Electronic vehicle manufacturers face major short-term loses

24 July 2018 Consultancy.uk 6 min. read
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New analysis has revealed that producers of electric and autonomous cars could be on a collision course with a billion dollar disaster, with demand for the products still languishing in single digit percentages. Sales are only anticipated to reach levels of 15% of the global automotive market by 2025, suggesting that manufacturers stand to make a loss on the hefty investments they make in the technology, at least in the short-term.

One of the recurring jokes in the energy sector is that nuclear fusion is 50 years away, and will always be. In the automotive sector, the same could probably be said of the electric car, the vehicle of a tomorrow which never comes. In fact, Electric Vehicles (EVs) long predate the much heralded Tesla-type automobiles being enthusiastically talked up by technological experts in recent years. In 1900, for example, as the combustion engine began to eat up the market, 28% of all cars on the road in the USA were still electric, while President Woodrow Wilson and his secret service agents toured Washington, DC, in Milburn Electrics, which covered 60–70 mi (100–110 km) per charge.

Soon the durability and cost-effectiveness of the combustion engine would see the EV all but disappear from American and global roads. It was not until 1990 that it returned as a major concept for transport, with General Motors' President introducing an EV concept two-seater, the "Impact", at the Los Angeles Auto Show. From 1996 to 1998 GM produced 1,117 EV1s, 800 of which were made available through three-year leases.

Electronic vehicle manufacturers

While cost and functionality held back the EV from taking a major hold in the market, during the last few decades, the environmental impact of the petroleum-based transportation infrastructure, along with a residual fear of peak oil, led to renewed interest in an electric transportation infrastructure. As a result of this trend, a number of major European economies are moving to ban the sale of combustion engine vehicles by 2040, and as manufacturers look to avoid disruption from this and an apparently heightened interest in autonomous vehicles, there has been a glut in investment from the industry’s big beasts.

However, despite the reported benefits of the technology, and its long-term profitability in nations such as France and the UK beyond the next 20 years being all but assured, in the immediate future, the outlook is less secure. According to a recent study from global consultancy AlixPartners, the evidence suggests that a victory for electric cars and autonomous ones is far from certain. The firm’s researchers found that R&D and CapEx relating to electronic and automated vehicles has risen by $72 billion over the past five years, and have forecast that by 2023, $255 billion will have been spent globally developing electric vehicles, but in-line with predictions of IHS Market – which anticipate combined BEV and plug-in hybrid electric (PHEV) sales will only reach 7% of the big three markets of the North America, Europe and China market by 2020 – the estimated 207 electric models which will go to market by 2022 seem largely destined to be unprofitable.

Combined BEV and PHEV sales currently amount to under 2% of those markets, and will only rise to 15% by 2025. While these sales will make a quarter of the market in those key regions by 2030, the lack in demand over the 20 years preceding it is potentially still due to currently-high systems costs, low volumes and intense competition.

A long road ahead

AlixPartners said an additional $61 billion has been earmarked for autonomous-vehicle technologies, even though, according to an AlixPartners’ survey, consumers say they are willing to pay just $2,300 extra for autonomy—compared with current industry costs of around $22,900, or about 10 times consumers’ willingness to pay. The sluggish growth of electronic vehicles will not be helped by growth rates of the global automotive market struggling to maintain an annual rate of just 2.4% through 2025, behind the overall expansion of worldwide GDP at 3.3%, while the US market will see a downturn, partially cyclical, partially exacerbated by protectionist economic policies, with sales amounting 16.8 million, down from 17.2 million in 2017, and headed to a likely trough of around 15.1 million in 2020.

Electronic vehicle manufacturers

While short-term figures, which international corporations have a habit of taking as the be-all and end-all, seem relatively unimpressive, however, AlixPartners also demonstrated the cause for optimism in the long-term. Battery-electric vehicles (BEVs) will reach about 20% of the US market, around 30% of the European market and roughly 35% of the Chinese market by 2030, while autonomous vehicles will account for 3 million in sales in the US by that date. The problem is that the study finds the return on capital employed (ROCE) for automakers reached a three-year low in 2017 of 3.6%, while automotive-related commodity costs have hit a six-year high in the last year, leaping 70% to a $884 per vehicle premium. These trends could see investment become more cautious, should shareholders become nervous about their short-term bottom lines.

Meanwhile, “robo-taxis” – self-driving vehicles sold to companies such as Uber or Lyft, usually at lower profit margins than if sold at retail – look likely to eat into retail sales of the automotive industry, as consumer trust in the technology rises, opting to call a cab, rather than face the current industry costs of automated driving. At present these extra costs stand at around $22,900, or, according to AlixPartners, around 10 times the willingness of consumers to pay.

John Hoffecker, Global Vice Chair at AlixPartners, said of the situation, “A pile-up of epic proportions awaits this industry as hundreds of players are spending hundreds of billions of dollars on electric and autonomous technologies as they rush to stake a claim on the biggest change to hit this industry in a hundred years. The winners in this free-for-all will be those who have the right strategies and, equally important, execute on those strategies to their fullest potential – as billions will be lost by many.”