DEMAND FOR ELECTRIC VEHICLES

WILL THE ECONOMIC LANDSCAPE MAKE OR BREAK THE TRANSITION IN EUROPE?

The sales of battery electric vehicles (BEVs) in Europe have grown each year since 2015, supported by ambitious vehicle electrification targets [1], encouragement from governmental subsidies, and increased environmental awareness among consumers. The more favorable operational cost and improved performance of BEVs have also been argued to be strong drivers for the development.

Theoretically, the ongoing green transition in the automotive industry from internal combustion engine vehicles (ICEVs) to BEVs has just started to take off. However, the car industry is still impacted by the Covid 19 pandemic and Russia’s war in Ukraine which are disrupting global supply chains, causing limitations in production, and increasing prices on raw materials. While the production cost of vehicles has gone up, customers' purchasing power has decreased due to the current economic landscape with high inflation and high interest rates.

“The automotive industry has set an end-date to the production of fossil cars roughly a decade from now”

This article investigates how the total cost of ownership (TCO) of BEVs and ICEVs has changed based on these circumstances and if that has an impact on the demand for vehicles, especially BEVs. What can be concluded is that the past couple of months have resulted in an increased TCO for both BEVs and ICEVs, especially for BEVs, mainly due to the higher interest rates. The reason why BEVs are more impacted is the generally higher purchase/leasing price compared to an ICEV, aspects of TCO investigated in this article (taxes, energy prices, insurance, maintenance, and residual value) seem to be less impacted.

Due to the current economic landscape, customers’ purchasing power has eroded, but there are still many customers who want to seize the opportunity to invest in BEVs. The two main reasons for this are that customers want to invest while the technology is still subsidized (upfront or through lower taxes) and to benefit from lower fuel costs compared to an ICEV. It is therefore likely that the ratio of BEVs could increase in the future, even though the total market declines short term due to an unstable economic landscape where customers might postpone investments in new cars.

In the long term, subsidies are unlikely to sustain the demand for BEVs in European markets. Environmental legislation will become stricter and taxes on fossil fuel will probably increase in the coming years, causing resistance to invest in ICEVs. At the same time, the corporate and governmental efforts to electrify transport provide a solid basis for continuous growth in BEV sales. An example of this is that the automotive industry has set an end date to the production of fossil cars roughly a decade from now.

Analysis of TCO aspects - How is the current macro-economic landscape affecting the TCO of BEVS vs. ICEVs?

Purchase/leasing price

In the past months, the purchase price of both BEVs and ICEVs has increased in general, with a few exceptions. Supply chain disruptions fuelled by Russia’s invasion of Ukraine (and a backlash on Covid lockdowns in China) has led to production shortages and price increases on raw materials, which is reflected also in the price of the vehicles.

The increased prices of raw material and components force OEMs to choose between either taking the increased costs themselves or passing them on to the customers. Several OEMs have increased the price of their vehicles [2], but there are also actors like Tesla who are instead challenging the industry by lowering the prices by approximately 20% on some of their models which put pressure on other BEV OEMs [3,4]. For gasoline cars in Europe, the average purchase price has increased continuously since 2016 and peaked at around 44 000€ last year [5]. For an average BEV in Europe last year, you would have to add roughly 12 000€ to that price [5]. These price increases will for sure be noticeable for the customers.

A challenge for the competitiveness of BEVs is that battery pack prices are expected to increase for the first time in 10 years due to both increasing demand for battery metals and Russia’s war on Ukraine causing the prices for lithium, cobalt, and nickel to soar. In February 2023 the price for lithium was seven times higher than at the beginning of 2021 [6] and the prices for cobalt and nickel also rose. Everything else being equal, the cost of battery packs could increase by 15% if these prices are staying at current levels [7]. This implies that it could take several years longer for BEVs to become as affordable as ICEVs from a purchasing price point of view, especially for a smaller car where the battery accounts for a higher percentage of the total cost.

European subsidies have played an important part in reducing the threshold of choosing a BEV by reducing the purchase price gap between BEV and ICEV, and hence also enhancing the adoption rate. As an example, customers who bought a BEV in Sweden before the 9th of September 2022 got 70 000 SEK in return [8]. However, this subsidy has now been removed [9], since the cost of owning and driving a BEV is becoming somewhat comparable to the cost of owning and driving a gasoline or diesel car. The subsidy has therefore been deemed to have fulfilled the purpose of promoting the market introduction of more environmentally friendly cars. Eventually, other countries might follow Sweden’s example but for now, 20 out of 27 countries in Europe have some sort of subsidy to the purchase price [10].

Annual vehicle taxes

“BEVs will likely still be subsidized in many EU countries and hence be more beneficial from a tax perspective compared to ICEVs.”

High annual tax for ICEVs and low tax for BEVs seem to be the dominant mindset in Europe. 21 out of the 27 members in the EU have tax incentives for BEV ownership with taxes based on CO2 emissions [11]. Two examples of countries having this approach are Sweden and Norway, where the current annual tax for all types of BEVs is 360 SEK per year in Sweden, and in Norway, the tax is removed completely [12]. For a Volvo XC40 [13] that runs on gasoline, the vehicle tax in Sweden is considerably higher with 17 775 SEK for the first three years, and after that, 2 670 SEK per year [8]. It is unlikely that the taxes on ICEVs will decrease in the future, instead the taxes might increase on BEVs to keep governmental income at a stable level when BEVs make up a larger part of the sales. In the short term, BEVs will likely still be subsidized in many EU countries and hence be more beneficial from a tax perspective compared to ICEVs.

Energy prices

The cost of fuel for a BEV depends on the method of charging. Home charging is usually much cheaper than public charging but in either case, the cost of fuel appears to be lower for BEVs than ICEVs since the cost of electricity is generally lower than for diesel and gasoline, and the electrical engine is more efficient.

The cost gap is however difficult to predict based on the past months. Due to the geopolitical situation in Ukraine, the gas and fossil prices skyrocketed. In Sweden, the price of gasoline and diesel peaked at approximately 24 and 28 SEK but has decreased since then [14]. Electricity prices also took a hit by Russia’s invasion of Ukraine at the end of February 2022 but recovered relatively quickly to lower levels again (if not as low as before the invasion), only to peak again last summer due to extreme heat driving up electricity demand in July combined with uncertainties over future gas supply [15]. Prices for gasoline and diesel will likely not go down much further due to governments' desire to phase them out. The electricity prices on the other hand are more difficult to predict. The EU has plans for ambitious investments in renewable energy in the future, which could lead to more stability and lower electricity prices in the long run [16].

Insurance

Insurance cost is based on several different factors, for example, age, type of coverage, and insurance history. Given that insurance is determined by many factors, we have in this example assumed that we are insuring an ICEV and a BEV of the same car model, a Volvo XC40.

Studies show that electric cars still tend to be more expensive to insure than their gasoline and diesel counterparts [17,18]. This has mainly to do with their higher purchase price and less available data on them than ICEVs. However, some OEMs try to encourage consumers to invest in BEVs through campaigns. One example of this is Volvo Cars which is offering customers that are buying an XC40 Recharge online extended warranty where also service and insurance for the first three years are included in the price [19]. Therefore, insurance costs will partly depend on current offers.

Maintenance

When it comes to service and repairs, there is no clear winner in terms of price for ICEVs versus BEVs. The costs depend on the workshop, but also on what part that needs service and the availability of it, so it varies on a case-by-case basis. The service cost is generally lower for BEVs compared to ICEVs due to fewer moving components [20,21]. On the other hand, repairing a BEV can be costly if a battery replacement is required. A Tesla battery replacement costs at least 13 000$ [22] which can be compared to replacing the engine in an ICEV which cost roughly 4000$ [23].

Residual value

One can expect a longer lifetime for BEVs than for ICEVs [24], which is one of the contributing factors to why the residual value is generally higher for BEVs [25]. The residual value of both BEVs and ICEVs seems to have been boosted due to constraints in vehicle production. The general direction of where the automotive industry is heading could also be in favor of the residual value of BEVs. Since ICEVs could be prohibited in the future, and we see an increasing BEV adoption rate, the pre-owned market of BEVs could become a seller’s market when the demand exceeds the supply.

Conclusion

What will the demand for BEVs look like in the future?

In the current economic landscape with increasing interest rates, inflation, and consumer prices, people and companies’ purchasing power is decreasing as more money needs to be spent on necessities such as rent or paying for loans. With changed financial prerequisites, customers that were on the verge of buying or leasing a new car might think twice before proceeding with the investment, since the willingness to take risks decreases significantly when the margins get tighter. This could indicate that the total market for vehicles could slow down in the near future.

“We are convinced that it will be a dominant future technology meaning that higher sales growth rates can be expected again in a not-too-distant future”

Predicting the future is difficult, but there are some indications as to what the demand for BEV might look like. Generally, TCO has increased both for BEVs and ICEVs. The TCO is currently still in favor of BEVs regardless of if you own or lease the vehicle, given that your driving pattern benefits from the advantage of lower electricity fuel price. Another enabler for BEV adoption is well-functioning charging infrastructure and more governments and companies are making progress within this area, which further facilitates the transfer to BEVs. Hence, it is likely that the market share of BEVs can remain strong due to both benefits in terms of TCO, and environmental regulations since ICEVs can be prohibited in city areas.

Looking more long term there might not be an option for customers to choose between an ICEV and BEV. Both Volvo and Volkswagen have confirmed that by 2030 and 2035 respectively they will no longer produce ICEVs [26,27]. In the case of Volvo, this will also include not selling hybrid cars with an ICEV.

Fortos view is that the growth rate for sales of BEVs might decline in the short-term. However, we are convinced that it will be a dominant future technology meaning that higher sales growth rates can be expected again in a
not-too-distant future.

References:

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