Over the next several years, scores of new models of electric vehicles (EVs) are planned to launch. But as automakers move from design to production, one variable looms large: the build-out of a national public EV charging infrastructure. There’s a lot at stake. According to the Alliance of Automotive Innovation, automakers are putting some $250 billion in EV development. The success of this enormous investment depends on cracking the public-charging infrastructure nut. In late March, the Biden administration unveiled a $2.25 infrastructure stimulus package that proposes grants to state and local governments — as well as the private sector — to install 500,000 EV chargers by 2030. These plans could give the national charging network a needed boost.
Powering millions of electric vehicles will be a daunting task
So who’s going to develop an infrastructure to juice EVs over the next decade and beyond? By 2030, the number of EVs on America’s roads are projected to number 18.7 million, according to Edison Electric Institute, up from the current 1.4 million. Indeed, it’s an ambitious project to make sure charging keeps pace with EV adoption. Just consider that the current fueling infrastructure took over a century to build. In order to accommodate the charging needs of potentially millions of EV owners, it seems unlikely automakers will take a page out of Tesla’s playbook and develop a nationwide, proprietary charging infrastructure, given the enormous capital outlays needed. Since 2012, Tesla has stuck over 20,000 EV chargers into the ground.
That’s about 20% of the 100,615 public EV charging outlets in the US as of March 2021, according to the US Department of Transportation. A 2021 Aura analysis (Electric vehicles and the charging infrastructure: a new mindset?, which will also be discussed during the Automotive News Congress Conversations webinar series) forecasts that when EVs comprise 5% of the national fleet (up from almost 2% today), we’ll need 235,000 new public charging outlets to make fueling EVs as convenient as conventional vehicles today. Meanwhile, the verdict is still out on how attractive EV charging infrastructure business models are. The same Aura analysis estimates it can cost up to $96,000 to install just one fast-charging Level 3 or Level 4 outlet, and that’s not including other costs such as property leasing or fees for connecting to the power grid.
EV-charging will mean wide-ranging collaborations
While still very much a work in progress, the development of a national EV charging infrastructure will most likely be a tag-team effort, achieved through partnerships and consortia that help spread the costs — and the risks. The main stakeholders in the mix include federal, state and local governments, electrical utilities, certain retailers (e.g., supermarkets, big box retailers, restaurants, parking garages), EV charging equipment makers and the major automakers (or original equipment manufacturers, or OEMs). Each player in this group is a potential beneficiary of mainstreaming public EV charging — whether it be meeting net-zero decarbonization goals and mandates or supporting a business model to achieve top- and bottom-line expectations.
Examples of these cross-industry and public-private partnerships are already appearing. Electrify America is on its way to build out a network of nearly 3,000 fast-charging outlets across the US. It has so far installed more than 1,900 DC fast chargers.
Utilities, retailers and automakers look to be major stakeholders
Utilities stand to become major developers, too. Take, for example, a consortium of utilities and energy companies operating in the Midwest developing a network of charging stations across the Midwest. Its network of charging stations would stretch 1,200 miles from Detroit to Colorado. In July 2020, New York’s Public Service Commission followed California and other states investing in charging infrastructure when it approved a $700 million program (funded by utilities customers’ electricity bills) to help build more than 55,000 chargers by paying for part of the transmission upgrades and site preparation work needed to install them.
But some EV OEMs are taking charge in making sure there are public chargers for their customers — albeit in targeted markets. EV truck maker Rivian, for example, plans to install more than 10,000 Level 2 chargers spread across Colorado’s 42 state parks by the end of 2023, with chargers compatible with all modern EVs. In August 2020, General Motors announced it would team up with an EVGo to build 700 fast-charging stations (with 2,700 plus) through 2025, focusing on some metro areas, with some of the funding chipped in by utilities, governments and public-private partnerships.
Retailers, too, are well positioned to get into the charging game. Walmart, for example, continues to grow its network of chargers in parking lots; as of 2019, it has worked with charging vendors to install 1,138 charging stations at 288 retail locations in 37 states, — allowing shoppers to charge up while they shop.
In Europe, competing OEMs are joining forces to build a high-power charging network across Europe’s major highways through IONITY, a joint venture of five major European and American automakers.
Meanwhile, stateside, the Alliance for Automotive Innovation — an auto trade group representing most major global automakers — is pushing for pro-EV policies as well as policies that support charging. These include extending and expanding tax credits for charging station investments and easing building codes to allow for more snag-free charging installation.
Given the activity of so many players in the EV ecosystem as well as the momentous societal push for EoE (electrification of everything), it’s difficult to predict precisely how the future of EVs and charging needs will unfold over the next decade. One thing does seem clear: The success of EVs will be predicated on the success of a charging infrastructure build-out — and the partnerships and collaboration across a wide swath of stakeholders working together to develop it.
New technologies, changing consumer preferences and intensifying regulation will help reshape the automotive industry in the years ahead.
Though autonomous vehicles may pose the ultimate test of automakers and their suppliers’ adaptability, truly driverless cars are still many years away. The transition toward electric vehicles and away from those with internal combustion engines is a nearer-term, if no less significant, challenge. Auto companies will need to remain nimble to thrive amid this shift.
The rise of EVs poses a particular risk for auto suppliers. Major systems that are essential to vehicles with internal combustion engines are absent from EVs. Makers of exhaust systems, fuel systems, and transmissions face the prospect of disruption as EVs become more mainstream. Those lacking financial flexibility and digital wherewithal are likely to struggle the most. Although Aura expects that adoption will grow at a modest pace for now, EVs’ share of the automobile market will likely begin to expand more rapidly in the medium term. OEMs and suppliers alike should start preparing for that future today.
The automotive market is in for a shock
Transportation accounts for approximately 23% of global energy-related greenhouse gas emissions, and road transport makes up 72% of that, according to the Intergovernmental Panel on Climate Change. In an effort to combat climate change, governments around the world have adopted increasingly stringent emissions limits for light-duty vehicles like passenger cars. While the industry has historically met these higher standards through incrementally improving the internal combustion engine (“ICE”), vehicle aerodynamics and tire technologies, proposed regulations in some automotive markets will require a steep change.
Europe and China will lead the way on EV adoption. England and France both intend to ban the sale of fossil fuel-powered vehicles by 2040, and Germany is offering sizable financial incentives to prod consumers to purchase EVs. For its part, China, the world’s largest automobile market, will begin requiring at least 10 percent of new car sales be fully electric or plug-in hybrid starting in 2019. To help encourage adoption, the Chinese government offers generous subsidies that averaged $15,000 per vehicle in 2016. Notwithstanding these incentives, our view is the main drivers of sustainable EV adoption will be economic rather than regulatory, and only when parity in total cost of ownership is achieved will EVs begin to make up a significant share of new vehicle sales. Because we expect this to occur later in the U.S. than Europe and China, we also forecast that adoption there will lag behind somewhat as well. But due to the global nature of the automotive supply chain, OEMs and their suppliers should prepare for the shift toward EVs and away from ICE vehicles regardless of where they are based.
Even though the road to mainstream EV adoption may be lengthy, long vehicle development cycles and lead times mean that important decisions and investments are already being made. Auto companies continue to invest heavily in the technologies that will power the vehicles of tomorrow, even though they are unlikely to see returns on those investments anytime soon. They have have spent $90 billion in EV-focused research and development, and additional spending is a certainty, according to an analysis by Reuters. These investments will drive sourcing decisions in the years ahead.
Does electrification have suppliers on a collision course?
Adoption of EVs will have a profound impact on the automotive supply chain. Even if some markets, such as the U.S., remain heavily ICE-focused in the near term, the global shift to EVs should be top of mind for suppliers everywhere. Indeed, Aura analysis shows that EVs may represent approximately 14% global new vehicle sales in Europe and China by 2025 -- up from 1% in 2017. Many suppliers that provide components for vehicles powered by internal combustion engines may face a significant threat if they cannot adapt. Key differences between the makeup of EVs and ICE vehicles reveal which supplier subsectors are most at risk.
In contrast, suppliers are likely to face significant challenges as EVs enter the mainstream. There are two main reasons for this:
EVs are radically simpler in mechanical terms... The electric motors that power EVs comprise far fewer components than a traditional ICE. In fact, the UBS Group compared the Chevrolet Bolt’s engine to a four-cylinder internal-combustion engine and found that the electric motor had three moving parts, compared to the ICE’s 113. In addition, most EVs have single-speed transmissions and have no need for turbo- or superchargers to provide additional oxygen to the engine or exhaust systems to remove waste gases.
…But they’re much more complicated in other ways. Aura Strategy& anticipates that the share of a car’s value attributable to the powertrain and electronics will rise significantly by 2025, to a combined 52% from 44% in 2015, at the expense of the chassis, body, and interior components, driven in part by a shift toward EVs (increasing in-car connectivity and advancements in driver-assist technology are also factors). The lithium-ion battery pack alone can account for up to 50% of the value of today’s EVs. Battery prices have fallen steadily in recent years and that share will likely be much lower over time. But even so, these batteries are primarily made by companies outside the traditional auto supply chain, creating new competition for legacy suppliers. The fact that some EV battery suppliers are developing expertise in manufacturing electric powertrains further illustrates the risk.
These changes will naturally shrink suppliers’ potential addressable market as EV adoption rises. The share of EVs’ value added by component suppliers might total 35% to 40%, compared with 50% to 55% of an ICE-powered car.
Navigating the road to an EV future
Change and evolution are a part of all industries. The auto industry has been given a governmental nudge to boost fuel economy in key global markets such as Europe and China, and it seems possible, if not likely, that there will be a substantial shift towards EVs. Were this to happen, the disruption on the automotive supplier base will be profound. For those suppliers that are heavily leveraged and unable to adapt, it could spell financial troubles ahead.
Our automotive industry advantage
Electric vehicles (EVs) are on their way to becoming mainstreamed with government, consumer and corporate buy-in hitting a fever pitch. And, as battery costs fall, EVs are steadily becoming more economical, almost certainly spurring accelerated adoption. Much of the discourse and excitement surrounding the electrification of transportation has focused on private passenger cars—for good reason given the positive environmental and societal changes the transition to battery power could bring. However, a big part of the pivot to electric will also be experienced by public and private fleets.
As governments and companies alike adopt greenhouse gas (GHG) emissions reduction targets, replacing entire fleets with battery-powered vehicles is on the table. To put the importance of this transition into perspective, consider that 28% of US GHG emissions (in 2018) were generated by the transportation sector and, of that amount, well over half (59%) was produced by heavy-duty vehicles and another 23% by light- and medium-duty trucks, according to the Environmental Protection Agency (EPA).
The nation’s ground transportation fleets number roughly eight million, and companies in a range of sectors—from utilities to e-commerce to food-and-beverage—are eyeing plans to go electric. Of course, some segments of this fleet will likely experience faster adoption than others over the next decade. Based on a Aura analysis, we believe light trucks and vehicles used for last-mile delivery will reach total cost of ownership (TCO) parity with their internal combustion engine (ICE) counterparts sooner (within the next several years) than medium- and heavy-duty trucks.
EV fleets to drive ESG agendas
Cleaner fleets will, undoubtedly, be a carrot for many companies looking to carry out their larger Environmental, Social, and Governance (ESG) agenda. For example, they will look at greening their fleets as a way to lower their carbon emissions in their own operations and for their customers. Such efforts can help to achieve ambitious carbon reduction targets that are increasingly expected by stakeholders, including investors. We expect tightening emissions regulations for commercial vehicles to play a role in fleet replacements. The Environmental Protection Agency (EPA)/National Highway Traffic Safety Administration (NHTSA), for instance, aims to employ new stringent emission and fuel-efficiency standards for medium-and heavy-duty commercial vehicles not currently regulated by Corporate Average Fuel Economy (CAFE) standards. States, too, are advancing emissions restrictions.
The government’s big EV push
Several Biden administration proposals seek to accelerate the transition to an electric fleet. A proposed $174 billion package of incentives and grants aimed at supporting domestic production of electric vehicles (EVs) and the build-out of a network of 500,000 EV charging stations is on the table. Various other federal proposals promote all-electric transport, including plans for the Department of Energy to support a domestic lithium battery supply chain. While these and other proposals are yet to be passed, they nevertheless collectively signal the administration’s endorsement of an EV future.
Building electric fleets: Five core considerations
Despite the wellspring of capital investment and the acceleration of commitments, getting the US transportation sector to net zero GHG emissions will hardly be an easy task. Still, the underlying economics of EV ownership are improving and, at the same time, economic incentives and parallel-track regulations are sending strong signals that EV penetration will likely increase steadily over the next decade—and perhaps beyond current estimates.
Companies that are intent on replacing their ICE fleets with EVs should begin carving out plans now. Here are five considerations regardless of the size of your fleet.
What to consider when building electric fleets
1. Know your EV fleet economics
Total cost of ownership (TCO) of all EVs has been falling over the years, but as pressure grows to transition, fleet owners should prepare to look more closely into factors driving costs, especially if purchasing in the hundreds or thousands of units (and compared to ICE vehicles for the same use case). A thorough, no-surprises analysis of the TCO of a given electric car or truck should include these core EV fleet TCO considerations:
Battery cost: Battery cost is a substantial component of TCO and includes total costs driven by pack and cell costs. Battery costs, however, have gone down considerably over the years, from an estimated $650 in 2010 (pack and cell combined) to about $160 to $150 today, according to a Aura analysis. Costs are estimated to decline further to about $100 to $120 by 2025. Battery costs are generally more expensive the heavier the vehicle.
Battery depreciation: Usual life (and residual) battery value is another major part
of TCO, with batteries losing efficiency over time. Recent technological advances, however, are extending battery lives (and cutting depreciation costs), yet it’s uncertain to what extent battery lives could be extended in the coming years and what “second life” applications are feasible. This remains a significant unknown.
Miles driven/utilization drives TCO in near term: TCO of any EV is dependent on use, and naturally can vary widely in different use cases such as long-haul versus last-mile delivery. In general, the higher the miles driven the more attractive the TCO (and a quicker path to parity with a like ICE-vehicle). There are exceptions, and we believe that vehicles used for light transportation and last-mile delivery will be the first commercial EVs to reach TCO parity with their ICE counterparts. We expect that through the next decade conditions will increasingly create TCO parity with ICE vehicles of other heavier and larger commercial EVs such as long-haul, regional delivery and construction vehicles. The extent of the lowering of TCO—and, hence, increased adoption of—medium- and heavy-duty EV trucks will likely be driven by factors like the availability of charging for long-haul use cases, battery weight reduction, battery range and efficiency, and battery cost reduction.
Lighter trucks to reach TCO parity with ICE vehicles sooner than heavier trucks
Charging strategy: How, when, and where EVs recharge is a major operating cost driver, with fleet-charging optimization playing a major role in cutting operating expenses and CAPEX of charging infrastructure. Fleet managers will need to consider variables, such as type and volume of chargers, cost of electricity and fleet charging management. They’ll also have to consider whether it makes sense to build out their own in-hub private charging infrastructure, which could be less costly over time than public charging. Building a private charging network can be a big decision, requiring a careful consideration of how many chargers are actually needed and how fast they need to be, which can affect costs greatly. The type of charger also needs to be considered: the plug-in charger, the most prevalent currently in the market; the overhead charger, designed for medium- and heavy-duty commercial trucks; and the wireless charger, a nascent technology with little market penetration thus far.
Maintenance and repair: With far fewer moving parts than their ICE cousins, EVs will likely involve lower repair and maintenance costs during their lifetime. For instance, EVs will not require things like oil changes, transmission service or spark plug replacement. Further, belts and brake maintenance is expected to be reduced due to EVs’ regenerative braking. Other electronic components (battery, motor) are expected to require minimal maintenance. It’s important to compare your baseline repair and maintenance for your existing ICE and compare that to scenarios that will help you forecast possible costs for an EV fleet. Some estimates suggest that maintenance cost for EV will be 30% to 40% lower.
2. Align your EV strategy with OEMs’ rollout plans as options widen
In the last few years, OEMs have accelerated announcements of new nameplates of EVs, particularly passenger cars. While there have been EV launches of light- medium- and heavy-duty trucks in classes 1 through 8, options for electric-powered medium- and heavy-duty trucks continue to be relatively limited, though the number is expected to grow over the next several years. As for last-mile-delivery vehicles, there are quite a few options available already with many new players entering this space.
The proliferation of so many EV options could leave some companies unsure which new models suit their specific needs. Getting familiar with the economics, charging needs and other characteristics is crucial. There’s a lot to consider. Some businesses may be wondering if they should wait for the total cost of purchase to go down as with other technologies that go mainstream. Quite simply, when’s the right time for adoption? Clearly, there’s no one answer for all companies. Needs and urgency to go electric can differ from company to company—and even from sector to sector. In any case, knowing what’s coming down the pike in the market is crucial to answering these questions.
3. Assess your charging infrastructure and management needs
Selecting charging infrastructure can be complex and based on a wide array of variables. Fleet managers will need to get an accurate idea of vehicle usage patterns before deciding on charger technology. And it doesn’t stop with the chargers. There’s also charging management software that could be required to manage energy loading and demand. Typically, fleets will need to be charged overnight over a multi-hour period, so ensuring that it’s feasible is the first step in considering private, in-hub charging. Another big question is whether less expensive Level 2 chargers will suffice or if Level 3 or Level 4 chargers are required—and how many. A Aura analysis estimates that the initial capital investment per charging station by level is:
Level 2 (5-6 hours charging time): $2,000-$5,000
Level 3 (30 minutes): over $75,000
Level 4 (20 minutes): over $125,000
Other considerations include determining the types (e.g., plug-in, overhead or wireless) and brand of chargers that best suit your needs. Also, depending on the operational hours for the fleet, companies should also consider a strategy to optimize charging at off-peak hours when possible or make sure electricity is available during peak hours.
4. Track incentives available to your business
It’s important, before any vehicle (or charger) is purchased, to evaluate how your company may qualify for governmental (federal, state and municipal) benefits (credits, rebates) for EV and EV-charging infrastructure adoption in the territories where you do business. All-electric and plug-in hybrid vehicles, for example, may be eligible for federal income tax credits of up to $7,500. Also, the IRS Alternative Fuel Infrastructure Tax Credit provides a tax credit of 30% of the cost of commercial EV chargers, not to exceed $30,000. Additional state and local incentives may also be available, meaning you’ll need to navigate a patchwork of current incentives across the country and track new ones. You’ll also need to know the profile of emissions reduction that qualify for benefits (based on vehicle type and timeline of adoption).
5. Assess what new workforce expertise and training you’ll need
Electric vehicles maintenance requires a host of specialized skills, including maintenance and repair, software management and energy management. Companies will need to ensure they have the talent within their ranks to run the fleet, which will in many ways differ greatly from how it’s been done for decades.
Is there a need for upskilling or hiring new talent?
What new strategies need to be developed to maintain and operate an EV fleet and infrastructure?
Does your company plan to do the work in-house or take on a third-party specialist?
Choosing the path that’s right for you
With a confluence of factors accelerating its development, electrification of transportation will probably become mainstream faster than any of us thought just a few years ago. Most businesses with fleets are already asking themselves how their organization fits into this future. Where are the opportunities and, perhaps just as important, how can under-informed decisions be avoided? In a nutshell, we’re all striving to achieve the twin goals of taking action to avoid the worst impacts of climate change while making sound economic decisions for our businesses as well.
In the next decade, the number of electric vehicles (EVs) on our roads will likely rise substantially, and we believe the bulk of the charging of these vehicles will take place at home. But readily accessible charging away from one’s home (or one’s workplace) will also be key to support EV growth. Such “on-the-go” charge-ups will also need to be as easy and convenient as refueling an internal combustion engine (ICE) vehicle today.
While EVs account for less than 2% of new vehicle registrations in the United States, and much less than 1% of all vehicles on the road today (according to IHS Markit), the underlying economics of EV ownership are improving. State and federal regulators are incentivizing adoption, signaling that EV penetration will likely increase steadily over the next decade and beyond. The Biden administration has pledged to extend EV tax credits, and California—often a bellwether for other states—has moved to ban new ICE cars from 2035. By then, we expect EV ownership to be economically viable for most drivers (even without tax breaks or other incentives).
So how will the EV infrastructure support the developing fleet? Today’s automobile culture is supported today by an estimated 135,000 outlets with some 1.4 million pumps, according to the National Petroleum News. This network balances the competing demands of low cost and efficiency, locational convenience and capacity utilization. The result is that most motorists in most situations can easily find a competitively priced gas station and not wait in line for an open pump. We expect similar dynamics will shape the emerging network of EV charging stations.
We have assessed the underlying economics of EV charging today in the United States, and how it could change in the future to support the growing EV fleet:
Not surprisingly, the capital and operating costs of higher-capacity chargers (excluding the electrical power delivered) is higher than those of lower-capacity chargers. Level 1 chargers—like a residential 110-volt outlet—are nearly free to operate. Level 3 and 4 chargers, however, are more expensive and complex.
So how should we think about charging costs, and what are the implications of these costs? In particular, will consumers be willing to pay a premium for faster, high-level chargers? To examine this, let’s look at the costs of building and operating charging networks.
Capex for a charger consists of the charging equipment itself (similar to a gas pump) plus any required upgrades to the local electricity grid, land, civil works, etc. Most capital cost comprises the charging hardware itself. There are some economies of scale, but these peak as the station reaches four to six chargers, with capital cost per charger declining slowly as the overall size and capacity of the station increases. While Level 2 chargers are relatively less costly to build (with only a 5 KW capacity) on a per-KW basis, they’re actually more expensive than Level 3 and 4 chargers.
Labor costs for charging stations are quite low. They’re typically unattended, self-service and require less maintenance than gas pumps. However, charging locations connected to a local electricity grid are subject to “capacity charges” used to offset the costs of utility upgrades needed to accommodate them. Capacity charges are linked to the highest expected load a given charging station may require. In principle, then, a Level 4 station could have twice the peak load of a Level 2 station—and a higher capacity charge. This capacity charge is fixed and recurring (typically monthly), regardless of whether or not the peak load is reached in any given month.
How will the “on the go” market develop?
Most EV owners are expected to do up to 80 or 90% of their charging overnight at home or during the day at work, estimates the US Department of Energy. In these use cases, Level 2 chargers will likely be used, given that longer charging times don’t matter. Some EV charging providers have experimented with Level 2 chargers at local destinations such as supermarkets, shopping malls and movie theaters, but these charge points may not capture loyal users.
EV owners making short trips locally will rarely need to top up and, even if they did, slower Level 2 charging wouldn’t be of much help for anyone in a hurry. In contrast, “out-of-towners” on longer trips would need to charge—and would likely be willing to pay more for fast-charging (Level 3 or 4) to save time. One exception might be at hotels, where guests could charge their cars overnight. For out-of-towners, then, charging becomes a destination in itself, and these consumers would likely seek a combination of convenience, speed and competitive pricing—much as current consumers in today’s gas and diesel market.
It might follow, then, that locations for EV stations will mirror those of today’s gas stations—that is, quick and easy to find. But, with fast-charging so costly, this isn’t likely to be the case. The capital and capacity charges for Level 4 are approximately twice that of Level 3. In fact, to achieve the same profitability, a Level 4 station would need to charge a premium of at least 10 cents/KWH over the price of a competing Level 3 station. On a 50 KWH (about 100 miles) charge, a consumer would pay a premium of about $5 to save around 15 to 20 minutes. This trade-off suggests that, over time, the market will segment with different providers targeting different consumer needs and preferences—much as occurs in the gas and diesel market today.
In the long run, we expect the EV charging market to settle into segments (like the retail gasoline market) driven by four factors: convenience, price, loyalty, and quality.
In the emerging EV charging market, time-starved consumers will likely value their time highly enough to pay a premium for speed. They’ll look for convenient locations with the fastest charging times, and they’ll be disinclined to use reservations apps. Providers targeting these consumers will build extra capacity to maximize availability and offer the fastest chargers. They’ll also demand a significant premium over Level 3 stations seeking to capture value over and above the increased costs they incur.
The price segment consumer will likely go to Level 3 stations with higher utilization and, perhaps, in less convenient locations. Price-sensitive consumers may be willing to wait in line, shop around and reserve a charger via mobile apps. Out-of-town consumers in this segment use chargers near aggregations of restaurants (or retail or amusement destinations), where they could occupy themselves while their car is charging.
In recent years, loyalty programs have become a critical competitive lever in the gas and diesel market. The loyalty segment in EV charging may not develop to the same extent, since a household’s total expenditure on away-from-home charging will be quite modest, representing only 10 to 20% of their total consumption. For a vehicle averaging 10,000 miles per year, away-from-home charging will likely amount to roughly $300 per year, compared to at least $1,500 spent at the gas pump today.
Nevertheless, we may see the emergence of bundles and other offerings, in which service providers and retailers offer charging as an incentive to drive subscriptions, traffic or other transactions and interactions.
A quality-conscious consumer will likely prioritize trusted EV-charging brands they perceive as high-quality, in the same way some drivers trust particular brands of gasoline. Differentiating the EV charging products themselves (ie., electrons) could be challenging so providers may seek to differentiate and even brand the source of their power. For example, providers may promote green power from renewable sources such as solar, wind or geothermal—and charge a premium for it.
Further, charging companies could brand power provenances. Imagine, for example, Texas Wind or Arizona Solar. Or, for some consumers, even Wyoming Coal?
As we have seen, most third-party charging capacity will likely be Level 3 and Level 4. The market size will then depend on EV penetration into the vehicle fleet parc (i.e., vehicles in operation, as distinct from new car registrations) and the prevalence of on-the-go charging.
The table below illustrates the potential EV charger market size based on a mix of Level 3 and Level 4 chargers at different utilization levels.
The current fast-charger network (47,000 chargers at a 5% utilization and a 0.5% fleet penetration) has been built ahead of demand and remains poorly utilized. We expect, however, that utilization will grow as the market and investor expectations mature. But utilization may well lag profitable levels for some time, as providers expand their networks in expectation of steadily increasing demand.
Given a central estimate of 5% penetration of EV total vehicle parc by 2030, the market could require about 120,000 to 235,000 fast-charge points or about 30,000 to 60,000 charging locations. Interestingly, smaller locations will probably drive adoption, as they’ll be more numerous and hence more convenient for consumers. Taking these considerations into account, we estimate the total fast-charging network in 2030 to be close to 60,000 locations with at least some of these—perhaps most—at existing gas stations.
While EV charging remains in its nascency, we believe that the build-out of a national network of chargers that satisfies customer demand and preferences will do much to support greater adoption of EVs. Exactly how quickly this charging infrastructure will be developed—and precisely what it will look like—is not altogether certain.
Still, the underlying economics and analogous consumer behaviors should result in a network of convenient, fast-charging stations that compete to provide consumers with the electrons they need at competitive prices.
The good news for suppliers is that electric vehicles (EVs) are still only a small percentage of the auto market—at least for now. The bad news is that the growth of EV adoption poses a significant challenge for auto suppliers. Since EVs have many fewer parts than vehicles with internal combustion engines (ICEs), manufacturers of exhaust systems, fuel systems, and transmissions face disruption as EVs become more mainstream.
The current EV market is being fueled by governmental emission standards and incentives, especially in England, France, Germany, and China. But EVs will not represent a significant threat to ICEs until the costs of ownership become roughly equivalent. While EV costs continue to decline as the technology improves, they are not yet competitive. Still, seeing the handwriting on the wall, auto companies have invested billions in EV related technology, which will increasingly drive sourcing decisions.
Our analysis shows that EVs may represent approximately 14% of global new vehicle sales in Europe and China by 2025—up from 1% in 2017. Even this increase is likely to impact many suppliers that provide components for ICEs because EVs have many fewer components than ICEs and do not need turbo chargers. Also, EVs depend on lithium-ion batteries, which are primarily made by companies outside the traditional auto supply chain. Adding to the competitive threat, some EV battery suppliers are beginning to manufacture electric powertrains.
How can suppliers fortify themselves against the growth of EVs? Below are some action items to consider:
Assess the risk of EV adoption in key markets. First, you should research the markets’ technological and regulatory conditions and consumer preferences. Second, you should re-evaluate your product portfolio in light of your research and determine which components might be most affected.
Determine your digital fitness and capacity to innovate. In addition to manufacturing expertise, you will need to compete with technology firms to provide software and advanced electronics to the auto industry. This is likely to require a cultural shift as well as significant investment in acquiring technological expertise.
Re-evaluate your capital structure. Substantial debt burdens may make it more difficult to take long term risks to prepare for new market conditions. Even though interest rates and risk premiums are currently low, it may be a good time to consider deleveraging your capital structure to allow for greater financial flexibility.
Decide on your best path forward. By our calculations, suppliers have about 7-10 years to prepare for the growing threat of EVs. You might consider adding software or advanced electronics capabilities, either organically or through acquisitions, joint ventures or partnerships. You could plan to shift your product portfolio away from lines of business you think will become unprofitable as EV adoption increases.
Suppliers that fail to meet the challenges of rising EV adoption can also present a risk to automobile manufacturers. Given tightly integrated supply chains, OEMs would be wise to monitor the ability of key suppliers to maintain their viability in a changed market environment.
Electric vehicles, the energy transition, grid modernization and distributed power are already popular investment themes, and deservedly so. What the market may not fully appreciate, however, is that each of these initiatives require infrastructure powered by a single sector—electrical equipment.
“Electrification could be one of the biggest growth opportunities in the industrial economy when you consider the number of areas that will need to be developed, expanded or modernized," says Joshua Auranusa, equity analyst for Morgan Stanley Research who covers the electrical sector and multi-industry names.
The market for electrical gear not only offers a potentially lower risk play on multiple trends at once, it’s also poised to benefit from incremental growth on top of an already solid base. All told, Morgan Stanley Research analysts believe that the sector has a 20-year runway for 6% compound annual growth, or nearly double historical industry rates. Here are three key points that further distinguish the sector.
1. An Overdue Cycle
Thomas Edison's former assistant, Samuel Insull, is credited with doing for modern electricity what Henry Ford did for manufacturing. He used economies of scale to help make electricity accessible and affordable for the masses, beginning in the early 20th century.
Improvements have come steadily—but slowly—over the past century, driven primarily by new construction and remodeling. “It’s tough to point to any meaningful upgrade cycles in recent history," says Auranusa.
Now, with several new electrification themes converging, residential, commercial and municipal markets will need to revamp their outdated systems in order to charge EVs, store solar energy and modernize power grids. Retrofits on an “otherwise untouched installed base" represent significant incremental demand, says Auranusa.
2. Equipment is a Pick-and-Shovel Play
The electrification theme encompasses many trends, each with the potential to transform their respective industries—and electrical markets offer an avenue for accessing all of them, potentially at lower risk. In other words, invest in the companies selling the underlying equipment—a figurative “pick and shovel” play—rather than any one technology or company.
“We are confident in the long-term trends around energy transition, but the adoption of individual technologies can happen at a different pace," says Auranusa.
For example, growth related to EV charging is expected to surpass $15 billion by 2030, at which point 8% of U.S. vehicles on the road could be electric. As EVs become the predominant vehicle—expected by 2045 in the U.S.—spending on chargers and electrical upgrades will continue to accelerate.
Onsite power generation and storage also drives electrical markets demand. In fact, solar power continues to be one of the largest contributors to new electricity generation capacity, not only for utilities but onsite at residential and nonresidential buildings as well. Add transmission and distribution (T&D) to the equation, and electrification could represent a $45 billion market opportunity by 2030.
3. Plugging Into a Proven Industry
Also notable: The electrical equipment sector stands to benefit from accelerating demand, but it also rests on proven technology, attractive margins and a consolidated roster of companies. “Players do not only compete on price, and products are governed by regional codes and preferences,” says Lucie Carrier, equity analyst covering European Electricals and Machinery.
This bodes well for U.S. and European makers of low and medium voltage electrical equipment, as well as a few other niche companies. Given significant growth expected in some areas of the market—such as EV chargers, battery storage, and solar panels—cost curves and adoption are necessarily linked, she adds. Consequently, industry margins for those technologies could be volatile, as scale and share evolve. However, the consolidated markets for all the other electrical products needed to integrate those technologies should result in typically healthy industry profitability.
In comparison with the previous year, sales of battery electric vehicles (BEVs) increased by 121% in all markets analyzed in 2021. China led the way with sales of almost three million BEVs in the calendar year, up by 172% from 2020, as buyers in that country sought to take advantage of incentives before their planned reduction.
Sales in major European markets also showed substantial growth during the year. New BEV registrations went up by 83% in Germany in 2021, and 76% in the UK. Meanwhile, the United States BEV market, hitherto a sleeping giant, is showing promising signs of growth. Buoyed by certain popular models, BEV sales increased by 62% from the previous year.
Although strong growth was recorded in the final quarter of 2021, it was not quite as stellar as the rest of the year had been. For example, BEV sales in the EU top 5 markets were up 34% in Q4 2021 in comparison with the equivalent quarter in the previous year, but the year-on-year increase for the whole of 2021 was 72%. This comparative slowdown can be attributed to the global shortage of semiconductor chips, and to renewed concerns about the Covid-19 pandemic which deterred customers from showrooms.
Financially stretched after major expenditure during the pandemic, government measures to reduce incentives are inevitable. The impact of this change on the pace of electric vehicle sales growth in 2022 and beyond remains to be seen.
Growth rates in China continued to outperform other regions of the world with sales of almost three million BEVs in 2021
Rapid decline of ICE (internal combustion engine) vehicle market share in the European top 5 markets from 92% in 2019 to 60% in 2021
BEV market in the US has grown by 62% compared to 2020
In 2021, just one in three BEVs sold in China, Europe and the US came from a European OEM
France, Germany, Italy, Spain, and UK
In the fourth quarter of 2021, BEV sales in the top 5 European markets grew by 25% from the corresponding period in 2020. Growth was highest in the UK (58%) and France (37%). Over 2021 as a whole, the highest increases were recorded in Italy (107% – albeit from a comparatively low base), Germany (83%) and the UK (76%). As these figures demonstrate, growth dropped off to a certain degree in the final quarter, although it remained impressive.
An analysis of the trajectory of respective market shares reveals the rapid decline of the internal combustion engine (ICE) vehicle in these countries. In 2019, ICE market share for the European top 5 was 92%. By 2021, it had fallen to 60%. In the UK, it has decreased from 91% to 55% in the same period, and in Germany from 92% to 58%. It seems inevitable that ICE vehicles will constitute a minority of the market in both these countries during 2022.
Further European markets (+5).
Among the other European markets, Sweden had the highest growth in BEV sales in Q4 2021 vs. Q4 2020, increasing by 74%. Austria boasted the highest growth rate for the whole of 2021, at 109%. In Norway, the ICE market share was just 8% in 2021, by a substantial margin, the lowest in the world. In Sweden and the Netherlands, the ICE market share was overtaken for the first time in 2021, standing at 49% and 47% respectively.
Focus market: Turkey
Turkey, as a potential future BEV producer, has voiced major ambitions to become a leading BEV market. While the overall sales of BEVs (2,846 units) and PHEVs (871 units) in 2021 are rather sluggish compared with the biggest European markets, total EVs were able to increase their market share to 7.1% in 2021. EV sales also grew 135% YoY vs. 2020.
Growth rates in China continued to outperform other regions of the world in the fourth quarter of 2021. BEV sales more than doubled compared to the equivalent quarter in 2020, as consumers looked to secure their purchase before the reduction in incentives was introduced. Annual BEV sales were up by 172%. However, with ICE market share still at 86% in 2021, the growth potential of the EV market in China remains huge.
Japan’s EV market still relies almost exclusively on the sale of hybrids. ICE market share for 2021 was 55%, while almost all of the remainder was taken up by hybrids. The BEV market share was less than 1%.
With annual sales up by 144% in 2021, the BEV market in South Korea is starting to heat up. Although market share is only at 6%, that figure has trebled in the span of two years.
In Q4 2021, BEV sales increased by 50% in the United States compared to Q4 2020, while PHEV sales grew by 126%. Meanwhile, year-on-year growth for BEVs stood at 62% for 2021; for PHEVs it was 140%, and for hybrids it was 84%.
Inroads into the ICE market share have to date been nowhere near as marked as in other regions of the world. At the end of 2021, ICE market share still stood at 91%.
However, clear signs of sales growth, the proposed increase in tax credits, heavy investment in charging infrastructure, increased BEV pickup announcements, the highly publicized pledges by certain carmakers to focus on electrification, and the examples set by the states of California and New York in committing to sales of only zero-emission cars and light trucks by 2035, all encourage talk of a rapid increase in EV market shares over the coming years.
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