Electric vehicles approach a critical tipping point in adoption
Historically, electric vehicles have been associated with luxury vehicles and wealthy customers. It’s a market defined primarily by Tesla (TSLA) and its next-generation cars, which often cost between $45,000 (U.S.) and $70,000 each. This has let electric cars push technological boundaries and carve out a cultural niche. However, with price points at the top of the market, these vehicles have remained out of reach for most consumers.
Quite suddenly, automakers have started promising that will soon change.
In recent months, many car companies have begun announcing changes to their lineups that emphasize electric cars as the way of the future. For some companies this means introducing electric versions of their most popular models, such Ford Motor’s (F) fully electric Ford F-150 Lightning scheduled for release in 2022. Other companies, such as Volvo, have taken the bolder step of committing to a majority or entirely electric fleet by the end of the decade.
Prices are central to this electric future. Car companies haven’t just announced fleets of new vehicles. They’re announcing cars at price points far closer to the middle of the market. Tesla has begun marketing its Model 3 for $38,000. Nissan has advertised its all-electric Leaf for $32,000 and Mini has promised the Cooper SE for $30,000. By contrast, according to Kelley Blue Book, the average price for a new car is typically almost $41,000.
It feels like a dam is breaking in the market for electric vehicles. But according to Anna Stefanopoulou, the William Clay Ford Professor of Technology at the University of Michigan, that’s not quite right. This isn’t about a sudden sea change in the market for electric vehicles. Instead, this represents a convergence of changes in technology, public policy and consumer preferences. The market has been slowly changing. Now it will start changing all at once.
“It’s a dynamical system,” Stefanopoulou said. “It’s a demand and market supply. You find the point where the actual pricing drives adoption, [and] the adoption increases the volumes and the incentives for streamlining the process more.”
“Of course,” she added, “you cannot go forever. You still have the cost of materials and the cost of manufacturing. You cannot go below that.”
Consumer demand has played a huge role in this process.
As the technology for electric vehicles has progressed, these cars have gotten increasingly less expensive to produce. More than anything else this has meant advances in battery design. The most expensive single part of an EV, Stefanopoulou said, is the battery. The rest of the car can be designed for the customer who will drive it (not every vehicle needs the bells and whistles of a Tesla), but the battery requires advanced technology and rare materials to build. Automakers have gotten better at packing more power into simpler designs, and as a result can now build an electric car’s battery far more easily than they could even five years ago.
However, even an inexpensive battery can still cost a relative fortune if the company has to make each one from scratch.
While electric cars remained a niche market, the few automakers in this field had to rely on individual purchases to pay for each car they produced. This meant that they couldn’t take advantage of economies of scale to reduce the price of each part they manufacture.
The consumer market has caught up with this industry now. It has hit what Stefanopoulou calls a tipping point, where enough consumers now want electric vehicles that manufacturers can begin to streamline their production. Car companies can build their parts in advance, because the market has less uncertainty. They can order in bulk, produce parts in large assembly lines, and otherwise take advantage of the efficiencies that come from making thousands of vehicles at once. Instead of having to build and ship each battery for each car, they can now create the most cost-effective system possible, confident that the market will be there when the next shipment of batteries arrives.
And according to analysts, that market is more than ready to go.
“It’s consumer demand,” said Neil Patel, the co-founder of NP Digital, a firm which specializes in consumer data.
“We started seeing a high demand of people actually typing in brand name electric vehicles, and this was before some of these brands even had electric vehicles released that they were talking about… And if you get thousands and thousands of people looking for [your company’s electric car] every month and it doesn’t exist, you start looking at it.”
One of the clearest signs that the electric vehicle market is ready to go mainstream is the degree to which customers have begun looking for these products from auto manufacturers at large. Tesla carved out its identity in the marketplace years ago and, despite a handful of products like the Leaf and the Prius, is largely synonymous with the market for electric cars.
That’s changing. Patel’s firm reports that in the last year alone the number of people searching for electric vehicles from non-Tesla automakers has surged by 450 per cent.
People have begun asking Ford and General Motors (GM) for an electric car, and those companies are responding.
If technology and consumer demand make up the first two prongs of this market convergence, the third is equally powerful. In both the United States and abroad, governments have passed increasingly strict laws to try and combat global warming.
Advocates and, indeed, virtually all climate researchers argue that the current policies are still not strong enough to combat the cascade effects setting in. (This chain reaction, researchers argue, is what makes global warming so dangerous. An ecosystem is quite resilient. It will resist change until, much like the spread of a novel pathogen, it hits its own tipping point. Then change happens very rapidly.)
Both federal and state governments have passed a series of laws over the past several decades that require increasing fuel efficiency and related standards in cars.
By 2035, all new cars and passenger trucks sold in California must be zero-emission vehicles.
In other countries the laws have been even more stringent, with the U.K. alone banning the sale of all new gas powered vehicles after 2030.
Keeping up with even U.S. efficiency standards has made production increasingly more expensive for auto manufacturers. As engines have to become more green, eventually it has become cheaper for carmakers to consider simply cutting fossil fuels out of the picture altogether.
That doesn’t mean that electric vehicles will conquer the market just yet however.
“I think they’re still premium priced against similarly sized and powered gasoline vehicles,” said Matt DeLorenzo, senior managing editor for Kelley Blue Book. “In a perfect case in point, all you have to do is look at the Hyundai Kona. You can get an entry level version of that thing in the $20,000 range, and the EV version of that vehicle is in the high 30s.”
While the numbers suggest that EVs have become cheaper than their competitor vehicles, DeLorenzo suggested that these averages should be taken with a grain of salt. The $40,000 average price of a new vehicle, he said, accounts for all cars, and is particularly weighted by the popularity of pickup trucks and SUVs. Right now, he sees the “premium” on an electric car at about $5,000 to $10,000, meaning that bolt-for-bolt, an electric car will cost about that much more than its gas powered counterpart.
But, he said, consumers shouldn’t expect it to stay that way forever.
“An EV, no matter what class of vehicle you buy, is still a premium purchase,” DeLorenzo said. “But it’s getting closer to parity, and I think it will reach that point within the next five years.”
The key is to look at market share. Right now electric vehicles make up about 2 per cent of new car sales. That could double and still remain a small footprint. DeLorenzo said that the number he is looking for is 10 per cent. So long as EVs make up less than 10 per cent of the market, they will stay a niche product. Once they break above that barrier and start demanding 15 per cent and 20 per cent of the market, that’s when consumers can know that the electric future has begun in earnest.
“And,” DeLorenzo said, “it could happen fairly soon.”
