The automotive sector is undergoing a radical change that is underpinned by the stock market. Electric car manufacturer Tesla, founded as recently as 2003, already has a significantly higher market capitalization of $60 billion than General Motors, with $51.46 billion, whose roots go back to 1908.
That is all the more astonishing as electric cars are still the exception rather than the rule on the road. But it is not just experts who predict that these vehicles will have as much disruptive power as the Model T, which was brought onto the market in 1908. This pioneering vehicle from Ford was, after all, the world’s most sold car until 1972.
Comparisons like that are premature praise for a technique that is still in the early stages of development. As a result, speculation surrounding the impact of electric cars is not surprising; such conjecture also surrounds such sectors as technology, capital goods, chemicals and raw materials.
To get to the bottom of the matter objectively, Swiss bank UBS bought a 2017 Chevrolet Bolt and disassembled it. The model was deliberately chosen because the Bolt, with a price of $37,000 and a range of more than 230 miles, is considered the world’s first electric vehicle for the mass market.
The result of that work: The Bolt’s powertrain costs are $3,000 lower for the battery and $2,000 lower for the other modules than earlier UBS estimates.
This means total cost of ownership parity between an electric vehicle (EV) and an internal combustion engine car (ICE) is reached two to three years earlier. As a consequence of the earlier-than-expected cost parity, UBS raises the sales penetration forecasts for electric vehicles to 3.1 million sold in 2021 and 14.2 million sold in 2025, instead of 2.5 million and 9.7 million previously.
Cost estimations down – sales forecast up
The UBS team came up with several pivotal questions and answers from the teardown. The most crucial of these findings was that the electric vehicle powertrain is cheaper to produce than originally thought, and there is greater cost reduction potential. Based on this, the new conclusion is that consumer cost of ownership parity with internal combustion engine cars can be reached from 2018, creating an inflection point for demand.
When comparing the differences between electric vehicles like the Chevy Bolt and traditional cars, UBS found that some 56 percent of the electric vehicle content comes from outside the traditional auto supply chain.
In the case of the Bolt, the entire electric powertrain and infotainment modules are supplied by LG from South Korea. This comes at the expense of “traditional” tier-1 suppliers.
Additionally, UBS counted 24 moving parts in the Bolt’s powertrain, versus 149 in the Volkswagen Golf. The powertrain electronics content is $4,000 higher on the tier-1 level, motor included.
Assessing the profitability of electric vehicles like the upcoming Tesla Model 3, UBS estimates that Tesla will require a sale price of roughly $41,000 to break even in terms of earnings before interest and taxes. This is approximately $6,000 above the estimated base price of $35,000. But as Tesla buyers are likely to order well-equipped versions – margins on the options should be roughly 50 percent – the required $41,000 threshold is likely to be comfortably exceeded.
At the same time, analysts estimate that General Motors will lose roughly $7,000 per vehicle in earnings before interest and taxes, but the contribution margin (sales prices less variable production costs) is positive at roughly $3,000.
Based on the component costs forecasts of UBS, the earnings before interest and taxes per vehicle can improve to $1,300 (5 percent margin on earnings before interest and taxes) by 2025, assuming that the lion’s share of the cost savings are passed on to the consumer to reach consumer cost of ownership parity.
Widespread impact on different sectors
That assumption, of course, raises the question about what the impact will be on the auto industry. According to UBS, the transition to electric vehicles could be better than thought for original equipment manufacturers from a return and CO2 cost perspective, but there are potentially more risks for “traditional” tier-1 suppliers. This is contrary to the consensus view that suppliers are better positioned to master the transition to electric vehicles.
UBS believes earlier cost parity means earlier and more visible returns for original equipment manufacturers on their currently high research and development expenses.
In addition, the contribution of electric vehicle to CO2 fleet targets, particularly in Europe, will remove a key cost burden. For the tier-1 supplier, the teardown delivered two takeaways: First, LG has roughly 56 percent content in the Chevy Bolt, whereas “traditional” tier-1 suppliers exist only outside the electric powertrain. Second, the analysis of moving and wearing parts has shown that the highly lucrative spare parts business should shrink by roughly 60 percent in a world that only has electric vehicles, which is decades away.
That means electric vehicles are an opportunity for tech companies. For example, UBS estimates that the Bolt EV powertrain has $580 semiconductor content, or six to 10 times more than an average equivalent traditional car.
BS also assumes that in an internal combustion engine vehicle, the powertrain electronics can range from as much as $60 to $90, implying a significant step up, even for a relatively low-end mass-market electric vehicle.
In 2016, automobiles accounted for 10 percent of global semiconductor revenues, or $33 billion. But UBS believes that could expand to 14 percent, or $63 billion, by 2025. Additionally, based on the analysis, UBS estimates that electric vehicle penetration and the adoption of advanced driver-assistance system could add a net $15 billion of revenues to the semiconductor industry by 2025.
Another important point is how global commodity markets are probably influenced by the shift to electric vehicles. The Bolt’s body and chassis are fairly conventional in terms of the commodities used. However, it has a 70 percent higher aluminum content, but no carbon fiber-reinforced polymers were found. In terms of commodities use, the Bolt contains more copper, aluminum, battery active materials and rare earths than a traditional car, but fewer platinum group metals. Largely no impact is expected on steel demand.