Listen to this Fuel for Thought
podcast
As EV sales slow, OEMs must consider multiple factors to
align their EV production with government regulations and consumer
demand.
Insights in this Newsletter & Podcast:
-
The pathway to electrification: from the here-and-now reality to
the long-term aspiration of decarbonization in the transportation
sector. -
The US government regulatory aspirations and their pressure on
OEMs towards an accelerated response to electrification. -
The consumer mindset and sentiment towards electrification:
pricing, technology and the willingness of adoption. -
OEM showroom response to align regulation and pricing via
alternative vehicle electrification pathways.
The first quarter of 2024 brought significant attention to the
tapering of electric vehicle (EV) momentum in the United States,
with many clamoring “I told you so.” There is no question that
aligning the current administration's aspirations of a decarbonized
transportation sector to the reality of how consumers transition
towards electrified vehicles will remain very fluid. Much of this
chapter of history will be written in the coming decade and is
likely to feature surprises as the industry is shifting very
quickly to a known emerging technology with an unknown consumer
response. As a result, it is important to separate today's
front-page news of early adopters from the mid-term ramp up and
eventual long-term stabilization of EVs in the marketplace. It's
also critical that all stakeholders are aware that failure to
electrify is not an option.
Light vehicle sales in the US closed the first quarter at an
estimated 15.4 million-unit SAAR, featuring growth of 5.4%
year-over-year. The market is also transitioning from a
build-to-order model back to a business-as-usual world of
inventories and incentives for most segments. From a propulsion
perspective, the market share for EVs is largely unchanged
year-over-year. This is starkly different from the 50% expansion of
2023 and the first time in many years where EV growth has tapered
to the single-digit level.
The stagnation of EV sales is making many within the industry
uncomfortable (OEMs and suppliers alike) as the ongoing ramp-up of
EV production capacity requires a continuous robust expansion of
electrification. Capacity in North America is roaring from 20
million units today to 26 million within the next few years, as all
OEMs want to proactively respond to regulatory requirements.
Roughly 20 plants are expected to start or restart operations this
decade (since 2020) geared towards ZEV assembly and dozens more are
retooling their production from ICE to ZEV platforms.
This capacity expansion is pointing toward an industry
migration—with more than 65% of North America-manufactured
vehicles expected to be electric by 2030. However, the mood is
cautionary for many OEMs with a manufacturing base in North America
as they try to match government ambitions of a 50% Zero-Emission
Vehicle (ZEV) market by 2030 (roughly a six-fold expansion in a
six-year period) alongside weaker consumer demand. This alignment
is only aggravated as it comes on the tails of a newly minted labor
agreement that will boost wages by over 25% through 2027 for most
plants in the US and Canada and is likely to erode
profitability.
It is also important to mention that the Biden administration
understood that matching a 50% ZEV regulatory target would need
support. Simply put, this was going to be a carrot-and-stick
approach, with the carrot being the Inflation Reduction Act (IRA).
The IRA has multiple components supporting the path to
decarbonization in the U.S.; the most critical to the automotive
industry are the consumer and manufacturer credits for purchase and
production of ZEV vehicles. Putting these two together could
represent an average stimulus of $12,090 for ZEVs that meet all
requirements, assuming a full $7,500 consumer credit and a $4,590
manufacturer credit ($45 per kW on the average US battery size of
102 kW for 2022).
This approach triggered unparalleled investment for the
expansion of ZEV capacity. OEMs assumed if they built them (EVs)
they (consumers) would come. It was only natural to assume that the
strong consumer demand for EVs seen in California and many other
West Coast markets was going to expand across the country if IRA
funds helped to close the gap in price between ZEVs and legacy
Internal Combustion Engine (ICE) vehicles. OEMs have worked very
hard to match the success Tesla is having in these markets,
especially after the EV juggernaut's Model Y was the third
top-selling light vehicle last year. The response from OEMs is a
pipeline of over 30 different new EV models due in 2024 and more
than 200 models due by 2028, according to current forecasts.
To understand consumer behavior and mindset, S&P Global
Mobility runs proprietary surveys on a regular basis, one of which
measures EV consumer sentiment. This research essentially
recognizes the willingness of consumers to buy EVs. Our 2023 survey
showed a 67-percent willingness to consider buying an EV vehicle,
though a 19-percentage-point decline relative to the same survey in
2021 when EV excitement was cresting in the middle of the
inventory/semiconductor crisis. Our 2023 survey indicates the
primary concerns consumers had in mind were pricing, range and
charging.
This same survey shows that consumers prefer a gentler
transition towards electrification—more of an evolution than
revolution. Here, hybrids are clearly top of mind to consumers
where the need to change is not as drastic—essentially
remaining on the same fueling system they are familiar with. It has
only been in recent months that we have seen some OEMs assimilate
this reality and reconsider their pathway to electrification.
The electrification roadmap will be primarily dependent on the
triangulation of these three elements: pricing of EVs, meeting
regulatory requirements from the government, and OEMs' creativity
and flexibility to adjust their showroom portfolios to best match
these two. Some OEMs are realigning strategies to create a bridge
in the shape of Hybrid Electric Vehicles (HEV) and Plug-in Hybrid
Electric Vehicles (PHEV) to address consumer concerns of pricing,
range, and charging for EVs. This comes after traditional OEMs are
now publicly stating that price parity for EVs won't be as easy as
originally envisioned and have gone back to the drawing board to
look for alternate roadmaps to appease consumer hesitation while
remaining good corporate citizens.
Historically the law of the land has revolved around
miles-per-gallon and meeting the regulatory requirement has been no
small feat over the last two decades as it required an average 5%
improvement in efficiency year-over-year. In response to lowering
carbon emissions in the US, the Biden administration has added new
dimensions to that equation by proposing a revised setting of e-MPG
(equivalent MPG rating for EVs and PHEVs) and the requirement to
also reduce emissions of other pollutants. From a numeric
standpoint, if an EV used to get a 350 e-MPG rating the revision to
the e-MPG calculation means that same vehicle will only be getting
roughly 125 e-MPG rating in coming years.
To most, this is already a very tall order to meet, but again,
times are very fluid. The roadmap of electrification becomes even
more challenging as it may have to accommodate for a long list of
what-ifs: US presidential elections, cost of raw materials, a
revision of USMCA, or other factors. This accommodation and
flexibility demand that OEMs respond quickly and, in the process,
shift their entire value chain at similar speed, starting with
suppliers, raw material providers, and logistics operators as
well.
The writing of this thrilling chapter of the automotive history
book as OEMs are asked to align pricing, regulation, and portfolios
will not be black and white, but a true prism of colors. Lack of
action is certainly not an option; the OEM ships have left the
ports in search of a new carbon-free world and are navigating
uncharted consumer waters and the perils that come along with such
an altruistic endeavor.
Rest assured, we at S&P Global Mobility look forward to
helping the industry best chart these waters to anticipate the
rough seas and storms ahead.
——————————————————————-
Dive deeper into these mobility insights:
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