Road & Track Says EV Price Parity May Never Happen: Why That's Wrong01/28/2021
The article’s main argument is that automakers will not give up on profit, but when have they?
It is not unusual to see articles arguing why electric cars will never be mainstream. They deserve a public debate either when they make valid points or when they are in places with a wide reach, such as at Road & Track. The magazine recently published an article that argues electric cars may never reach price parity with combustion-engined vehicles. According to it, they would always charge a premium, but the article fails to prove why.
Its first and main argument is that carmakers will not give up on profit. No company still alive ever has, but what the author means is that any savings on battery pack costs will just become beefier profit margins, not lower prices to reach a larger number of clients.
First of all, it is important to establish what price parity originally meant. It was related to production cost parity, not with the final price, which would only follow this more relevant price composition aspect. If a car costs more to be produced, it cannot be sold for the same price as an equivalent ICE vehicle without a reduced profit or even loss. But what if it costs less?
This is what the current environment for passenger cars suggests. While development costs for combustion engines are rising due to increasingly restrictive emission regulations, battery-pack costs are getting lower. As Sandy Munro once explained, these components and electric motors can represent 51 percent of an electric car’s production costs.
While the R&T article claims battery costs are just one of the price components for EVs, it is by far the most important. There are many others, such as manufacturing, labor, taxes, government incentives, and, most importantly, the growing burden combustion-engined vehicles face.
Although internal combustion engines are getting more efficient, there is a technical limitation to how efficient they can get. Anyone reaching 40 percent of thermal efficiency is already at the top of their game, and it still means that you burn $60 off every $100 you spend on gas. Mazda vowed to take its engines to a 56 percent efficiency – you already know what that means. EVs can convert more than 90 percent of electricity into movement.
If there were any chances ICE vehicles could beat that, they would still be more complex to build. As engineers say, each additional component a vehicle has is another opportunity for defects.
When it comes to government interference, internal combustion engines are dealing with bans all over the world. Even if that were not happening, these machines would eventually get more expensive due to the emission rules we already mentioned. Apart from burning a good chunk of your money, combustion-engined cars also oblige you and others to breathe the result.
Norway’s strategy to make EVs prevail was to anticipate increasing running costs for ICE vehicles rather than giving electric car credits. If it were for energy efficiency and maintenance needs alone, that would already happen.
It is evident personal transportation has to go electric to remain a feasible option. Climate change and other situations most people have a hard time understanding are probably not as pressing as air pollution in large cities – which raise healthcare costs – more rational use of energy, and less money on maintenance.
Yet, the Road & Track article states companies will not lower car prices when battery packs cost less than $100/kWh. For the record, Tesla already does that with its current vehicles, but the author probably does not take that into account by claiming the company “barely generates lunch money from Model 3 sales.” Still, who said current products would be the ones to present any benefit from lower production costs?
The article takes that into consideration but places cost parity at least 10 to 12 years from now as if all new EV presentations were solely to replace vehicles that are already for sale. That is far from true: electric cars still do not compete in a wide range of segments, including some of the most important ones in all key car markets in the world – we are still waiting for electric pickup trucks in the US.
Lowering the prices of current vehicles can make them depreciate more. If the companies that sell them avoid this, that will delay price parity but not cost parity. Costing less to produce and selling for the same prices will turn these EVs into golden geese until competitors end the profit party. The ID.4 promises to do that with the Tesla Model Y and even the Model 3 in China, for example.
Future EVs will reach the market with proper prices for more profitability, as Luca de Meo said Renault EVs and electrified cars would do in a matter of 18 months. Volkswagen also mentioned that the ID.3 costs 40 percent less to produce than the e-Golf and that this allowed the company to sell it without eroding profit margins.
Another issue with R&T’s article is saying car manufacturers are moving towards more profitable vehicles instead of trying to offer cheaper cars. That would cut the need for cost parity, but the author misses why that is happening: it is to finance the transition from combustion-engined vehicles to electric cars.
As we recently told you, Ford closed its remaining factories in Brazil because of that. Although competitive issues played a role, Ford’s global strategy certainly had more weight. All the cars it produced in Brazil were entry-level models, and the company needs to raise money to invest in its shift to EVs.
Higher volumes do not necessarily come with more affordable cars, as the pickup truck segment in the US shows. That said, why would Ford insist on selling econoboxes when most of its sales worldwide are for SUVs and pickup trucks? Why would it do it when it needs to survive?
Most automakers already know that their business will change dramatically. They are the Kodaks and Fujis watching digital photography emerge; the Blockbusters in front of video streaming services; the Nokias worried with smartphones. They know they need to get rid of how they always made cars to keep afloat.
Ask all engineers in developing countries – apart from the ones close to retirement – what keeps them awake at night. Most, if not all, will say it has to do with the future of combustion-engined vehicles.
When the companies they work for adopt electric cars in their home countries and main markets – such as China, the US, and Europe – why would such automakers keep investing in the affordable ICE cars these engineers help develop?
A few years ago, many of these emerging countries had their own development centers. They are now closed or in the process of shutting down their doors. All engineering works were taken to China or the US. Guess what the Chinese government wants R&D departments to focus on?
When emission rules in these developing countries reach a point in which combustion-engined vehicles are no longer allowed, production will simply end, and factories will close there, as they have in Brazil. This is why engineering associations are urging governments to stimulate clean transportation solutions before it is too late for these jobs.
For EV manufacturers that do not have that commitment with past internal combustion engine investments, this is the opportunity for them to gain market share. They may try to do that right off the bat, but only cost parity will make them competitive with high-volume cars.
Tesla is the most successful of these newcomers, and it may use Giga Shanghai and Giga Berlin to invade segments in which it still has no products, such as the $25,000 car that will have LFP batteries.
Startups like Lucid and Rivian are investing respectively in luxury sedans and electric pickup trucks because of their low production volumes. To make money selling a few thousand vehicles a year, profit margins have to be initially higher, and only more expensive vehicles can offer that. When production capacity improves, they may afford to earn a little less per car because they will sell many more of them. Lucid’s AMP-1 will be able to produce 400,000 vehicles per year. In its first full production year, it will manufacture only 33,000.
If anyone is betting on high-volume EVs, it will be Tesla and legacy automakers such as Volkswagen, Renault, and Hyundai/Kia. They are the ones who need battery pack costs to decrease the most.
In Tesla’s case, its goal is to prove critics wrong regarding its market cap disparity in the face of how many vehicles it sells every year. Regarding Volkswagen and all other legacy carmakers willing to sell EVs, their business model is based on high volumes.
Justifying their factories’ production capacity and preserving thousands of blue-collar jobs is just part of their problem. All these traditional companies have commitments to the dealership network that only a large offer of products will manage to preserve.
GM did not pay Cadillac dealers to leave if they did not want to sell electric cars just for a matter of belief and value differences. Again, another good example comes from Ford leaving Brazil: it estimates it will spend $4.5 billion just to get rid of its factories and dealers there, and people are saying it will disburse way more than that.
Whether from Tesla or these other automakers, investments in bringing down battery production costs will keep coming. Not because these manufacturers want, but because they need that. Production cost parity is crucial for them to survive the change. Ironically, that is precisely what will ensure price parity will also arrive.
Instead of putting money into new engine families, innovative cycles such as SPCCI, and electronic aids to cut – or conceal – emissions, legacy automakers will do that for batteries and electric motors. And that is a lot of money.
That will cause battery innovations such as new chemistries and even new formats to pop up at an even higher pace than today. Solid-state batteries seem to be each time closer to reality. When production costs decrease, new electric cars will reach the market with lower price tags.
Will that prevent automakers from offering high-end products? Obviously not. On the contrary: if EVs reach cost parity with combustion-engined cars, luxury cars based on the same platforms can offer even higher profit margins. Rolls-Royce is working on an EV right now, probably based on BMW’s EV platform for the iX.
Will price and cost parity between EVs and combustion-engined cars arrive? Certainly, probably sooner than later. While you are not obliged to like change, it is a huge mistake to try to dismiss it when it is so evident. This is what ties companies and jobs to electric chairs. Electric cars, at least in what refers to the automotive industry, will put them in a much safer position.
Source:Road & Track
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