The future? Electric!

Everyone now seems to know about hybrid and electric cars; their share of newly registered vehicles is climbing steadily – and they will clearly play an ever-greater role in the future. A few issues remain: When will alternative drives finally breakthrough to the mass market – and how will the various markets in Asia, Europe and the US differ? 

The figures are impressive: The International Energy Agency (IEA) states that the number of electric and hybrid vehicle registrations around the world rose by 50 percent from 2016 to 2017. The increase of some two million to more than three million vehicles in total is striking. A look behind the figures reveals big variations in developments around the globe, as found in studies by the consultancies, McKinsey and the Boston Consulting Group.

For example, the McKinsey Electric Vehicle Index states that China is the largest market for electric vehicles. Nearly half of the 1.2 million electric and hybrid vehicles sold in 2017 are registered here. Sales increased 72 percent over the previous year. The McKinsey experts are not surprised: “The Chinese government is providing power incentives for electromobility both in the both the markets and industrial sectors,” says Timo Möller, Head of the McKinsey Center for Future Mobility.

China: Government driving supply and demand

Demand is rising because tax breaks lower purchase prices, making expensive electric cars more affordable for consumers. “In many large cities the license plates for new vehicles with standard drives are auctioned or issued in a lottery. Those hoping to register a car sometimes need to wait years or pay enormous amounts of money,” says Stephanie Schenk, author of the Electric Vehicle Index. “Electric vehicles are generally exempt from the law and receive special treatment. This is an enormous incentive.

McKinsey Electric Vehicle Index: On a global perspective, China is on its way to become the overall market and industry leader in electric mobility.

At the same time the incentivized customers have an ever-greater range of vehicles with alternative drives to choose from, because China is subsidizing domestic battery and vehicle manufacturers. This is linked to another Chinese policy goal: Over the long term, Chinese companies will prevail on the international market and increase high their 41 percent market share of global plug-in hybrid and pure electric vehicles.

While every second electric vehicle in Europe is a plug-in hybrid, pure electric vehicles tend to dominate in China. “People in very large cities are the target group,” says Stephanie Schenk. “In large cities smaller cars designed to travel shorter routes are simply needed. In addition, the incentives from the government and large demand from car sharing companies are also driving the high revenue figures.”

Norway as good example in Europe

US sales of electric and plug-in hybrid vehicles are slower than in China: Some 200,000 electric vehicles were sold there in 2017, an increase of only about 25 percent over 2016. One reason: The current administration has removed all pressure to move forward with electromobility, says Timo Müller. “However, individual states are very active in promoting it. California set standards early on and will probably make them tougher in coming years.”

In Europe, 306,000 new electric vehicles were registered in the past year, an increase of 39 percent relative to 2016. Sales doubled in Germany to 58,000 electric vehicles. “The situation in Europe differs from that of China,” says Möller. “In Europe the focus is on meeting general CO2 targets in various fields. Electromobility is only one piece of the puzzle.”

One European country has been outstanding. Norway, where alternative drives have a 32 percent market share, is a model for how to effectively support electric vehicles. “Norway has long privileged and subsidized electric mobility,” says Stephanie Schenk. “Electric vehicles are exempted from the country’s 25 percent import tax. They can often be recharged for free, drivers do not have to pay any road tolls and parking in Oslo is cheap. The overall package is thus very attractive.” The Scandinavian country is ranked number one, followed by China. Germany is ranked 12th. The measures here in Germany have not been as effective as some hoped. “The German government’s premium for buying electric vehicles in 2016 was not enough to generate massive increase in sales.”

Dramatic growth starting 2025, also in Europe

China is taking the lead – when will the rest of the world follow? The Boston Consulting Group’s report, “The Electric Car Tipping Point” names several important milestones. “The paper finds a clear shift to alternative drives is coming soon. The market for electric drives will grow dramatically starting in 2025,” says Andreas Dinger, partner and auto expert at BCG. “Dramatically falling costs for the manufacture of batteries, stricter emissions laws and greater customer demand will be the main forces behind the massive growth in electromobility starting in the middle of the next decade.”

McKinsey Electric Vehicle Index: Global electric vehicle sales

In 2017, global electric vehicle sales crossed the 1mn unit sales mark for the first time – growing slightly faster than PHEVs, BEVs now represent 66% of the overall market.

McKinsey EVI - Global Sales Chart

The consultancy expects a significant increase as soon as 2020, as the automotive manufacturers will need to promote the sale of vehicles with alternative drives to meet stricter emissions standards. By 2030, BCG sees electric and hybrid vehicles pushing the global market share for combustion engines down from today’s 95 percent to about 50 percent. Vehicles with hybrid drives will make up 36 percent of all registered vehicles and thus represent a far higher share than those with pure electric drives.

Experts from McKinsey also foresee a significant impact from the tougher CO2 regulations: “Starting in 2020, a new era will dawn in Europe,” says Timo Möller. “The new highest levels permitted for fleet emissions will be a clear incentive for manufacturers.” The electric charging infrastructure as well as the range of new electric models will grow, lowering costs while more and more cities create environmental or zero-emissions zones; generating clear buying incentives in Europe as well.

The clear trends mean automotive manufacturers are not going to be able to serve the entire world market with a narrow range of electric or hybrid models. On the contrary: “The markets will drift further apart,” says Timo Möller. The growing competition between European and Chinese companies is merely one reason among many. The main reason will be the difficulty is satisfying all the legal regulations. “The requirements such as those placed on the safety of batteries and driving assistants will become ever more specific from country to country,” says the McKinsey consultant. “The result is a vehicle’s competitiveness will differ widely between individual markets.”

McKinsey Electric Vehicle Index: The German market for electric vehicles grew surprisingly quickly by 108% in 2017 making Germany the leading EV country in the EU in absolute terms.