Why EVs will be a common sight on the roads of the future

-- | 16/09/2020

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Lex Hall: The electric vehicle revolution is coming to a highway near you. It's predicted that by the end of the decade one in every five cars sold will be battery powered. With me to discuss that today is Morningstar Equity Analyst and Chairman of Morningstar's Electric Vehicle Committee, Seth Goldstein.

Hi, Seth.

Seth Goldstein: Hi, Lex. How are you?

Hall: I'm very well. Thanks. Now, this prediction about one in five cars sold being battery powered by the end of the decade. What sort of reasons do you think justify that forecast?

Goldstein: So, currently we see two markets for EV consumers. First is your early adopters' market. Those are people who may already have an EV or interest in buying one right now because they're cool or because they want to be environmentally friendly. But these consumers make up a small portion of total auto consumers. These consumers are willing to accept a more expensive vehicle, and if you call that quite frankly has worse function right now. You look at things like EVs currently have a shorter range, much longer recharge time versus refueling your car with gasoline and they have right now a lack of places to charge and many times you can't take a road trip without having to plan where am I going to charge this thing.

However, by 2025 we think all of these costs and functional barriers to EV adoption will be gone, and we think the EV and the ICE will be functionally equivalent. So, as a result, I think starting in 2025 we're going to start to see a much faster uptake of EV adoption, and that's how we're going to grow from EVs being a little over 2 per cent of new auto sales globally today to 20 per cent by 2030.

Hall: OK. We'll talk about a few of those details a little bit more. Let's begin with cost. Now, the Model S Tesla, for example, which is a sort of sedan, which roughly resembles the Toyota Camry, if you like. In Australia, at any rate, it's a bit of a status symbol, and it costs about $85,000 to begin with, which is about US$60,000. Toyota hybrid sedan, by comparison, is about half that. When do you think EVs will be cheap enough for people to take them up as much as they do a model like the Toyota Camry?

Goldstein: So, we look at the cost equation on a total cost-of-ownership basis. So, we're factoring in things like the purchase price. But then also these savings that you would get from charging an EV versus paying for gasoline and the lower maintenance costs that are associated with an EV versus internal combustion engine vehicle. What we see is, we think the purchase price of an EV will come down to where by 2025 EVs will be cheaper on that total cost-of-ownership basis than an ICE. Even though we still think EVs will be more expensive from a purchase price standpoint, the consumer will more than make up the extra costs by the cost savings of operating the vehicle.

Where we see costs falling for an EV? First, batteries will become much, much cheaper over the next several years as we see more and more battery gigafactories start to come online and then you're going to see lower battery costs just due to the massive manufacturing scale and operating efficiencies that are going to happen. Second, as we see automakers start to invest more into manufacturing EVs, you're going to see EV manufacturing costs fall just from greater scale there as well. So, those two factors will contribute to the purchase price of an EV falling to where—again, it's still going to be more expensive than an ICE. However, when you factor in the cost savings from charging versus gasoline and the cost savings from lower maintenance, the EV will be cheaper on a total cost-of-ownership basis.

Hall: And what about subsidies, Seth? Will subsidy still play a role in encouraging people to buy electric vehicles?

Goldstein: I don't think subsidies will be needed past the next several years. You look right now, the cost difference is so much that subsidies are needed in many cases to, sort of, nudge the consumer towards purchasing an EV. But once we see the batteries continue to fall and the EVs get cheaper, I think you could get more consumers there without a subsidy once the purchase price can fall on its own.

Hall: And finally, Seth, I have a couple of friends who have Teslas. And one of the things that they're always telling me when I have them on the phone or whatever is they say ‘I'm at the charging station charging the Tesla’, i.e., it's a bit more effort to go to a charging station. If I'm not wrong, you have to plan it. It's not like when you're driving about, and you see fuel gauge and you see that you're running on empty and a fuel station appears. When do you think this charging infrastructure will be as ubiquitous as the petrol station or gas station as you guys call it?

Goldstein: So, I think charging infrastructure will be the regional wild card that will either help or hurt EV adoption depending on how much charging infrastructure is built out in a given region. When you look at places like China and Europe that are investing heavily in building out charging infrastructure and charging networks, I think you could see consumers no longer have what I'll term ‘road-trip fears’ where they're worrying about having to find a place to charge, they're worrying about having to plan a road trip carefully so that they always can keep the EV charger always be close enough so that they don't get stuck in the middle of nowhere and have to be towed to a charging station that's far away.

But in places where you don't see the charging infrastructure built, I think some of that road trip anxiety will still occur and some consumers will still not want to purchase an EV. However, in many places, certainly China and Europe are building out a lot of charging infrastructure. And once it's built out, I think the consumers will then want to buy an EV because they will no longer fear taking a road trip, and they'll consider it alongside an ICE for their next purchase.

Hall: All right. Stay tuned. I'm going to talk to Seth again because this is obviously a stock story. So, we're going to drill down into a few stocks that are worth looking at, which cover the entire supply chain from battery production to car parts, and indeed car manufacturers.

So, Seth, thanks for your time. We'll catch up in another video shortly.

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