OEMs Double Down as EVs Hit Tipping Point
December 2020

CO2 regulations and the on-going crisis have caused the market penetration of plug-in vehicles (EVs) to accelerate this year. This is particularly the case in Europe where EVs are likely to represent 8-10% of all light vehicles sold in 2020 vs. 3.1% last year. This figure reached 9.9% in Q3 2020, when the share of diesel dropped to 28% from 50% at the end of 2015 (chart below). Thanks to the old continent, EV sales are likely to finish 2020 around 2.5M units globally, up from 2.1M in 2019. We are entering the vertical portion of the S-curve — certainly in Europe — which is triggering a virtuous circle fueled by incremental investment and product visibility. 

 

2020 EV acceleration in Europe shows clear tipping point

In Europe, the launch of new EVs, the increased awareness of the impact of fossil-fueled mobility on air quality and a set of strong incentives delivered drastic EV growth starting in Q1 2020, then building momentum. In Germany, the EV share reached 17.4% in October and 11% YTD. France recorded 14.3% in November, and 10.3% for the first 11 months. Across Europe, the share of EVs among light vehicles sales more than tripled in Q3 vs. 2019, approaching 10%.

In China, the EV market picked up steam in S2 2020 after slower penetration in S1. The EV market share stood at 5% in 2019 and will likely be marginally higher in 2020 before building steam in the coming years. The EV market is led with majors such as SAIC, BYD and Tesla, but a few emerging players are making significant inroads. More on this later.

In the USA, 228k EVs were sold in the first 10 months of 2020 vs. 327k for all of 2019, representing a slight drop in market share. Fortunately, EVs continue to inch up in California, increasing to 7.9% of all light vehicles YTD 2020 vs 7.6% in 2019. It should be noted that the state has historically represented about half of US EV sales even though it has about 11% of the US population. However, this local increase won’t suffice to generate EV growth at national level.

Regulatory pressures and incentives deliver electrification

Starting in 2021, OEMs must reach 95 grams of CO2 per km for their European sales from an average of 122 g/km in 2019 (JATO data) — or pay a 95€ per vehicle per gram CO2 above 95. The pressure on CO2 emissions will only increase in Europe with a 2030 target at 60 grams and possibly even 47 grams, with an objective of at least 30M zero-emission cars on European roads by 2030. OEMs have no choice but to widely electrify their portfolio.

In China, the central government decided in 2019 to extend incentives, initially scheduled to expire a year ago, through 2022. Last month, it presented a comprehensive plan for 2021-2035. EVs (a.k.a. New Energy Vehicles or NEVs) are to reach 20% of news car sales by 2025, and the objective is significantly more aggressive for public fleets.

In the USA, the outgoing administration has relaxed CAFE going forward from +5% per year (established under Obama) to only +1.5%, aiming for 40.6 MPG — or 137 gram CO2 per km for a gas engine — in 2026. Thankfully, the Biden administration has a clear climate agenda. It includes higher financial incentives and the addition of 500k public charge points to the current 90k by 2030 — which is clearly insufficient as China already has 600k plugs and the EU 200k+. In addition, more OEMs are now backing higher CO2 targets, closer to California’s. This will hopefully reverse the negative EV trend observed in 2019 and likely in 2020.

Most OEMs now rush to bring more EVs to market faster

If all OEMs are developing a range of electrified vehicles, from mild hybrid, to plug-in hybrid, battery EVs (BEV) and fuel cell EVs, some are deploying more aggressive strategies. OEMs are reducing their internal combustion engines (ICE) development budgets, many having announced their decision not to develop any new ICEs from now on, akin to Daimler. Let’s look at what some of the most ambitious players are doing to grab market shares in the fast growing EV segment. 

GM raised its budget for electrification and autonomous driving by 35% to $27B through 2025  (over half of the company’s Capex and product development budget). Vehicle rollouts are being  expedited: 30 new EVs are to be introduced and 40% of its US lineup will go electric by 2025. Development cycles for some models are shortened and significant efforts are made in battery tech — GM announced a 60% drop in battery cost by mid-decade. Speed is of the essence!

The company is so engaged in electrification that they are willing to pay US-based Cadillac dealers up to $500k to drop the franchise if they are not willing to embark on the EV journey, which entails an upfront investment (charger, tooling, training) estimated at $200k and lower maintenance revenue down the road.

The VW Group (see above) announced it will invest 73B€ in electrification and digital tech over the next 5 years, equal to 50% of the Group’s total R&D and Capex budget, up from 40% previously. This should result in the launch of approximately 70 BEVs by 2030. A critical aspect of the shift towards electrification is the conversion of existing assets. The Zwickau, Germany plant was completely revamped from producing 100% ICE vehicles (it once produced the 2-stroke Trabant) to 100% BEVs, starting with ID.3 and ID.4.

The German OEM is off to a good start with ID.3, despite initial software glitches. The Golf-size hatchback took the lead on the European market with 10.475 units in Oct, slightly ahead of Renault Zoe, the 8-year old previous EV market leader. VW expect the mainstream brand to sell 1M EVs in 2023 and 1.5M in 2025.

Hyundai Motor is also aggressively pursuing electrification. The OEM’s ambition is to sell 1M EVs in year 2025. It plans to introduce 23 BEVs by 2025, based on a recently presented modular platform capable to reach 500 km WLTP. The Korean OEM also invested in Arrival and Canoo, among others, to gain faster access to technology.

 

Several new OEMs are emerging from the pack with massive means

Dozens of companies have been established over the last few years to take a shot at the EV market, aiming for Tesla’s success. However, only a few will succeed.

In China, emerging players are emboldened by their skyrocketing valuation. Nio, Xpeng (P7 below) or Li Auto are currently valued between $30B and $60B, with massive increases — but largely unreasonable given their size — over the past 3 months. Nio and Xpeng respectively delivered 37k and 21k BEVs during the Jan-Nov 2020 period. This remains marginal but is growing fast, i.e. +111% for Nio and +87% for Xpeng y-o-y. This easier access to cash will certainly bolster their growth, with more products for more markets.

In the USA and Europe, a series of emerging OEMs are readying their product introductions. They include Rivian, Lucid, Canoo, Lordstown in the USA, or Arrival in Europe. Some are surfing on the EV hype to go public, such as Arrival and Lordstown, raising hundreds of millions to fuel their growth. Rivian remains private but recently raised $2.5B.

 

What does this mean for Tesla

Will the acceleration at the traditional OEMs and the emergence of new players result in a massive dilution of Tesla’s market share? I don’t think so. Tesla is not resting on their laurels. Tesla strives to stay ahead of the pack in technology, particularly re. battery tech. Elon Musk announced a few weeks ago that the company had a roadmap to roughly halve battery cost per kWh at vehicle level. In the meantime, more range is being packed into existing vehicles, e.g. soon 435 miles (EPA) on the 8 year-old Model S. For reference, the longest range Audi eTron offers only 222 miles.

Tesla is also expanding its range with a pickup truck, a 2nd gen Roadster, and is considering a Europe-focused $25k hatchback, the real volume kicker there. The company sold 319k in the Jan-Sept 2020 period, i.e. ~30% of all BEVs sold globally. Given this trend, 500k vehicles in 2020 seems within reach. For 2021, the financial analysts’ consensus puts Tesla sales at 800k units — four plants will be operating by year end vs. one at the beginning of 2019.

If VW, Hyundai and Tesla progress as announced, the later’s volume will remain higher in 2023 and most likely in 2025, even if Tesla will see its BEV market share dilute somewhat. What matters in the end is that the overall EV penetration continues to accelerate to quickly become the norm across the globe.

Marc Amblard

Managing Director, Orsay Consulting

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