By Andrew Wetzlel, CFA®, Managing Director of Sustainable Investing
News headlines in the US related to electric vehicles (EVs) have been broadly negative over the last six months as a number of headwinds have emerged to take the shine off of EV enthusiasm. While the near-term outlook remains somewhat uncertain, the reality is that all new technologies experience volatility when moving from new and niche to mainstream; this is where EVs are currently. When thinking about the path forward, it is important to take a global perspective and focus on structural factors that can drive mass market growth and thus scale and profitability.
Recent negativity around the current state of EVs in the US can be attributed to temporary headwinds and a framing issue. Context matters: In this case, excitement around Tesla’s success and the meteoric run in its stock price in 2020 and 2021 served as a wake-up call for the rest of the auto industry – EVs can be nicely profitable, and consumers will buy them. Traditional auto manufacturers battled to announce the most ambitious battery electric vehicle (BEV) targets they could come up with, creating mix-shift expectations that are proving unrealistic. These targets will be met, though not as quickly as originally expected due to a series of temporary headwinds.
The rapid increase in interest rates starting in 2022 drove the average US five-year rate on a new auto purchase or lease to more than double by mid-year 2023. Higher financing costs along with stubbornly elevated pricing, particularly for EVs, became a challenge for buyers outside of the luxury market. Add to this a shifting tax incentive system from a credit captured when filing taxes to a point-of-sale credit starting in early 2024, and would-be buyers paused.
Taking a step back, the experience over the last few years represents volatility, and certainly swings in sentiment, around a longer-term trajectory. As illustrated in the chart below, EV sales continue to grow. The expectation is that this will continue as consumers adjust to a new financing environment and EV costs come down while the number of models available expands. Near-term growth of the EV category is also supported by higher volumes of plug-in hybrid electric vehicles (PHEVs), an important transition vehicle type. In 2023, EV sales in North America (NA) were up 50% over 2022 to 1.63 million units, with BEVs representing 81% of sales. Bloomberg New Energy Finance (BNEF) forecasts that sales will reach 2.1 million units in 2024, representing 29% growth, a deceleration, but still solid expansion. Should this estimate prove accurate, EVs would move from 9.5% of NA units to about 11.8% in 2024. While there are certainly risks to this growth, primarily around the presidential election, these are shorter-term factors. In the medium- to long-term, cost, range, and convenience are the factors that will drive mainstream adoption.
The most significant cost driver of BEVs over internal combustion engine (ICE) vehicles is the battery. Data from Wolfe Research shows that the battery pack represents roughly 40% of the average BEV bill of materials or 25% of total manufacturer cost. Like other technologies, scale matters, and since 2010 the real cost of battery packs on a $/kWh basis have fallen from about $1,300 to $151 as of 2022, according to BNEF. Wolfe Research shows that battery pack prices have continued lower to $130/kWh by the end of 2023 as a result of lower the end of 2023 as a result of lower lithium prices. BNEF and other industry forecasters widely see the $100kWh level as the point at which BEVs and ICE vehicles will be at cost parity. Major Chinese battery manufacturers are already in the $60-$70/kWh range and US manufacturers such as GM and Ford expect to be at $100/kWh in 2024-2025. Tesla has a battery roadmap that points toward the $60-$70/kWh level within the next year or so.
Note: EV sales include battery-electric and plug-in hybrid vehicle sales
Lower battery costs are a function of shifting chemistries, material substitution, and manufacturing scale. Certain Asian manufacturers are already producing commercial cells with sodium instead of lithium, and broadly, lower price point vehicles are shifting to lithium iron phosphate (LFP) from lithium nickel manganese cobalt (NMC). There is also rapidly developing work being done on semi-solid-state and solid-state lithium batteries. These and other battery developments will lower costs, improve safety, and increase range. Paired with higher voltage electrical architectures, charging times will significantly decrease over time. As soon as 2026, there should be BEVs hitting the US market at price points before subsidies in the low-$20,000 range with better range and faster charging times than most models currently available.
As investors, we are currently cautious given the level of disruption and perceived political risk heading into November, though it is clear that the shift from ICE to EV is structural and will increasingly be driven by the economics of cost of ownership and purchase decisions of consumers. Our research focus is on enablers of the transition toward EVs, an area that will likely be of increasing interest over the next few years.