Future of the car, Part 1: Have electric vehicles hit the tipping point?

In his 2006 bestseller, The Tipping Point, Malcolm Gladwell noted that there are moments when something that had been outside the norm suddenly becomes mainstream, as trends converge. Those “tipping points” are identifiable—after the fact. So my question is whether 20 years from now, we are going to see 2016 as the tipping point for electric vehicles. I am going to go out on a limb and say: Maybe.

That sounds like a cop-out, but it isn’t, quite. I would have said “no” any previous year. But things are changing.

In the first 9 months of this year, more than 110,000 EVs were sold in the United States, almost as many as in all of 2015; September saw the best month of all time, with 16,794 plug-ins sold. The Tesla Model S alone accounted for an estimated 4,350—the best month ever, again by a long shot.  Overall, sales are on course to be triple that of 2012 and 10 times that of 2010.

And there is every reason to believe that this momentum will keep building. Later this year, Chevrolet will release the new Bolt. This is a plug-in hybrid electric vehicle (PHEV) priced at $33,220—almost exactly the average price of a new car. The Bolt has an EPA-estimated range of 238 miles (how far you can go on a single charge). In short, the Bolt looks awfully close to dealing with the two biggest concerns about EVs: price and “range anxiety”—that is, running out of juice. The Bolt also has a gas engine, just in case; canny owners, though, could easily go 1,000 miles or more between fill-ups and theoretically forever. Toyota’s forthcoming plug-in Prius Prime (which is a hybrid that relies more on electric power) will cost even less than the Bolt. Tesla, which has missed many targets, looks on track to hit a big one, delivering a record 24,500 all-electric vehicles in the third quarter, 70 percent up on last year.

And I could go on. Because one of the things that makes me think we are near an EV tipping point is that there are so many players in the game, including BMW, Porsche, Nissan, Daimler, Ford, Kia, Fiat, BMW, Volkswagen, Hyundai, Mercedes, Audi, Volvo. I don’t think the hardheaded strategists at just about all the world’s major auto companies are playing with EVs for fun. They are betting that there’s a future in it—a big future. And given the financial strength and expertise of the competitors, it is all but certain that performance will continue to go up while prices go down. Another way of looking at it, as Christopher Mims of the Wall Street Journal put it, is to see the EV as a gadget on wheels—and the adoption rate of gadgets can accelerate fast, once the basics are in place.

Those basics start with price and range, both of which are getting better. The third is a little more distant. This is the availability of charging. Drivers accustomed to filling up the tank somewhere, everywhere are not keen to go hunting for a charge, and the business model for on-the-go charging is still being worked out. The trend line is improving, though. There are already almost 15,000 public charging stations in the United States (and of course it is also possible to charge at home). That is not enough; there are fewer than a dozen public charging stations in the vicinity of my Houston office, for example. But there are beginning to be interesting new options, such as ChargePoint, which is building and operating a network with more than 32,000 charging spots in the United States, at both homes and businesses. In Britain, Royal Dutch/Shell is apparently considering adding charging points to its gas stations starting in 2017.

Finally, battery costs have been falling fast—by a factor of four since 2008—and are primed to continue to do so. Considering that batteries can account for as much as a third of overall EV costs, the cheaper they are, the narrower the cost gap versus conventional cars.

For a reality check, let’s note that the future of EVs is not right now. In 2015, 540,000 plug-in electric cars were sold around the world. That was a record; it was also less than 1 percent of the total (72.4 million). All told, of the billion or so vehicles on the road, there are perhaps 1.26 million EVs (or a little over one-tenth of one percent).

What is the likelihood that is going to change substantially? Good. OPEC, the oil cartel that has much to lose if EVs get big, offers an estimate on the low side—that only 6 percent of all vehicles would be run on something other than oil by 2040. That may not sound like much—but it would still represent some 120 million EVs on the road and a 60-fold increase in market share. Exxon estimates a 10 percent penetration of plug-in electrics by 2040 (though it sees big progress for hybrids, with a market share of 25 percent). Bloomberg New Energy Finance (BNEF), on the other hand, projects EVs of some kind will account for 35 percent of new car sales by 2040. McKinsey’s own estimates are in between—19 percent of global new car sales in 2035.

We’ll only know who (if anyone) was right in 2040. The pace of change will to some extent be shaped by the price of oil. The cheaper gas is, the longer it will take for EVs to compete with conventional cars. But that is what makes recent American developments so interesting. Although gas prices have been low—and indeed are lower in the United States than in most developed countries—EV sales have gone up, suggesting an intriguing degree of resiliency. In Europe, where prices at the pump are much higher, analysts at UBS think cost parity—in terms of the total cost of ownership—could come as early as 2021, and by 2025 in China. When that happens, there will be no need for the subsidies that are such an important part of the current business model. And that is a very good thing. Any industry that relies on such support is vulnerable in a way that one that meets consumer demand cost-effectively is not.

So I do believe that EVs are on the rise, and perhaps in a big way. That does not mean the end of oil. Even if the most bullish forecasts are true—35 percent market share by 2040—that still leaves two-thirds of what will be almost 2 billion cars on the road running on oil. In addition, there will be rising demand from the chemical and aviation industries. What EVs could do is flatten the demand-growth curve; McKinsey’s own estimates are that if there is widespread adoption of EVs, plus an increase in car-sharing and autonomous vehicles, the use of oil to move light vehicles could peak as soon as 2023—and then begin to fall. If that happens, the world could enter an era of permanently lower oil prices (assuming no massive supply disruptions, which is, admittedly, a big assumption). And while EVs would not be great news for oil producers, they would be for other industries, such as chemicals (required for electric batteries) and utilities (adding as much as 8 percent in demand). They would also be good for air quality.

Figuring out the implications of EVs is a book, not a blog post (and a speculative book at that). But I think the emergence of EVs could be the biggest change in the car industry since the gas-powered internal combustion engine beat out the rest in the early 20th century. The conventional car has a lot of road ahead. But it’s becoming clear that it is going to be jostling for space with the EV.  

My next post will be on the “Future of the car, Part 2: Autonomous vehicles.”