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Commitments to carbon-neutral economies accelerate the reshaping of the automotive industry

14 April 2021 Reinhard Schorsch

The regulations currently in discussion will propel BEV shares above 50% in Europe by 2030. China and the US will reach 40% and 25% BEV respectively.

Many countries have committed to become carbon-neutral economies by 2050 (China by 2060). IHS Markit is tracking these developments closely and offers new analysis on the transformation of the transport sector that will be required to meet these targets.

To succeed, the transportation sector will need to turn many of the vehicles in operation into battery electric vehicles (BEVs) or zero emission vehicles (ZEVs) within the proposed timeframes. In turn, internal combustion engine (ICE) and hybrid vehicle sales will need to be phased out at least 10 years before the target dates, with many markets becoming pure BEV/ZEV sales markets by 2040 at the latest (with only few exceptions), according to IHS Markit estimates.

Europe is in the vanguard of this transformation from a regulatory perspective. Although not formally agreed yet, IHS Markit expects an EU-wide ICE phase-out by 2040 or before. Indeed, nine EU member states are lobbying publicly for 2035 or an earlier timing. A new CO2 reduction target for OEMs is likely to see a 55% reduction on 2021 levels (instead of 37.5% today). To get there, BEV/ZEV sales will need to be greater than 50% by 2030. Regardless of the CO2 reduction target or EU7 norm, the ICE sales era will be replaced by the BEV sales era between 2035 and 2040. Meanwhile the window of opportunity for hybrid vehicles as a transition technology will be short. Independent from EU-wide regulations, some countries are on their own timeline, using the few options which are in-line with EU-legislation to create de facto ICE bans. Norway has used high ICE taxes and BEV incentives over the years to meet its target by 2025. The Netherlands will rely on low-emission zones to reach its target by 2030. After Brexit, the UK can introduce the announced ICE ban after 2030 with exceptions for selected hybrid vehicles during a transition phase.

From a regulatory perspective, China is only a few years behind Europe. IHS Markit expects New Energy Vehicles (NEV) sales targets to be around 40% by 2030, greater than 50% by 2035 and up to 100% by 2050 at the latest. Additional CAFC targets in the direction of 3 l/100km by 2030 and 2 l/100km by 2035 (under the WLTC test protocol) will leave room for only the most fuel-efficient hybrid vehicles alongside NEVs.

The U.S. is tied to Safer Affordable Fuel-Efficient (SAFE) rules until 2026. From 2027 onwards, IHS Markit assumes that Biden's administration will revert to the MPG improvement levels which are at least as stringent as those seen under the Obama administration. Furthermore, IHS Markit works with the assumption that five states including California will ban ICEs by 2035. Under these assumptions a BEV/ZEV new vehicle sales trend of between 25-30% by 2030 and 45-50% by 2035 is expected.

OEMs accelerate their electrification plans with less room for platform, vehicle and powertrain complexities other than BEVs

The upcoming regulations described above will require minimum BEV sales shares of more than 50% in Europe, more than 40% in China and more than 25% in the U.S. by 2030, according to IHS Markit analysis. This will lead OEMs to a deep review of their technology, platform, vehicle and powertrain strategies. They are also wrestling with the required investments to become successful with BEVs and the perspective of the financial markets to support these investments.

"The tipping point for decisions towards an accelerated BEV roadmap or even a full BEV switch has arrived in the board rooms of major OEMs in regulated markets," said Reinhard Schorsch, Director, OEM Planning Solutions at IHS Markit.

Consequently, Jaguar, Volvo, Mini, Bentley and Ford Europe have announced ambitions to become BEV brands by 2030. Other brands are striving make BEVs their major propulsion system by then. These include Porsche (80% BEV), VW Europe (70% BEV), Land Rover (60% BEV), BMW (50% BEV) and Kia Europe (50% BEV). BEV related announcements for 2035, such as GM's aspiration to be fully tailpipe emission free, seem to be self-evident in this context.

OEMs with big sales footprints in fewer or non-regulated markets are still hesitant to make the move towards BEVs. While it might only be a matter of time for a big player such as Toyota, others might be left in an uncertain ICE world, especially if they try to establish and to secure a BEV supply chain too late.

Regulations enforce the move towards BEVs/ZEVs, OEMs plan according to or even beyond regulation compliance, but markets and customers need to be ready

"Broad consumer acceptance and readiness for BEVs will occur when price and total cost of ownership match with mobility budgets, when real driving ranges match with use cases, and when charging is no longer a concern in consumer's mindsets," according to Schorsch.

Due to incentives, price parity between BEVs, ICEs and hybrids largely exist today. When incentives run out, however, OEMs will need to compensate these through cost and price reductions for BEVs; but perhaps not to the same extent; ICE prices will likely increase as incumbent OEMs favor profits over volumes. In the end, the cost leaders (likely none of the incumbent OEMs) will have the freedom to decide over the exact BEV price levels. Overall, IHS Markit expects that by 2030, BEV prices will not be an obstacle constraining demand.

BEV driving ranges continue to improve, and in most cases, are virtually no longer a restriction for consumers. Customers are used to a range provided by an ICE that is far beyond their requirements in most daily use cases. The last decade has brought significant cost reductions alongside lithium-ion battery technology advancements, and the next decade is expected to bring significant range improvements as solid-state batteries become the norm. As a result, IHS Markit believes that the "range anxiety" problem will be solved by 2030. Meanwhile, BEVs with greater interior spaces, enjoyable driving performance, new software and applications will add to BEV appeal for many consumers and will also reshape segment structures and differentiation criteria.

Charging infrastructures remain the key questionable factor in this context - market by market. They can be developed over time, but it is yet to be seen if their development speed will keep pace with the development of the other factors driving demand.

The direction is obvious in regulated markets, but the road ahead is not straight

Will commitments to carbon-neutral economies be fulfilled and will the consequent regulations be put in place? Will the OEMs' accelerated electrification plans be supported by the supply chain and will their BEVs match with customers' expectations in the same timeframe? While the answers to the general questions might be obvious, the answers to the detailed questions still bear risks. At this point however, it is rather less risky to prepare for the BEV era, than to miss it.

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