The mass deployment of clean mobility solutions such as electric vehicles (EVs) presents a significant challenge to deliver the energy transition – profitability. Looking at the whole ecosystem to derive greater value could help address this issue.
Solving the profitability quandary
“We’re facing this conundrum at present: we all want to drive electric cars but it’s not working, either because of the lack of infrastructure, or because it makes no economic sense. We need to think in broader terms about the theme and include manufacturers (OEMs) and consumers in this reflection,” argues Joachim Reinboth, co-head of Automotive and Mobility Services, CIB Industry Group, BNP Paribas. Undoubtedly, despite increased demand for EVs, OEMs embarking on this journey are finding the path to profitability rather arduous.
In a 2020 McKinsey survey of players in battery electric vehicles (BEV) production, only 18% expected a profit margin above $3,000 per vehicle, while more than half expected a margin of less than $1,000 per vehicle. Yet, over the next five years original equipment manufacturers (OEMs) will spend €165bn on EV Investments, according to BNP Paribas estimates.
We need to look at the entire supply chain.Joachim Reinboth, co-head of Automotive and Mobility Services,
CIB Industry Group, BNP Paribas
“We need to look at the entire supply chain. That includes manufacturers but also consumers. For some users, it is cheaper to use EVs – it’s not just about educating consumers about the environmental benefits of EVs but showing them where the value is,” Reinboth states.Currently, regulation is a key driver in pushing EV demand. But beyond the “sticks” approach, we’re increasingly seeing some countries and regions use the “carrots” of economic benefits to encourage new EV sales.
“In 2020, Norway was the only country in Europe with more than half of new car sales being electric in one way or another,” notes Reinboth. “Thanks to public policy and taxation, and higher demand, the Total Cost of Ownership (TCO) is now lower in the country. In Norway, you can save up to €150 per month in choosing an EV over a conventional one, and this is what we need to push for,” he stresses.
A holistic view at the value chain
On top of the value for consumers, it is also important to consider their changing lifestyles.Until now, most OEMs were focused on designing and selling cars – the relationship with the customer ended after the vehicle was sold. On the consumer side, car ownership is linked to high levels of depreciation.
We need to think about alternative ownership models and the car’s function as a mode of transport. With the car becoming a battery on wheels, the view of it as an asset may soon become irrelevant. OEMs can create useful profit pools by being more vertically integrated, thinks Reinboth. “There are significant environmental and economic benefits of a more closed loop approach to batteries, for instance. They should not be seen as just a production asset, but rather as energy as a service to better price and calculate net profit on the capital provided over time.” On the downstream part of the value-chain, charging should rely on renewable energy to properly enable the green transition.
Finance, the lubricant of clean mobility
As automakers face huge disruption, not just of driving but also away from fossil fuels and towards a cleaner and more efficient mobility eco-system, finance will play a key role, as part of the wider ecosystem of partners in the mobility industry, to support the automotive sector in its transformation.
Working with partners ranging from financial institutions to fleet operators, the automotive industry can co-create new business models associated with usage and sell a solution, rather than outright ownership. “Armed with more data, a forward-looking and flexible view of clean mobility, and strongly enhanced scale, there is no doubt OEMs are at the nexus of the energy transition,” remarks Reinboth.
Despite the lack of profitability of EVs, capital markets may already be factoring that in, with the market capitalisation of the top 5 listed OEMs in Europe accounting for about half of the of the top 5 pure EV players.
“Over time, we may see that ‘battery as a service’, or ‘mobility as a service’, is not only an interesting way of defining a broader profit pool, but with greater use of fleets or ‘aggregated assets’, we may also find that the securitisation markets that historically have focused on auto-loans may evolve as well. The combination of capital, technology, and usage-based view of green mobility will drive the change for the future,” concludes Reinboth.