Battery electric vehicles and climate change
Rule 3: New technology must provide manufacturers with clear incentives to drive its adoption
If consumer take-up of electric vehicles has been slow, might not automotive manufacturers (OEMs) have taken a more aggressive approach to stimulating demand? Herein lies one of the challenges for any new technology seeking rapid adoption: manufacturer incentives may not actually be aligned to drive change. The electric car pretty obviously creates a damaging risk to the oil industry. With a third of global oil demand dependent on the fuel consumed by cars (Domm, 2018), any shift to electric power is naturally going to damage both the upstream fuel production and downstream fuel retail businesses of large oil companies such as ExxonMobil, BP and Shell. Such a threat has been interpreted by the oil industry – undoubtedly in exaggerated form – as an existential challenge, resulting in an oil lobby movement and industry activity that environmentalists claim has sought to stifle electric car innovation and take-up for at least twenty years (Paine, Paine, Deeter, & Sheen, 2006). Even in 2020, that movement continues, under the banner of protection of consumer choice: the typical consumer, they say, should not have to pay for incentives or charging stations that mainly benefit people wealthy enough to afford cars like Teslas (Bade, 2019). Oil companies are even less supportive: as recently as September 2019, Reuters reported that ExxonMobil CEO Darren Woods rhetorically posed the question to the Oil & Gas Climate Initiative Meeting: ‘what’s the point of having electric vehicles that will end up being charged by power generated from coal? ’ Conversely, electric cars, at face value, represent an opportunity for automotive manufacturers. In a fiercely competitive market, where every potential point of differentiation is maxed out through the manufacturers’ large marketing budgets – representing more than 10% of total spend (Almadrones, 2017) – the chance for genuine innovation and rapid market share gain is limited. Nonetheless, over the last decade, OEMs have restricted battery electric vehicle launches to, at most, one or two models within their overall line-up, and vehicle production capacity remains at no more than 2% of total production volumes. What then, has prevented auto manufacturers from pursuing single-minded innovation and rapid product launches in an attempt to gain market share and drive sales? In short, the answer is economics: a supply-demand equation driven by price points and vehicle profitability. Battery electric vehicles are inherently more expensive to manufacture and take to market than their internal combustion equivalents. In 2019, McKinsey & Co (Baik, Hensley, Hertzke, & Knupfer, 2019) assessed that a cost gap of $12,000 exists today between an electric vehicle and its internal combustion equivalent (exhibit 3.1). The majority of this is the cost of batteries – an average $10K extra cost that BEVs have to carry per vehicle. To make the same margin per car, OEMs either simply have to ‘ price up ’ , and set higher vehicle purchase prices with corresponding reduction in consumer demand, or accept a very heavy economic price in any effort to buy market share. Couple consumer concerns, with underlying reservations on range and recharge convenience, with a risky economic landscape for auto manufacturers – where the return on the combination of upfront research, design and capital costs of production lines can prove to be either positive or negative simply through small differences in vehicle lifetime sales versus initial projections, or their realized price points post necessary discounts once on sale – and the ‘whole concept of battery electric vehicles starts to become a decidedly less attractive proposition toOEMs than onemig ht presume’, says Klaus Stricker, Head of Bain & Company’s Global Automotive Practice (Stricker, 2018).
239
Made with FlippingBook Digital Publishing Software