Carmakers racing to drive down EV costs

If there was ever a signal that electric cars (EVs) have gone mainstream, their addition to the formula used to calculate inflation in the UK is it.
For most people, a car is the second largest purchase they make, behind only housing, so statisticians throwing into the mix the price of electric vehicles and hybrids shows that even the bean counters have realised their relevance.

"Electric cars have crossed a critical threshold and gone mainstream," says Jamie Hamilton, head of EVs at Deloitte. "Everyone knows someone who has one."

This was despite their hefty cost when compared with conventional internal combustion engine (ICE) cars.

But why are EVs so expensive?

"There are several factors but two main ones are volume and batteries," says Ian Henry, of AutoAnalysis. "Even though EV sales are rising they are nowhere near ICE cars, so there aren't the economies of scale - yet."

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Tooling for a new model at a car plant costs hundreds of millions of dollars, and that is when it's a conventional ICE vehicle where the technology is well understood. It is even more expensive for the new systems and processes for EVs.

Jens Meyer/AP
Tooling for new cars is expensive and is all a part of the extra expense of a new EV.

Add in a supply chain is geared up for systems that burn hydrocarbons, rather than the immature set up for propulsion from electrons, and costs pile up. Henry adds: "Batteries are expensive and won't come down in price until enough gigafactories are set up to make them in greater numbers."

As a rule of thumb, a battery currently represents about 40 per cent of the cost of an EV. However, automotive companies hope that as EVs become more widespread, and the technology advances, smaller amounts of the expensive raw materials used in batteries will be needed.

Developing cars with new systems also incurs huge costs. Currently, some manufacturers are selling EVs at a loss; they do so because they must sell electric vehicles to stay relevant, meet pollution targets and position themselves for the future.

Either way, EVs are likely to become more affordable for the average motorist. And electric cars offer other savings. Charging them is far cheaper than fuel, they get reductions in taxes, and their simple mechanical workings require less maintenance.

Charging times still pose a question in the total cost of ownership equation for EVs.

It is also a mistake to look at just the headline cost of purchasing a new EV the "total cost of ownership" should be considered.

This measure not only accounts for the actual vehicle's price, but also fuel, tax and running costs such as parking, which is sometimes free for green vehicles. Under total cost of ownership, in some scenarios driving an EV may already be cheaper.

"A few years ago we predicted the total cost of ownership would hit parity in 2020, and I think that's pretty much happened," says Hamilton.

The exact point at that it is cheaper to own an EV depends on your driving. High-mileage motorists are most likely to be beneficiaries at the moment, but that assumes they do not entail other costs due to long charging periods.

It is predicted that Volkswagen will be able to produce the ID.3 EV as cheaply as the Golf in five years.

Other experts believe price parity is a little further out - most estimates say it will happen between 2023 and 2025.

UBS has been a leader in examining the economics of electric motoring, ripping apart EVs since 2017 to understand the costs involved.

It recently gave the Volkswagen ID.3 its "teardown" treatment and concluded VW will be able to make the car as cheaply as the bestselling Golf by 2025. In fact, UBS's analysts went further.

They predict EVs will have a 20 per cent global market share in 2025, up from 4 per cent in 2020, rising to between 40 per cent and 60 per cent by 2030 with a real possibility of 100 per cent a decade later.

"By 2040, we dare to say, 100 per cent EV could already be a reality," the report concluded. "Owning an ICE car will become a true luxury. Carmakers will stop investing in this technology, and 'laggard' emerging markets with low car penetration will just leapfrog combustion engine technology, like they did with phone landlines."

However, there may be a catch. As petrol and diesel sales inevitably fall governments will look to replace the tax take on fuel.

"The growth of electric cars will probably mean the Government is going to have a rethink on fuel taxation," says Hamilton. "It can't lose billions in duty as people go electric."

While the UKs Office for National Statistics' decision to include EV prices in its measure for inflation is no doubt a seismic moment, the road ahead is likely to include some more bumps.

The Telegraph

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