Electric vehicle adoption surges during pandemic

The market share for Electric Vehicle (EV) in the UK is rising fast with 1.3 million electric vehicles in Britain alone, according to government data from the start of this year^[i]. Meanwhile EV penetration in Europe has seen a five-fold increase over the past two years, surging from 4% to 20%.

This acceleration has largely been driven by regulations and incentives. The sale of new cars solely reliant on petrol and diesel engines will be banned in the UK from 2030, and hybrids that combine engine and battery will be stopped after 2035. European governments have introduced larger purchasing subsidies on EVs as part of a broader stimulus package to rescue the economy from the pandemic. EVs are also on the threshold of profitability due to battery costs falling and further innovation expected to offset higher raw materials costs.

The buyer base is also broadening as prices come down and the charging infrastructure is improving. From April 2020 to March 2021, UK drivers registered twice as many Tesla’s as any other electric vehicle, according to the government’s vehicle licensing statistics. There are now more than 42,000 charge point connectors across the UK in over 15,500 locations - that's more public places to charge than petrol stations^[ii].^[1] However, the key to cracking mass market adoption of EV is for the industry to create an EV that is as affordable and convenient to own and operate as traditional internal combustion engine (ICE) vehicles.

Despite the considerable progress, challenges persist. There are concerns that the recent shortage in semiconductors may prove to be the first in a series of bottlenecks as EV makers ramp up production. Automakers have responded to the chip shortage by trying to vertically integrate or secure supply via partnerships. Management of the supply chain and ensuring access to the resources needed will be crucial for car companies in the coming years.

As an increasing number of people own EVs, the demand for EV charging points is also likely to outstrip supply, especially in high population density areas. We need to consider the impact of that additional demand on the electrical supply and the grant capacity. As such, governments need to work closely with utilities and auto manufacturers to create a charging network that is fit for purpose. Utilities need to develop a strategic plan to allow and enable greater electricity supply and distribution, as well as the ability for cars to be charged in different places – for example, we need slower charging points in or near home and work, and faster charging points on the road network.

For traditional auto companies, the transition presents unique tensions. ICEs are extremely complex, but in contrast EVs are mechanically simple with, essentially, just a battery, electric motor, inverter and a one-speed transmission. This means the fixed cost for producing an EV is much lower than an ICE, making it easier to scale. However, EVs do require investment in software and electronic architecture. Traditional auto manufacturers are having to spend a lot of money on building their software expertise. While they have the advantage of the profits and cash flows that are generated from their larger, established ICE business, as well as a long history of automobile construction, over time that may become more of a disadvantage due to the complexity of having to invest in both ICEs and EVs.

Opportunities exist particularly for tech companies to partner with manufacturers where quality software, such as “infotainment” – the combination of entertainment choices and a connected drive experience -  will become a differentiating factor. EVs that can offer a really good experience in a connected vehicle could be very strong monetisation opportunities for manufacturers. As such, there is an increased likelihood of companies, like Apple, Alphabet and Sony entering the EV market as they look to provide the software that underpins EVs. However, given the number of car companies, both ICE and EV, this is an industry structure that is both suboptimal and unlikely to change. Therefore, these tech companies, many of which are used to dominating the industry in which they operate, may also find the auto industry less appealing than their core markets.

With profitability in sight, investors can expect to see a broad range of investment opportunities across many industries from this transformational shift. Despite this momentum, solving the challenges on the road to mass market adoption remain the industry’s key challenge to meet.