By Marc Amblard, Founder & Managing Director, Orsay Consulting
The spread of coronavirus has caused massive havoc around the world, most importantly concerning the health and well-being of the population. We will collectively come out of this crisis at some point. However, many aspects of our lives and economies will look very different post-crisis than they did just a few weeks ago.
Whereas the fear of physical contact — which enables the transmission of the disease — may make many less inclined to shared mobility, several factors will likely accelerate the electrification of mobility, as least in some regions. These factors include better awareness of air quality and targeted incentives to the auto industry. However they may be counterbalanced by cheaper gas in the short- to medium-term.
Global plug-in electric vehicle (EV) sales have increased by about 10% in 2019 vs. 2018 to reach 2.2M units, or 2.9% of global light vehicle sales. Whereas EV volumes were mostly flat in a shrinking Chinese market (reaching 5.2% market share), they increased by 38% in Europe (3.1% market share), but dropped by 9% in the USA (1.9% share). What impact will the current crisis have on the evolution of EV sales?
Much improved air quality will help electrification
Forced confinement has drastically reduced the amount of passenger kilometers travelled as well as overall industrial activity. This reduced activity has resulted in dramatically cleaner air, particularly in the most polluted regions.
For instance, smog has by and large disappeared in many urban areas in China. Similarly, confinement brought NO2 levels down by 33% in Los Angeles and even 70% in Delhi. In Europe, Paris saw a 60% drop in NO2 emissions and a 20-30% improvement in air quality to reach a level never seen in the past 40 years.
People are breathing better and can enjoy clearer skies — for now. They must also be aware that these improvements are highly correlated with the absence of fuel burning vehicles: mobility must become massively electric for this exceptional improvement to be sustained. For this to happen, responsible regulators must accelerate the deployment of EVs under increasing pressure from their constituents.
A recent study by that Harvard University highlighted the correlation between air pollution and COVID-19 mortality. It concludes that “a small increase in long-term exposure to PM2.5 leads to a large increase in COVID-19 death rate.” Mobility is therefore responsible for about a third of particulate matter (PM). One more piece of evidence that burning fossil fuel is unhealthy!
Incentives should result in cleaner fleets
The first objective — beyond people’s well-being — for any initiative will be to restart the economy, thereby getting vehicle sales volumes back to pre-crisis levels as soon as possible. Yet, this can be done with some discernment as to what vehicles may be propped up. Responses to this critical issue will vary by region, based on past experience and general policy.
Europe: As in all regions, the automotive industry is experiencing extreme economic stress, with light vehicles sales dropping 53% year-on-year in March. This is compounded with the introduction of drastically lower CO2 limits, at 95g per km vs. 120g previously. OEMs are now liable for a 95€ penalty per vehicle sold for each gram in excess of 95 g/km of corporate average CO2. The crisis justifies that penalties be temporarily suspended, or better yet, that payments be differed so as to reward OEMs that are on track to meet the regulation.
China: Light vehicle sales have been dropping continuously for close to two years. In Q1 2020, they dropped by 42% y-o-y when EV sales decreased by 56%. In this grim period, the central government recently extended its EV subsidies by another two years. However, the significant reduction in subsidies introduced in June 2019 has halted EVs’ massive growth, which the new extension will not suffice to re-establish.
USA: Light vehicle sales are down 13% y-o-y in Q1. Whereas Europe and China are actively pursuing a reduction in green house gas (GHG) emissions, the administration just announced a drastic softening of CAFE requirement — 1.5% increase per year vs. the 5% implemented by the Obama administration. This very bad decision gives no hope that the federal government will favor clean vehicles in any incentive program. Given lower their lower unit margins, EVs are also less likely to be heavily promoted by OEMs in the near term as profitability will be critical.
Regardless of the region, one cannot lose sight of the long term goal to drastically reduce GHG emissions. Nor should the EV momentum be broken, as the industry around the globe has invested tens of billions in new EVs, underlaying technologies and the charging infrastructure.
Therefore, any incentive to restart the automotive industry should focus foremost on clean vehicles. Beyond the sheer environmental benefit, this would help OEMs and suppliers recoup their investment and entice them to do more. In addition, “cash for clunker” would remove dirty vehicles, thus contributing to better air quality, especially if replaced by clean ones — European countries and the USA have deployed such programs in the past.
As a result, I anticipate new vehicle incentives favoring EV in China and Europe, and “cash for clunker” programs being deployed in the USA and Europe (the Chinese fleet is still too young).
Lower oil prices reduce EVs’ operating cost benefits
Given that one of the key benefits of driving electric vehicles is their lower operating cost, a lower gas price translates in a lesser cost advantage vs. driving a fuel-burning vehicle. However, the significantly maintenance cost advantage of EVs remains.
The price of WTI Crude dropped from roughly $60 a barrel in 2019 to about $22 in the past month (Brent dropped from $65 to about $30). Given the low level of taxation in the USA, this significant drop has resulted in a drastic decrease in retail price. Regular gas costs $1.85 per gallon (or $0.49 per liter) on average across the USA vs. $2.60 in 2019, which represents a drop by almost 30%.
In Europe, changes in crude oil price have a much lower impact on gasoline or diesel fuel price, due to higher fixed taxes. In France for instance, crude oil represents only a quarter of the retail price, which has dropped by about 15% vs. the 2019 average to $1.50 per liter. Similarly, the price of gas in China dropped by about 20% during the same period, to about $0.85 per liter.
My personal experience driving a battery EV in Silicon Valley is that the gas price would have to drop to by about $0.90 per gallon ($0.25 per liter) to reach a breakeven point on energy cost only. However, California, which represents about half of EV sales in the USA, has much higher than average gas prices, currently at $3.00 per gallon for a mid-grade gas.
As a result, I expect Europe will likely see a marginal impact of lower crude oil price on EV sales. Efforts by OEMs to lower their corporate CO2 emissions (see above) combined with an increasingly attractive product offering will by far outweigh customers’ prime sentiments towards pure energy cost.
At the other end of the spectrum, most of the US states will likely see a further increase of the sales of gas guzzling vehicles (pickup trucks, SUV) at the expense of smaller or electric vehicles. EVs will continue to have a tough time gaining traction, except in California — which may further its EV leadership in the country — and a few other green-leaning states where energy savings are a “nice to have” rather than a “must have” in the decision to purchase an EV.
In the end, the coronavirus pandemic will likely have a small net positive impact on EV sales in Europe, driven by the increased awareness of their impact on air quality, as well as possible EV-focused incentives. In China, the EV market share will likely remain at its pre-crisis level, unless the government decides to reverse their June 2019 decision to decrease in EV incentives. In the USA, I expect the crisis to have an overall negative impact — at least in the short- to medium-term — on EV sales, in part compensated by a positive impact on California and highly polluted metropolitan areas.
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About the author: Marc Amblard is the Founder & Managing Director of Orsay Consulting. Based in Silicon Valley and focused on the mobility transformation, Orsay Consulting provides startup and tech scouting as well as advisory services to corporates, and advises startups on product-market fit, go-to-market strategy, business development and partnerships. You will find more articles on the Mobility Revolution here.