Bringing the Electric Future into Focus

Your next new car or truck will probably be the last one you buy that will require oil changes.

Consumers and businesses will transition to electric vehicles in the next few years.  They will do so not because electric vehicles are greener but because they are better.  The transition in the new vehicle market will be like that from film to digital cameras, with a slow ramp up leading to a sudden flip, and many winners and losers.

Digital cameras, even in their early days, had two enormous advantages over film cameras: you could see immediately if the photograph was as you intended, and the marginal cost of taking a picture was zero.  They had one weakness, which is that the picture quality was poor.  As soon as the picture quality became ‘good enough’, which happened in the early 2000’s, the sales of film cameras collapsed.  Similarly, electric vehicles have two enormous advantages over those powered by internal combustion engines (ICEs): their energy cost is much lower, and they have few moving parts, vastly reducing maintenance needs and points of failure.  They have one weakness: range.  As soon as battery technology and the charging infrastructure are ‘good enough’, the sales of new ICE vehicles will collapse.

As with the camera market, there is likely to be a very short period where owners chose between mainstream old or new technologies within each market segment.  The brevity of this period will be due partly to the inherent advantages of the new technology and partly to the cost of having stranded assets.  Once new technology becomes mainstream, the value of legacy technology quickly approaches scrap value.  When this happens with vehicles, manufacturers will be unable to offer affordable leases, given the relationship between used vehicles values and lease payments.

Cost has been a barrier to adoption, but with a drop of more than 80% since 2010 in the cost of batteries, the total cost of ownership (TCO) for electric cars is already lower than that of ICEs for some users and getting lower every year.  We expect electric vehicles to be cost competitive across all consumer segments, including economy models, within 5 years.  There is a catch 22 in this though, with those users who drive the highest number of annual miles having the most to gain from electrification but potentially the longest wait as the charging infrastructure that they require is developed.

In the rest of this paper, we discuss what is likely to happen to players within the ICE ecosystem and those that will have a more pronounced role as the automotive industry electrifies.

Gas stations

There will be demand for petroleum for many years after the switch in new vehicle sales.  However, newer vehicles tend to be the ones doing the highest annual mileage and the business case to switch will be strongest for the drivers doing the highest mileage, so the volumes demanded are going to drop faster than the number of users.  Gas stations often make more profit from the sales of food and snacks than from gasoline, and so they may be ambivalent as to whether their customers top up with petroleum products or electricity, but they will reach a point where it is no longer worth maintaining the pumps or tanks.

Note that not all gas stations make money from the sale of products other than fuel, and many are not well positioned to be used as electricity charging stations.  Those in the suburbs, where vehicle owners have garages attached to their homes and so can install charging equipment, are likely to be the first to go.  Those by interstate highways, which are used by drivers on long trips, are the ones most likely to survive.

 

Electricity network

There are three elements to the electricity network – generation, transmission, and distribution – and they will all be impacted.

The electrification of the transportation industry will lead to increased demand for electricity.  A back-of-the-envelope calculation puts the increase at around 25% versus the 2017 level.  This will put a strain on a generating base that has seen virtually no increase in demand in the last 20 years.  However, there are a couple of characteristics to this increase in demand that will help to mitigate it.  Firstly, vehicles will generally be charged overnight, when demand for other purposes is at its lowest.  Much of the increase can therefore be achieved through greater use of existing sources that are currently used for peak use, such as gas-powered plants.  Secondly, users will look for ways to reduce their costs.  It is likely that many homeowners will add solar panels to their homes, not because they want to do the ‘green’ thing, but because they want to mitigate the cost of powering their cars.

The story for the transmission companies is similar to that for generators.  There will be changes but it may well be in the way the network is managed rather than in significant additional capacity.  Especially if the increased demand comes during the traditionally slow periods of the day, existing infrastructure may suffice.

The distribution companies have a lot to gain from the electrification of the transportation industry.  However, they need to be careful to be enablers rather than obstacles to change.  The pricing of charging stations is the key area for them to decide how aggressively to participate in the change.  If they take advantage of the demand for new high-voltage outlets to seek monopoly profits, then they risk alienating their customers and driving a cottage industry of alternative solutions.  If they embrace the change and roll out their own networks, then they stand to gain directly from the increased demand.

 

Charging locations

Those consumers and businesses with the ability to install their own charging stations are likely to do most of their charging there.  It is just too easy to plug in at the end of the day to consider using any other solution.  Everyone else will rely on public charging stations.  The big question is where these will be.  Does anyone want to drive to the equivalent of a gas station to top up their batteries?  Heck no.  If it takes more than ten minutes to do anything then people want to do it when and where it is convenient for them.  This means having charging stations in parking lots, whether those parking lots are attached to offices, restaurants, malls, train stations, apartment complexes, or anywhere else where cars are left for hours.

When people are traveling long distances on the highway, they need to stop for food and bio breaks as well as for fuel, which is why gas stations by the highway compete as much on amenities as on price.  Similarly, long distance truck drivers need to stop for the night and would rather do so where they can shower and eat rather than just where they refuel.  Truck stops of the future will look the same as they do today but with fast charging stations at each parking bay rather than a line of fuel pumps.  Many of them already look like mini-malls with fuel pumps off to the side or hidden at the back.  This trend will continue and intensify, with stand-alone gas stations going out of business due to their inability to occupy drivers for the time that their fast charge will take.

 

Dealers

The biggest losers in this switch are likely to be new vehicle dealers.  Their business model is often dependent on performing repairs and maintenance on the vehicles that they sell.  With battery power, instead of taking your car in every 4,000 miles for an oil change and an opportunity for the dealer to inspect it for faulty components, your car will be monitored remotely, and you will be informed when something isn’t working as it should.  Given that there are so few moving parts, this is not likely to happen very often.

However, dealers are not likely to give up their role in the new car sales process.  Tesla’s ability to sell vehicles that consumers have never seen or driven is a short-term phenomenon.  Purchasing a vehicle is a major transaction and people want to go through the full process to make sure that they buy the right vehicle at the right price.  Dealerships may start to look more like computer stores but they still need to stock a range of vehicles and they need to employ people who can take customers through the selection and financing process.

 

Independent repair shops

Given the pool of existing ICE vehicles and the fact that independent repair shops are typically used by owners of older vehicles, these shops will be around for a while.  Over time, their numbers will consolidate as the volume of work decreases.  Those that survive will be the ones who provide services that are still relevant or that become relevant.  Tire replacement and body repair are the two most obvious examples of services that will continue, with battery conditioning and motor repair/replacement being example of new services that will become relevant.

 

Automotive OEs

Given the position that dealers hold in the value chain, those OEs with large entrenched dealer networks may have the most difficult time making the transition.  That gives an advantage to new entrants.  At the same time, the existence of an established service network as a barrier to entry becomes less important, given the decrease in service and maintenance needs.  This period will create both winners and losers among OEs, with some of the winners coming from outside the industry.

There are three ways that the industry could develop, with varies levels of balkanization of platforms evolving:

  1. In the first scenario, OEs will develop their own battery technology and associated control systems.
  2. In the second, a dominant player will arise in the OEM space and provide the rest of the industry with batteries, but the OEs will develop their own control systems.
  3. In the final scenario, one OEM will provide the industry with their batteries and related systems.

Our prediction is that scenario B is the most likely for larger OEs, possibly with a couple of OEMs becoming dominant in the supply of battery cells, while smaller OEs opt for scenario C.

 

Consumers

With cars that don’t require regular maintenance or fuel, but just plug in at night, and with performance to match high performance sports cars, there is much for consumers to like.  However, as stated earlier, there will be a large gap between those people who can take advantage of the technology and those who struggle.

Electric cars are not cheap to buy, and this won’t change any time soon.  Similarly, there is a cost to adding charging stations for home use.  The vehicles cost less to run but it is the up-front cost that will determine who can afford to buy them.  Wealthier households in the suburbs are going to adopt the technology quickly while low income households are going to stay with the ICE technology for an extended period, taking advantage of low used car prices, and being held back by the high initial cost of making the switch.  Given that many low-income households live in rented accommodation, much of it in apartments as opposed to single family houses, there may be an issue of access to charging infrastructure even when electric vehicles reach the used market and become affordable.  As with many other aspects of the economy, being poor will likely lead to solutions that cost more rather than less.

 

Truckers

Buyers of commercial vehicles prize dependability above all else.  Any time spent at the side of the road or in a workshop is time not spent generating revenue, and clients don’t appreciate it when you tell them that their goods are going to be delivered late due to a breakdown.  The case for electric vehicles, given their simplicity and dependability is very strong and we can expect commercial fleets to switch as soon as the range issue is solved.  For many fleets, the issue has already been solved and they are just waiting for the right product to hit the market.  If a credible OE launched a package delivery van with a 150-mile range and a reasonable price, the business case is strong enough that the market for urban delivery would switch tomorrow.

The most difficult segment of the market to meet the needs of is long haul trucking.  Traveling 500 miles per day while hauling large containers takes a lot of energy and the trucks don’t spend the night at their home base.  There is already a shortage of overnight parking along the national highway system and it’s going to take a large investment to put chargers at those locations.  This is therefore likely to be the last segment of the market to switch, not because of the technology but because of the logistics involved.

 

Summary

Technology improvements lead to smaller, cheaper, more powerful items.  The development of batteries for transportation needs will be no different.  The question of when the technology will have reached the tipping point will differ for each segment of the market but, given the amounts currently being invested in battery technology, it will happen soon for most segments.  When the tipping point is reached for electrification, changes will be quick and dramatic.  Even if we get some of the details wrong, it’s better to start to think about the changes now and prepare for them than to be a passive observer.

There are other significant changes taking places in the automotive space: automation and sharing of assets are the most obvious.  We have not attempted in this paper to address these changes and yet the interaction of these elements will have profound outcomes.  For example, it is easier to automate an electric recharge than a gasoline refueling, making the vision of autonomous ride sharing vehicles more realistic.  The next decade will be transformational for transportation as these elements combine.