Automakers are going green to save money, not just the planet

Virtually all of the world’s major automakers are shifting to an all-electric future — and that’s as much about the bottom line as it is the environment.

Volkswagen (VLKPF) plans to launch roughly 70 pure electric models by 2030 and has already overtaken Tesla in electric vehicle sales in many European markets. General Motors (GM) said last week it hopes to sell only zero-emission cars by 2035. There isn’t a major automaker that isn’t committed to developing zero-emission vehicles.

There’s good reason for that radical change: EVs are not only key to complying with tougher environmental regulations, but they are also far cheaper to manufacture.

Electric vehicles come with several inherent cost advantages — with no internal combustion engine, they have far fewer moving parts, and they require far less labor to assemble.

Ford estimates that an EV will take 30% fewer hours of labor to assemble than a traditional gasoline-powered car.

And the propulsion systems of EVs are much simpler to share across different models than the engines and transmissions that power gasoline vehicles, further increasing efficiency and reducing costs.

GM currently uses more than 500 different powertrain combinations in its lineup of traditional cars. It could have fewer than two dozen combinations powering all the EVs it plans to build.

“EVs are simpler to make, more profitable, and higher growth,” Adam Jonas, auto analyst at Morgan Stanley, said in a note to clients last year.

The lower cost of assembling EVs leave major automakers with little choice but to make the switch, said Daniel Ives, technology analyst with Wedbush Securities.

“The traditional automakers, they can’t go a half-step towards EVs. It has to be all in,” he said.

And while the cost of building EVs is expected to continue to drop, the cost of building gasoline-powered vehicles is likely to increase because of the difficulty of complying with stricter emissions regulations coming into effect around the world.

“Internal combustion engines are going to get more and more expensive to meet environmental regulations,” said Ken Morris, vice president in charge of electric vehicles at GM. “I think it will be harder to find internal combustion engine suppliers, and the parts necessary to comply with regulation, compared to the ubiquity of EV components.”

The only thing keeping EVs from being cheaper already is the cost of various components, especially the batteries.

But EV component costs have been falling, with battery prices down about 85% over the past 20 years, according to industry estimates.

Costs are expected to continue falling as battery production becomes more efficient and demand rises. Tesla said last fall it is looking at a 56% reduction in battery costs on a per-kilowatt-hour basis in the coming few years.

“The battery technology is getting much more cost-effective. It’s going to continue to get better,” said Brett Smith, director of technology at the Center for Automotive Research, a Michigan think tank.

Smith said the changing economics of the auto industry means that car companies can’t continue to bet their future on gasoline powered cars, even though EVs make up well less than 5% of global sales today.

“The companies have essentially stopped investing in advanced internal combustion engine research,” Smith said.

Morris said GM will continue to spend money developing gasoline-powered vehicles because the company will keep building them for more than a decade — even if it achieves its most ambitious emissions goals. But he also said that 60% of GM’s research and development spending is now directed to EVs. The company has previously said it will invest $27 billion in developing EVs. Volkswagen is committing to invest even more — €35 billion, or some $43 billion.

Ives said another key factor driving traditional automakers to make the shift is the huge increase in Tesla’s (TSLA) share price. Even though the electric car maker sold only 500,000 cars in 2020, a tiny sliver of the more than 70 million cars and light trucks sold last year, Tesla shares climbed 743% and now are worth more than the combined value of the top 12 global automakers.

“Every board of every automaker has watched the Tesla share run,” Ives said. “Maybe they were skeptical two years ago. But its performance since has cemented in the mind of every automaker that it has to go this way.”