In 2015 I placed a bet that one of that year’s top ten car manufacturers*, will stop manufacturing cars powered by internal combustion engines by the start of 2030.
Since then, growing trends in the sector and announcements by forward-looking automakers suggest I’m well on track to winning the bet. But more importantly for the industry and investors, it’s becoming clear that the EV rollout will happen much faster than many had anticipated just a few years ago, meaning the speed of disruption could well catch the market by surprise.
Many of the leading car manufacturers have shown they are taking the death of the internal combustion engine ever more seriously. This was seen most starkly in the decision by Volvo, owned by China’s Geely, to stop manufacturing combustion engine-only vehicles by 2019.
Technically my bet still stands of course, as Volvo was not counted as one of the world's top ten car manufacturers in the year 2015, and it would have to cease production of hybrids as well, which it’s not planning to do as yet.
However, the odds are shortening.
Virtually all of the 2015 top ten auto manufacturers are planning to expand their EV offering in some form, with the likes of BMW and Volkswagen aiming for EVs (including hybrids) to account for as much as 20% and 25% of total sales by 2025, respectively.
And of course there’s Tesla, which already only makes non-combustion engine vehicles, but is a long way off making the list of top ten automakers in terms of volume of cars sold. Though it overtook GM as the most valuable US automaker this year.
However, some of the large automakers, such as Fiat Chrysler, still appear to be stalling their EV strategy and are yet to have even one plug-in model on the road.
Scale and speed
It’s understandable that some auto makers and investors are cautious, given electric vehicles currently only make up around 1% of the global light passenger vehicle fleet. But underestimating the scale of disruption ahead could stifle the rollout of EVs and potentially risk competitiveness within the sector and the broader value chain. If the current 1% market share of EVs doubles every two years, which is possible given the exponential rate of technological change we’re seeing, EVs could dominate some 64% of the market within 12 years.
Bloomberg New Energy Finance expects the adoption of EVs to accelerate as the cost of building them is falling so fast. It forecasts more than half of new cars sold globally to be plug-in by 2040, thanks to key cities across Europe, China and the US embracing the new technology.
As battery prices rapidly decline, electric cars will outsell fossil-fuel powered vehicles within two decades, potentially displacing around 8 million barrels of oil production a day, according to the research.
In terms of battery costs, research from McKinsey & Company shows power storage prices are dropping much faster than anyone expected, due to the growing market for consumer electronics and EVs.
Meanwhile, one of the strongest forces pushing the EV rollout isn’t the car makers themselves, but the cities, states and regions desperate to tackle chronic pollution in built up urban areas. For example, California is pushing the uptake of EVs with its Zero Emission Vehicle Program, while in London Mayor Sadiq Khan is introducing an ultra low emission zone in 2019.
The scale of government support led ING to forecast that all new cars sold in Europe will be electric within less than two decades. And these policy signals are ramping up globally, such as India’s aim to sell only EVs by 2030, while the UK and France have moved to ban the sale of diesel and petrol cars from 2040.
However, the range of predictions for the coming EV era remains notably disparate.
The higher end of the Energy Transitions Commission scenario, in its Better Energy, Better Prosperity report, assumes that electric vehicles could represent up to 95% of new car sales by 2040.
UBS recently raised its 2025 forecast for EV sales by 50% to 14.2 million — 14% of global car sales. Following a slower trajectory, Carbon Tracker expects EVs to take a 19-21% share of the market by 2030, in scenarios where they achieve cost parity with conventional ICE vehicles by 2020.
Meanwhile, BNP Paribas is forecasting 11% penetration by 2025, and Morgan Stanley is even less optimistic, forecasting a 7% penetration by the same date.
However, many of the oil majors have even less faith in the EV rollout. For example, BP’s 2017 Energy Outlook sees EVs only holding a 6% share of the market by 2035.
Direction of travel
While the wide range of predictions adds uncertainty to the outlook, the direction of travel is clear. It’s not a matter of if the internal combustion engine will be assigned to the history books, but when.
Underestimating the speed of the EV rollout could not only take investors by surprise, importantly it could also stifle a smooth transition by delaying the necessary infrastructure and government incentives. It’s particularly damaging when low-ball estimates get accepted into scenarios planning, as I discuss in this previous post.
This in turn poses a real risk to the efforts to reduce carbon emissions and meet the National Determined Contributions set out in the Paris Agreement. It also hides the urgent need to transition to renewable power to meet the increased electrical demand that comes with widespread EV use.
Ultimately, investors and policy makers need to embrace the rate of exponential change happening in the auto sector, so they can make the right decisions that support EVs and protect against disruption.
Meanwhile, an engineering professor recently contact me willing to take the wager on, with a few slight amends, which shows this debate certainly splits opinion and will likely continue to do so.
* My original bet: “By December 31 02029 one of the world's top ten car manufacturers in 02015 (Volkswagen, Toyota, Daimler, GM, Ford, Fiat Chrysler, Honda, Nissan, BMW, SAIC) will stop manufacturing cars powered by internal combustion engines.”
Any more takers?