BEV prices and TCO: The impact of raw material costs and China
15 August 2019
The success of battery electric vehicles (BEVs) will be determined by their total cost of ownership (TCO) profile compared to internal combustion engine (ICE) vehicles in both the new and used car markets. Christof Engelskirchen, Chief Economist of Autovista Group, considers the influence of raw material costs, a slowdown in China and other factors on the prices of BEVs.
BEV price and TCO drivers
The price of BEVs is influenced by three drivers: (1) most importantly, economies of scale, which is why dedicated, scalable, BEV platforms and partnerships are crucial; (2) negotiating power with regard to battery prices and raw materials – again partnerships will help; (3) how much of the savings will need to be applied to range extension, instead of margin improvement or price reductions.
TCO profiles vary substantially between markets as they are subject to government subsidies and, in particular, subject to the extent of price differences between energy and fuel. With governments likely starting to retract from heavy subsidisation over the coming five years, OEMs need to be prepared to absorb those subsidies and offer the BEV at a lower TCO than alternatives to create a sustainable and competitive offering.
The next generation of BEVs coming to market should see a more attractive list price positioning compared to the BEVs of recent years. But they will not succeed unless they offer an advantageous TCO profile.
Small BEVs are already struggling to compete in terms of TCO against their ICE equivalents. This is jeopardising the future of small cars as they need to be electrified to meet emissions targets and the outlook is even bleaker for mini cars.
Plummeting raw material costs
The spikes in raw material costs last year, in particular for lithium and cobalt, were triggered by fears of dependency and supply shortage. They were short-lived, however, as lithium prices have dropped by 50% this year, to about $3/lb. Similarly, cobalt prices skyrocketed up to almost $45/lb in 2018 and are now back at $12/lb. Both cobalt and lithium would have been a weak investment since 2010 as they are currently trading only slightly above 2010 levels.
For cobalt, the automotive industry is making progress in advancing technology towards lower cobalt levels in batteries or even zero need for cobalt. The issue is not so much availability but the fact that the majority of global production comes from the Democratic Republic of Congo, as a by-product of copper and nickel mines, and there is little governance on labour conditions and environmental sustainability. For lithium, there are less supply-side concerns with Latin America, Australia and China being strong suppliers.
Investment cycles are a more prominent concern. With prices so low and the recent volatile price development and substantial uncertainty around real demand, it will be a challenge to attract capital to build capacities and secure supply quickly.
On the demand side, battery pack costs are far less dependent on raw material prices. Even prices for cobalt and lithium at 2018 peak levels would only result in something between 5%-7% higher battery costs per kWh, depending on the technology used, according to a 2018 McKinsey study. On average, we were at S176/kWh (€158/kWh) in 2018, according to BloombergNEF, down from $1160/kWh (€1038/kWh) in 2010, which represents an 80% drop. This drop in costs was much faster than expected. The research experts forecast prices to come down to $94/kWh (€84/kWh) by 2024.
This suggests that the battery costs for a 41kwh Renault ZOE amounted to $7216 (€6450) in 2018. Even if this was halved and the $3608 (€3225) cost saving passed on to the consumer through lower list prices, the ZOE would still have a TCO that is over €5000 higher in Germany than for a comparable petrol Clio and over €3500 higher than for an equivalent diesel.
China has reduced subsidies for BEVs and we may see them completely vanish over the coming years. This is merely a matter of focusing the fragmented industry on consolidation and thus encouraging the creation of real economies of scale. It is clear that China wants to lead the pack when it comes to electrified mobility and therefore decisions with regard to subsidies will always intertwine with the achievement of this overall target. China will also be the crucial market for non-Chinese OEMs when it comes to electrification and OEMs focus substantial volume ambitions on this market.
A bigger concern, however, is how the continuing trade conflict between the US and China will play out and whether it has the power to trigger a global recession. That recession will be much more impactful on the development of electric mobility than a slowdown in China.