Electric vehicles are expected to dominate automotive production in the coming years. But the signs to come point to an upheaval in the industry. Here’s a starting point for distinguishing the value of the hype.
The sounds of silence fill the highways of the world.
Sales of electric vehicles * have made huge inroads into the global automotive market over the past decade. The past year has been pivotal, even in the midst of the pandemic. Almost 3.2 million electric vehicles have been sold worldwide, representing a remarkable 40% year-over-year growth and 4.2% of all vehicle volumes. China and Europe led the trend, accounting for around 85% of all combined electric vehicle purchases. By 2025, forecasted global sales of electric vehicles are expected to quadruple, reaching nearly 15 million units.1
The growing trajectory of electric vehicle sales is fueled by several factors: 1) Many governments have established regulatory mandates to reduce or eliminate the production of internal combustion engine (ICE) vehicles; 2) customer acceptance of electric vehicles is increasing, fueled by increased model availability, lower battery costs and improved range; and 3) major automobile manufacturers engage in the development and production of electric vehicles. For example, many manufacturers, including Volvo, Honda, GM and Mercedes, have already set target dates for going all-electric between 2030 and 2040.
Even though the electric vehicle market is growing, questions about its profitability follow just behind. A crowded field of competitors and business models that have yet to be proven viable are causing manufacturers and investors to scratch their heads. Where should they invest their capital? When can they expect adequate returns?
A look at this rapidly evolving EV ecosystem provides a roadmap for distinguishing value from the hype.
Four strategies – four business models
As the electric vehicle ecosystem evolves, many different business models are emerging in the original equipment manufacturing (OEM) arena. OEM EV can be divided into four types:
- Traditional OEM players increasing electric vehicles (e.g. BMW, GM, Ford, Toyota, Volvo, VW, etc.)
- OEM only for electric vehicles (e.g. Tesla, NIO, BYD)
- New / start-up “challenger” OEMs (e.g. Lordstown, Rivien)
- Asset-light and Mobility as a Service, or “MaaS” providers (for example, Uber, Waymo, Fisker)
Each has their own primary strategy and associated business model designed to capture a targeted portion of the emerging market with specific value propositions. Tesla, the go-to-market pioneer, is focused on continuing its R&D to improve battery performance and build factories to continue to capture market share. Traditional players like GM and VW want to leverage their existing scale and automotive manufacturing assets to cut costs and gain market share by appealing to a larger consumer base.
Regardless of the goal, one thing all of these OEMs have in common is the struggle to make a profit. Many weigh the pros and cons of vertical integration as a strategy to control costs, increase potential margins and reduce supply risk. The approaches differ: several global equipment manufacturers have announced their intention to control or invest in the production of batteries (VW, GM, BMW); Toyota outsources battery production and outsources other components, such as transmissions; Tesla is fully vertically integrated; while Ford remains heavily outsourced for the time being.2
Each has a different path to achieving a break-even point for annual unit sales based on expected margins and invested capital.
A growing valuation bubble
At the end of March, President Biden announced “The American Jobs Plan, A proposed $ 2 trillion spending program that focuses on repairing and upgrading US infrastructure. Among the objectives of the bill is an investment of 174 billion dollars to “win the electric vehicle market”. This includes the financing of the construction of 500,000 charging stations, additional investments in R&D and the manufacture of electric vehicle batteries at the national level. While the exact details of the bill remain under debate, Biden’s message is clear: Bet on a global future for electric vehicles now.
Over the past two or three years, up to $ 250 billion in new capital has already been injected into the industry from sources such as governments, OEMs and capital markets. Targeted segments include R&D, infrastructure, batteries and other critical technologies, but much of the funding is speculative as investors seek winners in a value chain that has shown little or no revenue to be gained. this day.
The result is a huge valuation bubble.
Over 100 EV start-ups have received funding and many have astronomical valuations. Special Purpose Acquisition Companies (SPACs) are very active in this space, generating a combined $ 100 billion in 26 MaaS tech companies in 2020. The SPAC frenzy continued into Q1 2021 with another dozen EV startups. made public. Others are expected this year.
Meanwhile, the “EV Big 3” – Tesla, NIO and BYD – continues to ride in the investor fast lane, reaching nearly $ 850 billion in market value by the end of the first quarter. Remarkably, their market capitalization is almost identical to that of the top 10 traditional OEMs. combined.
How hot is the EV Big 3 in the eyes of investors? Comparing global vehicle sales for traditional OEM groups and “EV Big 3” last year against their respective market values provides a deeper insight. With around 55 million units sold, the valuation per vehicle for the 10 traditional OEMs is $ 1.5K. In contrast, Tesla, NIO and BYD sold less than one million units, resulting in a valuation per vehicle of $ 850,000.3
While investors may look to newcomers at this point, the major OEM players are not standing still. They are deeply determined to keep pace with significant investments in retooling. Their competitive advantage lies in their strengths and design knowledge, extensive experience in the construction and sale of automobiles, and an extensive network of branded dealers and service centers.
The valuation bubble can be best seen by looking at the current market capitalizations (as of March 31) of OEMs versus the number of vehicles sold in 2020.4
Survival of the Fittest – An American Perspective
In the United States, sales of electric vehicles in the United States are expected to reach 1.6 million units by 2025 (less than 10% of total US market volumes). The technological advance of pure electric vehicle companies like Tesla will allow them to hold a significant share, probably over 40% of this market. Traditional OEMs with major investments and dozens of electric vehicle model launches in the pipeline are expected to capture a similar share.5
This leaves less than 20 percent of the market remaining to all other players. This is a strong push for emerging nameplates today and for those that will enter the market in the near future.
Obviously, the market cannot absorb all of this competition. Restructuring will certainly follow and the right niche players and nameplates will likely be consolidated into larger EV platforms. By 2030, we can expect to see fewer 2025 nameplates even on U.S. roads.6
Race to the finish line
Traditional OEMs aim to switch from internal combustion engine to electric over the next decade. It will be essential to balance R&D, investment and capital allocation as they are re-equipped. For challengers, survival is more precarious and depends on finding the right partner and the optimal manufacturing strategy. How much capital will they need? What level of outsourcing and vertical integration will be appropriate?
Every car manufacturer will have to adapt quickly to this new reality. There will be several laps and pit stops in the race for profitability. Not all businesses will have what it takes for the long journey it takes to reach the finish line.
* Includes battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV) and hybrid electric vehicles (HEV)
4: Analysis of FTI Consulting.
6: Analysis of FTI Consulting.