The Real Cost of Going Electric: Part 5 - The Demand Problem
Electric vehicles (EVs) are often touted as the future of transportation and the solution to transportation decarbonization. However, as we have seen in the previous parts of this series, EVs are not without their drawbacks and challenges.
In this part, we will discuss how the over-production of EVs by automakers is creating a new headache for the industry and the environment. We will examine why the demand for EVs is not keeping up with the supply, and how this led to the recent announcements by Ford and GM that they are pulling back their EV commitments (Learn More 1).
The over-production of EVs
Automakers are ramping up their EV production to meet regulatory targets. To do this automakers are investing billions of dollars in developing and manufacturing new EV models. For example, Volkswagen plans to launch 70 new EV models by 2030 and produce 26 million EVs in the next decade. Ford aims to produce 600,000 EVs per year in North America by 2023. Tesla, the leading EV maker, delivered nearly 500,000 vehicles in 2020 and hopes to reach 20 million per year in the future.
However, this ambitious production plan is not matched by the actual demand for EVs. Despite the growing popularity and awareness of EVs, many consumers are still reluctant or unable to switch from conventional cars to EVs. As a result, automakers are facing challenges with selling their EVs and reducing their inventory levels.
For instance, Ford has been increasing its EV inventory in anticipation of high demand for its upcoming models, such as the F-150 Lightning and the Mustang Mach-E. However, as of June 2021, Ford had more than 162,000 unsold vehicles in its U.S. inventory, including over 25,000 EVs (Learn More 2). Similarly, Volkswagen has been struggling to sell its ID.4 model in China, where it had only sold 1,213 units in May 2021, compared to its target of 50,000 units for the year (Learn More 3). Tesla, which has been dominating the global EV market, has also seen its sales decline in some regions, such as Europe and China (Learn More 4).
The over-production of EVs has negative impacts on both the industry and the environment. For the industry, over-production leads to lower profit margins, higher inventory costs, and increased competition. Automakers have to offer discounts and incentives to attract customers and clear their stocks. They also have to deal with excess capacity and supply chain issues. For the environment, over-production means more energy consumption and emissions from manufacturing and transporting EVs.
According to a study by the International Council on Clean Transportation (ICCT), manufacturing an average EV produces about 8.8 metric tons of CO2 equivalent (CO2e), which is about 18% higher than manufacturing an average conventional car (Learn More 5). Moreover, if the unsold EVs are not used or recycled properly, they could end up as waste and pose a threat to the environment and human health.
The under-demand for EVs
Why is the demand for EVs not matching the supply, despite the growing popularity and awareness of EVs? There are several factors that are affecting the demand, such as high prices, limited range, lack of charging infrastructure, and consumer preferences.
One of the main barriers to EV adoption is the high upfront cost of buying an EV. Although EVs have lower operating and maintenance costs than conventional cars, they still have higher initial prices due to the expensive battery components. According to a survey by Deloitte, 28% of consumers cited cost as the most important factor when considering buying an EV (Learn More 6).
Another factor that limits the demand for EVs is the range anxiety that consumers face when driving an EV. Range anxiety refers to the fear of running out of battery power before reaching a destination or a charging station. Although EVs have improved their range over time, they still lag behind conventional cars in terms of driving distance and refueling time. According to the U.S. Department of Energy, the average range of an EV in 2020 was 259 miles, while the average range of a conventional car was 412 miles (Learn More 7). Moreover, it takes about 30 minutes to charge an EV to 80% capacity using a fast charger, while it takes under 5 minutes to fill up a conventional car with gasoline.
A related factor that affects the demand for EVs is the lack of adequate and accessible charging infrastructure. According to the International Energy Agency (IEA), there were about 7.3 million chargers worldwide in 2020, of which only 1.3 million were public (Learn More 8). However, the IEA estimates that at least 14 million public chargers are needed by 2030 to support the projected EV fleet. The availability and distribution of chargers vary widely across regions and countries, creating gaps and bottlenecks for EV drivers. For example, in the U.S., there are only about 43,000 public charging stations, compared to over 150,000 gas stations. Moreover, many of the existing chargers are not compatible with different EV models or standards, making it difficult for drivers to find and use them.
Another factor that influences the demand for EVs is the consumer preference and behavior. Many consumers are still attached to their conventional cars and are not ready or willing to switch to EVs. Some of the reasons that consumers gave for not considering EVs were: lack of familiarity or experience with EVs, preference for gasoline or diesel engines, concern about reliability or quality of EVs, and understanding of EVs as not suitable for their lifestyle or needs. Moreover, some consumers are influenced by social norms and peer pressure when making car purchase decisions. For example, a study by Yale University found that consumers are more likely to buy an EV if they live in a neighborhood where EV adoption is high (Learn More 9).
The under-demand for EVs poses challenges and risks for automakers and investors in a saturated and competitive EV market. Automakers have to cope with lower sales volumes and revenues, as well as higher marketing and promotional costs. They also have to innovate and differentiate their products and services to attract and retain customers. Investors have to be cautious and selective when investing in the EV sector, as not all EV makers or suppliers will be profitable or sustainable in the long run. They also have to consider the regulatory and policy uncertainties that could affect the EV market dynamics. Recently, Ford and GM became the latest casualties of the overproduction of EVs, with both companies announcing major cutbacks in their expansion projects to build new battery facilities and retool existing plants for EV production (Learn More 10).
The impact of oversupply on car dealerships
The mismatch between supply and demand for EVs is not only affecting automakers, but also car dealerships, which are the intermediaries between manufacturers and consumers. Car dealerships are facing several challenges and opportunities in the EV market, such as inventory management, pricing strategies, customer service, and profitability (Learn More 11).
One of the main challenges for car dealerships is managing their inventory of EVs. Due to the over-production of EVs by automakers, many dealerships have accumulated excess inventory of unsold EVs on their lots. This creates a problem for dealerships, as they have to pay interest and storage fees for the vehicles that they have not sold yet (Learn More 12). Moreover, having too many EVs on their lots reduces their flexibility and bargaining power with automakers, as they have less room to order new vehicles or negotiate discounts.
Another challenge for car dealerships is setting the right prices for their EVs. Due to the mismatch between supply and demand for EVs, many dealerships have to adjust their prices accordingly to balance their inventory levels and profit margins. Some dealerships have to lower their prices or offer discounts or incentives to attract customers and clear their excess inventory of EVs. However, this could erode their profit margins and brand value, as they may appear to be desperate to sell their EVs (Learn More 13).
The alternative solution: sustainable gasoline
Is there an alternative solution to decarbonizing transportation that does not rely on the mass production and adoption of EVs? One solution is sustainable gasoline, which is a type of liquid fuel that is made from renewable or low-carbon sources, such as biomass, waste, hydrogen, or carbon capture and utilization (CCU). Sustainable gasoline differs from conventional gasoline in that it has lower life-cycle emissions and does not depend on fossil fuels.
Sustainable gasoline has several benefits over EVs as a way to reduce greenhouse gas emissions from transportation. First, sustainable gasoline is compatible with existing vehicles and infrastructure, which means that it does not require consumers to buy new cars or install new chargers. It also eliminates the range anxiety and charging issues that plague EV drivers.
Second, sustainable gasoline is more cost-effective than EVs, as it does not involve high upfront costs or subsidies. It also has lower production costs than conventional gasoline, as it uses cheaper and more abundant feedstocks. Third, sustainable gasoline has less environmental impact than EVs, as it does not generate waste or pollution from battery manufacturing or disposal. It also reduces the dependence on rare earth metals and minerals that are used in EV batteries.
Sustainable gasoline offers opportunities and advantages for investors who are interested in decarbonizing transportation. Unlike EVs, which are dominated by a few large players, sustainable gasoline is a more diverse and open market that allows for more innovation and competition.