Amid a confluence of regulatory, market and technological factors, the production and sales of battery electric vehicles may finally shift into high gear.
For some years now, many industry watchers have predicted the demise of traditional gas-guzzlers and the rise of electric cars. Yet, despite the advent of hybrid vehicles, better and cheaper batteries, and the entry of high-performance luxury electric competitors, the former continues to dominate roads globally.
Now, however, the automobile's long-promised electric future may be in sight, according to a new Morgan Stanley report that projects that as many as a billion battery electric vehicles will be on the road worldwide by 2050, reaching parity with vehicles powered by the internal combustion engine.
The technology disruption risk to the global automotive sector is real and significant.
Why have battery electric cars never been successful before? Why is it different this time? “We think the key answer is that political and scientific concerns about the impact of CO2 and particle emissions on public health have risen sharply,” says Harald Hendrikse, who covers the European auto sector. These concerns are driving regulatory change all over the world, which is significantly raising the cost of developing and producing the internal combustion engine—both petrol and diesel, he says.
Indeed, new and coming standards and targets for efficiency and emissions may simply be too high for internal combustion engine drivetrains to meet—at least economically. More expensive engines will either mean higher prices for consumers or lower profit margins for automakers—or both. Meanwhile, government incentives could provide enough of a push for both the industry and consumers to go electric at a faster pace; and investors should be pole-positioning for companies best placed to take advantage of these developing trends.
Express Lane or Bumpy Road?
How fast can the industry turn this corner? In Morgan Stanley’s base-case scenario, sales of internal combustion engine vehicles would peak in a few years—if they haven’t already—and decline steadily after that. Meanwhile, battery electric vehicles’ share of global car sales, which accounts for only a few percentage points today, would rise quickly after 2020, as new products are launched, hitting 9% by 2025 and 16% by 2030. Adoption accelerates further, as the technology improves and consumer acceptance rises, with sales comprising 51% of the market by 2040, says Hendrikse. By 2050, electric car sales could reach a dominant 69% and account for nearly half of all vehicles in operation.
To be sure, the road to such a battery-powered future would be far from smooth. Despite decades of development, vehicular batteries remain expensive, heavy and still lacking in long-range capacity. In most markets, no broad infrastructure exists to recharge electric vehicles on the move—certainly not when compared to the ubiquity of gas stations.
And the danger of a policy-driven trend is that policies can change—sometimes quite significantly—in short order. Official resolve to cut emissions and enforce higher fuel-efficiency standards may reverse, especially given many governments’ reliance on fuel tax revenue. Nor is it clear that electric vehicles are the more environmentally friendly options, when taking into consideration the long-term impact of battery production and disposal.
Expanded Range of Disruption
Yet, each of these potential obstacles to broader adoption of battery electric vehicles can be overcome with time, development and technological breakthroughs, says Adam Jonas, head of Morgan Stanley’s global auto research team. “The major auto parts manufacturers are launching plans for new battery electric vehicles that have an expanded range of 300 miles (500 kilometers) and beyond,” he says. “We believe the consumer proposition will change swiftly, and that consumer interest will improve quickly."
As for the cost, Hendrikse draws a parallel between vehicular batteries and solar panels. Since 1990, the cost per watt for solar panels has dropped 90%, amid greater investment to create better technology, cheaper production, and a larger market. The same dynamics are in play to develop better battery-electric-vehicle technology, which should lower costs and grow demand over the coming decades.
Any significant embrace of electric cars would ramify through the global auto supply chain. Manufacturers would need to adapt to growing demand for all of the different components that go into new battery electric cars, while also maintaining existing production for internal combustion engine vehicles that can meet tougher emissions regulations. Their level of requisite investment to meet those goals could affect investor returns, at least in the short term.
“We believe that the technology disruption risk to the global automotive sector is real and significant," says Jonas. “The full shape of the battery electric vehicle market remains to be discovered. While we think there will be strong growth for a long period, the profitability of that growth cannot yet be ascertained."
For more Morgan Stanley Research on the future of battery electric vehicles, ask your Morgan Stanley representative or Financial Advisor for the full report, “One billion BEVs by 2050?" (May 5, 2017). Plus, more Ideas.