Beware the EV glut

How too many electric car models could hold back progress toward climate goals.

Tom Mayor

Tom Mayor

National Strategy Leader, Industrial Mfg., KPMG US

+1 216-875-8061

Jono Anderson

Jono Anderson

Principal, Strategy, KPMG US

+1 858-750-7330

Bala Lakshman

Bala Lakshman

Managing Director, Strategy, KPMG US

+1 214-840-4005

Tesla finished 2019 with a bang, selling 367,500 electric vehicles (EVs). Ford unveiled an electric incarnation of the iconic Mustang. And dozens more EV models are set to hit showrooms in 2020—everything from an electrified Ford 150 pickup to a plug-in Cadillac.

But the EV revolution—the wholesale shift to electric-powered cars and trucks that figures heavily in carbon-mitigation plans—is still in its infancy and faces serious potential setbacks in the near term. According to our research and our work with automakers, we see a growing risk that the global auto industry is setting itself up for an EV market failure.

Why? Because automakers are introducing more models than the market will likely absorb, creating a potential glut of loss leaders. Then, with no profits in sight, automakers could pull back from commitments to EVs, undermining carbon-mediation plans that assume EVs can reduce auto-related emissions (including from electricity generation to power EVs) by up to 70 percent by 2050.

This is a key finding of a new report from KPMG, EV Plan B, in which we lay out the risks in current EV strategies. Despite enthusiasm for EVs among a small slice of the car-buying public, EVs still represent less than 3 percent of U.S. car sales and about YY percent globally. Consumers are put off by concerns about charging issues—how far they can go between charges, the time it takes to recharge, finding a charging station, etc.

But more than anything, car buyers are reluctant to pay a 30 to 50 percent premium for a plug-in electric vehicle. Until EVs approach parity in cost of ownership with conventional internal-combustion engine (ICE) vehicles that use fossil fuel, the market for EVs will remain limited. And, according to our model, parity is not as close as some automakers assume. Achieving parity depends mostly on reducing the cost of EV batteries. Today, the Tesla Model 3’s battery leads at $165 per kilowatt hour—a metric that can be used to compare ICE and electric vehicle costs. It has been widely assumed that EVs could reach parity at about $100/kWh, but our model, which takes into account improvements in ICE technology, indicates that it may take $80/kWh to achieve parity by 2025. By then, we project, ICE-based compacts could average 52 miles per gallon, based on the pace of ICE efficiency improvements.

Meanwhile, automakers are moving ahead with new plans that assume a mass market. They are planning electrified versions of every kind of car and light truck and variations for every kind of buyer. In 2018, there were 44 different electric vehicle platforms and more than 90 models based on those platforms. If we count all the announced plans by automakers, there could be 268 platforms and 989 different models on the market in 2025. We estimate that, given the investment in development and the per-car margin contribution, sales of a single EV model would have to reach 500,000 to 700,000 units over a period of seven years for manufacturers to break even.

To avoid producing models that can’t break even, automakers can focus on producing EVs for markets where purchase price is not an obstacle and/or where generous incentives from government reduce sticker shock. Many automakers are already focusing on the luxury/high-performance segments, where consumers will pay a premium and where EVs turn in impressive performance numbers (the Tesla Model S Performance LM goes 0 to 60 mph in 2.4 seconds). There are electric Jaguars, Mercedes, Porsches and Lamborghinis. Such cars can be extremely profitable, but sell in small numbers.

One of the most promising markets for EVs, we believe, will be autonomous vehicles for mobility services. Because these cars require no driver and can be used day and night—logging 70,000 miles per year or more—self-driving EVs can be very competitive on a per-mile basis. EVs can also offer lower operating costs because electricity is cheaper than gasoline and EVs can require less maintenance (no oil changes, for example). But when it comes to selling fleets of EVs to mobility platforms such as Uber and Lyft traditional automakers may have few advantages. These vehicles will be optimized for passenger comfort and durability and won’t require all the performance and styling that the consumer looks for. Amazon, for example, has contracted to buy a fleet of autonomous delivery vehicles from startup Rivian, rather than from an established automaker.

Automakers can also focus on places where green policy depends on EV adoption and there are generous subsidies for purchase and use of cars and trucks that don’t use fossil fuels. Such policies have made Norway and China the top markets for EVs—in share of market and unit sales, respectively. In the U.S., California offers the best incentives and supports such as publicly-funded recharging stations. But even in California there are already too many models chasing too few buyers.

In our paper we discuss how automakers can adjust EV plans to conform to the near-term reality of the market. We do not dispute that a long-term shift to electric drivetrains is under way. Like other industry analysts, we expect that barriers to EV sales could fall away in the 2030s. To prepare, automakers of all kinds need to build the capabilities now to design, manufacture and sell EVs. But if the cost of learning includes launching dozens of models that can never break even, the benefits of EVs may be pushed farther into the future. First, many companies won’t take that risk and might rethink EVs altogether. And those that push on now and suffer the financial consequences may no longer be in shape to contribute to the advancement of EVs and compete in the mass market when it does materialize. Only by finding a profitable route into the EV market now can automakers make their contribution to mitigating climate change in 2050.