Electrifying cars: How three industries will evolve

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Source McKinsey Quarterly 2009-3

Upon entering the mainstream-In e few years or a couple of decades-electrified cars we transform the auto and utilities sectors and create a new battery Industry. What will It take to win in a battery-powered age?

electric cars 300x530It’s a safe bet that consumers will eventually swap their gas-powered cars and trucks for rechargeable models. Electrified transport, in some form, would seem to be In our future. But how long will investors have to wait for the bet to pay off? Years? Decades?
Bears would bet on decades. For the next ten or so years, the purchase price of an electrified vehicle will probably exceed the price of an average gas-fueled family car by several thousand dollars. The differ¬ence is due largely to the cost of designing vehicles that can drive for extended distances on battery power and to the cost of the battery itself. What’s more, the infrastructure for charging the batteries of a large number of electrified vehicles isn’t in place, nor is the industry tooled to produce them on a mass scale. In any case, consumers a rent exactly clamoring for battery-powered sedans.
Bulls are betting on intervention by government. They think that concern over energy security, fossil fuel emissions, and long-term industrial conpetitiveness will prompt governments to seek a partial solution by creating incentives-some combination of subsidies, taxes, and vestments-to migrate the market to battery-powered vehicles. In fact; governments across many regions are starting to act in this way. The bulls also note that electrified vehicles can address certain niches whose economics could be favorable more quickly, such as delivery and taxi fleets in Urge cities or elements of military fleets. In some countries such as Israel, electrified vehicles already make economic sense because buyers get substancial tax breaks from government. The stakes are high for companies in these industries. In the near term, executives should determine how to win revenues and contain costs if the governments of China and the United States, for example, live up to their promises to stimulate consumer purchases of electrified vehides. Planning should also begin on strategics and on ways to build capabilities if early adoption creates a sustainable market.
Running on electrons
The economics of electrified vehicles start with the batteries, whose cost has been declining by 6 to 8 percent annually. Many analysts predict that it will continue to fall over the next ten years as produc¬tion volumes rise. Battery packs now cost about $700 to $1,500 per kilowatt hour, but that could drop to as little as $420 per kilowatt hour by 2015 under an aggressive cost reduction scenario. Even then, the upfront purchase price of electrified cars would be quite high. We estimate that by 2015, a plug-in hybrid-electric vehicle with a battery range of 40 miles (before the need for a recharge) would initially cost $11,800 more than a standard car with a gas-fueled internal-combustion engine. A battery-powered electrified vehicle with a range of 100 miles would initially cost $24,100 more.

Subsidies could help bridge the difference. China announced that it will cover $8,800 of the cost of each electrified vehicle purchased by more than a dozen of its large-city governments and taxi fleets. Business innovation could address costs too. In the solar-technology market, for instance, I SunEdison owns, finances, installs, operates, and maintains solar panels for customer, willing to adopt the technology. The company then charges these consumers a predictable rate lower than the one they paid for traditional electric power but higher than the actual cost of generation. That allows the company to recoup its capital outlay and make a profit. Innovators are considering similar models to cover the battery’s upfront cost and recoup the subsidy by charging for services.

To sway buyers, electrified vehicles—hybrids, plug-in electric hybrids, or all-electric cars must be cheaper to operate than gas-fueled ones. The difference between the total lifetime costs of a car with an internal-combustion engine and an electrified car will depend for some time on the difference between the price of gasoline at the pump and the cost of the battery and of recharging it (for those who own the battery) or the cost of leasing battery and of recharging services. Oil prices have fluctuated wildly over the past two years, and electricity prices vary throughout the world. In Europe, electrified cars (for example, plug-in hybrid-electi vehicles with a 60-kilometer range) could have lower total running costs, assuming an oil price of $60 a barrel and current electric rates In the United States, electrified cars will be less expensive on a total-cost-of-ownership basis only if the price of gasoline exceeds $4 a gallon and electric batteries can go 40 miles before recharge or goverments gives manuctures incentives that subsidize the cost of production.

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