The automobile industry is pouring more than $1 trillion into a shift from internal combustion engines to electric vehicles, largely at the direction of governments. Automakers and government policymakers are touting electric vehicles, saying they provide “cleaner” and safer transportation. European countries and California have set 2035 as the deadline for ending sales of new combustion passenger vehicles, as well as some automakers such as General Motors who are planning to stop production of gasoline and diesel vehicles by then. Toyota, the world’s largest automaker, however, is not keen on the idea of only pursuing electric vehicles, questioning how quickly car companies can transition. Producers are faced with challenges in securing parts and raw materials for batteries and there are doubts about how quickly buyers will make the shift, especially as electric vehicle prices have soared this year. Overall, the average price paid for an electric vehicle in the United States in May was up 22 percent from a year earlier, at about $54,000. By comparison, the average paid for an internal-combustion vehicle increased 14 percent, to about $44,400.
Toyota’s Strategy
Toyota’s strategy is to invest in a diverse lineup of vehicles that includes hydrogen-powered cars and hybrids, which combine batteries with gasoline engines. The automaker sees hybrids, a technology it invented in the 1990s, as an important option, particularly when electric vehicles are expensive and charging infrastructure is not fully developed in many parts of the world. It is also developing zero-emission vehicles powered by hydrogen.
The infrastructure to charge electric vehicles is still lacking in the United States and many other parts of the world, making owning an electric vehicle a challenge for many consumers, and EV charging times are still many multiples of the time it takes to fill a gasoline tank. Further, traditional automakers have a broad base of customers, including many living in rural areas and developing economies with unreliable electricity supplies. Their internal combustion engine businesses are still driving the bulk of profits needed to fund the shift to electric vehicles, which not only requires the development of new models but also construction of new facilities and battery plants. This means buyers of internal combustion engine vehicles are indirectly subsidizing the electric vehicles governments are forcing automakers to build.
Electric Vehicle Sales
According to J.D. Power, the market share for electric vehicles in the United States has increased in the last couple of years. As of October, it was about 6.5 percent of the total new-car market, largely because electric vehicle sales are growing faster in places such as California, where there is a greater willingness among buyers to make the shift and enormous government incentives. The U.S. East and West coasts are electrifying much faster than the interior of the country. In China, the world’s largest single automotive market, electric vehicles have captured about 21 percent of the market. In Europe, electric vehicles account for about 12 percent of total passenger vehicle sales.
Sticker prices for electric vehicles have increased this year because of the rising cost of battery materials, limiting the pool of buyers who can afford one. It is also unclear whether electric vehicles emit less carbon emissions than internal combustion engine vehicles because it depends on the fuels used to produce electricity, which varies across the world. Coal still powers 20 percent of U.S. electricity and 36 percent of global generation. China produces 63 percent of its electricity from coal; India produces 74 percent of its electricity from coal. Also, electric vehicle batteries are big and expensive and better suited in smaller vehicles that Americans do not want.
Battery Factories Expanding in Asia
Battery production is expanding outside of the major markets of China, Europe and the United States as Asian electric vehicle producers enter new markets in Southeast Asia. In September, China’s largest electric vehicle producer BYD announced it would build a production hub in Thailand, while Hyundai is building a battery factory in Indonesia along with LG Energy Solution. South Korean battery company SK Innovation plans to build a battery plant with Ford and local company Koc Holding in Turkey. The plant in Ankara is expected to begin production of high-nickel NCM (nickel, cobalt, manganese) batteries in 2025.
Thirteen battery gigafactories are scheduled to be built in seven countries, including Malaysia, Indonesia, and India, which would add about 104 gigawatt hours of battery capacity by the end of the decade, enough for almost 2 million electric vehicles. The 13 gigafactories are expected to come online by 2026 and add about 78 gigawatt-hours capacity initially which would be scaled to 104 gigawatt-hours by the end of 2030. These gigafactories would together contribute about 37.6 percent of Asian (excluding China) capacity of 205 gigawatt-hours by the end of 2026 and about 40.5 percent by the end of 2030.
Electric Vehicle Sales Forecasts
One forecaster, Auto Forecast Solutions, predicts by 2029, electric vehicles could account for a third of the North American market, and about 26 percent of vehicles produced worldwide. But, the transition will not be smooth, particularly if there is a recession, which will slow EV adoption. On the other hand, Wards Intelligence forecasts that internal combustion vehicles will make up just under 80 percent of North American sales in 2027, making electric vehicles sales much less than the prediction of Auto Forecast Solutions.
A problem for automakers is overproducing in a niche market. By 2025, there could be 74 different electric vehicle models offered in North America. But fewer than 20 percent of those models are likely to sell at volumes above 50,000 vehicles a year. Automakers could be stuck with too many niche models and too much capacity.
Conclusion
Consumer preference used to be the major indicator for the market and technology production, but now it is government edicts and subsidies. Government policymakers are indicating that electric vehicles are “cleaner” and safer, thereby forcing the transition on the world, whether it is in agreement with consumer preference or not. The world’s automakers are proceeding with the transition phasing out gasoline and diesel vehicles in line with government edicts for electric vehicle adoption, forcing them to invest in expensive batteries and factories. The transition will not be cheap for producers and consumers and it is questionable whether it will make a difference in the long run since the predicted temperature change as a result of these sacrifices is very minimal.
