The battery electric vehicle will fail, unless…
23 July 2019
By Dr, Christof Engelskirchen, Chief Economist, Autovista Group
The battery electric vehicle (BEV) is hip and the new positive momentum around CO2 reduction and sustainability is a blessing for the BEV. Make no mistake, however, it will fail unless it offers a better total cost of ownership (TCO) profile than the internal combustion engine - both as a new and as a used car. Why is this?
Keep the end in mind: only an attractive used BEV will be successful as a new BEV
A car is a new car for only one day. Afterwards it becomes a used car and during the life of a car you can expect around four to five transactions. At each point, the attractiveness of the vehicle compared to other vehicles is evaluated and a price determined. A car that is not attractive as a used car will not succeed as a new car. The more attractive the used car, in the absence of oversupply, the higher the resale value. The higher the resale value, the lower the leasing rate or the discount needed to sell it as a new car. For the internal combustion engine (ICE) vehicle, there is a used car market and subject to age, mileage and condition, this market spans Europe - and sometimes the globe. For the BEV, a national, European or even global used car market does not yet exist. The exception is Norway, but it will not be absorbing all the used BEVs that Europe’s automotive industry plans to build.
Government incentives for a new BEV are impactful but risky – instead, list prices must come down
Producing an electric vehicle is more expensive than an ICE vehicle. Distinct electric vehicle platforms are required to realise lower cost. Partnerships across companies will help to create economies of scale. At this point in time, government incentives for new BEVs are impactful but risky. They may create a false impression of sustainability. A situation where the government co-funds the initial purchase of the electric vehicle via incentives or a reduced benefit-in-kind taxation effectively stimulates new car sales. But there is a risk of oversupply of used BEVs onto a non-existent BEV used car market. Have a look at France where the overambitious bonus-malus system has created just that situation. The only sustainable solution to the problem is to offer BEVs at list prices (and transaction prices), that are sustainably lower and therefore in line with the market.
How can governments and cities create benefits for driving a BEV over the life of the vehicle?
It is crucial that governments and cities become creative and decisive if they want the electric vehicle to be an attractive mobility solution over its lifecycle. The benefits of an electric vehicle, in particular in urban areas, are undisputable: low noise and low emissions. Think about lower energy costs for electric charging, more substantial annual tax exemptions, and designated (and controlled) parking spaces for electric vehicles. If you want (and can afford) a BEV, driving bans support the case too as they represent a burden mostly for the least affluent car owners. Become creative if you want long-term success of the BEV and think of something to make the more price-sensitive used car buyer struggle to choose an ICE vehicle over a BEV.
What should OEMs do?
OEMs must play their role in creating an attractive used car market for the BEV as well. Point number one - and several OEMs have understood this and acted accordingly - is to offer long warranties and capacity promises for the BEV (8 years and 80% are ideal). The idea is to give the used car buyer an additional layer of peace-of-mind that they cannot get for an ICE vehicle. Secondly, OEMs should establish Certified Used Car Programmes specifically for BEVs that offer additional benefits, such as a substitute ICE vehicle over a weekend or a vacation period. Consider offering cost certainty for after sales and service, for example via a used car service flat rate.
Simplify the car ownership experience
The BEV is an ideal chance to simplify the car ownership experience for a new and used car buyer. Simple and transparent business models, online configuration and purchase, attractive flat rate leasing and service packages would be an ideal combination with the BEV. A buy/rent business model is not a simple business model, as two business transactions are needed and re-selling is more complicated than in a traditional buy/buy model.
Take range anxiety out of the equation, finally
Years and years of statistics confirm that the majority of daily distances travelled are low but they have not succeeded in driving car buyers who are accustomed to the range of ICE vehicles into BEVs. And ranges vary substantially for the BEV compared to the ICE, especially when you adopt a more sporty driving style, drive at higher speeds on the highway, drive uphill, or experience a particularly cold winter or summer when your heating/air-conditioning unit will suck valuable range out of your battery. All of this is just proof of the high efficiency of the electric engine and is unavoidable. But this represents extra complexity for new and used car owners and OEMs should seek to develop and sell BEVs that deliver 400-600km of realistic driving ranges, depending on the segment. Those considering offering different range options to become more attractive for different customer segments should be careful not to increase the complexity around the decision-making process. If a second range is desired, it should be topping up the 400-600km.
Infrastructure, infrastructure, infrastructure
The BEV struggles to compete with the ICE vehicle when it comes to infrastructure. And despite year-on-year growth of charging stations in many European markets, it will remain a challenge for the coming years with new BEV sales picking up. While on the highway in some areas, there are now more charging opportunities than BEVs, the city centres are the designated habitat of the BEV and there we see a shortage of supply of private and public charging points. And those that are available, are often blocked by non-BEVs. Furthermore, the charging experience can be quite costly and far beyond the costs you would have when charging at home. Joint ventures and cooperation between those operating the charging stations and those clearing the payment are required to offer customer-friendly charging processes. This takes time and willingness to set up but it represents a prerequisite and ultimately a win-win for everyone.
Mileage and Total Cost of Ownership are key
BEVs are not for everyone. Those with high daily driving range needs and those that do not drive enough miles per year to make it economically viable to own a BEV will avoid ownership. Depending on the market - and the specific delta between fuel cost and energy cost - you need to drive between 15,000 and 20,000 km per year to start to come close to a break-even point, if you consider the full TCO perspective. The reasons for this are the currently higher transaction prices for the BEV, even after factoring in government incentives. BEVs materialise higher loss in value due to the higher transaction price, even if you consider equal or slightly advantageous resale prices for the BEV in value terms. To be on the safe side, the TCO should be more attractive than for the ICE vehicle to enable commercial success for the BEV.