Other Factors Affecting EV Market Growth

Several variables, such as the price of oil and subsidies, will affect the growth of the EV market. For example, our base model assumes a steady oil price of $60 a barrel. A jump to $90 would see a 3.4% decline in the global market share of ICE vehicles and a 1.5% increase for BEVs and plug-in hybrids. Similarly, if governments were to maintain current subsidies for BEVs through 2030, xEVs would gain almost 5 percentage points of share, at the expense of ICE vehicles. But the impact of these factors will be subdued compared with that of the fall of battery cost and the rise of AVs and car sharing.

The impact of regulatory shifts could be significant. In the US, the Trump administration has already indicated an intention to loosen regulations on ICE emissions, which would slow the adoption of hybrids and BEVs. The global impact of such moves may be muted, however, because OEMs still need to produce xEVs for sale in the rest of the world. We would also argue that loosening regulations on emissions could actually undermine the long-term competitiveness of US OEMs and suppliers in a global market that is clearly moving toward cleaner sources of propulsion. In addition, a greater number of xEVs would mean lower demand for gasoline, which would help keep gas prices down—a boon for both consumers and other sectors of the economy as consumers would have more money to spend elsewhere. (See “The Emission Standards Paradox.”)

The Emission Standards Paradox US automakers have generally received favorably the news that the Trump administration would review the emission standards set by its predecessor, with an eye toward relaxing them. But will loosening emission regulations really benefit manufacturers? To be sure, looser regulations mean less pressure on design and production and lower prices for consumers in the near term. But lower standards now do not necessarily undermine, or change, the broader market trend toward cars and trucks with fewer emissions and less environmental impact. For one thing, California does not plan to slow its regulatory march. For another, the US is only one market, albeit a big one, among many the world over. Because most automakers operate globally, their fleets still need to meet the standards set by different governments. US automakers in particular may remember the big gains made by upstart imports following the second OPEC oil embargo in 1979, when the big run-up in oil prices drove a dramatic market shift toward more-fuel-efficient vehicles. An argument can be made that tighter regulations actually have a benefit for OEMS and suppliers—in this case, they are driving more R&D, faster technological advances, and a generally quicker climb up the alternative-power-train development curve. Manufacturers benefit from developing new technologies and moving them into mass production quickly; indeed, those that move the fastest have the opportunity to establish a tech-based competitive advantage. In addition, they can roll out technical advances globally to help meet regulatory requirements in other major markets. In an age of increasing consumer concern over climate change, there is also the hard-to-quantify reputational benefit of being seen as a part of the solution rather than a leading contributor to the problem. In addition, one might consider the role of increased fuel efficiency on the lower gasoline prices that consumers enjoy today. In the US alone, the average miles per gallon for cars and trucks is expected to increase by about 40% and about 30%, respectively, from 2017 to 2030. The resulting reduced demand will help keep gas prices down, which along with more stable prices at the pump, is an additional economic benefit of tighter regulation for consumers.

One of the biggest long-term variables is the impact of the sharing economy. We expect car- and ride-sharing trends to follow regional TCO, so markets that have higher TCO will likely see more car sharing more quickly. Because one of the largest drivers of cost per mile is the difference between fossil fuel and electricity costs, MHEVs and HEVs are already the most cost-effective choice for most owners of taxis and other shared vehicles. By 2025, BEVs should enjoy a significant and fast-climbing advantage when the falling cost of batteries gives electricity a distinct and rising price-per-mile edge over oil. Ride sharing therefore has the potential to be a significant driver of BEV sales in markets such as the US from 2025 on.

The Impact for OEMs and Suppliers

As the industry moves through the transition to hybrids and then to fully electric powertrains, OEMs and their suppliers are going to have to balance a complex set of considerations that affect all aspects of the business, from supply chain through sales strategy, and that vary by region and market around the world. The challenges to profitability will be significant, and the competitive landscape could be complicated in the medium to longer term if tech giants continue to see opportunities for themselves in the nascent market for AVs.

OEMs. Perhaps the biggest challenge for OEMs will be developing and managing an ecosystem of partners and suppliers for the design and production of hybrids and BEVs alongside existing ICE networks. OEMs have demonstrated that they can innovate in new product areas—Nissan’s Leaf and GM’s Bolt are two examples—but most manufacturers are playing catch-up, particularly with respect to BEVs, and they will need to work with others to develop their xEV product lines. Traditional suppliers are one type of potential partner (although these companies will need to raise their own xEV game as well), but tech companies, software designers, and ride-hailing companies such as Uber and Lyft are others given that the economics of xEVs are more favorable for shared vehicles. (Many OEMs are already striking deals with, or making investments in, tech-oriented players.)

A complementary, but different, set of ecosystems may grow up around the design, production, and sale of AVs as the technology becomes commercially available. Our research shows that most consumers are looking to auto OEMs to play the lead role in AV development, but many also see tech companies as viable competitors. Technology operating systems as well as automotive powertrains could both be focal points at the center of these ecosystems.

In the medium term, as hybrids take a bigger share of the market, OEMs will face difficult choices in how, how much, and where to invest in various technologies, especially if they see the hybrid as a transitional phase on the road to fully electric cars and trucks. These choices will be complicated by the varying mix of hybrid vehicles in major markets. Again, partnerships with suppliers will be critical to managing hybrid production.

Many in the industry see innovation and differentiation as a growing challenge, especially with respect to BEVs, because one battery pack operates much the same as the next and power and range are mainly functions of size. We agree that differentiation will remain critical: consumers like choice in vehicles and their attributes, including design, performance, and features. Tesla has shown that BEVs can be highly distinctive, especially in the premium segment. GM, Nissan, Toyota, and Honda have all brought differentiated BEVs and hybrids to the market, each with its own appeal. Designing and manufacturing differentiated, high-quality vehicles at scale is something that major OEMs are good at, and this will continue to be an essential capability for automakers. However, BEVs reduce the barriers to entry for vehicle manufacturing in that they use more openly available components than ICE vehicles.

Companies need to determine which components add value by being manufactured in-house and which are commodities and should be outsourced to suppliers. The mix may be different by type of xEV. Toyota, for instance, is making its own traction motors.

Managing production strategy will require accurately anticipating regulatory requirements, the falling cost of electrification, and the rise of consumer demand in order to scale up xEV manufacturing at the right time. OEMs will need to work closely with suppliers as xEV production ramps up and to manage revamped supply chains oriented around xEVs that work alongside existing ICE supply chains. Questions of location, type of component, and cost of production must all be resolved.

Sales strategy will be another complex issue, especially in the transitional years between 2020 and 2025. Manufacturers will need to determine the best pricing strategy to persuade customers to buy sufficient numbers of xEVs to meet regulations, which can be done through incentives, increasing the cost of ICE vehicles, or some combination of the two. Sales strategies will differ by region based on regulatory requirements and consumer behavior. Profitability will be under pressure, unless sales are supported by government incentives.

And, of course, there is the issue of electric-charging-station infrastructure and who will construct it. We expect that OEMs will have no choice but to help develop charging networks in order to overcome consumers’ anxiety about the range that EVs can cover. Indeed, some are already doing so: Tesla has announced that it plans to double the size of its global charging network, and Volkswagen has committed to building approximately 400 fast-charging stations as part of its diesel emission settlement in the US.

Suppliers. These companies will need to make their own calculations as to where they can best find opportunities to add value. Like OEMs, they will need to carefully manage the timing of investments and the building of manufacturing capacity. They will also want to position themselves as top suppliers both to leading OEMs as demand for EV components starts showing significant growth and to potential new entrants that see the opportunity to change the game, whether they be tech giants or startups.

One place to start is the shift in the mix of components that will occur as production of xEVs scales up and the size and complexity of ICE vehicles fall. Key decisions include which specific xEV components are most attractive: Where are the best opportunities for differentiated products and high ROI? Does this attractiveness vary by region? What level of investment is required, by component, in each region? And, for suppliers that have long specialized in ICEs, what is the ideal strategy (internal investment, acquisition, or joint venture) for investing in new EV-driven adjacent markets?

At the same time, suppliers will have to manage the profitability of improvement and manufacturing of ICE components. Even as demand for these components falls, they are still critical to their OEM customers and to meet regulations. Again, regional variations in both declining ICE components and growing xEV components will complicate decision making.

Considerations for Governments, Too

The shift toward a market divided between traditional and electric vehicles raises its own issues for governments and regulators. For example:

To what extent do they want to support the transition to xEVs by providing incentives for purchase? Our analysis suggests that a certain of level of incentivizing will be required until 2025, when the market becomes more self-sustaining. How do they fund those incentives?

Longer term, how do governments compensate for the decline in tax revenue that will come with lower sales of gasoline and diesel fuels? In the US, for example, federal gas tax revenue exceeded $35 billion in 2014, and each of the 50 states also raised money through taxes on gasoline and diesel fuels. Do governments shift taxes to the sale of electricity (which could dampen the uptake of xEVs and have broader economic impacts)? What will be the impact on transportation infrastructure spending, which in many countries has been funded by fuel-related taxes?

What incentives will national, regional, and local governments offer as companies start to build new manufacturing facilities for xEVs and their components?



The tipping point is in sight. EVs are set to be a major market reality inside of the next 15 years. But the road from here to there is anything but straight. Regulatory-driven change, the presiding paradigm from 2020 to 2025, is rarely predictable. And given a variety of cost considerations, including how far and how fast battery costs fall, the pace of consumer demand for EVs could vary as well. It will certainly vary by market.

OEMs and their suppliers should keep their eye on two broad trajectories: the rise in the market share of xEVs from about 5% today to 50% sometime around 2030 and the increase in the share of BEVs from almost nothing to about 14% of the global market in 2030. The pace of change will vary depending on regulatory actions, the availability of AV technology, consumer adoption of ride sharing, and the economics of different fuel sources. Companies will need to develop a suite of strategic and product options to manage the transition to an economically sustainable xEV market. This will require clear choices with respect to investment and meeting market demand.