Despite this cost challenge, however, the report projects steady growth for hybrid and electric cars—including mild- and full-hybrids; plug-in hybrids; extended range electric vehicles; and fully electric vehicles. Under the most likely scenario of the industry’s evolution, BCG estimates that 26% of the new cars sold in 2020 in the major developed markets (China, Japan, the United States, and Western Europe)—or approximately 14 million cars—will have electric or hybrid power trains. That same year, the market for electric-car batteries in those regions will reach $25 billion.

Although lithium-ion cell and pack costs are expected to fall sharply by 2020, they are unlikely to drop enough to support widespread adoption of fully electric vehicles without a major breakthrough in battery technology, according to a new study by The Boston Consulting Group (BCG).

Of the roughly 14 million electric cars forecast to be sold in 2020 in China, Japan, the United States, and Western Europe, BCG projects that some 1.5 million will be fully electric, 1.5 million will be range extenders, and 11 million will be a mix of hybrids.

The new report, Batteries for Electric Cars: Challenges, Opportunities, and the Outlook to 2020, concludes that the $250 per kWh long-term cost target used by many carmakers in planning their future fleets of electric cars is unlikely to be achieved unless there is a major breakthrough in battery chemistry that substantially increases the energy a battery can store without significantly increasing the cost of either battery materials or the manufacturing process.

The study, a companion to one released in January 2009 that analyzed the technical and cost tradeoffs of competing alternative power-train technologies, addresses the two principal variables in BCG’s analysis of the developing market for electric cars: the technical attributes and the costs of lithium-ion batteries for electric-vehicle applications.

Given current technology options, we see substantial challenges to achieving this goal by 2020. For years, people have been saying that one of the keys to reducing our dependency on fossil fuels is the electrification of the vehicle fleet. The reality is, electric-car batteries are both too expensive and too technologically limited for this to happen in the foreseeable future. —Xavier Mosquet, Detroit-based leader of BCG’s global automotive practice and a coauthor of the study

The authors drew on BCG’s work with automotive OEMs and suppliers and on a detailed analysis of the relevant intellectual-property landscape. They conducted more than 50 interviews with battery suppliers, automotive OEMs, university researchers, start-up companies working on leading-edge battery technologies, and government agencies across Asia, the United States, and Western Europe, and also created a battery cost model to project future costs.

The report explores four main questions:

What technological challenges must be overcome in order for lithium-ion batteries to meet fundamental market criteria?

As battery technologies reach maturity, what might their cost profiles look like?

What will electric vehicles’ total cost of ownership (TCO) amount to?

How are industry participants likely to align themselves as they jockey for position in the evolving market?

Tradeoffs among five principle Li-ion chemistries. Source: BCG. Click to enlarge.

Technology.The BCG authors did not address the impact of new battery chemistries, lithium-based or otherwise, “because none of the players we interviewed expect that batteries based on new chemistries will be available for production on a significant scale by 2020.” However, the authors note, “there is increasing interest and activity, particularly among university research laboratories, in exploring new electrochemical mechanisms that might boost the specific energy and performance of future batteries.”

The report explores five principle chemistries—lithium nickel cobalt aluminum (NCA); lithium nickel manganese cobalt (NMC); lithium manganese spinel (LMO); lithium titanate (LTO); and Lithium iron phosphate (LFP)—along six dimensions: safety; life span (measured in terms of both number of charge-and-discharge cycles and overall battery age); performance (peak power at low temperatures, state-of-charge measurement, and thermal management); specific energy (how much energy the battery can store per kilogram of weight); specific power (how much power the battery can store per kilogram of mass); and cost.

Without a major breakthrough in battery technologies, fully electric vehicles that are as convenient as ICE-based cars—meaning that they can travel 500 kilometers (312 miles) on a single charge and can recharge in a matter of minutes—are unlikely to be available for the mass market by 2020. In view of the need for a pervasive infrastructure for charging or swapping batteries, the adoption of fully electric vehicles in 2020 may be limited to specific applications such as commercial fleets, commuter cars, and cars that are confined to a prescribed range of use. —BCG Report

Cost and TCO. Even if battery makers can meet the technical challenges, the authors wrote, battery cost may remain above the $250 per kWh target. Citing the current cost of similar lithium-ion batteries used in consumer electronics (about $250 to $400 per kWh), many original-equipment manufacturers (OEMs) hope that the cost of an automotive lithium-ion battery pack will fall from its current price of between $1,000 and 1,200 per kWh to between $250 and $500 per kWh at scaled production. BCG, however, points out that consumer batteries are simpler than car batteries and must meet significantly less demanding requirements, especially regarding safety and life span. So actual battery costs will likely be higher than what carmakers predict.

To show how battery costs will decline, BCG uses the example of a typical supplier of lithium-nickel-cobalt-aluminum (NCA) batteries. BCG’s analysis suggests that by 2020, the price that OEMs pay for NCA batteries will decrease by 60 to 65%, from current levels of $990–$1,220 per kWh to $360–$440 per kWh. So the cost for a 15-kWh NCA range-extender pack would fall from around $16,000 to about $6,000. The price to consumers will similarly fall, from $1,400–$1,800 per kWh to $570–$700 per kWh—or $8,000–$10,000 for the same pack.

Even in 2020, consumers will find this price of $8,000 to $10,000 to be a significant part of the vehicle’s overall cost. They will carefully evaluate the cost savings of driving an electric car versus an ICE-based car against the higher up-front cost. It will be a complex purchase decision involving an evaluation of operating costs, carbon benefits, and potential range limitations, as well as product features. —Massimo Russo, a Boston-based partner and coauthor of the report

Industry Dynamics. The report envisions two possible scenarios for significant strategic alliances in the industry: one in which OEMs forge new alliances with cell manufacturers, and one in which they stick with tradition by buying batteries from Tier one suppliers that, in turn, may forge their own alliances with cell manufacturers.

The electric-vehicle and lithium-ion battery businesses hold the promise of large potential profit pools for both incumbents and new players; however, investing in these technologies entails substantial risks. It is unclear whether incumbent OEMs and battery manufacturers or new entrants will emerge as winners as the industry matures.

As it stands today, the stage is set for a shakeout among the various battery chemistries, power-train technologies, business models, and even regions. OEMs, suppliers, power companies, and governments will need to work together to establish the right conditions for a large, viable electric-vehicle market to emerge. The stakes are very high. —BCG report

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