Electric Vehicles: Has the Tipping Point Already Passed Us By?

In our end of year newsletter, I led our top five list for 2022 with “next year could prove the tipping point for electric, as in electric vehicles, batteries, solar panels, wind farms and a push to modernize the electric grid.” I wanted to explore this a bit further as this shift may prove to be one of the most important to watch over the next decade. I had the chance to discuss this with analysts from four of Franklin Templeton’s investment groups.?

In 2020, electric vehicles (EVs) were approximately 3% of total passenger vehicle sales globally.?Early estimates for 2021 indicate that this number has jumped to over 7%, with Europe leading the world at close to 11% and the United States close to 3%.[1] Based on this rapidly increasing demand, traditional automakers like Ford, Volkswagen, Daimler, BMW, and Toyota will release new EVs in 2022. Depending on the analyst I consulted, the expectation is that 35-70% of the vehicles on the road in 2030 will be EVs.????

Finally, EVs go the distance

There are many reasons that seem to be leading this increase in EVs. One is the reduction in “range anxiety” with improved battery technology and increased charging infrastructure. For example, in 2012, the median range of available EVs was 76 miles with a max range of 265 miles. In 2021, those ranges are 234 and 405 miles, respectively.[2] Today in the United States alone there are already 160,000 charging ports.

Another reason is that the price of EVs is becoming more competitive with traditional internal combustion engine (ICE) models. EVs have 85% fewer moving pieces which in turn requires one-third less labor than assembling traditional ICE cars. With fewer mechanical parts, this has led to maintenance costs that are estimated to be 50% lower than ICE vehicles.[3] Considering that current estimates—based on miles driven, average fuel consumption, gas prices, and electricity prices—put charging costs at near parity with fuel costs, this lowers the overall cost of ownership.

Another powerful trend is the perception that EVs are a premium version of the traditional car in terms of driving experience. When price is no longer the limiting factor, the allure of higher levels of technology and comfort are powerful forces in driving customers towards EVs. Similar to the adoption of many new technologies, the vision for the experience of what it means to drive a car may be changing. Most of these highly desired new technologies are housed in EVs, and customers are beginning to notice.

The last is a push globally toward zero emissions. With 20 countries announcing targets to phase out internal combustion vehicles and 70 subnational and city governments announcing 100% zero emission vehicle targets by 2030, manufacturers are adapting their production just as other regulatory and safety issues become ubiquitous.[4] ????

Will it be a long and winding road to adoption?

So, it looks like we may reach the tipping point by the end of 2022 as we are predicting. Of course, the journey is never quite that simple, so let’s explore some important factors that could slow down adoption and may also have wider implications across the economy and capital markets. ???????????

The total number of passenger EVs on the road through 2021 is expected to be roughly 16 million, which is a tiny sliver of the 1.4 billion passenger vehicles in operation worldwide.[5] ?Not only would a large shift in the manufacturing base need to occur, but the replacement of the existing fleet would also need to happen. With the large employment base that the auto industry supports globally across the entire supply chain, this transition could have an outsized impact on the economic and political situation for many countries. Additionally, consumers’ ability to replace their cars would be dependent on their ability to afford a new one, which itself would be tied to the economic environment.?????

While it is true that battery costs have declined from $295/KWh to $137/KWh since 2016,[6] the battery industry would need to ramp up production at a breakneck pace to keep up with demand. The total demand for the minerals needed in battery production was 7 million tons in 2020 and would need to expand to 28 million tons by 2040 to meet expected demand from EVs and other climate targets.[7] With lead times to ramp up facility of 3-7 years, periodic supply shocks could create volatility in both availability and pricing. For example, the lithium price has spiked almost 300% in 2021 alone.[8] ?

Geography and geopolitics matter for both supply and demand

Of the four major resources used in batteries (lithium, nickel, cobalt and copper), Australia, Indonesia, Congo and Chile are the largest producers, respectively. Because demand is increasing at such rapid rates, procuring reliable supplies from each of these countries will be critical and local political, economic, and NIMBY (not in my back yard) considerations for each of these nations will play important roles. Additionally, China is the largest processor and refiner of all four, which adds another layer of geopolitical complexity.[9] ?

In terms of increasing the charging infrastructure, there will be an impact on plans to upgrade and expand the electricity grids. With a dual requirement of more capacity and increase in the use of non-fossil fuel-based generation (wind, solar, etc.), higher costs of electricity production may be passed to the consumer. The fact that approximately 80% of car charging is done at home[10] in the United States, because most homes have garages, may put less pressure on grids if charged at night during off peak hours. However, citizens in much of the rest of the world do not possess garages and will likely rely on charging stations that will potentially charge higher market rates.

China offers a glimpse into the opportunities and challenges for widespread EV adoption.?Within its six largest cities, China is at 14% share of EVs in terms of total auto sales, but at 3% in the rest of the country.[11] The lack of parking availability and unreliable local power infrastructure have made the charging situation difficult for consumers, creating some impediments to widespread adoption. In a survey done by McKinsey, 45% of EV buyers in China indicated that battery and charging was the primary concern, which was a higher proportion than in the United States and Germany.[12] ?

In short, our assertion that 2022 will be the tipping point for EV adoption is not straightforward.?While the near-term momentum for EVs remains strong, considerable challenges remain that will hamper and occasionally gum up the path towards widespread EV adoption. The story will be fascinating to watch as it unfolds.

Thanks to Rob Buesing from ClearBridge Investments, Alan Chua and Ming Da Zhuang from Templeton Global Equity Group, Tim Rankin from Franklin Mutual Series and Robert Rendler from Franklin Equity Group for their insights.

For more on electronic vehicles, read our December Global Investment Outlook:

US Viewers: Disruptions Redefine Risk and Opportunity in 2022

Global Viewers: Disruptions Redefine Risk and Opportunity in 2022

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[1] Source: International Energy Agency (IEA), 2021, Electric Vehicles, IEA, Paris. There is no assurance that any estimate, forecast or projection will be realized.

[2] Sources: US Department of Energy and US Environmental Protection Agency,?Fueleconomy.gov website

[3] Source: Consumer Reports, Maintenance Cost White Paper, September 20, 2021.

[4] Source: IEA Electric Vehicles, IEA, Paris, 2021.

[5] Source: Ibid.

[6] Source: Bloomberg.

[7] Source: IEA, World Energy Outlook, “The Role of Critical Minerals in Clean Energy Transitions,” May 2021.

[8] Source: Bloomberg.

[9] Source: IEA.

[10] Source: US Department of Energy as of December 21, 2021

[11] Source: China Passenger Car Association as of August 2021

[12] Source: McKinsey EV Consumer Survey 2019.