Improving electric vehicle economics | McKinsey
2/10/20, 07:22
!
Automotive & Assembly
By Yeon Baik, Russell Hensley , Patrick Hertzke , and Stefan Knupfer
Most OEMs don’t profit on selling electric vehicles. But addressing elements of the product and business model can put them
on a better path. We have a clear roadmap for EV profitability.
The future looks bright for electric-vehicle (EV) growth. Consumers are more willing than ever to consider buying EVs, and sales are rising fast. Most major
markets have consistently registered 50 to 60 percent growth in recent years, albeit from small bases. More new models from a growing cadre of automotive
OEMs make finding a suitable EV easier: in 2018 alone OEMs launched about 100 new models and sold two million units in total globally. Likewise, performance
improvements continue with respect to range, performance, and reliability. Regulations in major car markets—namely China, the European Union, and the
United States—compel OEMs to produce more EVs and encourage consumers to buy them.
However, there is a problem: today, most OEMs do not make a profit from the sale of EVs. In fact, these vehicles often cost $12,000 more to produce than
comparable vehicles powered by internal-combustion engines (ICEs) in the small- to midsize-car segment and the small-utility-vehicle segment (Exhibit 1).
What is more, carmakers often struggle to recoup those costs through pricing alone. The result: apart from a few premium models, OEMs stand to lose money
on almost every EV sold, which is clearly unsustainable.
Exhibit 1
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Improving electric vehicle economics | McKinsey
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Many carmakers appear to be resigned to this fate, at least for now. Battery costs represent the largest single factor in this price differential. As industry battery
prices decline, perhaps five to seven years from now, the economics of EVs should shift from red to green. Current thinking holds that the industry will continue
to produce EVs—largely because it has little alternative in the face of stringent fuel-economy and emissions policies—and that the industry will, in the
meantime, absorb the losses.
Our analyses show that better options exist, even today, to accelerate the industry toward profitability from both product and business-model perspectives.
Some of these options include aggressively reducing cost through “decontenting,” optimizing range for urban mobility, partnering with other automakers to
reduce R&D and capital expenditures, targeting specific customer segments, and exploring battery leasing.
An industry in a jam
Understanding the challenges and opportunities for OEMs requires examination of the changing landscape of consumer attitudes, product availability, EV
economics, and regulatory tailwinds.
Consumer preferences on electric vehicles
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Consumers’ EV preferences are shifting. The share of global consumers that would consider purchasing an EV is on the rise. In the United States, between 10
and 30 percent of consumers indicated their preference to consider an EV as their next purchase on national surveys.[ 1 ] In Europe, the reported share of
consumers considering EV purchase was higher, at 40 to 60 percent,[ 2 ] and in China, it was over 70 percent, given the presence of strong government
incentives to adopt these vehicles.[ 3 ] This trend is even more pronounced among customers younger than 50 years old living in urban areas. Sales in 2018 only
provide a partial view, given that EVs accounted for less than 5 percent of sales in most markets. However, the pace of change tells a different story, with annual
sales’ growth rates now frequently in the range of 100 percent or more.
Product availability
On the supply side, this increasing demand will be met with a broader set of choices. Today, new EV models are launching at a rate of approximately 120 a year,
providing significantly more options regarding vehicle segment, performance, feature set, and value. Compare this with the prior seven years, during which new
plug-in-hybrid-EV (PHEV) and battery-EV (BEV) launches globally averaged about 20 per year, often with premium prices. Historically, domestic Chinese
OEMs provided the widest selection of models, but by 2020, most global OEMs across China, Europe, and the United States will offer a broad range of vehicles
and price points.
Electric-vehicle economics
Our survey from 2017 also revealed that an EV’s purchase price and driving range are the biggest hurdles to wider consumer adoption—and both are linked
inextricably to battery economics. Today, a typical BEV in the United States, priced around $30,000, does not provide a reasonable payback period for many
buyers, given the size and cost of a battery pack; to recoup the price premium for an EV versus an ICE vehicle through savings on fuel and maintenance, the
payback period is five to six years for an average US buyer driving 13,000 miles a year. For high-mileage drivers exceeding 30,000 miles per year—such as
full-time cab, Uber, and Lyft drivers—EVs are already “in the money” during a typical two- to three-year ownership or lease period. Looking ahead, each 20 to
25 percent improvement in battery cost reduces payback by one year, but OEMs will need to take other actions to accelerate profitability.
Regulatory tailwind
The role of the regulator in today’s EV landscape cannot be overstated. Ever-tightening government emissions regulations act as direct stimuli for OEM EV
investments, and current subsidies and tax exemptions help bridge gaps between OEM pricing and consumer willingness to pay. In China, for example, the
2018 regulatory-incentive system, including supply and demand incentives and restrictions, pushed global EV sales above one million units.[ 4 ] However, China
is not the only major market increasing regulatory pressure. In December 2018, the European Union’s 28 member states agreed to new carbon-dioxide
regulations that would set a target of 37.5 percent reduction in car emissions by 2030 when compared with 2021. This was significantly more aggressive than
the European Commission’s original proposal of a 30 percent reduction.
Accelerating toward profitability
At the beginning of this article, we highlighted the fact that today’s EVs are costlier to produce, and consumers have a rather limited willingness to pay a
premium for EVs. The combination of these two factors leads to lower profitability of today’s EVs versus today’s ICE vehicles.
However, based on our analyses, it is possible to use today’s technology to design a profitable EV—one that would be cost-competitive with ICE vehicles by the
early to mid-2020s. In our study, we analyze the example of a small- to midsize EV that is today approximately $12,000 more costly, and therefore less
profitable, than a similar ICE vehicle. The challenge: find cost and revenue levers to narrow the gap.
Optimize electric-vehicle designs for the market
We believe OEMs can reduce their EV costs by $5,700 to $7,100 by pursuing strategic decontenting paired with a dedicated EV platform (Exhibit 2). This could
be accomplished leveraging new freedom in design unlocked by using electric rather than ICE subsystems and applying leading strategies in low-cost ICE
design and from cutting-edge EV-focused OEMs.
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Improving electric vehicle economics | McKinsey
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Exhibit 2
Design simplifications and value-neutral decontenting
OEMs can take lessons from leading e-vehicle concepts, for which our proprietary teardown study revealed that cockpit, electronics, and body simplifications
netted up to $600 in reduced costs, without removing core feature content tied to value generation for the OEM. Eliminating extra displays, buttons, switches,
wiring, modules, and additional structural components, as well as reducing the overall design complexity, drove major savings. Our experts also noted that
OEMs can only capture all of these material cost savings when using a dedicated EV platform that enables better packaging of interior cabin space, power
electronics, motors, and battery packs. However, we also gain insights by benchmarking low-cost designs from the non-EV world. Our analysis shows that
OEMs can apply these learnings and create fun-to-drive and simple vehicles costing $1,300 to $1,800 less through smart feature choices, designspecification adjustments, and manufacturing improvements—all without compromising safety. Some of these content choices include using more basic
vehicle electronics with fewer powered options, straightforward body styling and lighting, uncomplicated seat designs, and simplified interior trim (Exhibit 3).
Our work suggests that companies can extract component savings of 20 to 30 percent with these design approaches, including by adjusting material
specifications and negotiating with suppliers with the shared objective of EV profitability.
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Improving electric vehicle economics | McKinsey
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Exhibit 3
Decontenting or design revision may be an opportunity for electric vehicles.
Teardown study cost-reduction areas
Simplified user controls,
with reduced complexity
and enhanced functionality
via electronic components
Next
Optimizing for urban mobility
For many customer segments, today’s EVs offer either too little driving range, such as smaller EVs with ranges of fewer than 100 miles, or too much, such as
luxury EVs with ranges of approximately 300 miles, when compared to actual driving patterns. The average vehicle-miles traveled (VMT) for an urban
population is around 20 miles per day in the United States, and it increases to around 30 miles per day when accounting for demographic groups that drive
more.[[footnote 5]] Assuming today’s battery efficiency in kilowatt-hours (kWh) per mile, a potential sweet spot for urban customers is approximately 25 kWh of
energy. However, if we account for consumer preference to use the same vehicle for suburban and occasional rural travel, the optimal battery capacity
increases to approximately 40 kWh, equating to ~250 kilometers, or about 160 miles, based on average VMT in rural areas. A reduction in battery capacity to
40 kWh, from 50 kWh, would save $1,900 to $2,100 today, while the range would still enable most consumers, especially those in urban environments, to
complete trips without any sacrifice to their daily routines.
Final assembly optimization
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Improving electric vehicle economics | McKinsey
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Our recent study of EV design also suggests that a purpose-built EV platform is simpler to assemble and could deliver up to $600 in savings per vehicle in
lower fixed-cost allocation.[[footnote 6]] That savings comes from having fewer components to assemble in an optimized EV platform and requiring less capital
in EV-only plants versus complex plants that combine ICE-vehicle and EV lines.
Partnership during the transition
During the next five to seven years, as the industry transitions toward electrification but struggles with profitability, automakers should more strongly consider
partnering and collaborating with competitors. At a time when OEMs face the possibility of retooling numerous models and platforms for electrification,
collaborating with other OEMs can reduce the fixed-cost burden of R&D, tooling, and plants. Benefits will be especially high if OEMs can share EV platforms
and plants, which can still enable multiple model variants. These alliances will also be most beneficial when they enable higher-volume procurement of the
same battery cells and power electronics to take advantage of scale that is otherwise elusive when going it alone. In fact, some automakers have already
announced a range of different global partnerships focused on reducing the cost of designing and producing EVs.[ 7 ] In our analysis, we examined the impact of
two OEMs codeveloping a dedicated EV platform, which could lead to two to three times the volume spread across a similar fixed-cost base—reducing costs by
$1,500 to $2,000 per vehicle.
Boosting margins beyond cost cutting
OEMs could explore several other efforts to improve margins.
Communicating electric-vehicle economics to customers
Per insights from EV-consumer surveys, some consumer subsegments may present the opportunity to boost take rates and pricing.[[footnote 8]] This analysis
suggests that more than 40 percent of EV shoppers may be willing to pay a small premium, but history shows that convincing even the most enthusiastic
customers to pay a more significant premium is difficult.
We see more opportunities in a targeted “value-selling” approach, in which OEMs find ways to explain better the full economic benefits of an EV. For example, a
consumer paying 10 percent more for an EV than for an ICE vehicle will achieve breakeven with a comparable ICE vehicle in close to one year if he or she also
includes fueling and maintenance costs in the calculation. However, our dealer surveys show that this approach is rarely used. OEMs must do a better job in
informing all stakeholders in the sales channel to educate buyers regarding the benefits of EV ownership. For instance, spending an extra $20 per month in
financing or lease payments juxtaposed with saving about $60 per month in fuel and maintenance costs should be a great deal for most consumers. This
assumes annual mileage of roughly 14,000 miles, with consumers who drive more experiencing even larger paybacks.[[footnote 9]] The economics for EV
owners will also be better in cities like London, where EV drivers do not pay the congestion charge of £24 per day in 2019.
Exploring new business models
Automakers that take a bolder approach to closing the profitability gap can also experiment with a range of new business models for niche segments. Example
ideas include targeted direct sales to fleets and battery leasing (Exhibit 4).
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Exhibit 4
Economically, it makes sense to target fleet customers with EV models, given that these fleets typically fall into a high-mileage category in which the total cost
of ownership (TCO) of EVs is beneficial—and they prioritize TCO higher than other buying factors. Direct selling to these customers can reduce selling costs by
about $1,000 per vehicle by circumventing showroom costs. Given the positive business case for fleet customers and their more predictable and simple
charging logistics, these customer segments are early use cases for high EV take rates.
OEMs could offer to lease batteries separately from the vehicle and resell older batteries to the stationary storage market for secondary use. Battery leasing
has a potential to attract consumers who shy away from purchasing an EV due to uncertainty in performance and degrading capacity of batteries today. OEMs
operating a successful battery-leasing program could add more than $1,000 in revenue per vehicle during the assumed lease term of five years. A customer
would be paying a monthly fee to lease the battery, with an assumption of added margin on the depreciated value of the battery pack.[[footnote 10]] This could
be an increasingly viable profit-generating idea, but we still assume that this will only appeal to a minority of customers today.
Operating in an increasingly complex environment
Beyond cost and regulatory pressures, OEMs must also contend with an increasing complex set of choices in product design, capital allocation, and changing
mobility dynamics in cities .
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Product design
OEMs have reached a crossroads on vehicle-platform design , with a number starting to invest in “native,” or purpose-built, EV platforms, while others primarily
produce EVs based on modified ICE-vehicle platforms. Purpose-built EV platforms are lower in material cost and allow better performance in range,
acceleration, and interior space. They do, however, come with additional investments in new, stand-alone platforms, leading to higher fixed-cost allocation,
especially when initially produced in lower volumes. Each automaker would need to save more than $4,000 per vehicle in direct materials cost to recoup the
estimated $1 billion in incremental fixed costs for a dedicated platform if selling about 50,000 units per year over five years. Today’s mass-market EVs typically
sell at volumes between about 30,000 and 80,000 vehicles globally.[ 11 ] Significant debate, especially for passenger-car segments, resides around the choice
of a pure EV platform versus a versatile platform that can house both EV and ICE power trains. OEMs that choose to make a BEV or PHEV from a modified ICE
platform to limit capital investment will often have to sacrifice higher material costs driven by the “overdesigned” platform and face challenges in battery
packaging, not only in the same capacity (sacrificing range), but also in a less cost-efficient manner, potentially making them less exciting to consumers.
Capital allocation
In addition, we have witnessed bolder actions by cities to address air-quality challenges, and pressure will increase as demographic shifts favor migration of
more people to urban areas. Cities are counting on EVs to be part of the solution, and, in many cases, individual-city emission regulations will be stricter and will
require higher EV adoption than will national regulations. (See sidebar, “Changing mobility dynamics in cities: Micromobility’s role,” for a view on another part of
the solution.) For example, in Beijing, license-plate restrictions continue to shift consumer demand to EVs, and taxi fleets are also going electric, with 70,000
EV taxis now on the streets. In Europe, London is expanding ultra-low-emission zones with daily fees and pushing to add charging stations at one out of every
five parking spots. In the United States, cities such as San Jose offer consumer-purchase incentives of $2,500 on top of federal incentives to improve
consumer economics, and California emission regulations are more stringent than regulations on the US federal level.
Fast forward to 2025: Electric-vehicle cost parity
While not as profitable as ICE vehicles today, our analysis shows that EVs have the potential to reach cost parity with and become equally—or even more—
profitable as ICE vehicles by around 2025 (Exhibit 5). McKinsey and other industry experts have conducted detailed studies on the potential cost trajectory for
EVs, including battery-cost and efficiency improvements, power-electronics scale economies, and indirect cost reduction based on increased volume
production. We believe these can unlock $5,100 to $5,700 in cost reductions per vehicle. We assume battery-cost and related price declines will continue,
driven by chemistry and scale improvements, although it is fair to assume that we may witness short-term upward price movement in markets with constrained
supply. Alternatively, we may see even faster price declines if competitive intensity rises among battery makers seeking volume.
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Exhibit 5
Based on our analyses, an OEM could expect to break even in cost with EVs compared to ICE vehicles, and thus even achieve a profit margin of 2 to 3 percent
per vehicle, in 2025. This scenario holds true in the absence of any premiums in pricing paid by consumers or any subsidies provided by governments.
Application of the newer business models described above are also excluded here.
While it is true that the majority of EVs are not generating profits today, our analysis shows that OEMs should not be fatalistic about their plight, nor can they
afford to wait for reductions in battery costs to change this dynamic. We believe there are multiple levers that automakers can pull, even today, to help
accelerate their path toward mass-market EV profitability. Taken together, we believe that OEMs can reach a break-even cost basis for mass-market EVs
compared to ICE vehicles in the next few years—and for some targeted customer segments, even achieve earlier and higher profitability with EVs.
Based on our analyses, accelerating EV profitability will, however, require some bold steps, including the following:
making tough choices around EV-platform design, including balancing lower material cost with higher capital allocation and maximizing volume where
possible
applying more ambitious cost-reduction approaches to EVs, including design simplification, value-neutral decontenting, and aggressive purchasing
strategies
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evaluating new potential partnerships with competitors to share R&D, tooling, and production costs for new EV platforms
considering more creative use of alternative EV-specific business models that can boost margins
There is no debating that the next five years will be a challenging transition period for automakers and suppliers alike. Consumers, city dynamics, regulators,
and competitors will increase pressure on most OEMs to switch more quickly from ICE vehicles to EVs, often with little consideration of EV economics.
The key debates are thus: Which automakers will crack the code of EV profitability first, what bold actions and visions will they pursue, and, as a result, how will
the global automotive industry be permanently reshaped?
1. Russell Hensley, Patrick Hertzke, Stefan M. Knupfer, Nicolaas Kramer, Nicholas Laverty, and Patrick Schaufuss, “ Electrifying insights: How automakers can drive electrified
vehicle sales and profitability ,” January 2017; “AAA: 1-in-5 U.S. drivers want an electric vehicle,” AAA NewsRoom, May 8, 2018, newsroom.aaa.com; Hoang Nguyen, “Middle of the
road: An analysis of the automotive sector,” YouGov, January 9, 2019, today.yougov.com.
2. Russell Hensley, Patrick Hertzke, Stefan M. Knupfer, Nicolaas Kramer, Nicholas Laverty, and Patrick Schaufuss, “ Electrifying insights: How automakers can drive electrified
vehicle sales and profitability ,” January 2017; “Electric Vehicles Survey results,” Dalia Research, November 1, 2016, daliaresearch.com.
3. “Consumers in China increasingly enthusiastic about new-energy vehicles and eager for battery technology advancement, J.D. Power Survey finds,” J.D. Power, February 26,
2018, jdpower.com; China Youth Daily, August 2018, cyol.net.
4. Total EV sales in China from January to November 2018 was approximately 730,000.
5. Antoine Chatelain, Mauro Erriquez, Pierre-Yves Moulière, and Philip Schäfer, “ What a teardown of the latest electric vehicles reveals about the future of mass-market EVs ,”
March 2018.
6. 2018 Nissan Leaf sales are approximately 80,000 per year; Chevy Bolt sales are approximately 30,000 per year.
About the author(s)
Yeon Baik is an associate partner in McKinsey’s Chicago office, Russell Hensley and Patrick Hertzke are partners in the Detroit office, and Stefan
Knupfer is a senior partner in the Stamford office.
The authors wish to thank Ravi Mangipudi, Patrick Schaufuss, Stephanie Schenk, Dennis Schwedhelm, Giulia Siccardo, and Katherine Wolosz for their
contributions to this article.
https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/making-electric-vehicles-profitable
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McKinsey Center for Future Mobility
Expanding electricvehicle adoption despite
early growing pains
The latest analysis of our Electric Vehicle Index shows the global
electric-light-vehicle industry continues to make solid progress.
To accelerate growth further, several hurdles need to be overcome.
by Patrick Hertzke, Nicolai Müller, Patrick Schaufuss, Stephanie Schenk, and Ting Wu
© Elektronik-Zeit/Getty Images
August 2019
The global electric-vehicle (EV) industry continues Continued electric-vehicle growth
to expand rapidly. However, regional performance
through 2018
varies, with some EV markets approaching nearEV sales grew to more than two million units globally
mainstream status, while others remain stuck
in 2018: an increase of 63 percent on a year-on-year
in neutral. Overall, global EV-sales volumes are
basis, and a rate slightly higher than in prior years.
becoming large enough to create substantial
Nevertheless, with a penetration rate of 2.2 percent,
profit pools for well-positioned suppliers and
EVs still only represent a fraction of the overall lightother upstream players—but they are also having a
vehicle market. The ratio of battery EVs (BEVs) to
negative impact on traditional OEM profit margins.
plug-in hybrid EVs (PHEVs) held relatively steady
The entire power-train value chain continues to
from 2017 (Exhibit 1).
recalibrate as OEMs follow different sourcing
strategies across e-power-train components and
as many incumbents, plus new suppliers, enter
Electric-vehicle-market snapshots
the market. In the current highly competitive
Regional performance varies considerably, with
environment, the ultimate winners have yet to be
some EV markets approaching near-mainstream
determined. With the breakeven for EVs still a few
status, while others are simply marking time. A
Insights 2019
years away, OEMs are feeling the heat. To accelerate
breakdown of EV-industry progress through 2018
Expanding electric-vehicle
adoptionprofitable
despitegrowth,
early growing
pains
and ensure sustainable,
the
by select countries or regions follows.
Exhibit 1 of 3
industry still needs to overcome several challenges.
(For more on the research underlying this article, see
sidebar, “What is the Electric Vehicle Index?”)
Exhibit 1
The global market for electric vehicles has grown at about 60 percent per year, reaching
2.1 million in 2018.
Global light EV¹ sales,
million units
CAGR,²
%
Share of global light EV sales, %
EV-penetration rate, %
2.1
38
+59%
per annum
40
36
32
31
68
69
2.2
PHEV³ 51
1.3
62
60
64
1.4
0.8
0.9
BEV⁴ 64
0.5
0.6
0.3
0.4
2014
1
2018
2014
Electric vehicle. 2 Compound annual growth rate. 3 Plug-in hybrid electric vehicle. 4 Battery electric vehicle.
Source: EV-Volumes.com; McKinsey analysis
2
Expanding electric-vehicle adoption despite early growing pains
2018
2014
2018
What is the Electric Vehicle Index?
The index explores two important dimenMcKinsey’s proprietary Electric Vehicle
Index (EVI) assesses the e-mobility perfor- sions in the advance of electric mobility:
mance of 15 key countries around the world. markets and demand, on the one hand,
and industries and supply, on the other.
It focuses on light-vehicle adoption as well
as plug-in electric cars (battery electric ve- On the market side, it analyzes the share
of EVs in the overall market. It also looks
hicles (EVs) and plug-in hybrid EVs). Since
at incentives, such as subsidies; the
the creation2019
of the EVI several years ago, it
Insights
existing
infrastructure;
and thepains
range of
has served as aelectric-vehicle
critical tool to help organiExpanding
adoption
despite
early growing
EVs
available.
The
industry
side
deterzations
exposed
to
the
automotive,
mobility,
Exhibit Sidebar
mines how successfully the automotive
and energy sectors understand how EV
sector in each country has supported
dynamics have evolved at a granular level
electric mobility. It involves analyzing a
and where they are trending for the future.
range of factors, such as the current
and future share of EVs in the global
production of vehicles, and incorporates
key components, such as e-motors
and batteries.
The EVI assesses every country on its key
performance indicators and accumulates
a score from zero to five. It then translates
these into an overall weighted score, which
is the basis for the final EVI matrix and
country ranking (exhibit).
Exhibit
Norway leads electric-vehicle adoption on the market side, while China excels on the
industry side.
Overall Electric Vehicle Index (EVI) results, score (range from low of 0 to high of 5)
High
5
Market EVI ranking
1. Norway
2. Netherlands
3. China
4. Sweden
5. United Kingdom
6. Switzerland
7. United States
8. Canada
9. Portugal
10. France
11. Germany
12. South Korea
13. Japan
14. Italy
15. India
Norway
4
3
Netherlands
Market EVI
China
Sweden
United Kingdom
2
Switzerland
Canada
United States
Industry EVI ranking
France
Portugal
1. China
2. Japan
3. Germany
4. United States
5. South Korea
6. France
7. India
8. Italy
Germany
South Korea
1
Japan
Italy
India
0
0
Low
1
2
3
Industry EVI
4
5
High
Source: McKinsey analysis
Expanding electric-vehicle adoption despite early growing pains
3
China leads
China’s EV market grew 85 percent over the prior
year, significantly above the industry average. The
market experienced healthy growth—despite a
subsidy cut by the government, which significantly
impeded sales of micro EVs that once represented
around half of the Chinese EV market.
For BEVs in China in 2018, the minimum
performance on electric range was increased to
150 kilometers (km), from 100 km, and the minimum
performance on energy density rose to 105 watthours per kilogram (Wh/kg), from 90 Wh/kg. The
government once more raised the bar for 2019,
to 250 km and 125 Wh/kg, respectively. While
last year, BEVs with a very high range and energy
density benefited from an increase in subsidies, the
government has now cut the incentives at all levels.
Standing at 1.1 million units, or 51 percent of global
EV sales in 2018, China’s EV market is now about
three times the size of the European and US markets
each (Exhibit 2). With the government aiming to
phase out subsidies entirely by next year, OEMs are
in doubt that the market will be robust enough to
sustain its growth beyond 2020. Furthermore, the
trend toward an overall market decline (light-vehicle
sales fell around 15 percent through May 2019
compared with last year) might also affect the EV
segment going forward.
Europe’s mixed signals
The European EV market saw moderate growth
(an increase of 90,000 units), with a mixed picture
at the country level. Norway remains significantly
ahead of other markets and appears on its way to
mass-market adoption. Large markets (in absolute
light-vehicle-unit sales terms) such as France,
Germany, and the United Kingdom still have to gain
momentum, with EV-market shares of around 2
percent, while comparably small Nordic countries,
like Norway (40 percent market share), Iceland (17
percent), and Sweden (7 percent), currently perform
the best. However, tightening CO2-emission
regulation will most likely lead to significantly larger
market shares for EVs across Europe through
2020–21 and beyond.
4
Expanding electric-vehicle adoption despite early growing pains
North America gets an electric-vehicle boost
The US market almost doubled to 360,000 EV units,
mainly because of the strong sales performance of
Tesla’s Model 3. Tesla sold 140,000 Model 3 cars
in 2018, making it the best-selling EV in the United
States (40 percent market share) and globally (7
percent). For the first time in the country, an EV
model sold equally as well as comparable internalcombustion-engine (ICE) cars. While high sales
numbers for the Model 3 in 2018 were partially
supported by EV tax credits and high demand from
the list of reservation holders, they still show that
EVs can be attractive alternatives to gasolinepowered cars and that a strong market potential
exists for a growing number of premium and masspremium buyers. Nevertheless, sustainable market
growth will also depend on regulatory developments,
given ongoing discussions among federal and
national parties regarding the rollback of 2025 fueleconomy standards as well as state authority under
the Clean Air Act.
Japan follows a portfolio approach
Japan lost momentum from 2017, when sales
increased by 142 percent driven by the introduction
of a next-generation PHEV model. In 2018, the
market declined by 9 percent compared with the
year before, with EV penetration standing at only
1 percent. While Japanese OEMs were among
the first movers with respect to the introduction
of EVs, the country now lacks a strong push for
more aggressive adoption. There has been some
activity around BEVs recently, with Japanese OEMs
moving from full hybrids and hydrogen fuel cells
to pure battery-electric technology, as the former
alternative-propulsion technologies struggle to win
widespread global support.
India’s four-wheel market remains stalled, but
two- and three-wheelers accelerate
The Indian EV market remains largely driven by
mass- and low-cost-mobility segments, such as
two- and three-wheelers. Recent government
policies and those under debate could steeply
accelerate electrification in these segments (for
instance, differentiated tax policy promoting EVs
and localized incentives to promote start-ups).
Expanding electric-vehicle adoption despite early growing pains
Exhibit 2 of 3
Exhibit 2
China’s electric-vehicle market is three times the size of that of Europe or the United States.
Light EV¹ sales, by region, thousand units (% share of EV market)
China
European Union
1,062
269
+69%
per annum
PHEV²
(25)
United States
+28%
per annum
+46%
per annum
793
574
105
339
220
66
BEV³
(75)
469
78
232
261
154
2015
2018
361
320
154
169
83
88
71
81
147
(46)
114
117
2015
173
122
(54)
2018
115
44
71
158
73
84
200
93
239
(34)
(66)
107
2015
2018
Light-EV-penetration rate among overall light-vehicle sales, by region, %
China
European Union
United States
3.9
2.1
2.1
1.8
1.3
1.2
1.0
0.9
2015
1.2
1.0
0.7
2018
New models continually introduced
Government phasing out EVsubsidy program by end of 2020
Corporate Average Fuel
Consumption and New Energy
Vehicles dual-credit scheme applies as of 2019
2015
2018
Competitive premium-EV models launched
New CO₂-emission targets for
2025 and 2030
Transition from New European
Driving Cycle to Worldwide
Harmonized Light Vehicle Test
Procedure
2015
0.9
2018
Tesla Model 3 production scaled up
Emission targets most likely relaxed until
2025
New-model launches by key US brands
Note: Figures may not sum, because of rounding.
1
Electric vehicle. 2 Plug-in hybrid electric vehicle. 3 Battery electric vehicle..
Source: EV-Volumes.com; McKinsey analysis
Expanding electric-vehicle adoption despite early growing pains
5
In addition to such regulatory tailwinds, product
innovation in the form of new two- and three-wheel
EV models rolling out each year (using longer-range
lithium-ion batteries) and new business models,
such as battery swapping, are having an impact.
On the other hand, four-wheel EV sales have been
almost unnoticeable so far, with fewer than 2,000
units sold in 2018 out of a total light-vehicle sales
volume of four million units. Insufficient four-wheel
consumer-focused government incentive schemes,
limited models, price-sensitive consumers, and a
lack of charging-infrastructure investment (public
or private) are persistent challenges. Benchmarking
policies focused on what other markets are doing
could improve this situation, as could increases in
EV imports while domestic players retool for EV
production. This year, the government announced
plans to order ride-hailing companies to convert
40 percent of their fleets to electric by 2026.
The global outlook for electric vehicles
Tesla is now the world’s largest EV producer,
followed by two Chinese automakers, BYD and BAIC
Motor. However, industry observers project that in
2019 and 2020, the intensity of competition will heat
up significantly, with competitive models launched
by several international premium brands. Overall,
international OEMs are expected to launch 66 EV
models in 2019 and 101 models in 2020, including
several models in larger D and E segments—as well
as SUVs and crossovers (Exhibit 3). These launches
are part of a bigger strategy, as automakers need
to comply with increasingly stringent CO2-emission
regulations in Europe as well as Corporate Average
Fuel Consumption (CAFC), New-Energy Vehicle
(NEV), and other regulations in China.
In China, the industry in aggregate overachieved
its 2018 CAFC target of 6.3 liters per 100 km, while
several international joint-venture companies and
imported brands missed their individual targets
(offset by positive credits carried over from past
years). The enforcement of the EV-credit-quota
system in 2019 and 2020, as well as the increasing
stringency of CAFC targets, should support rapid
EV growth. International OEMs should catch up on
CAFC progress because of an increase in EV sales
through new-model launches, although they may
benefit less from government purchases.
Challenges to overcome to scale
electric vehicles
While EV manufacturers continue to make progress
in developing EVs with greater range, more power,
and superior styling, the industry still needs to
overcome several challenges to accelerate growth
and scale EVs in a sustainable way.
Making bold choices to accelerate electricvehicle profitability
Automotive-OEM-profitability compression
because of EVs and other advanced technology is
now a top concern for management: EV investments
ramp higher each year, and increasing losses are
tied to negative margins for most EV models sold in
2018. However, if OEMs pull the right levers, there
are options to make EVs profitable. In the short term
to midterm, these include redesigning EVs with
new approaches to content trade-offs, expanding
partnerships with mobility players, and making
bolder moves to partner with competing OEMs
on platform development and manufacturing. For
a deep dive on the topic, see our article “Making
electric vehicles profitable” on McKinsey.com.
The industry needs the emission relief EVs provide—
especially in Europe, where average industry fleet
Synchronizing the electric-vehicle value chain
emissions did not decrease for two consecutive
Across these different markets, we continue to
years in 2016 and 2017. In addition, the European
find that OEM strategies to develop and promote
Union agreed last year—as the first market globally— EVs are not always in sync or well supported by
to commit to even more stringent CO2-emission
all players in the e-mobility ecosystem. Recent
targets through 2030, aiming to reduce CO2
shortages in battery-cell production leading to long
emissions by 37.5 percent from 2021 to 2030.
waiting periods for some EVs in Europe is just one
6
Expanding electric-vehicle adoption despite early growing pains
Expanding electric-vehicle adoption despite early growing pains
Exhibit 3 of 3
Exhibit 3
Established OEMs are expected to launch around 400 new electric-vehicle models through 2023.
Existing and newly launched BEV¹ and PHEV² models by vehicle segment, number of model launches
1
2018³
2019
2020
2021
2022
2023
Total
A City car or
minicompact
12
3
4
10
1
1
31
B Supermini or
subcompact
8
16
11
5
9
11
60
C Compact or
small family
31
28
42
22
25
29
177
D Large family
or midsize
21
10
27
19
30
27
134
E Executive
or full size
24
9
17
16
21
22
109
Total
96
66
101
72
86
90
511
2018³
2019
2020
2021
2022
2023
Battery electric vehicle. 2 Plug-in hybrid electric vehicle. 3 Cars actually produced in 2018. All subsequent year numbers are estimates by segment.
Source: IHS Markit; McKinsey analysis
example. An integrated approach across industries
and government leaders would ease the burden.
For example, greater clarity with respect to nationaland city-level emissions and air-quality regulations
through 2030 would help to do three things: provide
greater ability to plan necessary investments in
new mining production for raw materials, such as
nickel and cobalt; ramp up localized battery-cell
production with room to grow; and improve OEM
volume planning. Similarly, the coordination of
renewables ramp-up to meet greater electricity
demand, potentially paired with second-life EV
batteries to avoid peak-load strains on the grid,
Expanding electric-vehicle adoption despite early growing pains
could be another “unlock.” For further information,
see our publications Race 2050—a vision for the
European automotive industry and “Second-life EV
batteries: The newest value pool in energy storage”
on McKinsey.com.
Further expanding the model range
Despite the numerous model launches announced
by international automakers for 2019–20, the
available options still skew predominantly toward
higher-priced premium vehicles. Mass-market EV
choices that are competitively priced with existing
volume-brand ICE vehicles are currently slated to
7
hit the showrooms later. Accelerating availability of
small, affordable vehicles will be especially important
in early-stage price-sensitive EV markets, such as
Brazil and India. More affordable options will also be
critical for tapping into demand in mobility services—
for example, independent ride-hailing drivers.
In markets such as China, small BEVs are frequently
nearing—or at—purchase-price parity with ICE
vehicles, especially with subsidies, and they are
cheaper on a total-cost-of-ownership basis.
Markets like the United States, which is heavily
skewed toward large-vehicle demand, will need to
take a different approach with models that can go
head to head with today’s crossovers and SUVs.
Higher-range expectations for these vehicles may
force OEMs to pursue greater scale at a global
platform level and to partner up to drive costs down
in batteries, e-motors, and other power electronics.
Industry and government can also collaborate to
make strides in the decarbonization of transport
and equipment and the improvement in air quality in
cities through greater investments in, and promotion
of, e-buses, EV commercial vehicles or e-trucks,
and off-highway electrification (for example, in
construction equipment and material handling). If the
expected total-cost-of-ownership benefits in energy
and maintenance costs are borne out in the test
fleets rolling out across the globe from 2019 to 2022,
we expect the pace of adoption to increase sharply
in these vehicle types, as the economic benefits
for businesses will be hard to ignore. For further
information, see our articles “Harnessing momentum
for electrification in heavy machinery and equipment”
and “Fast transit: Why urban e-buses lead electricvehicle growth” on McKinsey.com.
The global EV industry has accomplished major
achievements in a relatively short time, driven by
regulatory pressure, strong technical innovation
in batteries, and increasing investment in EV
platforms. But as EV markets continue their rapid
but sometimes unpredictable growth toward massmarket proportions, automakers have begun to
experience growing pains in their supply chains
and in their bottom-line results. Fortunately, longterm cost trends continue to head downward,
and in the near term, there are still many levers
that the industry can pull. However, solutions for
OEMs will require bolder moves, new design and
business-model thinking, and better collaboration
with suppliers, governments, fleets, and even
competitors. For an industry that typically plans in
two or three five-year product cycles, we may now
be roughly one product cycle away from a more
sustainable automotive market, with respect to both
carbon footprint and OEM economics.
Patrick Hertzke is a partner in McKinsey’s Detroit office; Nicolai Müller is a senior partner in the Cologne office, where
Patrick Schaufuss is an associate partner and Stephanie Schenk is a research specialist; and Ting Wu is a partner in the
Shenzhen office.
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