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13 September 2017

Electric Vehicles - Extinction level event

EVs could trigger a huge decline in vehicle demand

Vehicle makers are queuing up to announce their commitment to electric vehicles (EVs) but at the same they may be cheering for their own demise. Volvo began it by committing to an EV line-up in 2019 followed by Chinese plans to ban all sales of fossil fuel vehicles and now Mercedes-Benz will offer a hybrid or electric version of its entire line-up by 2022. Unlike the optimists, we do not see EVs as the beginning of a new golden age for the vehicle makers but instead the trigger for a potential collapse in demand from which most of them will never recover.

Edison Research has concluded that owning an EV could easily halve the amount of money that the consumer spends on private transportation. This is because EVs should last much longer than internal combustion vehicles allowing them to travel 2-5x more miles than vehicles that use fuel before they need to be replaced. Assuming that EVs cost the same, they will be much cheaper to own when considering the cost to drive each mile. Furthermore, EVs have many fewer moving parts than internal combustion vehicles meaning that there is much less to go wrong and hence they will be cheaper to maintain. Most vehicles are driven to destruction meaning that assuming total miles driven does not increase, a vehicle market that is 100% EVs will be just 20%-50% of the size of the same market with internal combustion vehicles. In USA, this means a market of 3.4m – 8.5m light passenger vehicles compared to the 17m that are sold today. It is important to note that these estimates are extremely sensitive to small changes in long-term assumptions meaning that these forecasts are purely an indication of a scenario for which all players should be prepared. For the large, bureaucratic and slow vehicle makers (almost all of them), this represents an existential change in the market that most of them will not survive.

What is likely to then happen is a massive consolidation of the global market in to 5 or 6 vehicle makers down from the 26 or so that there are today. However, it is not all doom and gloom as from this shift, substantial opportunities are likely to emerge. EVs are all likely to be connected to the cloud with a myriad of sensors detecting events within the vehicle and its immediate vicinity. This data should enable a series of highly valuable services for which users will be willing to either pay for or consume advertising. As it stands today, the OEMs have a lock on this data and as long as they don’t let it slip to Google or one of the other digital ecosystems, they should be able to make a good return from it. We very much doubt that it would make up for the revenue lost from lower vehicle demand but it will be much higher margin than selling vehicles which should soften the blow.

Of the vehicle makers, we continue to think that BMW and Tesla have the best chances of survival but we think even BMW might struggle to survive a decline in demand of this scale

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