Published on November 27th, 2020 | by Zachary Shahan
November 27th, 2020 by Zachary Shahan
I wrote a version of this article below almost a year ago for another company in order to explain the EV market and its future potential. With some modification, I’m publishing it here too.
This report conveys 4 main points:
- Electric vehicles, particularly Teslas, are already more than competitive in certain market segments.
- The tech transitions that led to the electric vehicle (EV) market of today will continue in the coming decade.
- EV sales will rise quickly, outperforming most people’s current expectations.
- Tesla will continue to lead the market due to core competitive advantages.
The electric vehicle market 10 years ago was basically nonexistent. Almost zero market analysts or investors were on the lookout for a promising electric vehicle startup. You couldn’t find one person out of 100, probably not one out of 1,000, and maybe not even one out of 1 million, who expected an electric car to be the best selling automobile in some notable country and regional markets by 2020. Chances are good that you did not predict a Silicon Valley automaker would be outselling BMW, Mercedes, and Audi in the United States in the luxury car market. Nonetheless, this was the future that was awaiting us, and is here now. The Tesla Model 3 had more than twice as many sales as the second best selling automobile in the Netherlands in 2019. In the USA, the Tesla Model 3 significantly outsold all other luxury vehicles. In fact, the Model 3 has been outselling the BMW 2 Series, BMW 3 Series, BMW 4 Series, and BMW 5 Series combined.
The electric vehicle market of today seems unbelievably gigantic in the context of 2010 expectations, but this is not the pinnacle of electrification, not even close. The tech trends that brought electric vehicles (EVs) to where they are today will continue. Just as the past 5 to 10 years surprised the majority of the market, the next 5 to 10 years will surprise the majority of the market. Things will again change much faster than people thought possible. The technology has not stopped improving. The costs have not stopped dropping.
Plug-in vehicles accounted for approximately 2% of global vehicle sales in 2019. If they double their market share every two years, that’s 16% market share in 2025, and 64% in 2029. Even if the growth is half that fast, plug-in vehicles will become 32% of new vehicle sales within the decade.
On one hand, such rapid growth seems hard to believe in an industry as large, complex, and slow-changing as the auto industry. On the other hand, tech transitions are almost never slow once a technology becomes cost-competitive. The fabled S-curve of tech adoption looks much more like the steep rise of a mountain than an S.
In industry after industry, the “problem” with major tech transitions is that they happen much faster than industry experts, forecasters, and even top industry CEOs expect, thus “disrupting” the market. Mental inertia is a big part of the problem. “This is how the industry has been, so this is how the industry will be.” Add large investments based on that mental inertia and it becomes even harder to break through. If “company XYZ” just invested $3 billion in a new factory, or just launched a new product, it surely wants to make a lot of money off of it before throwing it into retirement. A desire for an investment to pay off can make people not acknowledge that the market is moving faster than they had previously been expecting.
Plug-in vehicle market share in 2019 in Norway was 56%. So far in 2020, it’s 72%. In the Netherlands, it was 15% in 2019, which is approximately where Norway was in 2014. So far in 2020, it’s 17%. In the UK, EV market share was 3% in 2019. So far in 2020, it’s just above 9%. The world as a whole was probably around 2% EV market share in 2019. What will it be in 2020? What will it be in 2021, 2022, 2023?
Much of this comes down to finances and economics. Norway and the Netherlands are ahead of the curve because of government incentives, but the curve is organic and will just be delayed a bit longer in other regions. What’s important is that battery prices have steadily marched downward, making electric vehicles more and more competitive. That little bit of support in certain countries and regions already makes large portions of the public choose electric vehicles over gasoline or diesel vehicles. Eventually, there will be no competition at all between electric vehicles and gasoline vehicles, subsidies or not, just as there’s no longer a competition between a flatscreen TV and an old analog TV.
Up until now, among conventional automakers, battery improvements have mostly been about adding range to EVs that didn’t have enough range for most consumers (see chart below). For Tesla, it’s been about bringing down costs (and also adding range on the higher end). The Model 3 was the first hyper-competitive electric vehicle in a mass-market class, and in 2019 it was actually the only vehicle with a starting price around $40,000 that was in the top 10 of US car sales (it was #9 in the US in 2019). But we can’t just look at today. We have to look at the trends to consider what’s coming around the corner.
Once you have adequate range and charging, one can weigh the pros and cons of electric vehicles versus gasoline vehicles.
Objectively, it turns out electric cars are safer, are quicker off the line thanks to instant torque, are quieter, and have many fewer parts to replace or fix. Also, due to low operational costs, their cost of ownership is much lower in cases in which the purchase price is similar, or the cost of ownership might be the same even if the purchase price is much higher than the competitor’s.
A 2019 Bank of America Merrill Lynch report found that, even outside of its home market, the Tesla Model 3 is significantly cheaper than the BMW 3 Series. Going deeper, in the United States, a Capital One report shared that used car prices for other luxury brands have been slammed as fewer and fewer buyers are interested in a used non-Tesla luxury car. With their value retention diminished, leasing companies must raise leasing prices so that they don’t lose money on the vehicles in the long term, but raising leasing prices makes them even less competitive, which leads to a death spiral of sorts for these models and brands.
Then there’s a whole other matter of potential revenue from full self driving and robotaxis that I won’t even discuss here. But here are a few figures from Tesla Autonomy Day 2019:
It Mostly Comes Down to Batteries
Lower cost batteries enabled the laptop market. Even lower cost batteries then enabled smartphones and tablets. After that, low cost batteries resulted in the Tesla Model S and then the Tesla Model 3.
Years ago, McKinsey tried to figure out the crossover points where different types of electrified vehicles would become cost competitive with conventional gasoline vehicles. The real-world findings have turned out to be fascinating, and the original report seemed to be spot on. As Tesla’s battery costs came down, the company broke the cost-competitive marker and started breaking sales records, as noted above. It immediately surpassed all of its gasoline competitors in country after country.
This first chart below shows the main premise from the McKinsey report — if the price of gasoline is $4/gallon and the battery cost is $300/kWh, an electric car is cost-competitive.
A few years ago, I argued that Tesla’s first gigafactory is what would get Model 3 battery costs down enough to make a car with the specs required to hit this crossover point. That’s what happened, as you can see from a slide below from 2016 and one from 2019.
The steep sales ramp we’ve seen with Tesla is expected to be repeated in the EV divisions of various leading automakers in the coming years.
However, it appears that Tesla continues to lead on battery development and battery costs. The driving range per dollar shown for the 2021 Tesla Cybertruck goes far beyond what the market offers today. It appears this is due to battery breakthroughs achieved in-house at Tesla that will go into production vehicles within the next couple of years.
As noted above, while Tesla seems to still be in the lead on this front, other battery companies and automakers are following the same trends. They are also coming out with increasingly long-range, low-cost electric vehicles. Just look at these two articles I published yesterday:
The thing that is always hard to explain to people — and even my own mind if I’m being honest — is how quick change occurs once a crossover point is hit. It may feel like forever getting to a crossover point, but once the tech is both better and cheaper, old industry leaders can fall off the shelf quickly! Who wants to buy a worse and more expensive product? It doesn’t happen overnight, but it also doesn’t take long for word to get around once there’s been a solid, clear, powerful crossover.
As shown in the tech adoption curve at the top, a new technology may seem to grow somewhat fast to a few percent or perhaps 5% adoption, but then it often really takes off after that.
Globally, we’re not at 5% electric vehicle adoption yet. But we’re getting close. What happens then?
From my perspective, it’s hard to imagine
spending wasting money on a fossil fuel car today, especially considering how much it will probably depreciate in the coming few years. Even thinking about a normal consumer, it’s hard to imagine many people wanting to buy a gasoline car by 2025. Who will not realize that such a car will be nearly worthless by 2030?
All of that said, I do see one potential barrier. Mineral supply for EV batteries, and EV battery production capacity overall, may not be able to keep pace with demand. That could raise costs and dampen the adoption trend. Tesla has pretty wild plans for EV production innovation and growth in the coming decade, but even if those play out as hoped, what about the rest of the market? Can miners, other battery makers, and automakers match such a pace? What happens if there are big bottlenecks with battery mineral mining and battery factory development? Does the Osborne effect really hit as we are expecting?
It’s possible that the market is anticipating all of these issues well enough and the mining, battery cathode, battery electrode, battery cell, and automobile industries will all rise up steeply as needed to match the adoption growth trends of the technologies tracked in the graphs above. Or not. Aside from the self-driving tech and robotaxi question (how soon it will take to really get self-driving cars and robotaxis on the market), I do think the mining and battery production question is the biggest question in this industry. I see possible solutions, and possible paths forward, but I don’t see quite the certainty I saw when envisioning Tesla’s path from 2014 to 2020.
What do you think? Should we be bullish, focusing on the tech adoption trends of the past and expecting something similar with electric vehicles? Or should we assume that cars are so much more complicated and battery mineral needs are so much tougher to serve that EV adoption will follow a milder, more gradual curve?
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