Electric Cars: An Unavoidable Opportunity – 12/29/16

In a decade, give or take a few years, electric cars will likely outsell gas guzzlers… at least that is the impression that Bloomberg and Wall Street Journal are giving off.

Precisely when electric vehicles will leave their niche as a luxury item for the environmentally conscious and become the mainstream mode of transit depends on relative cost. Analysts are agreeing that the future will be electric simply because it will be the cheaper option.

On the price front, electric vehicles have an advantage thanks to the plummeting cost of batteries. Since electric motors are simpler and cheaper to produce than engines, batteries become the main price point setting component of electric cars so declining battery costs mean a more affordable electric car. And, unlike engines, batteries have plenty of room for cost reductions. Mercedes-maker Daimler predicts that production costs for engines versus batteries could reach parity in 2025.

Of course, given subsidies, consumer tastes, and lower maintenance costs, electric car makers will see rising sales ahead of that point. Between tightening environmental standards making internal combustion engines more expensive in Europe and aggressive electric vehicle subsidies in major markets like China, electric cars have built-in advantage in most places.

The inevitable switch to electric cars presents both a threat and an opportunity for car makers.

According to analysis from Morgan Stanley, profits from manufacturing electric cars are expected to stay relatively low for a long period.

Those are the years of costly investment in a technology that is much easier for new competitors to replicate. The lower barriers for entry into electric- versus engine-car manufacturing will mean lower profits for the long run as well. But, the bigger threat comes from the possibility of missing out on the transition and fading into obscurity.

The electric future is already closing in as Tesla has succeeded in exposing existing consumer demand for electric cars, spurring heavy investment from competitors. General Motors is planning to releasing its all-electric Chevrolet Bolt at an after-tax price of roughly $30,000 i.e. less than the average new-car sale price in America. Tesla’s Model 3 is expected late next year at a slightly lower price. VW, Daimler, BMW, and Toyota have all unveiled new electric-centric strategies this year.

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