Looking Into The Future Of Battery Electric Vehicles With The Society Automotive Analysts

The automotive landscape is becoming ever more confused as we work solidly into the middle part of the decade. What governments are demanding automakers to produce, what consumers want to buy, and what automakers would like to build have passed an inflection point and are beginning to diverge rapidly.

With the Consumer Electronic trade show wrapping up in Las Vegas with fewer automotive OEMs participating, the Society of Automotive Analysts gathered for a series of presentations at the FANUC facility in Auburn Hills, MI, 35 miles north of Detroit. I joined representatives from the likes of Ford, S&P, IPSOS, FANUC, and several other analyst companies, which gave nine different presentations.

The presentations had an overriding theme, though the conclusions were not all in agreement. Two main items stuck out for me that no one really had an answer for, either on or off the record. How do we realistically get there, and what happens if consumers resist?

Bryan Bezold, Senior North America Economist at Ford Motor Company, kicked off the formal presentations with an overall macro look at the economy and the auto industry in general.

There has been a sentiment of a coming recession over the last 18 months; however, that has failed to materialize. Bryan addressed the question of why upfront. Even though the core inflation numbers are higher than the current Consumer Price Index (CPI), driven primarily by housing, rent, and energy costs, the PCE Price Index Excluding Food and Energy, also known as the core PCE price index, has been rapidly trending down, though still higher than the Fed’s target of 2%.

While consumer sentiment was negative, even more pessimistic than during the 2008 recession, consumers kept spending. A combination of home values, stock market gains, and income growth that exceeded inflation by nearly 2% equaled an 11% increase in household net worth, adjusted for inflation compared to 2019 pre-pandemic levels. So, while consumers’ confidence was low about the general economy, they had sufficient disposable income to keep spending up. Therefore, unemployment rates stayed low and generally kept a recession at bay.

The question of why the price of new cars accelerated far more than inflation was also addressed. The convergence of parts shortages and labor issues, both strike-related and plant staffing, disrupted production, creating a shortage of inventory. That largely has passed now. Inventory at dealers has been trending up, and most automakers are looking at a 41-day supply of inventory, still below the pre-pandemic target of 56 days. While not mentioned in this presentation, EVs are averaging 75-80 days of supply at dealers.

The beginnings of downward pressure on pricing have appeared towards the end of 2023 and may continue through the year, depending on what level of interest rate cuts happen throughout the year.

As to those rate cuts, currently, the market is pricing in six rate cuts through 2024 down to 3.75%. Bryan thought that was quite aggressive and agreed with a consensus of economists that three cuts to a rate of 4.75% are more likely. However, 2024 being an election year, other factors may have a bearing on the economy and how the Fed addresses it.

Changing Demographics And The Economic Landscape Are Making Brands Consolidate

Joe Langley from S&P Global Mobility began his presentation by drilling down into how the car marketplace is transforming right now. Not only with the shift away from ICE vehicles but also with the continued evolution of brands in automotive, as well as generational shifts in wealth, income, and purchasing power.

This shift comes in the face of global Governments’ moves to austerity, tightening credit markets, higher commodity prices, and rising costs for compliance.

While we have yet to see Chinese branded manufacturers make direct inroads into the United States, though Geely owns Volvo and Polestar, they are making inroads in Mexico led by BYD, Great Wall, MG, and Chery. The lower cost of these vehicles in comparison to “traditional” OEMs from Europe, Japan, and Korea is the primary driver, and the quality is “good enough”. How much this will affect the U.S. market is a wait-and-see.

Younger Car Companies Are Moving Away From Dealerships

New brands are avoiding the dealership model where they can because of high costs not just for real estate, but also to improve overall margins. In 1985, 43 car brands were selling in the US. In 2023, that number was 53. Projected for 2030, it may be as high as 56. More new brands will be coming primarily from China, though with the move to EVs, other countries have the opportunity to export here and only need to meet safety standards with no need for emissions testing.

Traditional brands will continue consolidating, and others will be closed down. Closing down a brand will be difficult due to the high exit costs of current dealers for those brands and their footprints. You are seeing a pruning of dealers from the likes of Cadillac, Buick, and Lincoln to try to keep the brands viable.

In 2030, the generational makeup of the U.S. will look like this:

• Gen Z (18-35) – 68 million
• Millennials (36-50) – 72 million
• Gen X (51-65) – 65 million
• Boomer (66-84)- 72 million

The Boomer generation is passing their wealth down. Millennials are entering their peak earning years, and Gen Z’s influence on future trends will be transformational to the markets. OEMs are struggling at the moment dealing with this generation shift, trying to understand how to best appeal to the younger demographics. While BEVs remain a catalyst, there is a reimaging of what vehicles, luxury, and the freedom cars once brought into the market. In addition, while Boomers and Gen X have the highest disposable income, they’ve reached a point in life where they have become more particular and more demanding with what they want and expect.

There Is A Huge Gap In EV Adoption After The Early Adopters

Brought up first in Joe Langley’s presentation but repeated by several others later is the gap or chasm we are approaching for BEV adoption. If you look at the market as a bell curve, the first 2.5% make up the innovators, and the next 13.5% make up the visionaries. Right now, BEVs make up about 8% of total sales. Interestingly, for all the noise, hype, and incentives, BEVs are still less than 10% of the market and likely will not break into double digits in 2024.

Crossing “the chasm” is where the challenges lie for all the OEMs. Going back to the bell curve chart, getting past the 15-16% of the early adopters to the 34% that make up the pragmatists, the “let’s see how this plays out for a bit” crowd, that it will take to make BEVs mainstream is the question. Somewhere between 2026 and 2028 is where most envision this happens. Currently, forecasters see only another 500,000-1.2 million units annually as pent-up demand for BEVs.

What are the roadblocks creating this chasm? Certainly, the obvious ones, affordability and infrastructure, lead the list. Mike VanNieuwkuyk from IPSOS, the 3rd largest consumer research company, mentioned that consideration for BEVs had leveled off for the first time since 2019. While the younger generations have the most significant interest, they have the least ability to afford them. Not just the purchase price but also items like homes and home charging are major factors.

Infrastructure and affordability could be further drilled down into items such as battery life, range, replacement costs, and charge times. Adding to the affordability issue is that fewer BEVs are qualifying for tax credits.

An interesting stat was brought up in a Q&A session: Even among EV enthusiasts and early adopters, those who had a bad experience with public charging had their satisfaction drop by over 50% and were less likely to recommend BEVs to others.

The Result Of The 2024 US Elections Will Affect EV Sales

Most of the presenters agreed that the results of the 2024 elections will have a significant effect on how, how soon, or if this chasm will be bridged. If the Democrats win the Presidency and control Congress, then expect accelerated changes to ZEV mandates and a further tightening of CAFE and CO2 mandates. At the moment, current reductions for CO2 through 2026 are 8%, but proposed from 2027 through 2032, they would be 13% annually.

California has A ZEV mandate for 2035 and is holding fast to that for now. Canada is likely to mimic the California requirements, though they have elections coming soon as well and may be subject to change.

If the Republicans win and control Congress, look for a reduction in requirements and for the Federal Government to rescind the California requirements for CAFE and CO2 targets. If there are mixed results in the election, stalemates and standoffs will be the likely outcome with no clear path forward.

David Andrea from Plante and Moran shared a Bull case and a Bear case regarding where BEVs are headed. The Bull case is predicated on continuing cost reductions for batteries in general and BEV specifically along with greater range, but hold that thought for a minute, and we’ll come back to it. Secondly, emission regulations continue to tighten not only in the U.S. but also worldwide. Finally, it will take a long-term commitment for the high infrastructure costs to continue.

There Are Bear And Bull Scenarios For EV Sales

The Bear case forms around:

1. Costs remaining high, limited adoption to the near lux market and the top end of the mainstream market.
2. Regulations being loosened, driven by the recognition of EVs not being ready for widespread adoption.
3. The availability and reliability of public chargers being limited, and making daily driving a challenge.

Let’s go back to two items from the Bull case. Number one is battery cost and range. In the Q&A secession from a Midwest Automotive Media Association presentation from Andy Oury, the “Engineering Technical Leader for High Voltage Battery Packs” at General Motors, he stated that GM, in particular, and OEMs, in general, are likely focused on making batteries more power dense and lowering costs than adding range.

As for long-term infrastructure investment, the IRA incentives totaling $400 billion are set to expire in 2032. According to David Andrea, on the consumer side, there needs to be about a $12,000 incentive/credit to consumers for true mass market adoption, but that is unlikely because of political concerns.

EV Adoption Is Still Moving Forward, But Industry Insiders Are Cautious

While the consensus from the presenters was that everything is still going forward, unlike two or three years ago, no one is ready to bet the farm on it. Even while OEMs are still openly talking about the BEV future, behind the scenes, some, perhaps more than expected, are making plans to pivot away to some extent.

With just ten years before governments worldwide want to eliminate the production of ICE engines for passenger vehicles, the magnitude of that shift is beginning to take hold. The infrastructure is not ready. Many question if there are enough raw materials and resources to produce 30-35 million units annually for the EU and North America, let alone the rest of the world. Off the record, two of the panelists I spoke with also commented that the narrow focus of batteries only for zero emissions coming from governments is short-sighted.

Governments may be dictating where production is headed; however, if consumers are not willing to buy in, there is a real potential for the output of vehicles to plummet. OEMs need the volume to drive down costs. Only a very few are actually making money off selling BEVs at the moment. Even Tesla still makes a significant amount of their profit from selling credits, and competition is quickly eroding what profit margins they do have with their vehicles.

As the late Hunter S. Thompson once wrote, “Buy the ticket, take the ride.” The takeaway was this, stay agile and be ready to pivot because nothing is certain over the next 5-7 years in automotive. This in the face of hundreds of billions of dollars still needing to be spent on assembly lines, production, and R&D. Stay tuned as this ride is about to get very interesting.