The Five Percent Threshold
The EV revolution advances despite growing challenges.
(Article originally published in July/Aug 2022 edition.)
“U.S. Crosses the Electric-Car Tipping Point for Mass Adoption” trumpeted a headline from Bloomberg recently. That’s good news for anyone concerned about climate change. Electric vehicles are considered crucial in driving the clean energy transition and reducing global carbon emissions.
According to Bloomberg, once five percent of new car sales in a country go fully electric, “everything changes.” That conclusion comes from an analysis by Bloomberg New Energy Finance (BNEF), a unit focused on climate change and green energy, of auto sales in the 18 countries that have already reached that pivot point.
Yes, U.S. sales of EVs are climbing rapidly. According to BNEF, nearly 173,000 were sold in 2022’s first quarter, a 5.3 percent market share. However, another EV data tracker found 10 percent fewer sales and just a 4.6 percent share, but still a record.
Sales are helped by healthy government subsidies, mandates, a growing number of EV models for buyers to choose from and, more recently, high gasoline prices. Higher EV market share is helped by the decline in total auto sales due to parts and semiconductor chip shortages. Those shortages caused automakers to build thousands of cars minus critical parts and park them until the supply chain caught up.
EVs are reshaping the domestic vehicle fleet mix. The U.S. Department of Energy Vehicle Technologies Office reported in April that the nation had a cumulative 2.6 million plug-in vehicles or about one percent of the domestic fleet. That fleet includes both plug-in hybrid vehicles as well as battery electric vehicles (BEVs). EV sales started in December 2010 when the original Nissan LEAF and Chevrolet Volt models entered the market, opening the next chapter in transportation.
Argonne National Laboratory’s data show the industry needed nearly eight years to accumulate its first million plug-in vehicle sales while the second million took just two and a half years. Merely 10 months later, an additional 600,000 plug-ins hit the roads, suggesting the industry is growing at an annual rate of 700,000 or more plug-ins a year.
Expectations are for a pace of 100,000 plug-ins a month, or 1.2 million cars a year, by the end of 2023. To achieve that, hurdles will need to be overcome, but probably with some disappointments and unforeseen challenges along with billions of dollars in new investment.
The history of Nissan’s LEAF plug-in provides perspective on how difficult the EV revolution has been for auto companies despite substantial help from governments and cheerleading by environmentalists.
Former CEO Carlos Ghosn championed the LEAF. It was a pioneering vehicle but never lived up to Ghosn’s or the company’s expectations. Nissan invested heavily in EVs by building manufacturing sites in Japan, the U.S. and the U.K. Nissan also formed a joint venture with NEC to provide in-house battery production. The key to Ghosn’s plan involved introducing four different EV models, allowing it to scale up output to improve profitability.
Sales, unfortunately, were significantly below expectations. The U.S. plant was designed to produce 150,000 LEAFs annually as well as 200,000 battery packs. In its best year (2014), Nissan sold only 30,200 LEAFs. Today, its annual sales are less than half that.
Nissan scrapped plans for additional EV models. Recently, an automotive newsletter reported it plans to phase out the LEAF within three years. Nissan recently introduced an EV SUV, but it’s counting on new BEV models to be ramping up by the time LEAF production ends.
Nissan’s experience as an EV pioneer was the opposite of Tesla's success. Having better managed its supply chain, Tesla minimized disruption from the chip shortage that hobbled other car manufacturers and has aggressively expanded into producing its own battery supply. In the second quarter, Tesla sold 18 percent fewer cars than in its first quarter as its Shanghai plant was shut down over COVID and supply chain issues. With those issues now remedied, Tesla reported record output for June.
BNEF, like other EV forecasters, relies on the S-shaped adoption curve experienced by many products like electricity, televisions, mobile phones, the Internet and LED lightbulbs. Sales are slow to rise in the early-adopter phase but then rapidly accelerate.
The EV acceleration point is assumed to be the five percent threshold. Because impediments to EV adoption are universal, BNEF believes most countries will follow this S-shaped growth pattern. Impediments include not enough public charging stations, expensive cars, limited choices and uneducated buyers.
The U.S. government is working to expand the nation’s EV charging network, recently committing $7.5 billion for 500,000 charging stations located 50 miles apart along interstate highways. Each station will handle four EVs and have universal plugs. However, charging EVs takes longer than filling up a traditional car, so charging stations can develop lines.
Anderson Economic Group also tracks U.S. EV sales, which it estimates represent four percent of total auto sales. It points to eight of 10 EVs sold being high-priced luxury models as the main problem. According to market researcher J.D. Power, the average EV sells for $54,000, which is $10,000 more than the average traditional car.
Others estimate higher selling prices and a wider price gap. The cost of EVs is rising at a 14 percent clip, meaningfully faster than traditional car increases. That means the price gap is widening, not narrowing, as assumed by EV forecasters.
Why are EV cost rising faster? It has to do with the cost of materials used in EV batteries and car bodies. Larger batteries are needed for increased range, so batteries are growing physically larger, adding weight that car manufacturers must offset with more weight-saving materials in vehicle bodies. That means more exotic metals, more aluminum and more plastic – all costly. EV driving trends – faster acceleration and the need for tires with minimum road-rolling resistance – mean more expensive tires.
During the EV revolution, lithium – the key metal in EV batteries – has been in abundance, keeping its cost down. With the surge in EV newbuild plans, automakers are scrambling to build out mineral supply chains.
Although most “rare” earth minerals involved in EVs are not rare, expanding capacity requires new mines and processing plants that are environmentally challenging to construct and often are located away from where EVs are assembled. These issues add to the EV cost structure and will not be easily resolved or offset by greater manufacturing scale.
Of the three dominant EV markets, the U.S. trails China and Europe by wide margins. That’s why BNEF is excited by its calculation showing the U.S. market reaching the tipping point. Europe’s adoption is about 10 percent while China leads with a 20 percent share.
When we look at the types of EVs sold in those markets, Europe more closely resembles the U.S. in buyer preferences while China has many more small EV models appropriate for large, highly congested cities. Those smaller models are not likely to be popular choices in the other geographic markets.
Another challenge for the EV industry is that over a third of the world’s 100 million annual auto sales are in countries in Latin America, Africa and Southeast Asia. In many of those countries, access to electricity is limited, let alone the ability to charge EVs, assuming residents can afford them. This means a large and growing share of the global automobile market will lag in transitioning to EVs.
Even in the U.S., as previously noted, its 2.6 million EVs represent just one percent of the domestic vehicle fleet. With an average vehicle age of 12.5 years, it will take decades for the fleet to change without mandates that people must own EVs. That’s why states are legislating bans on the sale of traditional cars, which is likely to make their cities resemble Havana.
In the rush to transition the personal transportation segment of economies to EVs, few have considered the impact on global carbon emissions. EVs are known as “clean” cars because they don’t emit carbon from their tailpipes, but are they really clean?
Depending on the fuel mix powering the electricity to charge them, EVs may never be clean. An additional carbon challenge comes from EVs rolling off the assembly line having created 70 percent more emissions than traditional cars. This carbon emissions legacy is erased as EV miles are driven, depending on their electricity supplier’s fuel mix, but it requires years of driving. Thus, a surge in building EVs will likewise lead to a surge in carbon emissions.
Nonetheless, the EV revolution in the U.S. is gaining steam. The push by governments and the buy-in by automakers will help propel it along. If prices of battery raw materials do not fall, the revolution’s speed will be jeopardized.
Contrary to the S-shaped growth curve, cars are not bought like cell phones. Vehicles are expensive and purchased infrequently, so buyers are influenced by factors often not captured in marketing surveys. Eliminating adoption impediments will be necessary for EVs to come to dominate our vehicle fleet. It will take years. Building nuclear power plants may be the better way to reduce our carbon emissions than building millions of EVs.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.