27 02 2019

Electric cars - who will be the winners and the losers?

VW I.D. Neo. Production start expected for late 2019. VW I.D. Neo. Production start expected for late 2019. VW website

The automotive industry is on the brink of a major upheaval due to the arrival of electric vehicles. Not only cars, also delivery vans, trucks, buses – you name it. After the automotive industry tried to pretend for years that nothing serious was going on, it is now increasingly clear that change is unavoidable, and may come much faster than many think. There is presently a lot of arguing and sweating in the board rooms. Some will take right decisions, some will take wrong. Some well-known car companies may survive and prosper – others may disappear ingloriously in the coming years. But change will come.

The automotive industry is extremely important to most industrialised countries - and several emerging economies too. Millions of jobs depend on it, both in manufacturing and related services (sales, repairs, financing etc.). According to the world association of car manufacturers (OICA), 73 million cars and 24 million trucks were produced in the world in 2017. The annual turnover of the world automobile industry is more than 2.75 trillion Euro, which corresponds to 3.7% of world GDP (and in the big automobile producing countries a way higher percentage). About half of the world consumption of oil, rubber, about a quarter of the glass output, and one sixth of the steel output is according to OICA consumed by the automotive industry.

BYD electric bus K9. By Nissangeniss - Own work, CC BY-SA 3.0.

This enormous industry will soon undergo a major upheaval. It is finally being recognized (at least by people who still have their common sense) that it is unsustainable to continue emitting CO2 and particles from burning gasoline and diesel in more than one billion cars, buses and trucks worldwide. Capable zero emission vehicles are now appearing as an alternative, mainly in the form of electric vehicles. The push for change comes from stricter regulation to bring down CO2 emissions and reduce particle pollution. But to this comes that electric cars are actually better and more fun to drive. They may soon become cheaper too.

There are huge interests vested in the industry that are threatened by this revolution. From humble industry and car repair workers, to heavy capital interests in the vehicle and oil industry. There are many who stand to lose. And we still don’t know exactly who will benefit - apart from our planet and human health.

The automotive industry is not the first industry to be shaken by technological change. To take a recent example, do you remember Nokia, once almost a synonym for a mobile phone? Came the smart phone, the Nokia leadership didn’t understand what was coming, took wrong decisions and finally the company disappeared ingloriously as a mobile phone producer. Or remember when the electronic watches made the Swiss mechanical watch industry collapse? Honourable producers of typewriters that disappeared with the onslaught PCs and printers? The king of the photographic industry, Kodak? This is what the German-American economist Joseph Schumpeter called creative destruction. It is about to strike the automotive industry.

The established vehicle producers (VW, BMW, Daimler, Toyota, Renault-Nissan, Ford, GM etc.) have many decades of research and know-how vested in gasoline and diesel motors, gearboxes, clutches, exhaust systems and so on. This intangible capital suddenly risks becoming worthless.

The automotive industry is dominated by a few, very big companies, many of which have merged or formed alliances with each other during the last decades (Renault with Nissan, Dacia and Autovaz, Peugeut with Citroen, Fiat with Chrysler, Ford with Mazda, Hyundai with Kia, Geely with Volvo etc.). There are high barriers to entry for new producers, important economies of scale and strong brand loyalty. New competitors are rare, except for existing companies from emerging economies starting to compete internationally (Japan half a century ago, Korea during the last two decades and now China knocking on the door).

And how has the automotive industry reacted to the increased pressure to bring down CO2 and particle emissions? Defensively and trying to gain time. The automobile manufacturers see it as a threat to their existing business. They fear that if they bring in successful electric vehicles, these will mainly compete with their own profitable conventional cars and cannibalize the sales of these. So they have until recently mainly come up with “compliance cars” - taking an existing gasoline car, pulling out the gasoline engine, putting batteries under the back seat, throwing in an electric motor and sticking on an “eco/electric” badge. When it became clear some years ago that they couldn’t continue like that, some companies created a common platform for the gasoline cars, which at the same time allowed them to put in batteries and an electric motor in a bit more orderly way. Take the electric VW Golf or UP, the electric Kia Soul and now recently the Hyundai eKona and Kia eNiro.

The present picture is therefore that we have the majority of the established automobile manufacturers dragging their feet, producing low volume electric vehicles at high prices and only doing what they are forced to by the regulatory authorities (and by the way lobbying to weaken the regulations). This despite that it is becoming increasingly clear that there is no escape – electric vehicles are the future, sooner or later.

The changes would have been much more swift if there had been serious competition from outside the established industry. New producers with no vested interests in the gasoline or diesel technology would have acted differently. But as barriers to entry for new producers are very high, these outsiders are few. The most well-known is Tesla, but there are also a couple of Chinese startups that may turn out to be serious, and in Europe some enthusiast startups with scant chances of success.

One may ask why the automobile companies are so short-sighted? Can’t they see the writing on the wall? This is not so easy. If a company moves too early, it may go bust as electric vehicle production at competitive prices is not yet profitable. If it moves too late, it risks becoming irrelevant and disappear. There are some first-mover advantages, but there are also first-mover costs. So there is a lot of arguing and sweating going on in the board rooms these days.

Change is coming, but there are different expectation as to how fast it will come. Oil companies claim that in twenty years, the majority of vehicles will still use gasoline and diesel. Others predict change will come faster. My guess is that it will be very fast, once the electric vehicle industry passes a certain threshold, probably around a 10 % market share – in 2018 plug-in vehicles were 4.6% of the market, but that includes plug-in hybrid cars so purely electric vehicles may be half of that. Once the threshold is passed, different mechanisms start to accelerate the process, among these better charging infrastructure, improved value of second hand electric vehicles, risk of conventional cars being banned from city centres, and increasing customer fear of investing in obsolete vehicles that may be difficult to sell later on. We are talking about a few years, not decades, before this process goes into motion. The main factor holding back the process will probably be the capacity of the successful companies to expand production fast enough to keep up with demand.

Electric vehicles are still expensive, but a few companies are finally trying to get a first-mover advantage by scaling up rapidly.

Tesla Electric Truck/Lorry By Korbitr - https://imgur.com/a/INiuj, Public Domain

The most well-known is the American company Tesla, an outsider with no vested interests in gasoline and diesel vehicles. Tesla has been shrugged off as a niche player, making low-volume toys for the rich, but as the company is starting to reach scale with a more average priced model (the Model 3), things are changing. They produced 146,000 units of their Model 3 (a mid-sized sedan) in 2018, which were all sold in the USD. They may deliver 300,000 units in 2019, and with production of Model 3 ramping up in their new Shanghai factory it may reach 500,000 units in 2021. With their other models, including the upcoming SUV version of Model 3 (called Model Y) Tesla may soon reach an annual production of 1 million vehicles and hence become a serious threat to the established industry.

More competition may be coming from China in the coming years with very competitively priced electric cars of reasonable quality. Even so, I don’t think they will be serious competitors in Europe or the US for some years, both because of the customers’ doubts about the quality and because the Chinese manufacturers will struggle to supply their home market, which because of stricter regulation is expected to continue to grow faster than the rest of the world. But eventually they will come.

Among the established automobile companies, Renault-Nissan were early starters (with Nissan Leaf and Renault Zoe), but they seem to be failing to capitalize on their early lead. Presently, a 60 kWh battery pack and capacity to charge at 100 kW is considered the minimum standard for an acceptable electric car, and none of theirs live up to that yet.

All automobile companies have been talking for years about electric vehicles, showing off “concept cars” and promising a lot of electric models in 20XX. The one that presently looks most serious is VW, even if it has very little to show for it yet. They have established a common platform for their electric vehicles called MEB to be used across the company’s many brands (VW, Audi, Seat, Skoda). The first car (called I.D. Neo), a compact hatchback similar to the VW-Golf, is expected to start production in end 2019, and the company has promised it will have a 60 kWh battery, ability to charge at 100 kW and be priced at the same level as similar diesel cars. If they can keep that promise and produce at scale, VW may be one of the companies that will survive and prosper in these new times. It is worth noting that the trade union representative at the VW board has been one of the most outspoken supporters of a more aggressive electric strategy, despite that electric cars are simpler to make and hence will require a smaller workforce.

The company that has most stubbornly rejected battery-electric cars is Toyota, once the largest car producer in the world. The Toyota leadership thinks that fuel cell vehicles are the future (an electric car where electricity is produced on-board from hydrogen with fuel cells). They are presently selling only one fuel-cell car (called Mirai), of which they produced 3,000 in 2018. The concept is interesting, but I doubt it will prosper. Not so much because it will need a fuelling infrastructure (which it will), but because it still is inherently energy inefficient with no immediate prospect of improving. Hydrogen is presently produced from natural gas, which severely limits its potential for reducing CO2 emissions. It can also be produced by electrolysis (from water), with energy coming from renewable sources, but the round trip efficiency (from electricity to hydrogen and back to electricity) is low. Toyota has finally accepted to start producing battery-electric cars but only because this is a requirement on the Chinese market, which is very important for it. Toyota does not look like a winner – more like a new Nokia. But there is of course still time for them to change course. Other potential losers are Fiat-Chrysler, Ford and GM.

It will be interesting to see what the industry looks like in five years time, when the dust has settled.

This is the second article on thise theme. To read the first, click here.




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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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