The Accelerating Adoption of Hybrid Vehicles By Goldman Sachs

Once lofty expectations for an electric-car future may have been temporarily scaled back, but the adoption of hybrid vehicles is continuing to accelerate. We sat down with Goldman Sachs Research’s Kota Yuzawa who explained why companies are investing in their hybrid technologies before EVs take off in earnest.

Kota, you’ve said hybrids are going to prove more than a passing fad on the road to fully electric vehicle adoption. Why?

Kota Yuzawa: One of the biggest hurdles is the cost of batteries. Battery costs need to fall below US $100-per-kWh for fully electric vehicles to gain broader consumer acceptance. In the interim, we believe companies will focus on selling hybrids and plug-in hybrids as the most practical and profitable technology. Governments around the world, in fact, are replacing their electric vehicle policies with policies for “electrified” or hybrid vehicles that are viewed as more practical than fully electric vehicles. In our view, this should keep the hybrid movement in the mainstream of vehicle electrification for at least the next 10 years. We now expect electrified or hybrid vehicles to account for 35% of global auto sales by 2030.

Why is it taking so long for automotive battery costs to decline?

KY: Innovations have yet to reduce auto battery costs. Even in China, where lithium-ion battery production capacity continues to increase, the per-kWh battery cost was still US$175 at the end of 2018. While the fixed-cost portion that makes up one-third of the battery cost continues to decline with mass production, reducing the remaining variable costs is much harder because you have to increase the batteries’ energy density. That’s very difficult because of the batteries’ reliance on high-nickel cathodes, so considerable care has to be taken to ensure that appropriate levels of safety and durability for automotive applications are met. Even if battery costs reach the level at which EV adoption accelerates — and that key hurdle is US$100/kWh — there are still concerns about future battery deterioration.

How do you expect the adoption of electrified vehicles to vary across geographies?

KY: Adoption of hybrid vehicles is likely to accelerate in Europe which recently tightened its already strict environmental regulations. Automakers could be hit with massive fines for missing the EU’s fleet CO2 emissions reduction target that starts to take effect next year. In China, the world’s largest EV market, the government is pushing ahead with its new energy vehicle or NEV policy by sharply reducing current NEV purchase subsidies. So instead of offering the subsidies as a “carrot,” the government is moving to a “stick” approach with regulations that require automakers to sell a certain number of EVs — even if they lose money — or get hit with penalties. Japan is aiming for a gradual shift to electrification, with balanced adoption of several powertrains including hybrid electric vehicles, plug-in hybrid electric vehicles and fuel cell vehicles. Electrification in the US, on the other hand, could slow given a rollback in environmental regulations and efficiency standards.

What other factors could help or hinder broader adoption of EVs?

KY: In general, government incentives and lower costs are factors that help drive EV adoption. Some Northern European countries, for example, are promoting EVs as part of their environmental conservation and energy policies, while aiming to nurture their own auto industries. China is trying to limit the number of new vehicles on the road by imposing strict license plate quotas — but is making an exception for electric vehicles. NEV buyers in China can also recoup the costs of buying their cars in less than three years with monetary benefits.

To be sure, government policies are still a wildcard, and more broadly, the proliferation of EVs could create tight supply/demand conditions for natural resources, including lithium, cobalt, and nickel. A doubling in prices of raw materials would likely drive up battery prices by 15%. Also, we think EVs will likely proliferate only if they can provide users with a better experience than traditional internal combustion engine vehicles. Going forward, manufacturers are likely to focus on continuing to reduce costs and improve satisfaction levels on range and charging times.


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