Category: Automotive

Volkswagen MEB platform architecture
A flood of new electric-car models is washing into the market in the next year as automakers scramble to meet regulatory demands for electric cars around the world—not to mention scrambling to compete with Tesla.

The challenge, as with Tesla, is whether they can sell those cars at a profit.

A new report by AlixPartners, a worldwide business consulting firm, shows the transition to electric cars is coming at a steep cost to automakers.

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The company pegs the cost of building new electric cars at almost $9,000 more than conventional cars, and plug-in hybrids at an additional $5,700.

Worldwide, the report says, established and startup automakers are spending $255 billion to develop more than 200 new electric models that are expected to hit the market by 2022.

Many of these will be low-volume models that will not make a significant dent in the development costs for new powertrains, the report says.

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Further, the number of new models is likely to exceed customer demand, the report says, meaning that intense competition among these new electric cars may force automakers to sell them at a discount. This hit to automaker profits could be exacerbated by ride-sharing and autonomous car fleets, which would buy cars at fleet prices.

As if to confirm the report, BMW cheif executive Bernhard Kuhnt told Bloomberg Friday, “Tesla is now ramping up their volumes, and it’s putting pressure on that market segment.”

At the same time, the study notes, the overall car market in the U.S. is beginning a cyclical downturn from its record sales of 17.2 million new cars and trucks in 2017.

That's not to say the study expects electric cars to be unsuccessful. AlixPartners forecasts that by 2030, electric cars will make up 20 percent of the U.S. market, 30 percent of European car sales, and 35 percent of car sales in China.

2020 Mercedes-Benz EQC

In a consumer survey conducted as part of the study, AlixPartners found that 22.5 percent of Americans say they plan for their next car purchase to have plug-in capability.

A Reuters report on the study notes that auto executives generally concur that the transition to electric cars will be expensive, and that R&D and development costs for electrics may not be paid off any time soon. “What everyone needs to realize is that clean mobility is like organic food—it’s more expensive,” Carlos Tavares, chief executive of Peugeot, Citroen, and Opel manufacturer PSA told Reuters.

Last month, BMW warned investors that investments in electric-car development and meeting cleaner emissions rules would erode profits. Volkswagen and Mercedes-Benz also each warned separately that developing electric cars will cost more than they initially budgeted.

So far tax incentives from many governments, such as the U.S. federal $7,500 tax credit, are designed to offset these higher costs. As automakers begin to sell millions of electric cars, however, these tax incentives may become unsustainable.

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The hope is that by then battery prices will equal the cost of internal combustion powertrains, but that's not guaranteed. Batteries currently account for 40 percent of the cost of building an electric car, Reuters reports.

AlixPartners reports that commodity costs are up 70 percent the last year compared with 2015, at $884 per car, a six-year high.

“Industry players are sort of caught between a rock and a hard place,” said Shiv Shivaraman, co-head of AlixPartners' American automotive and industrial practice. “If they don’t participate in some way in the ‘new-mobility’ revolution that’s coming, they stand to lose out on what might be the biggest thing ever in this industry. If they do participate, as so many are, they have the chance of benefiting from first-mover advantages, but they also face the possibility of going broke in the process.”