Battery Technology Advances Are Driving EV Industry Optimism

Colin McKerracher:

In consumer adoption theory, there is this kind of gap that often forms after the innovators and the early adopters, before you get into the early mass market. And that's maybe where we are on EV adoption right now. You've seen some of the early buyers go, and now the others are waiting a little bit to see what comes. Because one of the things that gives you longer-term optimism is just that, look, the technology continues to get better. We're nowhere near at the end of how good a battery or an EV can be.

Michael Torrance:

Welcome to sustainability leaders. I'm Michael Torrance, chief Sustainability Officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Angela Adduci:

Hi, I'm Angela Adduci, senior advisor to the BMO Climate Institute, and today I'm joined by Colin McKerracher, head of Advanced Transport and Storage at Bloomberg NEF. Colin, this is your second time on the Sustainability Leaders Podcast. Thank you for joining us.

Colin McKerracher:

Thanks. It's great to be here, Angela.

Angela Adduci:

So I'll dive right in. A recent Bloomberg article written by you had the headline, Reports of an Electric Vehicle Slowdown have been Greatly Exaggerated. This is somewhat provocative, and it runs somewhat counter to a lot of the headlines that we've been seeing about EVs in the broader media landscape. So I was hoping that you could explain to our listeners, what did you mean by that? And what was behind those initial slowdown reports in the EV industry?

Colin McKerracher:

Yeah, so over the last few months you've heard more and more automakers, particularly the largest and most established automakers sounding the alarm a bit and saying, "No, the EV demand is slowing." And it's important to sort of look into the data before you take that at face value. And what the data shows is that, globally EV sales rose by over 30% last year. And in markets like the US where some of those voices are kind of the loudest, they grew by 50%. So that's a very healthy growth rate.

There does seem to be a little bit of a slowdown in the last few months, but overall, the EV market is still growing by any industry standard, quite quickly. We estimate there was about 13.8 million plug-in vehicles sold globally last year. That's about 17% of the total vehicle sales in the world. We think this year it's going to be about 17 million, a little under 17 million, so a growth rate of 20%.

So that is a bit lower growth rate overall than the year before, but it's still quite a healthy rate of growth. And actually, if you look right at the end of last year in December and the final quarter of last year, EVs hit 20% of global vehicle sales. So one in five vehicles sold in the world were plug-ins, either battery electrics or plug-in hybrids in Q4 of last year.

It doesn't really look like much of a slowdown. What it looks like much more of is certain automakers doing well and other ones doing less well. So groups like BYD and Tesla, of course posted record sales in last year. And some of the groups that have been struggling more are some of the established ones who have always said, "Oh, when EVs start to take off will make the pivot and we'll be able to do it successfully." They're finding it's harder both to scale up production but also to attract buyers than maybe they thought it was going to be originally.

So I would say what we're seeing right now anyway is a bit more of a winnowing of who's got good competitive price models and highly capable models on the market versus those that don't yet. And that's kind of dictating who's still selling well and who's struggling.

Angela Adduci:

So to really dig into what this looks like on the ground, and specifically with a focus on North America, how would you then contrast these rising EV sales volumes against increasing days of supply on dealer lots?

Colin McKerracher:

Yeah, so definitely, as I said, there is this sort of hint of a slowdown, but it's affecting everyone very differently. And I think a lot of the inventory that you're seeing is from some of the groups that have struggled with their EV program. So certainly GM for example, had made very bold pronouncements about how it was going to be selling 400,000 EVs a year by last year. Didn't get anywhere near that, has really struggled with rolling out its new Altium platform, which is the new basis that its future EVs are going to be built on.

They thought they were going to have that in full production for many models last year, and instead it was barely moving, really only a couple of models on it and very, very low volumes. What we've seen is that the companies that have dedicated EV architectures, so when automakers build a new vehicle line, they build an architecture for that that is used across multiple vehicle models. Those are usually very large investments in the order of several billion dollars, and they're usually used for five to 10 years.

And what you saw is a few years ago, some automakers made bigger bets and said, "We're going to develop dedicated BEV battery electric vehicle from the ground up architectures and build multiple models on those." Definitely there is build up on dealer lots for some of the automakers, but not all of them. And it's important to recognize that I don't think all the automakers in the world will make this transition successfully.

And certainly one of the other things we're tracking is that these companies that just make electric vehicles, they've gone from about 1% of the global vehicle market a few years ago to over 7% of global vehicle sales came from pure play EV automakers last year, and that will continue to rise again this year. So again, it's a differentiated picture between all these different players, and I think that's the story that sometimes gets a bit lost. That nuance gets a bit lost in the headlines about an overall slowdown.

Angela Adduci:

So since you brought up GM, let's talk about their recent announcement, that they're introducing more plug-in hybrid vehicles to their product lineup, which suggests that mass market adoption of battery EV's won't be a straight trend line, and that the market in the US for hybrid vehicles is still relatively strong. So what are you seeing here in terms of consumers looking for an alternative to a fully electric vehicle future? What's your perspective on this?

Colin McKerracher:

Yeah, the starting point is that more efficiency is better, and overall the most efficient vehicles are the ones that are fully electric, but the ones that are plug-in hybrids are more efficient than traditional hybrids as long as they're charged. And the hybrids are more efficient than traditional non-hybridized internal combustion engines, and more efficiency is better. So we should be happy to see more levels of electrification being taken up.

At the same time, if you want to get to really eliminating emissions from the transport sector, you do need to get to these fully electric or zero emissions options. And of course, you need to decarbonize the power system at the same time. I think what you're seeing, particularly in the US, is that the US and Canada have the largest vehicles in the world. You have a very high mix of trucks, pickup trucks and large SUVs.

Over 70% of cars sold in North America are pickup trucks or SUVs. And those vehicles are heavy, really heavy, really large vehicles are harder to electrify cost effectively because you have to have a bigger battery. And even though battery prices are coming down, you still have a lot of just raw bill of material costs going into those vehicles. For those large batteries, you can see some of these pickup trucks with 150 kilowatt hour or 200 kilowatt hour battery packs.

It's going to be a long time before a vehicle with a 200 kilowatt hour battery pack is priced the same way with the same margin for the automaker as a internal combustion engine vehicle in a comparable class. So what that's leading is that preference for larger vehicles that has been building over three decades or more, and is to be honest, supported by the way the corporate average fuel economy regulations in the US are structured, which has differentiated targets for cars and sedans versus what it has for trucks and SUVs.

What that means is that yeah, there's a bit of alternatives needed that can electrify those really heavy vehicles cost effectively. And that's why in my view, you're starting to see rising interest again in plug-in hybrids. I will say the plug-in hybrid story particularly is not just a US one. We're also seeing rising plug-in hybrid sales in China. And a big part of that is that in the big cities where you have a lot of charging infrastructure built out, battery electrics are taking off and winning. But in some of the smaller cities or areas further out where there isn't as much charging infrastructure, plug-in hybrids are quite popular.

The big outstanding question, the big unknown with plug-in hybrids is still how much are they charged? So groups like Toyota are very big champions of plug-in hybrid and general hybrid technology, but they don't generally release a lot of information about how much those plug-in hybrids that they've sold and that are on the road are being charged. And when you look at some of the data, you find that in a lot of cases where it has been studied, they're not being charged as much as certainly regulators would hope they are.

Angela Adduci:

I'm glad you bring up China here, Colin. And I'd like to focus on this for a moment because it is the world's largest EV market, and it's also home to the world's largest EV manufacturer. So could you take a minute and explain for our listeners, what impact will Chinese EV producers have on North America when it comes to EV sales in 2024? So the very near term, but also looking out into the future.

Colin McKerracher:

So China is not only the largest EV market in the world, it's the largest vehicle market in the world, and we think there'll be more vehicles sold in China this year than North America and Europe combined. The US already has a fairly high tariff on Chinese imported EVs, and that's a big reason why you don't see many Chinese EVs on the road in the US, or really any. That will continue to be the case. I don't think in 2024 anything on that changes.

I think the risk is that the North American automakers are protected with various policies that they successfully lobby for to keep the Chinese automakers out. And in doing so, don't remain competitive. One thing we are watching quite closely is what happens with Mexico. So we've seen some of the Chinese manufacturers saying, "Well, actually..." And part suppliers saying, "What we're going to try and do is set up in northern Mexico, and supply parts or even supply cars across the border to the US in that way under the free trade rules that are in place." So that's kind of one piece we're watching. I don't really know how the US will respond to that, but that's certainly an alternative route in which Chinese vehicles or Chinese batteries could make their way into the US market.

Angela Adduci:

Yeah, you bring up a really interesting point here, which is the tension between EV adoption policy goals and other goals that the US or other countries may have around things like domestic manufacturing and local job creation. So I'm hoping you can expand a little bit about the dynamic between a reduction in cost of EVs and other components of the EV supply chain, and other goals, like the drive to manufacture locally?

Colin McKerracher:

Yeah, this is a really important question. If you go back a few years, most of the goals around the energy transition or clean transport and these sorts of things were about getting things deployed as fast as possible. And then increasingly, as this stuff has scaled, there's been more and more concerns with not only getting it deployed as fast as possible and cutting costs as fast as possible, but trying to get more and more of it made locally to build a base for jobs.

And there are some sectors where I would say other countries have sort of seeded that maybe it's okay to just buy a lot of this from China. Solar panel manufacturing, for example, is very dominated by China. China has a huge cost advantage, much cheaper cost of production than any other countries, and most of the panels are made there. And most countries seem to be generally okay with buying the solar panels from there. Automakers and the vehicle supply chain is quite different because a lot of countries have an incumbent local vehicle manufacturing business with a lot of people employed through that and a lot of high quality jobs there.

So that's why you're starting to see more and more pushback saying, "No, we don't just want it as cheap as possible, we want it made locally." And this is a real tension because in the near term, this will slow things down. Saying, "Look, we don't want it to just be vehicles made in China or we don't want just batteries made in China. We want it all made locally." I think in the near term, it's hard for me to argue that won't slow things down.

I think over the next few years what you'll start to find is that wow, China is really, really good at manufacturing and it's a skill that has been, I won't say lost, but certainly diminished in other western countries. And that's when the real gut check will come as to whether countries really want to fully compete on all of that or whether there is some acceptance that maybe some of these components are okay purchased from China, where costs are going to be much lower for quite some time, I think.

Angela Adduci:

So you bring up this near term slowdown, and there's a few data observations that I'd love to point out here, one of which is our annual BMO Climate Institute business leaders survey, which found that there was a pretty sharp decline in the share of US business decision makers whose company is encouraging a shift to the use of electric vehicles. So this went down from 71% in 2022 to 60% in 2023. The other observation that I'd like to bring up is, a longer term perspective, which is Bloomberg NES figures showing that EV annual sales growth has been slowing since 2021. So when we take these observations together, what do you think this downtrend reflects?

Colin McKerracher:

Yeah, I think it's interesting, the survey results, I hadn't seen that, so I'll have to dig into that. I do think there's some of this that is around a little bit of consumer spending trends and higher interest rates. So EVs still are more expensive than average combustion cars in North America, I should say. In China, the gap is much smaller, and they're actually priced pretty similarly. But in North America, there's still significantly more expensive, and when you have higher interest rates, that does start to curtail spending at the high end because the financing costs of these things.

So I think that's certainly part of what's at play, and we just haven't seen the sort of really cheap mass market cars that would go after those high volume segments in North America. And as I mentioned earlier, there's this question about, what's the best way to electrify a really big pickup truck? And the cost associated with that can be challenging because of the weight and power requirements.

And then the last thing I would say that is probably part of it too is, in consumer adoption theory, there is this kind of gap that often forms after the innovators and the early adopters before you get into the early mass market. And that's maybe where we are on EV adoption right now. You've seen some of the early buyers go, and now there's sort of the others are waiting a little bit to see what comes.

Because one of the things that gives you longer-term optimism is just that, look, the technology continues to get better. We're nowhere near at the end of how good a battery or an EV can be. And so that's both a good thing in the long term, but in the near term, there may be some consumers who are looking at, look, I've seen how much this has gotten better in the last two years. I'm going to wait another two years and see how much better it is again, in terms of range, in terms of price.

Angela Adduci:

That's really interesting. And I know that another kind of consumer reason to put off adoption or purchase of a zero emission vehicle might be the amount of infrastructure that we require to support getting EVs on the road. So this means everything from a battery factory to public charging stations to private charging stations, and there's really this need for infrastructure investment to keep up in order to encourage this demand, encourage the adoption. So if we stick to North America here, is the US more competitive on this than Canada? Do you think Canada is ahead on infrastructure? Where do you think the North American landscape is moving when it comes to infrastructure investment and what's really required on a macro level to encourage EV adoption and really reach these EV goals?

Colin McKerracher:

Yeah, this is an important point, and I should have mentioned that previously, is that where North America is different than the other big car markets of Europe and China is that the public charging infrastructure is generally much worse. So if you look at public ultra-fast chargers, just as an example, in North America, Tesla is far and away the largest. It's larger than the next five combined by several orders of magnitude.

In Europe, the next five combined are as big as the Tesla supercharger network. But then there's this long tail of other smaller charging network operators that combined together, many, many times larger than the Tesla supercharger network. So I think that is holding the North American market back. That's starting to change though. So the NEVI grants in the US are starting to be dispersed, and you're starting to see more and more charging infrastructure built as a result of that. I think you'll start to see that go up quite steadily.

One of the interesting things we were doing recently was analyzing data on how much people charge in public. Because you often hear the statement of, oh, 95% of charging is at home. If you look at the leading markets, that's not really the case. So if you look at Norway or the Netherlands, or you just look at Tesla owners, it's actually more like about 75 or somewhere between 70 and 75% of charging that's done at home and the rest is using the public network. Now in North America that could be a bit different because more people have detached houses where they can plug in, but it's not a bad rule of thumb. And with that in mind, then that emphasizes the case even more that you really do need a robust public charging infrastructure network.

I think you need government support to get it there. Once it gets to a certain point and a certain level of EV adoption, I don't think you need government support indefinitely. One of the things we've seen in Norway where EV penetration is the highest is that once the EV penetration reaches a certain level, then it's quite attractive for the private sector to build public charging infrastructure. They get enough utilization to make it pay for itself, and you start to see the private networks take over. And a similar thing has happened in China as well.

So the key is to, how much do you need to push in the early days to get to that level? And I think what you'll probably start to see in the US is that that NEVI funding anyway is going to push a lot more chargers out there, and will hopefully help both bring down costs of installing new chargers for the operators and installers that are out there. And then also help get the utilization up by having people trust the network more. I think the more important thing in North America in particular is that the chargers that are there often are down a lot of the time, they're often broken, and that is much more damaging to someone's experience of owning an EV than a charger just not being there at all.

Angela Adduci:

So around this idea of public money and policy driving this forward, we've seen some pretty significant legislation in the past few years intended to drive decarbonization of transportation. We saw the IIJA in 2021, we saw the inflation reduction Act in 2022. And I know the IRA in particular had this goal of crowding in private finance on top of public finance to kind of trigger a broader private sector investment across the EV value chain and ensure that funds weren't just being deployed from the government, they're coming from throughout the entire economy. So do you think that the IRA has achieved this crowding in effect? And what's your perspective on the pretty significant legislation that we've seen in the past few years?

Colin McKerracher:

Yeah, I mean, I think what we can very reliably say is it is driving a huge investment boom, the Inflation reduction Act. So we've tracked $132 billion of new investment in clean energy supply chains. Most of that in batteries, over 100 billion of that going to batteries in the US since the passage of the inflation reduction Act. And not all of that is broken ground yet, but a lot of it is breaking ground, and so that already shows up in the data. The private is flowing in.

There's some tension a bit with the US's allies where money that might've gone invested in other parts of the world is now being invested there instead. And certainly we've seen governments respond with big incentive packages, including in Canada or Germany, to try and ensure that manufacturing flows there as well. But certainly you are seeing a lot of private sector investment as a result of those programs. So I think by that metric it is working. You are getting a manufacturing boom and a bit of a manufacturing renaissance as a result of those policy moves. There is still an open question about, one, whether it's as successful as we want it to be. Again, we're in this sort of excitement and deployment phase, but then you have to get into the efficiency and cost competitive manufacturing phase, which is still a bit uncertain for some of these technologies.

Angela Adduci:

So my last question here is a big zoom out, and it's that you've talked about the rapid pace of growth in the EV market and the pace of adoption, but we haven't yet seen emissions from global road transportation decline. So I'm curious to hear about, when do you think that's going to happen, and what are some opportunities or areas where the transition to clean transit might accelerate moving forward?

Colin McKerracher:

Yeah, so emissions are a function of the stock of vehicles in the world, and most of what we've been talking about is a function of the flows. So that's new sales, so new sales, vehicle sales, roughly 80 million a year, sometimes a little more than that, sometimes a little less. The total stock of vehicles in the world, 1.3 billion passenger vehicles.

So by the end of this year, we think there'll be about 60 million electric vehicles on the road. That's about 4% of the total. So that's essentially why you haven't seen a peak in emissions yet, and is essentially just because it takes a very long time to turn over the stock of vehicles, even if the flow of new vehicle sales is going electric, I would say reasonably quickly. As I said, we crossed 20% of sales being electric in Q4 of last year. So the question then becomes when does that peak? When does the stock of them peak? When does the fleet of vehicles in the world peak?

I think we're getting close. So we kind of estimate that the next few years, the global fleet of internal combustion engine passenger vehicles is relatively flat, and then it starts to decline around 2026, 2027, and that you get a peak in road transport energy or road transport fuel use, so gasoline and diesel around 2027, which also leads to a peak in road transport emissions as well, because that's where the emissions are coming from. If you look at sales again, sales of internal combustion engine vehicles peaked in 2017, they're now down 23% from that peak.

I think the one area to really watch there is China. So not just to say, as analysts at Bloomberg NEF, we think that, but Sinopec, which is the largest fuel distributor in China, says that it expects gasoline demand in the country peaked in 2023, and that it is in long-term decline from here. I think you might be surprised there. I think you probably get a peak in road transport emissions this decade, this side of 2030. In BNF's outlook, it happens around 2027.

Angela Adduci:

That's really helpful analysis. So before we wrap up, is there anything else that you would like to add to this conversation?

Colin McKerracher:

I would just say that if we went back 10 years and had this conversation, I think we would be very surprised to see now where things had got to. Again, I keep bringing up this statistic, but one in five cars sold in the final quarter last year in the world were electric. Sometimes I see this as, oh, it's really slow. This is going slowly. I think it's further and faster than anyone would've thought 10 years ago.

So the question is, what do we think happens in the next 10? I think the biggest thing to watch is still what's happening on the technology front, and we're seeing still really rapid advances in batteries, both in terms of cost and in terms of technology, and not just within lithium ions. So we're seeing the first vehicles with sodium ion batteries going into production. We're seeing discussions from CATL, the world's largest battery maker, of being able to produce cells later this year at around $55 a kilowatt hour. I think the biggest thing that still gives me optimism is that the technology continues to improve and we're nowhere near at the end of how good a battery or how good an electric vehicle can get.

Angela Adduci:

I totally agree. Colin, this has been really great, and I really appreciate you coming on today.

Colin McKerracher:

Thanks, Angela. It's been really nice to talk to you.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button if you want to get notified when new episodes are published. We value your input, so please leave a rating, review and any feedback that you might have or visit us at bmo.com/sustainabilityleaders. Our show and resources are produced with support from BMO's Marketing Team and Puddle Creative. Until next time, thanks for listening and have a great week.

Speaker 5:

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