Why Are Electric Vehicles Expensive?

#Electricvehicles are getting out of hand. It was only four years ago in early 2019 that the Tesla Model 3 Standard Range Plus was priced at $37,000 ($35,000 for the limited SR model) and with the Tesla Q1 and Q2 EV tax credit of $3,750, could be had for $33,750. That’s cheaper than the 2023 Chevrolet Malibu 2.0T. Today, the entry level Tesla Model 3 can be had for $46,990 with no tax credit. And that’s still on the cheap end for #EVs.

Long range EVs are by and large a premium product. But why is that? Let’s dive into why EVs are as expensive as they are and what the future holds for #EV pricing.

Cost Breakdown of EVs

The average price of an EV is around $66,000. The average cost of a gas car is around $48,000. That’s an $18,000 difference. Seems crazy right?

How do automakers go about pricing their cars? There’s a lot to it, but we can commoditize the car pricing process and say that automakers largely aim for a gross margin on their cars of between 15% and 25%, depending on the class of vehicle. Some low cost vehicles have single-digit or even loss-leading margin, while some high end ($300k+) vehicles gross margin will exceed 30%. Note that this is #grossmargin, not contribution margin or corporate profit margin. This means that if a car is sold for $100,000, the company would likely spend around $80,000 on the “Cost of Goods Sold” (#COGS) of that vehicle - which is the sum of all of the parts in the vehicle. This ignores the cost of running a manufacturing line, paying employees, the startup costs of a vehicle program, and vehicle testing.

COGS is hardly the whole story of vehicle pricing though, particularly with the current world state. Automakers have seen massive increases in shipping costs, parts delays, and downtimes that have translated into higher vehicle pricing. Not to mention the big jump in inflation. However, for the purposes of this article, we’re going to focus on why EVs have such higher COGS and what can be done about that.

Let’s focus on the parts that are different between an EV and a traditional combustion-engined car. That $18,000 consumer price difference is about a $15,000 difference in COGS for the automaker if our assumptions around margin are correct. What makes that number so high?

The Biggest Culprit - The Batteries

Batteries are by and large the heart of the electric vehicle. It’s been said that an EV is really just a battery on wheels. And that’s not far from the truth. The battery isn’t only what determines the range of the EV, it also determines the power, the top speed, the acceleration, and the handling of the vehicle. It’s also the most expensive part of the EV. Why?

Let’s say this hypothetical $66,000 EV has a battery capacity of 65kWh, which would translate to a range of between 250 and 300 EPA miles (to be explained in a later article). If that battery was built entirely with Samsung Electronics 18650 35E Lithium Ion Cylindrical cells (each has a capacity of 12.6 W), that would require around 5,160 cells for a 65 kWh pack. Retail prices for these cells right now are $6/cell, however, most automakers can get these for less than $3/cell in volume. Still, that amounts to $15,000 in the cost of battery cells alone.

Cells alone can’t make a battery pack either. The battery pack needs connectivity for every single cell, fusing, battery management systems, temperature monitoring, cell balancing, coolant channels, contactors, connectors, and housing. All these components together can be quite expensive, roughly equating to a battery pack that costs, all in, around $17,000.

Cost of the Battery Pack of Hypothetical EV: $17,000

The Rest of the EV Powertrain

What else makes up an electric vehicle powertrain that’s different from an internal combustion one? Let’s say our hypothetical EV is a RWD only vehicle. That means it has a single electric motor connected to the rear axle through a drivetrain (single speed gearbox). That motor needs a way to convert the DC power from the battery to something the motor can use to turn on and off electric coils, so an inverter or controller is needed. Buying these off the shelf can get expensive, up to $20,000, but automakers are typically getting much better pricing on these due to economies of scale, closer to $2,500 for a motor, gearbox, and controller or inverter.

Cost of the Rest of the EV Powertrain: $2,500

Other Key Differences

There’s a number of other components in an EV that differ from an internal combustion vehicle. For example, an EV typically has an onboard AC charger for charging at home, and a series of contactors and controllers for a DC fast charger when charged at a station. These parts alone can be pricey, up to $1,500 all-in.

Additionally, an EV needs a way of down-converting the high voltage battery pack into a normal vehicle’s voltage for its electronics. This DC/DC converter probably runs around $300 for an automaker. Pair this with another $200 for all high voltage cabling.

There’s a number of other things that are hard to quantify. For example, EVs are typically heavier, so they require bigger brakes and stronger support structures for their batteries. EV automakers are always trying to throw in the latest and greatest “futuristic technology” for these vehicles, which can get quite expensive. For this conversation though, let’s focus on the electronics.

Cost of the Other Electronics: $2,000

Cost of the Internal Combustion Drivetrain

So let’s see what an internal combustion engine runs us. Let’s build our hypothetical $48,000 internal combustion engine car. How about a luxury-feeling 4-door crossover with a ~250-hp, ~250 ft-lb I4 Front Engine, FWD layout. GM’s 2.0L Turbo I4 Ecotec LSY motor fits the bill quite nicely (Link). Let’s give it a  9 speed automatic and we’ve essentially built a Cadillac XT5.

So what’s different about the Internal combustion engine car? Well, it has a motor and a transmission. It’s hard to know exactly what these cost the manufacturer, but a LSY crate motor and 9T50 transmission can be had from a 3rd party for $7,500 with all the necessary things to hook it up. That leads me to assume that the motor and transmission costs the manufacturer under $5,000, given that it’s likely marked up once from the manufacturer, once from the 3rd party.

Then there’s the fuel tank, ECU, computer, lines, etc. Let’s group this all together as $500.

Cost of IC Powertrain: $5,500

Where Does that Leave Us?

Adding it up, we’ve got $21,500 for an EV’s batteries, powertrain, and electronics, while we’ve got $5,500 for a combustion engine’s motor, transmission, and fuel tank. That means for our hypothetical vehicles, an EV’s COGS are $16,000 more than in Internal Combustion engine’s COGS. That’s not far off from our estimate of $15,000 in additional COGS that makes up the difference in cost between the two platforms. So, maybe the high price is justified from a margin analysis alone.

Is This a Fair Comparison?

One elephant in the room is that most of the EVs in the market are advertised as higher-end vehicles, so is our comparison really all that appropriate? Wouldn't it have been better to compare two identically priced vehicles and analyze their difference in COGS? Maybe, but we found in the previous article, that despite the significant difference in MSRP, the total cost of ownership of the average EV and the average ICE vehicle over 5 years is quite similar.

How do EVs become cheaper?

Like any technology, time will bring the cost of parts and manufacturing down. However, there are a few things that will inevitably bring the cost of EV components down:

Batteries

Batteries will continue to get more energy dense and easy to manufacture. If half the cells are required for the same energy density, that makes an EV better all around.

Battery Packs

There are a number of technologies, (shameless plug - ours included), that are focusing on making the packaging of the battery cells simpler and cheaper.

Electric Motors

It wasn’t long ago that building a 300 hp internal combustion motor for an automaker cost the automaker the equivalent of $40,000 in today’s money. Now they’re 1/10th of that. Electric motor technology is accelerating at a rapid pace. There could be a day in the near future that electric motors don’t even need a drivetrain to power a wheel (direct drive motors).

High Power Electronics

There’s a number of new semiconductor technologies being developed that are inherently smaller and cheaper than existing technologies built to handle the high voltage and high power of an EV. For example, Silicon Carbide (SiC) MOSFETs in power electronics have already made inverters (potentially) significantly cheaper to build than just a few years ago.

Battery Sharing and Swapping

There are a number of proposed concepts where the battery of an EV is not owned in a traditional sense. Instead, the battery is swapped in battery swapping stations and the cost of ownership of the battery is distributed over the lifecycle of the vehicle and with the number of times the battery is swapped. We won’t dive too much into this concept, but it could hypothetically make EVs the same cost of an IC engine.

Government Incentives

This one may be contentious for some people, but it is difficult to change a direction of an industry without incentives to do so. Government subsidies for companies building EVs and EV components, along with subsidies for consumers to enable them to make the switch easier will indeed make building EVs cheaper.

Contract Manufacturing

One of the reasons semiconductors and consumer electronics can be had at such a low price point is that the manufacturers that build these are extremely efficient. They simultaneously run multiple manufacturing lines for multiple companies 25/7/365, while sharing suppliers, equipment, and floor space. This amortizes costs accross multiple companies and all but eliminates the cost of standing up a factory for the "automaker." EVs are prime candidates for the "consumer electronics" treatment, and countries are warming up to this quickly. Foxconn has already begun contract manufacturing for 6 different EV companies in their Lordstown, Ohio plant. We're on our way to a "Fabless Automaker" world.

Less Wasteful Materials

When you remove the giant ICE powertrain from a vehicle design, the engineering team gets a lot more flexibility on how to package occupants in the vehicle. This could lead to radical new vehicle designs that use less material to provide equivalent or better performance. More on this in a future article.

Time

Like many consumer products, EVs will get cheaper to build over time. Innovations we haven't even considered will be deployed to enable us to build EVs at a similar cost to ICE vehicles today.