McKinsey Electric Vehicle Index: Europe cushions a global plunge in EV sales

This article was written collaboratively by members of McKinsey’s Automotive and Assembly Practice: Thomas Gersdorf, Patrick Hertzke, Patrick Schaufuss, and Stephanie Schenk.

McKinsey’s proprietary Electric Vehicle Index (EVI) focuses on battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). Since we created the EVI, several years ago, it has given organizations in the automotive, mobility, and energy sectors a detailed view of the electric-vehicle (EV) market, while highlighting potential future trends.

The EVI explores two important dimensions of electric mobility:

1. Market demand analyzes the share of EVs in the overall market, as well as factors affecting EV penetration in each country, such as incentives (for instance, subsidies), existing infrastructure, and the range of available EVs.
2. Industry supply explores the share of a country’s OEMs in the production of EVs and EV components, such as e-motors and batteries, looking at both current and projected numbers.

The EVI assesses the key performance indicators in each country and rates them on a scale from 0 to 5 for every dimension. These scores serve as the basis for the final country ranking (exhibit).

How will the global electric-vehicle (EV) market develop over the short to mid term? Many uncertainties persist, so we asked some McKinsey experts about their views on pressing issues.

China’s declining EV sales, resulting from the government’s subsidy cuts, raise concerns about the sustainability of customer demand in the country. How will sales develop, especially considering the COVID-19 crisis, and what is the government’s strategy to achieve its 25 percent sales target for new-energy vehicles (NEVs) by 2025?

Ting Wu (partner, Shenzhen): NEVs are still a top priority for the Chinese government and take center stage in its postcoronavirus stimulus plan. The government recently decided to extend NEV subsidies by two years, to the end of 2022. In addition, RMB 10 billion ($1.4 billion) will be invested to expand the charging network for electric vehicles (EVs) this year. Overall, increased government purchases will probably drive the market. Nevertheless, achieving the 25 percent target by 2025 will be a challenge and probably require additional policy instruments and new business models to spur sufficient consumer demand.

Automakers are relying on EVs to achieve Europe’s upcoming carbon-dioxide emissions limits for 2020 and 2021. Although we have seen strong dynamics across countries, will the industry sell enough EVs to avoid looming penalty payments, and what might be the impact of the COVID-19 crisis?

Patrick Schaufuss (associate partner, Munich): OEMs have invested more than €30 billion in EVs over the past two years to meet Europe’s upcoming carbon-dioxide regulations. OEMs plan to make a spot landing on the targets. Every gram these companies miss costs the industry about €1.5 billion, but overachieving would tighten their 2030 targets.

In the first quarter of 2020, we saw increased momentum on the consumer side for buying EVs, despite the COVID-19 pandemic. Other signs also suggest that the momentum of EVs will be sustained in Europe—for instance, the creation of additional purchase incentives, the timely creation of EV standard operating procedures, and an infrastructure rollout.

Given the recent loosening of the US federal emissions regulations, how will the trajectory of the US market and the EV strategies of traditional automakers evolve over the coming years?

Russel Hensley (partner, Detroit): Vehicle electrification strategies will remain relatively consistent, despite the uncertainty about current regulations and the ensuing debate between federal and state policy makers. While some automakers may have cut or delayed their EV programs, domestic OEMs must continue their efforts to enhance the average fuel economy of their new fleets, given the large share of light trucks, SUVs, and compact utility vehicles.

Many automakers use plug-in hybrid electric vehicles (PHEVs) as a bridge to a fully electric future. How will this technology develop?

Ruth Heuss (senior partner, Berlin): Over the past few years, sales of plug-in hybrid electric vehicles have been growing more slowly than sales of pure battery electric vehicles (BEVs). PHEVs represented less than a third of the global EV market in 2019. While most automakers offer them, the number of available models will remain less than half of the number of BEV models over the coming years. Although a higher driving range is one of the major advantages of PHEVs, the electric range of BEVs has been constantly increasing: it rose by 55 percent from 2017 to 2020 and is now around 400 km. Given typical driving behavior, PHEVs recently started to face regulatory headwinds as their environmental impact raised concerns. In reaction, some countries have reduced or entirely abolished monetary subsidies for PHEVs, further increasing their already higher price point for consumers. In 2019, among the key EV markets, PHEVs dominated EV sales in only three countries: Finland, Iceland, and Sweden. We therefore currently forecast that PHEVs will represent only 5 to 10 percent of the global market by 2030. That could fall even further as emissions regulations are increasingly based on real consumption.

We hear very little about hydrogen–fuel-cell EVs, except for a few models from Japanese and South Korean manufacturers. Will the technology contribute to green mobility in the future, and if so, will it emerge first in the passenger or light commercial-vehicle segment?

Anna Orthofer (associate partner, Vienna): There is actually quite some noise around hydrogen on the commercial-vehicle front. Most large OEMs have teamed up to work on the technology—for example, Daimler and Volvo, Toyota and Traton, and Honda and Isuzu. New players, such as Nikola and Hyzon, are entering the market, and Chinese companies are moving fast. The big suppliers are following by building a comprehensive system offering in fuel cells.

Overall, we see fewer and fewer OEMs that do not think about hydrogen as a necessary part of their powertrain portfolios. In light of carbon-dioxide regulation for trucks (such as the European Union’s “–30 percent by 2030” target), each ton in weight and each kilometer in range will improve total costs of ownership for fuel cells relative to batteries. For long-haul trucks, our models show that fuel-cell electric vehicles can break even with battery electric vehicles within the next five years. They will also achieve lower total costs of ownership than diesel before 2030.

Markets such as China, Sweden, and the United Kingdom have reacted strongly to EV-incentive changes. Yet customer demand—independent of government subsidies—remains a major concern in the industry. Who is currently buying EVs, and what is required to scale up the market?

Timo Möller (partner, Cologne): Early adopters of BEVs appear to constitute a specific segment of consumers, best described as tech-savvy urban people with above-average incomes and a familiarity with online shopping. Beyond first movers, consideration of EVs has significantly increased among consumers over the past few years as they have come to recognize the numerous benefits of EVs. To scale up the market, OEMs should thus systematically try to affirm the consumers’ growing positive attitudes about many aspects of EVs, such as the driving experience and subsidies. OEMs should also disprove consumer fears, such as range anxiety, that do not reflect reality and solve pressing pragmatic problems, such as the availability of charging stations.

Shifting portfolios from internal-combustion engines (ICEs) to EVs is a major challenge for traditional automakers, especially considering profitability. What is the current view of profits for EVs sold today? Will falling costs and rising consumer demand overcome the need for government support, and how can OEMs share the pain?

Patrick Hertzke (partner, London): Shifting the vehicle portfolio from ICE to PHEV/BEV—a change driven by regulation and shifting consumer demand—is now a paramount focus for traditional automakers. Many of them are concerned about profitability. The majority of EV models are still unprofitable, but this is changing. At-scale EV producers will have a clear cost advantage in the near term, while other OEMs are more likely to seek partnerships to co-develop EV platforms or even fully merge. EV growth across transport sectors also remains one of the most critical levers in global efforts to reduce carbon-dioxide emissions and improve urban air quality. EV supply chains will get even greener over time with the expansion of renewables and the recycling and reuse of batteries. COVID-19 and the related economic crisis will raise the stakes further as the world seeks cleaner transport solutions but could require governments to continue their subsidies and penalties as well. They may also need to add other measures, such as green early-scrappage programs, which encourage consumers to swap older cars for EVs.

Inspired by the ambitious EV strategies of automakers, battery-cell suppliers are ramping up their capacities. What are the key trends and challenges for the battery supply chain?

Markus Wilthaner (associate partner, Vienna): The uptake of EVs has supercharged industrialization and expansion in the industry. Battery-cell makers have an outsize growth opportunity in front of them. By revenue, they could become some of the largest automotive suppliers globally. This opportunity comes with huge challenges and trade-offs. They need to ramp up production capacities fast, while remaining disciplined about capital expenditures. Battery-cell makers must also stabilize production processes and achieve very high yields, while constantly pursuing product innovations. Every year, they must reduce costs to deliver on long-term contracts and remain competitive, while simultaneously seeking new business models and opportunities for differentiation. Finally these suppliers must solve challenges related to sustainability by turning the whole battery value chain, from mining to recycling, into a sustainable and responsible industry.

Demand for battery cells is expected to increase at least fourfold over the next five years, and cell chemistry is moving to nickel-rich cathodes. What are the developments and challenges on the battery raw-materials side?

Ken Hoffman (expert, New Jersey): There are three main challenges for the battery raw-materials supply stream. First, will the industry produce the quality of the nickel, lithium, and cobalt necessary? Second, will it produce the extremely specific quality needed? Third, can this production meet the ever more stringent environmental, social, and governance requirements imposed by regulators?

What will enable a truly sustainable form of electric mobility in the future? Where does the industry stand on sourcing raw materials sustainably, green electricity, and battery recycling? Is awareness of these challenges increasing?

Hauke Engel (partner, Frankfurt): The journey to truly sustainable electric mobility has only begun. The industry has made great progress increasing the number of available hybrid and fully electric-vehicle models, and costs keep coming down. Now the industry must work hard to drive down the cost of batteries and to achieve end-to-end sustainability—from truly sustainable raw-materials supplies (such as zero-carbon steel) to circular-economy principles in vehicle design. I’m excited to see OEMs increasingly starting to recognize and embrace these challenges. The scale and complexity of the problems may seem daunting, and solving them will require imagination, determination, and new forms of collaboration. Failure is not an option. We must simultaneously solve the climate challenge and secure the prosperity of our automotive industries and the people they employ.

As recent developments in China and Europe show, government subsidies remain a major driver of electric-vehicle (EV) sales. In 2019, several countries changed these incentive schemes in ways that show how sensitive customers are to price adjustments. For instance, the EV market in China declined by 31 percent in the second half of the year after the government cut subsidies. In the United Kingdom, sales of plug-in hybrid electric vehicles (PHEVs) fell by 15 percent after the government stopped subsidies for hybrids. Government subsidies also play an important role in increasing growth. When Germany reduced the company-car tax in January 2019, it promoted a surge in EV sales later that year. Similarly, the strong 2019 showing of the EV market in the Netherlands occurred partly because consumers wanted to purchase vehicles before the benefit-in-kind tax rate increased in 2020.

As first-quarter 2020 figures show, the EV markets in several European countries could accelerate this year because of recently increased incentives:

• France revised its bonus–malus (reward–penalty) scheme, based on carbon-dioxide emissions. Companies must meet new requirements to receive the environmental bonus for low-emitting vehicles and face a drastic increase in the environmental penalty for high-emitting ones.
• Germany extended tax incentives for electric company cars through the end of 2030. It has also increased purchase-price subsidies for EVs and will continue them until the end of 2021.
• Sweden implemented a bonus–malus system in 2018. A January 2020 amendment for test procedures to determine the carbon-dioxide emissions of vehicles will benefit PHEVs.

While government subsidies obviously have a strong influence on the development of the EV market, future growth may depend largely on the extent to which the COVID-19 pandemic hits EV markets in the short term.