By Patrick Hertzke, Nicolai Müller, Stephanie Schenk, and Ting Wu
China remains firmly in the lead on our Electric Vehicle Index. But other pockets of growing public- and private-sector commitment to these vehicles have emerged. Last year, for the first time, global sales of new electric vehicles (EVs)1passed a million units (Exhibit 1), according to McKinsey’s Electric Vehicle Index (see sidebar, “What is the Electric Vehicle Index?”). Under the current growth trajectory, EV producers could almost quadruple that achievement by 2020, moving 4.5 million units, around 5 percent of the overall global light-vehicle market.
Sidebar
What is the Electric Vehicle Index?
Pure electric vehicles (BEVs) currently make up 66 percent of the global EV market. BEV sales are growing faster than those of plug-in hybrid vehicles (PHEV). However, specific markets have very different powertrain preferences, which are influenced by regulatory actions, customer choice, and the availability of specific models.
China solidifies its leadership position in EV sales
The Chinese market expanded by 72 percent over the previous year in 2017, solidifying China’s leadership position in EV sales. The country now has a larger EV market—primarily BEVs—than Europe and the United States combined. With a sales share of around 94 percent, domestic OEMs currently dominate the Chinese EV market.
Generous subsidies and tight regulation continue to drive much of the growth. Electric vehicles are exempt from license-plate lotteries and auctions in some Chinese cities, and this still plays an instrumental role in promoting EVs. After a successful pilot program in selected cities, the Chinese government decided last year to introduce green license plates for new energy vehicles (NEVs) across the country. At the end of 2017, the plates were rolled out to all provincial capitals and other selected major cities, with the remaining cities to follow in the first half of 2018. Car owners with these license plates will be eligible for preferential treatment. Furthermore, China’s national and local subsidies for electric vehicles are among the world’s highest, reducing consumer concerns about the comparatively high up-front cost.
However, in an attempt to reduce spending on subsidies while still encouraging EV sales, the government recently communicated a change in the incentive policy. On the one hand, it raised the minimum range to qualify for any incentive to 150 kilometers (up from 100) and the energy-density requirement to 105 watt-hours per kilogram (up from 90). On the other hand, the subsidies for long-range BEVs (400 kilometers or more) rose by 14 percent, to 50,000 renminbi ($7,900). Monetary support for plug-in hybrid vehicles fell by around 8 percent, to 22,000 renminbi ($3,500).
In absolute terms, China’s EV-sales performance is quite remarkable. Yet the adoption rate represents only 2 percent on a national level—a limited number of large cities (such as Beijing, Hangzhou, Shanghai, Shenzhen, and Tianjin) account for a majority of EV sales. Nonetheless, China’s positive market performance helped put the country in a strong, well-balanced position in McKinsey’s latest overall EVI rankings (Exhibit 2): it was outperformed only by Norway in the EVI market score and reinforced its leading position—ahead of Japan, Germany, and the United States—in the industry EVI analysis (the “supply” side of the equation). However, given today’s EV-battery economics, leadership in EVI scores comes at a price: China and Norway have some of the world’s highest levels of spending on consumer and supply-side subsidies, at the taxpayers’ expense.
A comparison of EVI performance over time reveals that China has rapidly overtaken the United States and Germany in combined EVI scores. Exhibit 3 shows China and Germany occupying roughly the same position in 2014, for example. Yet by 2018, China had far outpaced Germany in both market and industry EVI scores. In the market EVI scoring, China improved through higher EV sales, significant monetary and nonmonetary incentives, a greater variety of models, and the investment intensity of the charging infrastructure. China also excelled on industry scoring, significantly increasing its EV production and component shares. Major restrictions on local content—especially approved battery suppliers—keep a large portion of China’s EV profit pool locally based.
Exhibit 3
Germany and Norway led growth in the European Union
Europe’s EV market grew by nearly 40 percent from 2016 to 2017, albeit from a small sales base. A variety of factors contributed, such as the ongoing headwinds for diesel technology and increasing customer interest in EVs. Much of the regional momentum emerged in Germany, where the EV market more than doubled. That country is now Europe’s second-largest EV market, outperformed only by Norway.
Excluding the Netherlands, where an incentive shift from PHEVs to BEVs led to a significant drop in overall EV sales, European markets underlined the regional growth trajectory. Norway’s EV sales-penetration rate reached 32 percent in 2017, and by December every second passenger car sold there was an EV. Norway stands largely alone in its mass-market embrace of electric vehicles, so it provides a real-world picture of future EV sales proportions that developed markets could experience over the next five to ten years. Exhibit 4 shows the four stages of a disruptive trend. Having reached a critical mass of EVs, Norway is clearly ahead of other countries—the EV disruption is inevitable. Most other countries are still in the first stage, except for China and Sweden, which have already advanced to the second: disruption is somewhat more clear, with EVs emerging as a validated model.
Exhibit 4
The rollout of more attractive, better-performing EVs in key high-demand segments is another major driver for sales uptake, both in Europe and the United States. Nevertheless, at 27 percent, US growth lagged behind that of China and the European Union, since fuel prices remain low, reducing the operating-cost advantage of EVs. Likewise, the US Environmental Protection Agency recently announced that it would revise existing vehicle-emission standards (set by the previous administration), which require cars and light trucks to average more than 50 miles a gallon by 2025. It is still unclear what the new standards will look like, but the regulations, or the time frame for their adoption, will probably be relaxed. However, California and 12 states that follow its lead are determined to maintain stronger air-pollution standards than the federal government does.
What a teardown of the latest electric vehicles reveals about the future of mass-market EVs
India is new to the EVI this year. Both EV market acceptance and EV industry dynamics are at an early stage: the EV-adoption rate is less than 1 percent and domestic OEMs are just starting to launch EV models. Although the government rolled out a new tax policy to encourage EV adoption, a clear strategic road map is still missing. Demand comes mainly from commercial owners and the public sector, and the country has almost no charging infrastructure. Since India’s carbon-dioxide levels from electricity generation are among the world’s highest, it also needs more renewable-energy sources for its EVs to achieve true “well-to-wheel” zero-emission status.
New models (and regulations) to stoke markets
Global automakers will reportedly launch approximately 340 BEV and PHEV models in the next three years, significantly reducing supply as a barrier to further market uptake. The OEMs’ increased attention mainly reflects tougher emissions targets, especially in China and Europe, and announcements that several countries, as well as cities around the world, will set end dates for the sale of diesel- and gasoline-powered vehicles. Norway, for example, wants BEVs and PHEVs to account for 100 percent of its new-car sales by 2025. California, France, and the United Kingdom have proclaimed that they will end sales of ICEs by 2040.
China too seems to be developing a long-term plan to abandon vehicles powered by fossil fuels: a new EV policy, which will become effective by 2019, requires automakers to comply with a mandatory EV credit target. As a result, several international automakers announced new joint ventures with domestic Chinese brands to develop and produce numerous EVs together.
Electric vehicles have made meaningful progress in several regions and countries as they passed the milestone of one million sales, in 2017. With demand rising and manufacturers ramping up production capacities, the market will continue to grow. Looking forward, the confluence of government action, greater attention by OEMs, rising customer acceptance, and ingenious suppliers could accelerate the segment’s profitability until the early to mid-2020s.
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