Is the hype around electric vehicles justified?


Gail Counihan, Responsible Investment Analyst

27 October 2017

Comparing the hype around electric vehicles (EVs) with the prevailing reality is somewhat astonishing: electric vehicles still only account for less than 1% of cars on the road, displacing 0.0825% of our daily oil consumption – or 0%, if we round to the nearest decimal.  Generous subsidies have kick-started impressive growth rates in EV sales around the world but there simply aren’t enough tree-huggers with deep pockets to make a material difference to our demand for oil.  In order to muscle conventional vehicles off the road and become the dominant technology, electric vehicles need to be able to hold their own in three important ways: performance, practicality, and affordability. We take a closer look at these three areas.
Electric vehicle owners will be the first to vouch for their exquisite driving experience – namely the instant torque and sharp handling. Electric vehicles tend to have a lower centre of gravity compared to their conventional counterparts, which translates into sharper handling and greater protection against rolling over. The instant torque is a key feature of electric vehicles – electrons move from the battery to the motor at lightning fast speed.  Handling and torque are critical to some – but efficiency is probably a more universal consideration. The irony attached to the most widely used engine in the world is surely its staggering incompetence - most of them are really bad at performing its sole purpose: to turn fuel into usable energy.  More than half of the fuel it takes in is wasted, or expelled as fumes – air pollution. To contrast – an electric vehicle doesn’t even have an exhaust pipe. We see performance as being pretty strong for electric vehicles. 
It is difficult to argue whether performance, practicality or affordability is more of a deal-breaker to the success of electric vehicles, but if we subscribe to the belief that man is a creature of habit, then practicality surely presents the most likely stumbling block. Concerns about practicality are evidenced by lower EV sales in countries with fewer EV charge points. This isn’t rocket science: I’m not going to buy an EV if I believe that it will run out of power before I reach my destination or a suitable charging point. But are my fears warranted? An Massachusetts Institute of Technology (MIT) study in 2016 found that 87% of vehicles on the road “could be replaced by a low cost electric vehicle available today, even if there’s no possibility to recharge during the day.” Even super-fast chargers are not as necessary as drivers expect them to be – based on the views of over 2000 EVs drivers, in a CleanTechnica report in 2016. The survey found that the demand for cars capable of super-fast charging far outstrips the actual use of these chargers – suggesting that they end up being far less crucial to mobility than drivers expect them to be. Concerns about practicality are a very real hurdle to overcome, far more than actual practicality – quite simply because we are creatures of habit, and imagining a different way of doing things isn’t easy. We don’t see practicality as being a negative, although we do think they will require some getting used to.
The last piece of the puzzle that needs to fall into place is cost.  Countries or states with generous subsidies have seen widespread uptake - places like California, Norway and the state of Georgia. But what happens when these subsidies are removed? Not a single private EV was registered in Hong Kong, in the month after their subsidy was scrapped – and in Georgia, sales plummeted 83% after their subsidy was replaced by a registration fee. These subsidies were removed prior to electric vehicles being price competitive – average Joe simply does not have the appetite to dig deep for a cleaner car. These high costs don’t represent high margins for EV makers – in fact, auto executives at the recent Frankfurt auto show made no secret of the fact that going electric will hurt margins. The cars have been genuinely expensive to make, primarily because of the cost of the battery – something that has fallen by 80% since 2011. The magic number – when electric vehicles will cost the same as conventional vehicles – is said to be $100/kWh, a milestone that we are expected to reach by 2020. Companies such as BYD, Umicore and Panasonic, to name a few, are competing to make batteries better and cheaper than ever before, motivated by the size of the nascent clean transport industry. Until price parity is reached, supportive regulation is clearly a game changer.
In short – we see electric vehicles as being superior on performance, equal on practicality and nearly there on price. The implications for the auto industry as we know it are huge. Focus has shifted to parts manufacturers such as Valeo, who are committed to innovating in the area of cleaner, more intelligent transport. It remains to be seen which of the traditional auto makers will emerge as winners but little doubt remains that we are witnessing the disruption of one of the longest running, most entrenched technologies ever.

Comparing the hype around electric vehicles (EVs) with the prevailing reality is somewhat astonishing: electric vehicles still only account for less than 1% of cars on the road, displacing 0.0825% of our daily oil consumption – or 0%, if we round to the nearest decimal.  Generous subsidies have kick-started impressive growth rates in EV sales around the world but there simply aren’t enough tree-huggers with deep pockets to make a material difference to our demand for oil.  In order to muscle conventional vehicles off the road and become the dominant technology, electric vehicles need to be able to hold their own in three important ways: performance, practicality, and affordability. We take a closer look at these three areas.

Electric vehicle owners will be the first to vouch for their exquisite driving experience – namely the instant torque and sharp handling. Electric vehicles tend to have a lower centre of gravity compared to their conventional counterparts, which translates into sharper handling and greater protection against rolling over. The instant torque is a key feature of electric vehicles – electrons move from the battery to the motor at lightning fast speed.  Handling and torque are critical to some – but efficiency is probably a more universal consideration. The irony attached to the most widely used engine in the world is surely its staggering incompetence - most of them are really bad at performing their sole purpose: to turn fuel into usable energy.  More than half of the fuel it takes in is wasted, or expelled as fumes – air pollution. To contrast – an electric vehicle doesn’t even have an exhaust pipe. We see performance as being pretty strong for electric vehicles. 

It is difficult to argue whether performance, practicality or affordability is more of a deal-breaker to the success of electric vehicles, but if we subscribe to the belief that man is a creature of habit, then practicality surely presents the most likely stumbling block. Concerns about practicality are evidenced by lower EV sales in countries with fewer EV charge points. This isn’t rocket science: I’m not going to buy an EV if I believe that it will run out of power before I reach my destination or a suitable charging point. But are my fears warranted? A Massachusetts Institute of Technology (MIT) study in 2016 found that 87% of vehicles on the road “could be replaced by a low cost electric vehicle available today, even if there’s no possibility to recharge during the day.” Even super-fast chargers are not as necessary as drivers expect them to be – based on the views of over 2000 EVs drivers, in a CleanTechnica report in 2016. The survey found that the demand for cars capable of super-fast charging far outstrips the actual use of these chargers – suggesting that they end up being far less crucial to mobility than drivers expect them to be. Concerns about practicality are a very real hurdle to overcome, far more than actual practicality – quite simply because we are creatures of habit, and imagining a different way of doing things isn’t easy. We don’t see practicality as being a negative, although we do think they will require some getting used to.

The last piece of the puzzle that needs to fall into place is cost.  Countries or states with generous subsidies have seen widespread uptake - places like California, Norway and the state of Georgia. But what happens when these subsidies are removed? Not a single private EV was registered in Hong Kong, in the month after their subsidy was scrapped – and in Georgia, sales plummeted 83% after their subsidy was replaced by a registration fee. These subsidies were removed prior to electric vehicles being price competitive – average Joe simply does not have the appetite to dig deep for a cleaner car. These high costs don’t represent high margins for EV makers – in fact, auto executives at the recent Frankfurt auto show made no secret of the fact that going electric will hurt margins. The cars have been genuinely expensive to make, primarily because of the cost of the battery – something that has fallen by 80% since 2011. The magic number – when electric vehicles will cost the same as conventional vehicles – is said to be $100/kWh, a milestone that we are expected to reach by 2020. Companies such as BYD, Umicore and Panasonic, to name a few, are competing to make batteries better and cheaper than ever before, motivated by the size of the nascent clean transport industry. Until price parity is reached, supportive regulation is clearly a game changer.

In short – we see electric vehicles as being superior on performance, equal on practicality and nearly there on price. The implications for the auto industry as we know it are huge. Focus has shifted to parts manufacturers such as Valeo, who are committed to innovating in the area of cleaner, more intelligent transport. It remains to be seen which of the traditional auto makers will emerge as winners but little doubt remains that we are witnessing the disruption of one of the longest running, most entrenched technologies ever.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. RLAM is not responsible for content on third party websites.