East-West Partnerships may offer key to making transition to profitable EV manufacturing

AS we embark on the inevitable era in which Electric Vehicles (EVs) will dominate the car market we must ask the question ‘what do existing Internal Combustion Engine-based (ICE) OEMs need to do in the next few years to make the transition to EV-dominant manufacturing?’

One solution is to get as close to ICE/EV cost (of manufacturing) parity as quickly as possible. 

A recent McKinsey report, entitled Making Electric Vehicles Profitable, explores this very question in great depth. McKinsey calculates that right now the average small to medium-sized EV vehicle costs $12,000 more to manufacture than its ICE equivalent. 

Assuming that government subsidies will not be offered for EV vehicle manufacture (other than increasing penalties being mounted on the OEMs of ICE vehicles and the consumers buying them through increased taxes and fuel duties etc); manufacturers themselves will need to find ways of saving all or nearly all of that $12,000 per unit in the next few years.

McKinsey suggests 5 key routes to reducing the price of manufacturing EVs:

1. ‘Design simplifications and value neutral decontenting’. Essentially this means eliminating extraneous dashboard displays, buttons, switches and wiring; while simplifying interior trims, seat design and lighting. Primary areas where savings can be made in vehicle manufacture – all without negatively impacting the perceived value or actual safety of the car – are in the cockpit, electronics and body of the vehicle. McKinsey estimates an average of $600 can be saved here. 
2. Sticking with 40 kWh battery usage: Savings can be made from not pushing to build in the highest possible range batteries (currently 50 kWh) but sticking with the 40 kWh cells which already offer up to 250 km range, which is more than adequate for most early adopter buyers of EVs living in urban areas. Sticking with the smaller batteries would mean that OEMs would benefit from falling battery prices quicker and should be able to reduce the per vehicle cost by a further $2,000.
3. Clever collaboration: Manufacturers looking to make the switch to EV need to partner with other OEMs to command more bargaining power in the purchase of battery cells, power electronics and e-motors. These partnerships also offer the potential to share the huge R&D costs of building a dedicated EV platform together – potentially getting to market more quickly, with more cost-effective offerings. McKinsey calculates a further $2,000 can be saved per EV vehicle through clever partnering. 
4. Battery leasing: batteries can be leased from OEMs, rather than purchased with the car. That way, higher recurring revenue can be secured, creating another, and arguably more reliable, income stream. 
5. Battery re-sale: As batteries inside EVs reveal declining ranges there may be a potential to swap out the old and add a new one; while the older one could be re-used for less demanding ‘stationary power storage’ purposes. A further $1,000 per unit could be saved through these activities. 

If you add up all the savings evident from McKinsey’s experts you are talking about an EV OEM saving of $5,100-$5,700 per vehicle produced. Provided you get these elements right, that’s still over $6,000 adrift of ICE parity, a fact that also indicates that manufacturing EVs will not be profitable until 2025 at the very earliest. 

However, by moving in the direction of EV manufacturing quicker than competitors, early movers will be offered another EU market-specific opportunity presented by those ‘super credits’ flowing from the new Clean Air for Europe (CAFE) programme. 

Fiat Chrysler Automobiles (FCA) recently agreed to pay an estimated $1 billion dollars to Tesla for ‘pooling’ (i.e. using Tesla’s positive emissions super credits), reducing FCA’s emissions fines by as much as 80%. So, there’s more money to be saved there, or at the very least penalties to be reduced. 

Doubling back to the power of partnering – it seems inevitable that there will need to be many more East-West partnerships and joint ventures in the next few years as all manufacturers try to grab EV market share.

It’s worth remembering China is the largest market for EVs bar none today. 793,000 BEVs were sold in China in 2018, as against 173,000 across the whole of the EU and 239,000 in the USA. Admittedly Tesla is the #1 EV car maker in the world right now (and has received enormous tax breaks to get there). But two Chinese OEMs – BYD and BAIC – come in a close #2 and #3.