It’s the battery, stupid

Dear Shareholders,

The main difference between cars with electric and internal combustion engines is – quite clearly – the drive. The rest is largely identical for the driver, with the serious difference that electric cars do not require a gearbox, as the engine has full torque even at low revs. On the one hand, this ensures the sensational acceleration of electric cars. On the other hand, this noticeably reduces complexity: electric cars get by with around 20 percent fewer parts than conventional combustion engines.

Nevertheless, electric cars are not trivial. This is mainly due to the batteries. The manufacturing process is chemically and technologically very demanding, the smallest details make a big difference in quality. The battery blocks are still too large and have too little storage capacity to reach the ranges of gasoline and diesel engines. Above all, the batteries are still too expensive.

However, the cost parity between cars with electric and internal combustion engines is getting closer and closer. This is mainly due to the permanently increasing performance of the batteries and their decreasing costs. They still account for up to 40 percent of the total costs of an electric car. But the share is decreasing and declining. There are several reasons for this.

Cost parity in sight

On the one hand, the storage capacity of the batteries increases permanently. All major battery manufacturers and car companies are working on optimizing the battery packs. On the other hand, mass production plays a decisive role alongside technological progress. Dozens of so-called gigafactories are currently being produced worldwide, which will soon be producing large quantities of battery cells. The high volumes enable significant economies of scale.

Battery costs have already fallen sharply in the past. According to Cairn Energy Research Advisors, the cost per kilowatt hour (kWh) of lithium-ion batteries more than halved from $280 to around $130 between 2014 and 2018. Trend: further decline.

The joint project between Tesla and Panasonic is currently considered to be the most advanced. Their Gigafactory in the Nevada desert now produces around 3.5 million battery cells per day, which are further processed into the required battery units. This is enough to equip almost 900 Model 3 vehicles – a good 6,000 per week. This is roughly equivalent to Tesla’s current production capacity. The company is therefore autonomous in terms of battery cells and finished rechargeable battery blocks and has gained a lot of experience – in contrast to the other American and European car manufacturers.

Battery cells as a competitive advantage

Above all, Tesla produces batteries at a much lower price than its competitors and in consistently high quality. According to estimates by Cairn, Tesla already produces one kilowatt hour of battery power for $116. In addition to the range, sticker price is a decisive factor in the decision for or against the purchase of an electric vehicle. Tesla thus secures a clear competitive advantage in the market through its early commitment to its own battery cell production!

If subsidies are taken into account, electric cars are already no more expensive than gasoline or diesel in many countries in the longer term. The acquisition costs for almost all models are higher than for corresponding vehicles with conventional drives. On the other hand, the costs for charging electricity are lower than those for refuelling. Electric vehicles also have an advantage when it comes to maintenance. Electric drives are more robust and – as already mentioned – do not require a gearbox. According to calculations by the ADAC, Europe’s largest automobile club, a VW e-Golf, for example, beats a comparable gasoline engine on the cost side with an annual mileage of 30,000 kilometers. The Audi e-tron drives noticeably cheaper than its diesel counterpart, even when driving much shorter distances.

In recent years, electricity storage systems have become on average 16 percent cheaper per year. If the costs for the battery cells or the complete battery system continue to fall at the current rate, cost parity can also be achieved very soon when purchasing electric vehicles – probably as early as this year.

From 2020, Volkswagen plans to offer the electrically powered compact car I.D. for less than 30,000€. A comparable VW Golf costs considerably more than a petrol or diesel car.