EV Market Momentum to Continue Despite COVID-19

The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.

 

2020 was supposed to be a big year for EVs

2020 was supposed to mark an inflection point for the EV market. While demand for eco-friendly cars has stagnated in China and the US due to the drop in subsidies, global EV demand was expected to grow on the introduction of punitive environmental regulations in Europe. Automakers are launching EV-exclusive platforms, helping to improve the visibility of demand for EV batteries. Platform strategies are important for the following reasons. First, economies of scale achieved through the sharing of platforms can lower EV production costs by USD1,800-2,400 per vehicle, equivalent to roughly half of USD4,500-5,000/unit decline in cost of battery packs required for EVs to reach price parity with combustion-engine vehicles. Second, the strategies help to improve visibility in order intake for battery makers with platform-based supply contracts linked to the client’s overall sales target, rather than the sales volume of a single vehicle model.

EV market momentum to continue despite the COVID-19 pandemic

We are witnessing growing uncertainties over the EV market outlook, with auto demand falling sharply and environmental regulations likely to be eased to reduce the financial burden for companies amid the COVID-19 pandemic. In the 2000s, General Motors had to suspend development of its first-generation EV model EV1 due to the drop in oil prices and the Bush administration’s rollback of environmental regulations.

However, we believe the EV market momentum will remain intact despite pandemic-sparked challenges. Europe and China should continue to provide policy support for EV market growth. The US has decided to roll back fuel economy standards, but this has been long discussed since the country's withdrawal from the Paris Accord in 2017. Resistance to environmental regulations from major automakers (Volkswagen, Daimler, Hyundai Motor, etc.) has also decreased markedly.

Meanwhile, global automakers have changed their overall attitude towards eco-friendly cars in the face of inevitable competition with EV start-ups, which will likely continue to supply EVs even in the absence of policy support. Moreover, EVs produced by Tesla (TSLA US) are already competitive on prices in the US market even without subsidies.

Concerns over market leadership of domestic battery makers seen overblown

Doubt over the growth potential of the EV market as a whole is clearly limited, but some might be concerned that domestic EV battery makers could lose market hegemony on threats from Chinese competitors advancing on lithium iron phosphate (LFP) battery technology and Tesla considering internalization of battery production.

However, we believe global automakers are unlikely to adopt LFP batteries in earnest. Considering the low reliability of specifications announced by Chinese battery makers, LFP battery adoption will likely be limited to low-end EV models produced in China. We also see limitations in further advancement of LFP battery technology, given that energy density, the core determinant of battery performance, is unlikely to show significant improvement without changes in the key material.

Tesla is preparing for its Battery and Powertrain Investor Day in mid-May, the most anticipated EV-related event of 2020. At the event, Tesla is expected to announce: 1) the Roadrunner project, aimed at lowering battery costs to below USD100/kWh; 2) application of dry battery electrode technology secured through the acquisition of Maxwell Technologies (May 2019); and 3) internalization of the battery cell production process. The possibility of Tesla's battery cell internalization raises concerns for battery makers.

However, we believe that Tesla’s internalization plan will be limited to small investments in next-generation high-performance batteries. The possibility of internalization is even lower at other automakers, considering that: 1) the role of batteries is limited to energy storage, compared with the complex role of engines; and 2) global automakers need to improve investment efficiency amid growing complexity in investment management across various areas. Battery internalization will require expansion of the manufacturing value chain and excessively increase the investment burden for automakers.

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