McKinsey: Making electric vehicles profitable

The future looks bright for electric-vehicle (EV) growth. Consumers are more willing than ever to consider buying EVs, and sales are rising fast. Most major markets have consistently registered 50 to 60 percent growth in recent years, albeit from small bases. More new models from a growing cadre of automotive OEMs make finding a suitable EV easier: in 2018 alone OEMs launched about 100 new models and sold two million units in total globally. Likewise, performance improvements continue with respect to range, performance, and reliability. Regulations in major car markets—namely China, the European Union, and the United States—compel OEMs to produce more EVs and encourage consumers to buy them.

However, there is a problem: today, most OEMs do not make a profit from the sale of EVs. In fact, these vehicles often cost $12,000 more to produce than comparable vehicles powered by internal-combustion engines (ICEs) in the small- to midsize-car segment and the small-utility-vehicle segment (Exhibit 1). What is more, carmakers often struggle to recoup those costs through pricing alone. The result: apart from a few premium models, OEMs stand to lose money on almost every EV sold, which is clearly unsustainable.

Many carmakers appear to be resigned to this fate, at least for now. Battery costs represent the largest single factor in this price differential. As industry battery prices decline, perhaps five to seven years from now, the economics of EVs should shift from red to green. Current thinking holds that the industry will continue to produce EVs—largely because it has little alternative in the face of stringent fuel-economy and emissions policies—and that the industry will, in the meantime, absorb the losses.

Our analyses show that better options exist, even today, to accelerate the industry toward profitability from both product and business-model perspectives. Some of these options include aggressively reducing cost through “decontenting,” optimizing range for urban mobility, partnering with other automakers to reduce R&D and capital expenditures, targeting specific customer segments, and exploring battery leasing. . . .

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