Cross-posted from Forbes – 22 November 2016
Morgan Stanley has released a new report estimating that electric car sales will increase become 10 to 15% of the global new car market by 2025. That is three time the rate the investment banking house has projected in the past. Why the sudden shift in its thinking? While the US is conveniently planning to reduce or eliminate fuel economy regulations, every other civilized country has rules in place that will require auto manufacturers to dramatically lower the emissions from their vehicle in just a few years time.
A note on defining terms. Some Gas2 readers object strenuously to calling any car with an internal combustion engine an electric car. However, those who are less technically oriented often lump all cars that take advantage of an electric motor to drive an vehicle either full or part time together under the term “electric car.” Morgan Stanley falls into the group that is somewhat fuzzy with definitions.
Morgan Stanley analyst Harald Hendrikse, lead author of the report, says there are still significant barriers to mass adoption of electric cars. “Battery costs remain very high. Battery range remains too small and batteries are still too heavy. Battery charging infrastructure has not been sorted out in many countries. Are EVs actually environmentally friendly given through-life cost and environmental impact?
“Consumer demand seems to have been very limited for most EVs launched to date – presumably excluding Tesla. Despite this, we now have a situation where some of the largest (manufacturers) in the world are investing heavily in this technology, and setting aggressive targets for their take-up,” Hendrikse writes.
Those are all excellent points. Nonetheless, Hendrikse concludes, “Although many questions over EVs remain, we believe it is the sharply rising cost of regulatory compliance on existing internal combustion engines (ICE) that is pushing (manufacturers) to change their strategy towards EVs, as much as improvements in battery technology.” He adds, “As more (manufacturers) commit to launching more EVs, accessing more consumers, we think EV penetration forecasts could rise to potentially 10 to 15% by 2025, more than three times current forecasts.”
So far this year, manufacturers around the world have announced major new efforts to add electric cars to their product lineups. Volkswagen in particular has promised to pivot to electric cars to try and recover from its diesel cheating scandal. Its new electric cars will be sold under the I.D. brand. Not to be left out, Mercedes Benz says it is readying a new branding structure for its future electric cars. It has selected EQ as the brand it will market those cars under.
Hyundai and Honda have new electric cars coming soon. BMW and Porsche are rushing to join the party. Even Toyota, which held out the longest, has now changed its position and plans to build electric cars. “We do not think we can continue to ignore the change in strategy. It changes almost 100 years of automotive development, with significant implications for the current global automotive installed base, its employees, and also the global automotive supply chain,” Hendrikse writes in his report.
While the Morgan Stanley report may have electric car fans cheering, it has sobering news for car companies. “Our group auto EBIT (earnings before interest and tax) margins turn negative in the mid-2020s as a result of ICE price deflation and costs of EV development. Continued deterioration in the ICE business due to lower volumes from EV cannibalization and lower prices offsets the improving EV profitability after 2025, despite our cost restructuring assumptions,” Hendrikse said.
In other words, car makers are going to be a lot less profitable in the near term than they are accustomed to. That prediction may be enough to convince The Donald to fund research into coal powered pickup trucks, but in the rest of the world, where actual adults are in charge, the next decade is shaping up to be a very testing time for car companies. Not all of them will survive.