Auto manufacturers are fully engaged in the global movement toward battery electric vehicles (BEVs) as part of their efforts to comply with emission requirements, but the transition will pressure automakers returns, Moody’s Investors Service says in a new report.
“One of the auto industry’s major areas of focus for the past 10 years has been improving fuel economy and preparing to meet increasingly burdensome emission-reduction rules, and battery electric vehicles are an extension of this,” says Bruce Clark, Moody’s Senior Vice President and lead auto analyst. “But BEVs will require significant capital investment by automakers, generate low returns until the early 2020s and face hurdles to achieving broader consumer acceptance.”
Moody’s expects BEVs to represent approximately 7%-8% of global new vehicle sales by the mid-2020s, up from less than 1% currently, and rise to 17%-19% by the end of the decade as battery costs drop, driving range improves and charging infrastructure expands. Automakers will also rely on other alternative fuel technologies, including hybrids and fuel cell electric vehicles, to meet emission requirements.
The acceleration of electrification plans and the growing focus on BEVs is being driven by government environmental policies, as well as media and capital market attention garnered by Tesla, adds Clark.
Electrification will require considerable capital investment by automakers, but returns on such vehicles are lower than on internal combustion engines, which are already low, notes Clark. Moreover, the investments in electrification will occur at the same time the industry is spending on other rapidly developing technologies — notably autonomous driving, connectivity and ride sharing — further pressuring returns.
Auto manufacturers will also need to invest in multiple propulsion technologies simultaneously in case market conditions shift, increasing the risks associated with electrification and heightening the need for strong balance sheets and ample liquidity.
China’s government has ambitious initiatives to promote BEV production by full-line manufacturers and BEV-only manufacturers, while in Japan there is a high penetration of hybrids and support among Japanese manufacturers for fuel cell technology.
Moody’s report provides sales estimates and key forecast factors for various regions, such as adoption of California Air Resource Board emission standards in the US and the declining popularity of diesel engines in Europe. The report is accessible here