Preparing for the Mobility Revolution
New Products Accelerate EV Growth
Plug-in EV sales continued to grow at a significant pace in the first semester of 2019 (+46% y.o.y.) whereas the overall light vehicle market dropped in key regions. There is no doubt the accelerated introduction of new or upgraded plug-in models will further fuel this growth, as has been observed with the Tesla Model 3 recently. Among the latest of a slew of new products is the Volkswagen ID.3, presented this month at the Frankfurt IAA. The Golf-sized sedan is likely going to be one of the most impactful new products in the near term, given its price positioning and range, and the existential role it is to play for the OEM behind it. It also arrives at a time when the charging network is maturing faster — though there is still plenty of room to improve.
Regulatory market drivers
Let us first take a look at the governmental initiatives that drive the deployment of clean mobility in an effort to address global warming. In Europe, OEMs are required to achieve an average of 95 grams of CO2/km across their fleets by 2021 vs. 120 g in 2018, and a projected 60 g by 2030. For every gram above this level, a penalty of 95€ per vehicle will be levied. For reference, FCA is reportedly going to pay Tesla close to 2B€ for CO2 credits, as an alternative to paying the penalty in Europe. This will help the Californian OEM bring new BEVs to the market. The penalty will have served its purpose.
US standards are less stringent. The Corporate Average Fuel Economy (CAFE) target for light vehicles is equivalent to 120 g CO2/km (CAFE of 46 mpg) in 2021 vs. 135 in 2018 and 99 g (54.5 mpg) projected for 2025. This necessary measure decided by the Obama administration in 2016 is now (wrongfully) being challenged by the current administration. For every 0.1 mpg below the CAFE target, OEMs pay a penalty of $5.50, i.e., ~1/8th of the European amount for an equivalent deviation (the penalty was supposed to increase to $14).
In China, the central government has been heavily promoting EVs through its New Energy Vehicle policy. However, the program was recently scaled down and revamped, as incentives have been shifted from OEMs to buyers. Chinese cities, such as Beijing or Shenzhen, also deploy their own rules, imposing 100% electric taxi and bus fleets for example. More on CO2 historical data and targets here.
Product-driven market growth
These initiatives force OEMs to offer an increasingly broad range of products that appeal to most customers in order to drive their average CO2 emissions (or mpg) down and avoid penalties. By the way, various incentives are aimed directly at customers, such a tax benefits, restricted access to city centers, or free parking / charging, are also necessary to jump start EV sales.
Global sales of plug-in EVs — battery EVs (BEVs) and plug-in hybrid EVs (PHEVs) —grew 46% y.o.y. in H1 2019 to reach 1.1M units, after gaining 64% for the full year 2018 at 2.1M units. The global fleet of plug-in EVs now represents about 6.5M units, which is still only 0.5% of the total vehicle fleet. Major differences still remain between regions. To what extent is growth correlated with the introduction of new products?
China continues to lead, with plug-in EV sales growing 66% to 645k in H1, to represent over 6% of total light vehicle sales locally. The growth has been rather steady — though sales of New Energy Vehicles (NEV) started to drop in July and Aug 2019, pulled down by the overall market. The NEV market is overwhelmingly served by local players, mainly Beijing Electric (BAIC, EU5 above), BYD, Geely and Shanghai Auto (SAIC), which have introduced a stream of new EV models. NEV incentives also brought about a series of new, NEV-only players which likely will not last for the most part. It is interesting to note that BYD’s sales for the Jan-Jul 2019 period show a massive shift towards electrification, with a 42% drop in gas powered vehicles (97k) and a 73% increase in EVs (162k).
In Europe, 259k plug-ins were sold in H1 2019, up 34% y.o.y., to represent 2.7% of total sales. It is interesting to note that the Tesla Model 3, for which volume deliveries started in Europe this past February, reached 38k units in H1. This represents almost 60% of the net plug-in sales growth, during a period when there were no other significant product introductions. The Model 3 sold 1.5x the volume of Renault Zoe, in place #2 on the podium. By comparison, the plug-in market only grew 18% in 2018, when the Jaguar i-Pace was introduced with limited success.
The US continues to lag in plug-in EV sales with 149k units sold in H1 2019, up 23%, to reach 1.8% of total light vehicle sales. This limited growth must be compared with the +86% reached in 2018. That year, a single model, the Tesla Model 3, had a massive role to play in the market expansion. It represented about 90% of the 166k units added over 2017, whereas the only other real new BEV was the Jaguar i-Pace, which had limited success just as in Europe. We must also remember that Tesla exerted a massive sales push in Q4 2018 as incentives dropped from $7500 to $3750 on Dec 31.
New Plug-in EVs across the spectrum drive market growth
OEMs have announced a slew of new BEVs and PHEVs in the coming months. And there is much more to come as the industry is planning to spend an estimated $225B on electrification from 2019 to 2023, according to AlixPartners. We should expect a number of these products, especially BEVs, to have a significant impact on the plug-in sales growth.
At the top end of the market, we have the Audi e-Tron, Porsche Taycan (image above) or Mercedes EQC — and a number of PHEVs. These products (at least the first two) are not likely to generate massive volumes given their price. However, they will likely have a significant contribution to the perception of EVs, in particular on the fun and performance dimensions.
The explosion of new products is also taking place at the lower end of the market. It started with the Hyundai Kona earlier this year, and will continue with the Opel Corsa-e, Peugeot 208, Honda E or Mini E, which start to populate the market at the 30-35k€ (or $) price point for a comfortable range of 350-400 km (WLTP) in most cases. In China, customers have access to much lower priced BEVs made by local players. However, this is no longer the case as Renault recently announced its K-ZE/eNO, a small SUV, with a 271 km WLTP range for 61k CNY (8k€) after incentive!
In addition, existing products benefit from a significant increase in range. This is the case for the Nissan Leaf (now 385 km WLTP / 226 mi EPA), Renault Zoe (now 390 km WLPT), BMW i3 (now 310 km WLPT / 153 mi EPA), VW e-Up or Tesla Models S and X (now up 610 km WLTP / 370 mi EPA), or to a lesser extent the Chevy Bolt (now 259 mi EPA) given its previously class leading range.
The Volkswagen ID.3 is likely to have a significant impact on the market, in line with VW Group’s hopes to really put “Dieselgate” in its rearview mirror. With a starting price of 30k€ ($33k incl taxes), the 4-door sedan is positioned to replace the long-time market leading Golf (#1 in Europe, #3 in the world). With deliveries starting mid 2020, ID.3’s WLTP range of 330-550 km (205-340 mi, for 48-82 kWh) will address most people’s range anxiety. I expect we will see over 50% plug-in EV sales growth in Europe in 2020, largely as a result of ID.3. Whereas the Nissan Leaf and Renault Zoe were the first affordable volume products when introduced in 2011 and 2012, ID.3 arrives as the market has matured, EVs are better understood, and the charging infrastructure is better developed.
What about the emerging OEMs?
What roles are the emerging BEV-only OEMs likely to play here? Nio was the first of the post-Tesla wave of new players to launch vehicles, with ES6 and then ES8 in China only. Sales were promising at first, but then only to reach 20k for Jan-Jul 2019, which has resulted in some downsizing. Next to go to market, Byton will introduce its M-Byte SUV (image above) in China in late 2019 and Europe in 2020. Presented at the Frankfurt IAA this month, Byton may avoid a frontal collision with other OEMs thanks to a positioning focused on the digital experience with its pillar-to-pillar display. Rivian, which has received about $1.5B in capital so far this year, intends to launch its rugged SUV and pick-up truck in the US in late 2020. Sales will get a major boost with an order just placed by Amazon for 100k delivery vans. Lucid is expected to start production of the Air Sedan in 2020, targeting China at first. And there are many more such players, e.g., Lucid, Polestar, SF Motors, Dyson, etc.
These new players will have an increasingly difficult path to any success unless they opt for significant product differentiation. This seems to be the case for Rivian with its “rugged” positioning, or Byton with its extreme digital experience. Otherwise, these emerging OEMs will battle established players who have spent decades fining tuning their engineering and supply chain, building their brand image and are now coming to grips with electrification.
If certain products have significant impact on market development, any new or upgraded EV increases the number of market touch points, thus further educating the general population, and fueling the very necessary electrification of the global fleet.
Managing Director, Orsay Consulting
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