The Future’s Electric For Auto Industry, But Barriers May Short-Circuit The Sparks

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27 July 2009 – The growing potential of electric vehicles is clear from the introductions to the market by both new and established manufacturers, as well as the heavy investment in battery technology. The depth and speed at which electric vehicles will be able to penetrate the market will rely on several factors, but there remains little doubt that this technology will have a significant impact on the automotive industry moving forward. PricewaterhouseCoopers estimates that by 2020, pure electric vehicles (PEVs) could represent between two and five percent of the total output of light vehicles.

Climate change is an inescapable challenge for world leaders and while the issue of global warming remains highly debated, there is evidence to support the environmental impact of carbon emissions. The auto industry is responsible for 15 percent of global carbon emissions, amounting to roughly 8 billion tons annually. Although environmental protection has been the primary driver for change, other factors such as the price volatility of fossil fuels and energy independence have also helped perpetuate a change to alternative and renewable energy sources.

Steve D’Arcy, global auto leader, PricewaterhouseCoopers says:

“The European Union, widely seen as a leader in reducing automotive carbon emissions, has taken additional steps in setting a limit of 120g/km of carbon emissions by 2015, with 65 percent of new vehicles required to meet the standard by 2012. While other developed markets such as Japan are also enforcing tough emission standards, developing markets that have long lagged other regions in terms of enforcement are beginning to catch up and are adopting increasingly stringent emission regulations.”

“Electric vehicles are seen as one possible solution automakers can focus on to meet increasingly stringent emission regulations around the world, since electric vehicles release no carbon emissions while running on electric power.”

Growth inhibitors

Despite the aforementioned benefits electric vehicles provide, several important challenges remain that may slow and/or impede the penetration that these vehicles can achieve in the marketplace. The first issue is related to the technology surrounding electric vehicles. The main components of an electric vehicle are the electric motor and the battery pack that supplies the power to the motor. The main drawback in this setup is limited driving range due to relatively short battery life. Although certain types of electric vehicles include range-extending gasoline engines that act as battery chargers (known as plug-in hybrid electric vehicles, or PHEVs), pure electric vehicles, or PEVs, are solely reliant on the driving range that the battery pack provides. In response to this limitation, more powerful and efficient batteries are now being developed. Lithium-ion has emerged as a leading battery material for power, driving range, and price point considerations.

Steve D’Arcy, global auto leader, PricewaterhouseCoopers says:

“Inadequate infrastructure also will delay a widespread shift to electric vehicles. The lack of an available network of charging stations restricts drivers to short commutes, while it can take several hours to fully recharge an electric vehicle. The space required to place charging stations, coupled with a suitable means for consumers to pay for the electricity they use while charging their vehicles, are open issues. Projects such as Better Place in Israel and Denmark, which provide infrastructures that enable electric vehicle drivers to quickly charge their vehicles, have achieved initial success, but significant start-up costs will be realised in creating large-scale networks. Additional concerns remain about the effect electric vehicles will have on a nation’s power grid.”

Because the concept of mass vehicle electrification is fairly new to the automotive sector, continued R&D funding is necessary to increase efficiencies and decrease consumer cost. Major automakers and suppliers typically allocate between 1.5 percent and 6 percent of revenue to R&D expenditures.

With relatively new technology and low sales volumes, significantly higher costs will be incurred by consumers purchasing electric vehicles compared with vehicles powered by a traditional internal combustion engine. The cost differential can range from $7,000 to $20,000 USD depending on the type of vehicle under consideration. Most of this premium is directly attributable to the raw materials that comprise the vehicle’s battery. The extraction of the active battery components such as lithium and graphite, as well as the manufacturing and recycling process, contribute to a large portion of the cost. An appeal to consumers is that the cost savings realised from using electricity rather than gasoline will amortise quickly enough to offset the higher transaction price.

As vehicle electrification continues to emerge, significant changes within the industry are likely to happen alongside the rollout. In addition to the need for a network of recharging stations, fundamental changes to the traditional business model of automobile ownership should be considered as well. For example, some have proposed a battery swap program in lieu of waiting for a battery to charge.

Now that the automotive manufacturer playing field has expanded, no traditional automaker has a significant advantage over another, which enables new entrants to compete.

The changing geography of the automotive industry also represents an opportunity for traditional players in emerging markets. Chinese automakers,for example, understand it will behove them to focus on developing electric vehicles rather than committing major resources to catching up on internal combustion engine standards.

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