There are many factors involved in a person’s decision in buying any particular car. But foremost is the type of car that best suits the buyer’s needs. The reason why SUV’s are now the most popular passenger car is that they suit most people’s needs of easy access, the perceived safety of a higher riding height and the room inside which can be used for transporting several kids or transporting stuff that needs the cavernous area that opens up with the rear seats down.
While emotion is also an important driving factor, this is usually where auto makers provide several levels of features with corresponding higher prices (and higher margins). So even though emotion may impact what you ultimately spend, it is utility that is the overriding concern.
The concept of utility also extends to how often the car needs to be refuelled, how far it can travel and most of all, how much it costs to run and maintain. The interesting thing about all of the factors influencing the purchasing decision is that the highest cost of owning a car, depreciation, is probably at the bottom of the list of people’s concerns. This is often a case of people not knowing what this cost is or simply that they conclude that there is nothing they can do about it. But more on this later because depreciation will become a major purchasing factor sooner than many think.
So how do these factors apply to the new wave of electric cars coming onto the market? And more to the point, how do electric cars (and here we are focussing on battery electric vehicles or BEV’s – not hybrid electric cars) compare to their internal combustion (ICE) counterparts?
The legacy automakers who are slow to electrify (read Toyota) together with ICE adherents are already filling the airwaves with negative stories about EV’s. From issues about their limited range, batteries catching fire, their high price and the uncertainty about what technology (BEV’s, hydrogen vehicles or hybrids) will prevail, are all designed to muddy the waters. Their goal is to cultivate a perception of risk when a purchasing decision to go with an EV. So let’s briefly deal with each of these issues first:
Limited range – current battery technology limits the current range of most EV’s to between 300-500 km on average. This issue is compounded by the form of battery chemistry currently being used in most EV’s where the recommendation is to charge the battery between 20-80% of its capacity. But the average person only drives 25 km per day and rarely more than 250 km, so range is not an issue for everyday use of a passenger car. Battery technology is also advancing rapidly and operating ranges will most likely test the 1,000 km range by the end of this decade. But focusing on the present and, especially if you are replacing your second car, range should not be a major factor given that you can top up your battery overnight at your own home and always have several hundreds of kilometres available to you at the start of each day. Already, newer batteries which can operate between 0-100% of their capacity are also starting to adopted by the major EV manufacturers.
Battery Fires – there had been much publicity about the GM’s Bolt battery fires in the US over the past year. Defective batteries supplied by LG Chem were the source of the problem and a major recall is underway to replace the batteries. However, no-one wants to take safety risks especially with “new” technology and the auto industry always needs to reinforce the safety integrity of their cars. But to put this particular issue in perspective, in 2020 there were around 200,000 car fires in the US in ICE vehicles and only 52 in EV’s (interestingly there were 16,000 fires in hybrids). While this is not an argument for taking risks with EV’s, already there has been a shift in battery chemistry to Lithium Iron Phosphate (or LFP) which has significant fire protection above the Lithium Nickel Cobalt Manganese (NCM) battery chemistry used in most EV’s to date and particularly by LG Chem in the batteries supplied to GM. LFP batteries have been subjected to heat, piercing and crash testing with no issues around catching fire. It is significant that the largest EV maker in the world, Tesla, is already shifting to the use of LFP batteries.
High Price – there is no doubt that EV prices are anywhere from 20%-50% higher than their equivalent ICE counterparts. This is not surprising particularly when retailers are adding significant margins to EV prices given the supply shortage that most EV’s are experiencing when compared to the demand. This is a simple matter of timing in the market evolution given that the cost of manufacturing an EV has reached the cost of making an ICE vehicle (principally because of the lowering of battery costs). As more competition reaches the market, EV’s will continue to come down in price and most probably will undercut the cost of ICE vehicles as the shift to EV’s removes the economies of scale that ICE manufacturing currently has. So, if an EV is somewhere between price parity and parity +10%, the economics of choosing an EV for your next vehicle has probably passed the tipping point given the much lower cost of running an EV car together with government incentives.
Technology Uncertainty – the only real technology uncertainty for EV’s is around the battery technology employed in the car that you are considering buying. Battery technology is moving fast and what you buy today will be seen as old technology in 5 years’ time. The saving grace however, is that your old battery will be still be working in many years’ time and will also have a resale market if you want to upgrade to the newest technology. BYD’s blade battery (LFP) has a 500,000 km warranty which is probably well more than the life of the car. On the other hand, any suggestion that alternatives technologies such as hydrogen powered cars can compete in the passenger vehicle market has long been disproven and Toyota’s lobbying of the Japanese Government to support hydrogen is more about keeping out the competition in the Japanese car market than anything else. So, if someone wants to sell you a Toyota Mirai for a cheap price, run for the hills.
I indicated that depreciation would become a major factor in choosing your new car in the near future. While most people accept that their new car will be worth less than 50% of its initial purchase price in 3-4 years’ time, what if that percentage was only 10% – or even zero? How could that be possible? Think about a Nokia mobile phone and its value 4-5 years after the introduction of the Smart phone in 2008. Not only could you not give away your Nokia to a friend or family member, but Nokia which was once the largest manufacturer of phones in the world, was almost bankrupted (they still exist today but as a provider of centralised computer phone systems). EV’s are a similar disruptive technology as the Smart phone and the time it takes for EV’s to force the resale price of ICE vehicles down to scrap value only is not a matter of “ïf” but “when.”
The apparent slow take up of EV’s around the world has led many to think that it will take 20-30 years or even longer before ICE vehicles are replaced by EV’s. However, one only has to look at the early adopters in Europe and the plans of governments and car makers to make the switch to EV’s. The momentum is building quicker than anyone realised and that a Smart phone-like market shift could occur within a few short years. Legacy auto makers from GM to VW are planning on phasing out ICE vehicles by 2035 (and a few are already reviewing this timeframe). Governments around the world are mandating the exit of ICE vehicles for environmental reasons in a similar timeframe. Countries such as Norway are leading the way already on how quickly the uptake of EV’s can occur and China is fast becoming the EV manufacturing centre of the world and a major market as we speak.
In fact by 2025, 40% of the new car sales in the OECD countries are likely to be EV’s. This is much quicker than most commentators believe but we are dealing with a disruptive technology that is fast coming down in price as production capacity ramps up. This point is when the decision to purchase an EV over an ICE vehicle will become almost a given for most people.
|Source: International Energy Agency for 2020 data and Carven Consulting for forecast to 2025|
Even the oil refining industry can see the writing on the wall. Given that 45% of its output is made up of petrol and diesel, the market of which is now in potential jeopardy, the industry needs to consider how to respond to such a threat. In 2019, in response to a survey about the perceived impact of EV’s on their industry, 24% said that they were not all that concerned – because they expected to be out of the industry by the time that the impact of EV’s would really be felt. Those same companies must now be reassessing their exit strategies given that the past 2 years have seen major movements in the shift to EV’s which is being led by Chinese manufacturers who are starting to shift their attention to the rest of the world market.
And China is the key to understanding what is likely to happen in the development of the EV industry and how it will shake up the auto industry around the world. China is the biggest emitter of carbon di oxide in the world and not only sees the moral imperative of reducing their emissions but also how to make money out of that process. China is already the largest solar panel and battery manufacturer in the world and intends to become the largest auto maker. They have been producing cars for GM, BMW, VW and Volvo for more than 20 years and have developed the expertise for making high quality cars at very reasonable prices along the way.
Companies such as BYD, Xpeng, Nio and Geely are starting to ramp up their international sales and many new models are hitting the market in 2022. Not only will these models have the quality, features and styling required to break into western markets, but they will be priced to ensure that new car buyers think twice when considering whether they will buy an EV or ICE vehicle.
Based on where EV’s have come technically and the competition and pricing that results, if you are considering buying a new car in the next 2 years, your choice of an EV over an ICE vehicle will be a smart decision. With lower running costs, the ability and convenience to top up your car’s fuel supply in your home and a chance to reduce each person’s carbon footprint, the decision to go electric will quickly become the norm. No-one wants their ICE trade-in to become next to worthless, so simple economics will become a major factor in quickening the transition to EV’s.
Unless you are wanting to 4-Wheel drive in the outback or tow a caravan around Australia, the logical choice is to go electric now. And those 4-Wheel drive and caravan enthusiasts? They have about another 5 years before their diesel-powered SUV will also be made redundant.