Commentaries from founder Kenan Sahin

May 10, 2017

Coming Mass Arrival of Electric Vehicles and Consequences

I believe the case for electric vehicles (EVs) is very strong, and in less than a decade they will arrive in large numbers, providing great benefits and opportunities but also triggering large disruptions.

Before its arrival, a disruptive technology often either seems unbelievable or is relegated to a distant future. When it does arrive, not only is it widely accepted, but pundits behave as though they always knew it would be so.

Recent decades are full of jarring examples. In the early 90s, e-commerce was viewed that way.  Then it arrived with a vengeance.  Only two decades later, according to US Department of Commerce reports, e-commerce now accounts for nearly 10% of ALL retail sales and is growing at about 15% annually, as opposed to the 2-3% growth of total retail sales. Amazon alone might account for as much as 50% of e-commerce.

It would have seemed unthinkable in 2000 that Google, a company founded in 1996 and still small in 2000, would become the premier interface to the global recorded knowledge base in just a decade.  It is now used by about 1.2 billion people, constituting about 15% of humanity or about 25% of all adults in the world. And that is just Google.

Facebook was unknown in 2000.  In March 2017, there were 1.9 billion active users. That is approaching half of the world adult population. What is also remarkable is that people who in earlier times were so guarded about personal information, now broadcast it on Facebook or similar social media outlets. Smartphones were barely on the horizon in the 90s.  Now, global annual shipments have reached about 1.5 billion units. On and on it goes for LinkedIn, Uber, Airbnb, etc.

Right now, the prospect of EVs accounting for half of the global production of vehicles by 2030, or even earlier, seems like wild speculation, but the forces to make it so are all in place. Let me elaborate.

Acceptance: Against all early predictions, the world has accepted Tesla, a company founded in 2003 to compete in one of the most established and closed industries.  Its electric vehicle Model S was introduced in 2012 and would soon sell in 30 countries. When in 2016, Tesla opened the gates for preorders of its Model 3 without giving a firm delivery date and requiring a significant deposit, in a matter of months it received orders approaching half a million.

More remarkably, in 2016 Tesla topped the Consumer Report’s customer satisfaction survey.  And now the market cap of Tesla has exceeded that of GM. Unimaginable in 2005, but now the reality.

Cost: There is the misperception that EVs are just too expensive to make, and if they are to survive they will need massive subsidies. While subsidies do exist now and do help with the sales, the cost structure is changing rapidly, and the key to that change is the continuing reduction in lithium-ion battery cost. In an incisive analysis embedded in a report by Bloomberg, the cost switchover year is predicted to be 2022.  In my company, we had come to the same conclusion some years ago. In informal conversations abroad, I had learned that the relevant industrialists in Korea had reached the same conclusion an even longer time ago. Here is the link to the Bloomberg report.

The implications are profound. 2022 is just around the corner. Presumably beyond that, internal combustion engine (ICE)-powered cars might need subsidies to remain competitive!!! Wouldn’t that be an ironic twist?  But more seriously, beyond 2022 there will be no need for subsidies, and given the amazing acceptance of at least the Tesla vehicles, there is every reason to expect the mass arrival of EVs during the next 10 years driven only by cost.

CO2 Emissions: According to the recently released data from the US Energy Information, over the period January 2016 to Sept 2016, domestic CO2 emissions from vehicles for the first time exceeded emissions from the generation of electricity.  Unfortunately, transportation emissions are trending up, whereas electricity generation emissions are trending down.  As the use of substitutes for coal or oil to drive power plants increases, the emissions will decline even further.  However, transportation emissions can decrease only if EVs substitute for ICE-powered cars. Furthermore, while CO2 spewing out of the tailpipes of ICE-powered cars cannot be captured, it can potentially be captured at power plants.  Better yet, when energy source for transportation shifts from oil to electricity coming from the power plants, renewable energy sources could serve as the primary energy source for transportation: a huge boost for wind and solar power which would make them even more available and cheaper.   

Indeed, electrification of the vehicle drive train is the low-hanging fruit for reducing CO2 emissions. Washington is at best neutral and is actually now discouraging this most promising pathway.  

Regrettably, the US is no longer the key actor as the US is no longer the leading vehicle manufacturer and driver of the global vehicle market.  According to statistics compiled by OICA, 2016 global motor vehicle production reached 95 million.  Production by country was China (28 million), Japan (9 Million), Germany (6 million), India (5 million), and South Korea (4 million).  Just these 5 countries totaled 52 million vehicles and accounted for 55% of global vehicle production.  In contrast, 12 million vehicles were manufactured in the US, accounting for only 13% of global production.

Compared to the US, China is still an emerging market: while the US has 80 vehicles per 100 people, China has only 20 vehicles per 100 people and has faster economic growth than the US and a much newer infrastructure to support the auto industry.  Furthermore, China has a substantial new automotive infrastructure yet to be built, providing vital opportunities to make it fully supportive of EVs.

In order to deal with its pollution problem, but probably also to accelerate its emergence as the key player in the globally vast auto industry with EVs leading the charge, China has recently announced that car companies selling into China by 2020 must have 20% of their sales be EVs.  Suddenly Toyota (sales of 10 million vehicles in 2016), VW (10 million vehicles), GM with SAIC in China (10 million) and Hyundai/Kia (8 million) etc. are taking notice and gearing up.

Magnitude by the Numbers: Let’s project to 2030. Vehicle production then will have to accommodate the vast Chinese demand and potentially even bigger demand in India which now has only 5 vehicles per hundred in a population of 1.3 billion. In addition, the production in 2030 will have to provide for the partial replacement of the vehicles on the road which by then will have easily doubled.  With all of these demands, let us assume that annual production is only 50% more than what it is now or roughly 150 million vehicles and let us further assume that half is EVs or 75 million electric vehicles being produced annually.

If the average selling price in today’s dollars is $30,000 per car, that is $1.5 trillion. Battery costs by then might be 20% down from the current 35% or so. That means battery sales of $300 billion. The cathode is the most expensive part of a battery which by then might be also 20% down from a third today making just the cathode market around $60 billion.  These numbers do not include capital sales, ancillary businesses, maintenance and repair and of course the infrastructure sales like charging stations. All told the EV industry by 2030 might be globally approaching $3 trillion in today's dollars. No matter how one looks at it, it is massive. The numbers will still be into trillions of dollars even if one assumes that in 2030 only 25% of production will be EVs.  

With EVs already having strong acceptance and excellent customer satisfaction (at least in the case of Tesla), with EV cost advantage over ICE-powered vehicles coming as soon as 2022, and with China, now the giant in manufacturing and consumption of vehicles, mandating EV policies driven by environmental imperatives, there is no way of stopping the mass arrival of EVs in the near future.

Almost certainly, the disruption in this industry, one of the largest in the world, will be substantial.  Just think of the disruption to gas stations, repair shops, and parts suppliers.  The new opportunities can be gargantuan. Just think of lithium-ion batteries, electric motors, charging equipment, charging stations, new parts and new repair stations, to say the least.

In the US, if the established auto industry and the US Government accepts the mass arrival of EVs, anticipates and prepares for the subsequent large-scale dislocations, and becomes a driver of it, the US economy could be a major beneficiary, and the US auto industry could be even a bigger part of the US economy. On the other hand, resistance and being a laggard could be a much bigger threat than what happened in the 90s when the US auto industry ignored the shift to small cars leaving that to Asia.  

I spent a lifetime in academia where it is routine for a small group of people armed with deep knowledge to make a huge impact and difference.  For instance, my alma mater MIT has only about one thousand faculty members.  Any one department, e.g., Materials Science, might have fifty faculties or even fewer.  Yet such a small group can lead the world in so many ways.

How can academia achieve such feats, even though its “business model” is scorned by many in industry where just one company might have tens of thousands of workers? In another blog, I will address my observations across many decades that included both academia and industry.
With this “audacity”, we at CAMX Power aspire to be an enabling company in the vein of a small academic department and to have an impact far greater than our size would indicate.