electric Vehicle, and Some Consumers Would Use Low-Carbon Fuels, Survey Shows.” Consumer Reports, 7 July 2022.

2  Lienert, Paul, and Tina Bellon. “Exclusive: Global Carmakers Now Target $515 Billion for EVs, Batteries.” Reuters, 10 November 2021.

3  Welch, David, and Gabriella Coppola. “Tesla’s EV Market Share Seen Plunging to 11% by 2025, BofA Says.” Bloomberg, 30 June 2022.

4  Foote, Brett. “Ford CEO Jim Farley Says EV Pivot Will Spur Industry Wide Consolidation.” Ford Authority, 9 June 2022.

5  Leggett, David. “Automotive Industry M&A Deals Total $6.4bn in US in Q1 2022.” Just Auto, 19 April 2022.

6  O’Kane, Sean. “Troy-Based EV Startup Electric Last Mile Solutions to Liquidate.” The Detroit News, 12 June 2022.

7  Bellan, Rebecca, and Kirsten Korosec. “Canoo Warns It May Not Have Enough Funds to Bring EVs to Market.” TechCrunch, 10 May 2022.

8  “Luxury Share Increases in April, Pushing New-Vehicle Average Transaction Prices Higher, According to Kelley Blue Book.” Kelley Blue Book, 10 May 2022.

9  White, Joseph, and Ben Klayman. “Ford Announces Series of Deals to Accelerate EV Push.” Reuters, 21 July 2022.

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11  Steitz, Christoph. “Volkswagen CEO Sees Tight Race with Tesla for E-Car Crown by 2025.” Reuters, 9 May 2022.

12 Lambert, Fred. “VW CEO Thinks They Can Sell More Electric Cars Than Tesla by 2025 — Is It Even Possible?” Electrek, 9 May 2022.

13 Frangoul, Anmar. “Tesla Is Setting the Bar for Electric Vehicles, VW CEO Admits.” CNBC, 28 October 2021.

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15 Werschkul, Ben. “GM Has 4 New Plants Coming to ‘Have Control Over Battery Cell Manufacture’: Mary Barra.” Yahoo! Finance, 4 May 2022.

16 Wayland, Michael. “Stellantis CEO Warns of Electric Vehicle Battery Shortage, Followed by Lack of Raw Materials.” CNBC, 24 May 2022.

17 Keith, David Ross, Jeroen J.R. Struben, and Sergey A. Naumov. “The Diffusion of Alternative Fuel Vehicles: A Generalised Model and Future Research Agenda.” Journal of Simulation, Vol. 14, No. 4, January 2020.

18Alternative Energy & Mobility.” Strategic Vision, 2021.

19Deserted Factories Show How China Electric Car Boom Went Too Far.” Bloomberg, 20 September 2021.

20 Loveday, Steven. “EV Battery Shortage: Stellantis Reveals Plans to Get Around It, In 2025.” InsideEVs, 31 May 2022.

21 Krisher, Tom. “Ford CEO Sees Electric Vehicle Price War as EV Costs Decline.” ABC News, 1 June 2022.

 

About The Author
Robert Charette
Robert N. Charette is a Cutter Fellow and a member of Arthur D. Little’s AMP open consulting network. He is also President of ITABHI Corporation and Managing Director of the Decision Empowerment Institute. With over 40 years’ experience in a wide variety of technology and management positions, Dr. Charette is recognized as an international authority and pioneer regarding IT and systems risk management. Along with being a Contributing Editor to… Read More