Electric Vehicle convergence point approaches
A few things have happened in the last few weeks that are fairly significant. You may have heard about;
- Tesla Model 3 deliveries have started, with 455,000 back orders
- The UK announcing the ban of new fossil vehicles from 2040
- France banning the sale of new fossil vehicles from 2040
Meanwhile, there have been two separate market analyst reports, which have quantified the economic impacts of EV's on the industry;
- ING: Breakthrough of electric vehicles threatens European car industry
- Bloomberg: Electric Vehicle Outlook 2017
The lead times for design and manufacture of vehicles is measured in years, with massive investments in infrastructure and complex changes to production lines and supply chain. Manufacturers have been scrambling to respond to Tesla's success and the emissions cheating scandals.
The key take-outs from these reports are;
- 100% of new vehicles sales in Europe will be EV by 2040
- Over 50% of new vehicle sales globally will be EV by 2040
- Total cost of ownership (TCO) between EV and fossil will hit parity around 2025
- The upfront cost of EV will be cheaper by 2030
The 5 year window from 2025-2030 is the tipping point for private vehicles. By the time we hit 2040 when bans on new fossil vehicles are set to kick in, it's likely the market will have already voted. The exact timing of the first tipping point of total cost of ownership will depend on oil prices. It's inevitable to happen though, for the simple reason that EV's are simpler vehicles mechanically, as the ING report shows, from 1400 components to 200 in an EV. That will provide a competitive advantage for EV's.
The most important thing in my mind is how the reports from financial market analysts, line up with each other. These are not environmental advocates who want something to be true, they are people looking at the movement of markets and how investments are being made. There's a big difference between predictions that are popular sentiment and predictions that are based on people putting their money where their mouth is.
Until now, manufacturers have been tentative with EV's but that has changed. Here's where the money is going;
- Investing US$11b in EV production
- Accelerating EV plans by 3 years
- 10 EV models by 2022
- Building 2 battery "gigafactories" in Germany and China
- Has been backing hydrogen fuel cell (still EV but hydrogen fuel)
- Now investing in fast charge battery tech and a new EV for 2022
- All new vehicles will be EV or Hybrid from 2020
- Was the market leader with the Leaf in 2010
- Global market leader in EV sales (36k in Q1 2017) beating Tesla!
The CEO of Renault/Nissan Carlos Ghosn was in Sydney a couple of months ago. He spoke about the future of the auto industry at a Sydney Ideas event I attended. I asked him a question about the economics of the industry and mass market adoption. He said there were three things they now knew;
- Range of an EV required for mass market adoption is 300km
- People are starting to understand total cost of ownership incl fuel and maintenance
- Policymakers play a role through clean air initiatives like Zero emission zones in cities
All of this has some macro-economic and potential policy impacts;
- Global oil prices may remain stagnant or decline. A few years back we were concerned with peak oil, but now I think oil producers will lose the control of price as demand declines. The thing that may sustain it in the short term (next 3-5 years) is the growth of economies like China and India.
- Both China and India are putting policies in place to favour EV's so even now there are predictions of lagging demand for oil.
- Declining oil price will significantly impact global geopolitics. Alliances that are in place today will evaporate, particularly in the middle east, as we slowly and quietly distance ourselves from regimes that are not aligned to our values. In other places, the social fabric will fray as economies underpinned by oil need to restructure. Think of how Venezuela is falling apart, that may happen in more places as the money dries up.
- There will be concern about the capacity of national electricity grids to cope with the demand placed on it by Electric Vehicle charging. I personally think that will be more rent seeking by the grid operators. They have seen that they can spook the public and the government takes the heat. Policies should be put in place for grid operators to connect EV charging to controlled load circuits (think off peak hot water) which can be controlled based on grid demand. People could always run a mains charger in an emergency or use a public charging station.
- As vehicles switch to zero emission, or low emission hybrids, there will be significantly less pollution. This could be used as a policy initiative, with price incentives on the use of toll roads that have exhaust stacks (which themselves result in community concerns). Zero Emission cars could travel on those toll roads for half price. That would speed up adoption at a minimal effective cost for government. The operators could be aligned through incentives on the exhaust regulation (perhaps through tightening them to un-achievable limits with fossil cars).
- Electric Vehicles will have big batteries. Big enough to power most homes for 2-3 days. It would make sense for there to be some kind of two way power transfer, so a car could act as a home battery when parked in the garage, or available to the grid in periods of peak demand. On a controlled circuit, perhaps that could be part of the cost trade-off for folks to get lower energy prices.
- Road congestion will get worse, not better with EV's. People seem to believe the reverse. They are wrong. I generate enough from solar on my roof to charge my car. It costs more for me to catch public transport to the city than to drive.
- Congestion may be alleviated by automated driving technology to some degree but we will have people controlled vehicles well into the medium term future (15+ years) and human behaviour is the cause of most gridlock situations.
- Battery cell production will be a significant industry. Government investment in grants for research should look at how we can develop technology solutions in the battery chemistry field. Also, instead of worrying about mining coal, we should be looking at the geological record for battery raw materials. Half the global supply for cobalt used in battery production is mined in the Democratic Republic of Congo which has significant stability issues, not to mention child labour problems. Is there an opportunity for Australia to establish itself as a key global supplier for battery raw materials?
- Vehicle repair is going to be a very different business than it is today. This could be a significant dislocation of a bunch of motor mechanics. To start with, EV's will have less go wrong with them. Many Leaf owners have reported that there's just nothing to repair other than "wear and tear" items like tyres and suspension. The car is basically a sealed system with many fewer moving parts. Motor mechanics could become the next video store, we'll gradually see them disappear, replaced by dealers, and tyre repair centres which will expand into vehicle maintenance.
- Likewise the vehicle systems themselves will become far more complex. Autonomy aside, the compute power in cars is going up significantly, with connectivity and augmentation through consumer controlled devices like phones. There could be an industry for in-car systems maintenance, enhancement and cyber security. Ensuring vehicle manufacturers don't create closed ecosystems that only they can work on may be required. The potential for systems lock in is unlikely to be in the consumer interests. I see the initial battleground here between Google/Apple and the car makers. It the philosophy of the debate rather than the players we should focus on.
- We should ensure even if Australia is not a primary manufacturer, we have a role in the value chain somewhere.