Coming EV Onslaught Could Destroy Automaker Profits

  • Nick Jaynes has worked for more than a decade in automotive media industry. In that time, he's done it all—from public relations for Chevrolet to new-car reviews for Mashable. Nick now lives in Portland, Oregon and spends his weekends traversing off-road trails in his 100 Series Toyota Land Cruiser.

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Virtually every automaker agrees that the future is electric. Eventually, the global vehicle fleet will transition to automated electrified vehicles. That’s in the long term. In the short term, the next four to eleven years, EVs and automated driving technology could spell the ruination of some brands — or at least a gutting of their profits.

This is the dreary conclusion of a recent analysis by consulting firm Alix Partners. The firm estimates that by 2023 global automakers will invest $255 billion in electric vehicle models, of which 207 are set for launch by 2022. At the same time, brands will spend another $61 billion in automated driving technology development.

However, because of high systemic costs, low electric vehicle sales volumes, intense competition, and the fact that most of these EVs are sold at a loss to begin with, global brands could virtually lose their shirts on the switch from internal combustion engine (ICE) vehicles to electrified ones. And the losses just get deeper as time goes on and more EV models hit the market.

Slow Sales

While 22.5% of U.S. respondents to an Alix Partner’s survey indicated they planned to buy a plug-in electric as their next vehicle, EVs composed less than 2% of total U.S. sales last year. Certainly, interest will climb, but not as quickly as the number of entrants to the market.

Accordingly, automakers will need to add hefty incentives on EVs in order to sell them. This not only cuts further into profits but also decreases residual value, this harms current owners and future EV sales. For example, if you can buy a used Nissan LEAF at a fraction of the original sticker price, why would you purchase a new one from the dealer? It’s essentially a race to the bottom.

If the incentive wars weren’t damaging enough to the bottomline of automakers, the automotive industry is expected to enter a cyclical downturn. This, at the same time that more than two hundred new EVs are being introduced. Alix Partners forecasts annual new-car sales in the U.S. will decrease from 17.2 million in 2018 to 15.1 by 2020, which will further undercut carmaker profits.

2020 Ford Escape Hybrid, which can travel 550 miles between fill-ups. | Photo: Ford

 

In another survey, consumers were asked how much extra they’d be willing to pay for autonomous driving tech. $2,300 was the average response. This is in stark contrast to the actual estimated cost of full autonomous driving tech, which clocks in at around $22,900. Adding the losses from EVs to the unwillingness of buyers to cough-up barely a tenth of the cost of automated driving tech, car brands are in for a world of financial hurt from the prospect of selling autonomous electrified vehicles.

At the same time the U.S. new-car market is declining, the Chinese market will grow. It’s expected to expand from 29.1 million sales in 2019 to 38.2 million in 2020. However, Chinese carmakers are expected to capture 46% of the Chinese new-car market by the close of next year. So struggling American and European auto brands won’t be able to look to Asia as a panacea.

The hit that carmakers will take over the next decade, as they invest in autonomy and electrification, won’t last forever. Consulting firm LMC Automotive recently concluded that, by the year 2030, 69% of all vehicles in the U.S. will still be powered by fossil fuels.

That might be a slower adoption rate than some might hope. Jumping from around 2% to 31% in just 11 years is a pretty brisk increase in EV adoption. By the economy of scale principle, profits should increase at the same time costs decrease while EV sales rise. Right now, an electric vehicle powertrain represents half the cost of building that EV, that’s compared to less than the 20% of the total cost for a gasoline powered car. That is expected to drop rapidly, and car brands just have to weather the storm. Those already on shaky footing might not make it, however.

Big Changes

Believe me, it gives me no pleasure to report this grim outlook on the meager profitability, or public adoption, of EVs — quite the contrary. I am a big proponent of both EVs and autonomy. However, we the public, as well as automakers, need to have a realistic view of the future. High production costs of EVs plague automakers. Meanwhile, relatively minuscule charging infrastructure can be challenging for drivers outside of urban areas. Given those facts, EVs might not be the silver bullet we’re hoping for.

In looking at ways to reduce carbon emissions from personal transportation, we need to rethink the way we move — more than just the powertrain. A one-for-one trade from ICE to EV won’t solve transportation emissions problems. Heck, according to one recent study, EVs aren’t much better than diesels in terms of lifecycle carbon emissions, when we look at the big picture of both producing and running the vehicles.

Transitioning from cars (EVs or otherwise) to mobility solutions like e-bicycles will be essential. | Photo: Trek

 

The one person, one car example just isn’t sustainable. This means we’re going to have to make some hard decisions and adjustments to our daily routines. We need to shift away from driving and move toward mass transit, small-impact mobility tools like e-scooters and e-bicycles, and — gasp — walking. In turn, we need to curb urban sprawl and live more centrally with smaller footprints.

I say this, of course, knowing fully well that this won’t happen — at least not in my lifetime. The number of vehicles continues to rise across the globe. Even with the coming rise of robotaxis, customers have indicated that, while they might utilize ride-hailing services more often in the future, they don’t want them to supplant their personal vehicle. And good luck telling people they need to give up their suburban home for a small urban apartment.

It seems likely that it will be global climate change which forces the issue. Large swaths of the world will need to become uninhabitable before people are forced (by legislation or simple logistics) to reshape the way they live and move. Given the climate models, though, that could be by the end of this century. So, not a terribly long time.

We’ve built a pretty sweet way of life for ourselves. One person owning three fossil fuel-powered vehicles (guilty as charged) isn’t sustainable. And people understandably won’t be keen to jettison that anytime soon — or at least not at the price of real solutions. I mean, I am still sitting here chuckling that people would only pay $2,300 for autonomy.

All of this is to point out that the coming shift from fossil fuels to sustainable, renewable electric and autonomous vehicles will not be easy. And it won’t be a simple swap. We’re going to have to face systemic changes. So, buckle up, folks. Transportation is about to get messy.


About the Author

  • Nick Jaynes has worked for more than a decade in automotive media industry. In that time, he's done it all—from public relations for Chevrolet to new-car reviews for Mashable. Nick now lives in Portland, Oregon and spends his weekends traversing off-road trails in his 100 Series Toyota Land Cruiser.

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