EVs Shifting from Regulatory- to Supply Chain-Driven Disruption
In reality, the transition to EVs has taken longer than anticipated. There continues to be a niche group of consumers who are die-hard believers in the need to switch to electric vehicles, and they typically make up the bulk of electric vehicle sales. But the general population continues to have reservations about whether electric vehicles have improved enough in range, charging time, and price to give them a second look. Governments have tried to sweeten the offer by providing price subsidies to lower the cost of electric vehicles but even those are not enough for an average driver in places like the U.S. or Europe to view electric vehicles as replacements for their gasoline engine vehicles.
But winds of change are starting to form out of Europe. We see a threat on the horizon for auto manufacturers as the real electric vehicle (EV) arms race has now begun in Europe. In order for automotive original equipment manufacturers (OEMs) to meet European Union CO2 targets in 2021, plug-in hybrid electric vehicles (PHEV) and battery electric vehicle (BEV) volumes will need to double. Plans by a top EV player to boost European capacity by about 150,000 in 2021 and 500,000 units in 2022 — equal to about 30% of European market share — will make it significantly harder for incumbent automotive OEMs to meet these CO2 targets. This means automotive OEMs must begin to factor in either widespread fines or competitive pricing pressure particularly in the premium segment of the EV market.
For an EV manufacturer to make such a bold move into the European market is either foolhardy, or suggests it believes it has a product (i.e., battery technology) that will allow it to appeal to a broader section of the automotive market. With other disruptive players suggesting battery technology can develop significantly faster than anticipated by incumbent automotive OEMs, there is a clear risk that we are seeing a technological march on peers. In any case, with disruptive forces fully funded from a technological standpoint, the stage is set for a technological clash in the next 18 months.
We see three main areas where automotive OEMs could be disintermediated by disruptive players in the EV market. First, a leap forward in technology could make EVs technologically and cost competitive sooner than expected — giving demand for EV uptake a regulatory push versus a consumer pull approach. Second, easy availability of credit could result in vertical integration by disruptive players as new entrants are able to gain a competitive advantage by building their own battery supply. Finally, with the prospects of EV products surpassing internal combustion engine (ICE) vehicles from a performance and consumer cost perspective, regulators will likely come under pressure to support a faster transition to lower emission technology.
