The end of the beginning of the electric car

One of the many things going on during this pandemic that is related to it and also coincident with it is a major drop in demand for motor fuels and a big drop now and expected in the price of gasoline at the pump. One of the questions that begs for future industrial growth is, what does it do to the demand for electric vehicles. How much of that future forecast demand was gonna be based on consumers thinking they could get away from high fuel prices? And if those prices aren't high anymore, what does that do to their interest in EVs? Or is this just a temporary blip in electric car appetite demand and let's face it, interest at a time of global crisis. The first person who comes to mind when I have questions like this is Collin Mckarrick. He's the head of advanced transport for Bloomberg Nef. This is Bloomberg RESEARCH DIVISION that focuses on among other things, the future of transportation and energy. [MUSIC] What do you think's gonna be a bigger impact here on electric vehicles will it be A short term issue with fuel prices or a long term issue. I think I'm asking a dumb question there but I like to not assume anything. I think you have to separate the oil price issue from the Coronavirus issue. Right? When we think about oil prices and when we look at adoption of electric vehicles in different markets. They're actually not so far as sensitive to oil prices as you might think. And that's, that's really because it's upfront costs, not operating costs that's really been holding the market back. So the biggest thing that really matters is when do the upfront costs start to come down. And so what that means is really that battery prices end up being more important than oil prices. So there are some markets where it might have a bigger impact than others. For example, China puts a floor on retail fuel prices. So even if the underlying commodity price doesn't go goes below a certain level that doesn't all get passed on to the end consumer. In Europe, you have a lot of taxation that kind of blunts the impact of the commodity price change on the price and consumer see as well. Where you might see a bit more of an impact is the US but again, I think the big thing holding the Evie market back. Isn't operating costs, its upfront costs. So that's still the thing we're really watching. Now, the corona virus or COVID-19 impacts are a much bigger deal because there's serious demand destruction. There's a serious macro economic fallout. There's big questions of how long that's gonna last. I think that's going to have a much bigger impact in both the short term and the next few years. Then the oil prices, the oil price part of the story is gonna have. So as you talk about so much about the price for consumers to get into these vehicles being a big deal, I guess that's what links back to the corona virus impact as we may have a couple of years or maybe more of alot of consumers being just hesitant to invest in something that isn't. That is a little speculative perhaps in their minds.>> Yeah, I mean, if it wasn't for this we would have been heading for a record year for global Evie sales. They've been climbing steadily around the world for the last few years so about 2.1 million sold last year in 2019. That was a record. We were expecting 2.4, 2.5 million sold this year. That's all out the window now. This, we're probably heading for the biggest annual percentage drop in auto sales, certainly in the last 10 or 20 years and maybe ever this year, and Eevees won't be immune to that. If anything Eevees skews slightly more expensive than average vehicles. And what we know from past economic events, downturns is that those more expensive vehicles are often hit harder. Now there are some policy levers that are still in place. That means the market might hold up. So that's in places like China and Europe and California. But it's an open question, the degree to which governments are going to continue to prioritize those. If they have a lot of other more pressing issues on their plate. Interesting point. Now remind me, you guys at your most recent summit in San Francisco, talked about where we hit that point where the electric vehicle completely is a smarter choice for the consumer in terms of economics. It's just got A better, an equal price to get in as I recall and a lower cost of ownership and operation. Where's that break point coming? Yeah and this is the big thing that everyone's trying to figure out and we've spent a lot of time looking at battery prices around the world over the last ten years and seeing how much they're coming down As volume changes and as different chemistries come into play. We think it hits around 2024, 2025. But of course some segments will get there sooner and some segments will get there later, right? A high end of the performance and he is already fully cost competitive. You could say and maybe superior. Without with other internal combustion engine options in the performance segment. Now it takes a much longer it takes several years past that, that 2024 2025 timeframe before really small vehicles in say India where they often have a purchase price of 678 thousand dollars. It takes much longer to get cost competitive there So these parity points vary by segment and they vary by geography. But based on what we can see on butter prices today that point probably comes around 2024, 2025 for the broader outer market. So with that in mind Is there a possible advantage for the electric car because that's coming up pretty soon. If we have a long term, significant distress among consumers who are really feeling financial pain is this almost work in the favor of Eevee saying, Wait a minute, I need the most effective, cost effective vehicle I can get. To make my finances work in the foreseeable future, that's electric, is that a possible scenario. It's a possible scenario and definitely price elasticity of demand cuts both ways, right? So the degree of sensitiveness that consumers have to change in price Means that when things are more expensive they don't buy them, but then once they get cheaper, they start to buy them in large numbers and that's that's certainly what we've been forecasting for quite a while. I think the bigger question is what happens in the policy in the short term because a lot of those costs declines were forecasting depend on volume to increase and getting volume to increase still depends on policies don't sell very well in markets where there is no policy support whether that's Purchase incentives are broader policy mechanisms like fuel economy regulations. So if government's relaxed those as a way to try and get the auto market going again to get out of this crisis, then that pushes down the volumes that you would otherwise see which pushes out those price parity points. So it's all a bit finely tuned at the moment and one of the things we're definitely watching He's what response do governments take to this because their automakers are going to be in bad shape by the end of the year in several markets, and are going to go and lobby and say, look, this is not the time to introduce more stringent fuel economy regulations. You're already starting to see that in Europe, with the co2 regulations here, which were set to be a major driver of electric vehicle sales in Europe. Already the auto lobby group is starting to say look is this year we really want to do this, given all the other headwinds the industry is facing. So volume matters, policy matters to drive that volume. And if that changes, you could see those parody points pushed out a little bit. And I think the Trump administration here in the United States just it was no surprise but I think just codified. Their hair cut down from the previous Obama era fuel targets to a significantly lower set of fuel targets coming up in terms of fuel efficiency. So we're seeing that happen here as well. It looks like. Yeah, and I think that predates that predates the whole Coronavirus thing- Yeah. That the Trump administration pushing for for quite a while. What we see there is there's two things to watch one of them is that It's gonna end up in court. So that's gonna be heavily contested. California is also fighting against the removal of its waiver and its ability to set its own air quality standards which the Trump administration has gone after. It's also not clear what automakers are going to do because it California and the states that follow California have their own set of standards, and then there's a federal standard Then they may choose to design to the more stringent standard because it more closely aligns with what's happening in China and what's happening in Europe. So there's still several moving pieces there. I think the Trump administration was doing that separate from Coronavirus, but it's something we have to watch in other parts of the world as well. Yes, it did predated. Big fame at the Bloomberg NEF Summit just recently here in San Francisco early in 2020 was the end of the beginning, which was so interesting. Explain what's going to happen at the end of the beginning of EVs and what that concept means? I think it helps everyone understand where we are and how the motivations for electrification are starting to change to A different place. Yeah, this was a way I was trying to frame it to help people understand where we are. And if you've been an EDI enthusiast for the last decade, it feels like this is we're reaching the end of the journey but we're really not we're only reaching the end of the beginning. This is the very start of what will still take quite a long time. EDS have improved dramatically over the last 10 years. Range has gone up battery densities gone off, the charging infrastructures improved hugely. There's now almost a million public charging points around the world. So all these things have made it better and better for consumers. But we're still only at sort of 123 4% of vehicle sales in most markets. That's still the beginning. We're just getting beyond those really early adopters, those innovators And moving into a bigger segment of the market. And what we've seen with any consumer adoption of new technologies is that each new segment has its own challenges. What got you here won't get you there and I think that's toward the end of the beginning phrasing and framing is useful is to understand all of that just gets you to the starting line Now the race is really on. And part of that, if I recall correctly, was the idea that we've been relying strictly on the US market that I know and you described as being very much an incentive driven market early on state federal tax credits manufacturers for various strategic reasons, willing to sell these vehicles at a loss. But there was an awareness that perhaps we're moving much more to a regulatory phase being sort of requiring greater adoption of these vehicles and more infrastructure as we go to the next phase. Is that an accurate sort of projection? Yeah. Look, it gets really expensive to subsidize the purchase of something beyond the first two or 3% of buyers. And so what you're starting to see is as more governments hit that point, they're gonna start phased down phasing down incentives. So what that means is that the next few years are gonna be kinda bumpy. But then we have to look at is these big policy mechanisms that we talked about around fuel economy or CO2 regulations in Europe. In China they have their new energy vehicle quota system which forces automakers to sell a set percentage of their vehicles, either being battery electric plug in hybrid or fuel cell. These big policy mechanisms start to take over and fill up the slack from where these direct purchase subsidies Are dropping off, and that's again just a function of it gets expensive if you're giving out money for each one of these. So, I think you're gonna see more government start to push in that direction, trying to get away from direct purchase subsidies and towards using these larger [INAUDIBLE] To drive the market forward. And that would seem to then dovetail with the latest impacts you're talking about, which is governments that may say, we get to divert funds away from some of these more optional programs with a tough economy coming up. So maybe that dovetails and they say, yeah, here's another reason why we wanna turn down the subsidies. Yeah. And then there's a flip side of that though, which is that they may use the stimulus that they're trying to put in place to get the economy and get the auto market going again. To push forward with some of these things so China has already China's are already starting to come out of the worst impacts of the COVID-19 epidemic or pandemic and there's one of the things they have indicated is that they want one of the areas that they may invest in significantly is public charging infrastructure. So we know that In the past, when governments are trying to get the gears of an economy turning again, they do often look to shovel ready infrastructure projects. And things like charging infrastructure may play a role in that it's probably going to depend a lot on the politics of a given region, and who's in power at the time, but that's certainly something to watch too. It's not all downside. You may see a stronger push on some of this stuff as part of the recovery efforts to With infrastructure in mind, let me ask you that as we close here. What does this do to the infrastructure players you've, you've touched on them a little bit. But as we pull back to the industrial side, I guess of electrification, which is such an important part of every time I attend the Bloomberg NEF summit I see more and more of a march toward interest into how does the infrastructure not only get developed and built but how does it get built as a viable, thriving industry? So it's an exciting business and not just something we have to figure out. As that is the backdrop. What do you think this current climate around Deepening economic woes from the pandemic and the oil prices going through the floor. How might that be changing the calculus for some of the big infrastructure players out there, like shell, green lots or VWLE or others? It's a big hit. So what we've seen so far in January and February or February rather in China new installations of charging infrastructure fell 99% usage fell 70%. We're starting to see the same data points start to come in for early March in Europe from some of the operators I think this is a huge hit, the question is just how fast can we recover from it and how fast the things get moving again. If this drags on for a long time this is gonna impact. All the people aren't moving around very much, right? This is unique and you don't have just the normal impacts of an economic crisis but actual physical lockdown of people being forced to stay in their house it means they're not moving around so certainly they aren't going to charging stations. The big question is just how long all that drags on for but certainly this will be negative for them. And some of those early stage companies, the bigger ones will weather it fine. But some of those early stage companies are probably going to see a real strain on their finances as a result. Okay, very interesting. Yeah. Wow, that's a stark number in China. But hopefully it's a real sharp V, right, and we get them and then they bounce right out. That's the hope. And that's what everyone's trying to figure out and on the vehicle side as well, the question there is how much demand is deferred versus destroyed, right? If you're just pushing this back by two quarters, and things reserved to normal? That's one question. If everybody's noticeably poor off and this lasts a long time, then you're destroying demand, not just deferring it Do you think we still have to grapple with the idea that electrification of vehicles is seen, I think, by some companies, a lot of consumers, maybe also soon by regulators, as a luxury we can now defer, or are we generally gonna hold to our guns as much as we can through this economic recovery and say no. Bring electrification along with us. I think the next two years are bumpy. But I think the long term trajectory is pretty unchanged. I think we're gonna continue to see auto makers push more money into electrification. A lot of them have already made very significant investments in new platforms and models that they're rolling out This year, next year and the year after. They may delay some of those model launches but I don't think it will change their underlying long-term trajectory. So my best guess at this point is the impact on electrification stays confined to the next one to two years. And then we start to see things go back to normal. I think some of the drivers like Urban Air Quality, Those aren't going away, the drivers like technology improving, battery prices coming down, batteries getting more energy dense. Those aren't going away either. So I still think we have a lot of the same drivers. It's just that the next 18 months, maybe two years, are probably going to be bulky,>> OK? And some then in the electrification move that we're looking at of consumer vehicles. Where does the buck stop, who's really driving it? Cuz we know consumers, some of them really want them. The majority are still sitting on the sidelines, manufacturers will say, well, I'm doing it because mandates tell me but also I've got some subsidies that are making it attractive for consumers and governments over here saying we want to make it happen. Who really drives this thing? Is there one party of that face thats really the main motivator right now? One thing you can say well there isn't much policy support there isn't much AV sale. So certainly our regulation is a very important part of it. Now the skeptics will tell you that, it's all regulatory driven and nobody want to buy them Yeah. But the point of that argument is that if you talk to people who buy AVs They absolutely love their cars. They will talk your ear off over dinner about Yeah, Amazing is Yeah, And their parents or their neighbors, their friends. So both of them are simplistic. If you say look, it's all consumer poll That's not really accurate because you do need these regulations. And the evidence shows that if you say it's all regulatory driven, you're ignoring the fact that these things do have a high net promoter score and most consumers really like them. So it it really is I know it's a cliche answer, but it is really a mix of the two. We do know that you need both supply side and demand side measures to get these markets going. So I think I don't see that changing in the next few years. I think until we get to this point of unsubsidized price parity, that's where automakers will really start to push them on their own. They're starting to get there. You saw the Superbowl ads this year, a lot of them were about electric vehicles that shows they're starting to push them. I think you need another few years of solid battery cost declines until these automakers want to sell them as much as they want to sell their equivalent internal combustion. And that's where again, that's where I think the real tipping point. [SOUND] [BLANK_AUDIO]