Through all the turbulence of the past year, a source of enormous hope for the health of the planet has emerged: the automotive industry is shifting toward electric vehicles (EVs) even faster than we envisioned only a year ago. With steady support from governments and leading automakers in the face of the COVID-19 crisis, the global market share of electrified cars, SUVs, and other light vehicles grew from 8% in 2019 to 12% in 2020, and has shown continued strength in early 2021.
This shift will accelerate dramatically in the years to come. In fact, our updated forecast predicts that by 2026 electrified vehicles will account for more than half of light vehicles sold globally—four years sooner than we anticipated in our previous report. What’s more, we see zero-emission vehicles replacing internal combustion engines (ICEs) as the dominant powertrain for new light-vehicle sales globally just after 2035.
The transition from the ICE age to the EV age over the coming decade will represent rapid change in most countries. But from an environmental perspective, the EV age isn’t coming fast enough.
That’s because the global “car parc”—the total stock of vehicles in use—will change over far more slowly. As a result, our modelling predicts that the automotive sector in most major markets, including the EU with its European Green Deal, will likely fall well short of Paris Agreement targets for cutting worldwide emissions.
Steering the fight against climate change on course will require most markets to speed up the EV transition even further. For the EU to achieve its Green Deal targets, for example, it would need to reduce light-vehicle emissions by 90% by 2043—seven years sooner than currently forecasted—to compensate for its car parc emissions. This can be accomplished by further accelerating the adoption of zero-emission vehicles while strengthening the incentives to remove gas and diesel guzzlers from the roads. But it will also require transformational change and a fundamental shift in business models for most automakers.
THE FORCES DRIVING FASTER EV ADOPTION
Electrified vehicles, including hybrids, have achieved a breakout over the past year. Sales of plug-in hybrid (PHEVs) and battery electric vehicles (BEVs) were especially strong: their share of the light vehicle market rose to 2.2% in 2020 in the US, 5% in China, and a remarkable 9.3% in the EU, where sales of plug-ins in the fourth quarter surged by 230% over the comparable period in 2019. In addition to robust incentives, sales growth has been propelled by the falling costs of lithium-ion batteries.
Batteries are the most expensive component of EVs, accounting for 20% to 30% of total cost. The average cost of a nickel-rich battery pack fell below $150 per kilowatt hour (kWh) in 2020 for leading players—$20 below what we had expected in late 2019. The plunging price can largely be attributed to innovation in cell chemistry and pack assembly, greater production scale, and improved manufacturing processes.
On the regulatory front, the EU set a net-zero automotive emissions target for 2050 as part of the European Green Deal. In the US, President Joe Biden has indicated a strong focus on more stringent tailpipe emissions and re-joined the Paris Agreement, while California intends to ban gas- and diesel-burning new car sales in 2035. More than 15 nations have announced they will phase out ICEs by 2035; our forecasts assume that most of these targets will be met.
These strong signals from governments have further encouraged General Motors, Volvo, Jaguar, and many other leading OEMs to push more forcefully into electrification, with a growing number pledging to phase out ICE powertrains altogether. Growing investment into supply chains, charging infrastructure, and upgraded electrical grids will also help make these goals achievable.
A ROADMAP TOWARD ELECTRIFICATION
The powertrain transition is shifting into overdrive. We now expect that 47% of all light vehicles sold globally in 2025 will be fully electric or hybrids. This transition—especially to all-electric vehicles—will occur more quickly in the EU and China than other major markets, while electrification may occur relatively slowly in large developing nations such as Brazil and India. (See sidebar, “The Divergent Paths to Electrification.”)
THE DIVERGENT PATHS TO ELECTRIFICATION
Regardless of the market, rapidly declining battery costs, tougher government regulation, and the introduction of new EV models will continue to be the primary drivers of the shift. We see the end of the ICE age and dawn of the EV age playing out in the following three phases (see Exhibit 1):
- Phase 1: Incentive and Early Adopter-Driven Electrification. Regulation and government incentives will drive adoption of electrified vehicles through the next few years, at which point we project that electrified powertrain will exceed 25 million units sold annually across light vehicle segments. By 2023, OEMs are expected to have brought more than 300 battery electric and plug-in hybrid models to market, giving consumers vastly greater choice than they have today. Plug-in, full, and mild hybrids will command 25% of the global light-vehicle market in 2023; BEVs will claim a 7% share. With a number of OEM programs reaching high-volume production—and battery costs falling—more BEVs will be able to achieve parity in five-year total cost of ownership versus ICEs, even without government incentives.
- Phase 2: Ownership Cost-Driven Electrification. By 2030, consumers will begin converting to electrified vehicles en masse. The cost advantages of electrified-vehicle ownership will be clear, by then, across regions and segments. We project that battery pack costs will have dropped to $75 per kWh and that the global market share of BEVs will rise to 28%. The powertrain shift to zero-emission vehicles will be most notable in Europe and China; BEV penetration in those markets will reach 43% and 40%, respectively. Meanwhile, PHEV penetration might begin to decline as government incentives expire. We expect the market share of conventional ICEs to plunge below 20% by 2030. The first meaningful bans of fossil fuel-burning vehicles will begin taking effect during this period.
- Phase 3: Supply-Driven Electrification. By the end of this decade, we believe that supply, rather than total cost of ownership, will drive EV adoption. Several OEMs will start exiting the highest-volume ICE programs. The global BEV share will rise to 45% in 2035, and will reach 54% in the US, 58% in China, and 62% in the EU. (See Exhibit 2.) By this point, the eventual dominant players in e-mobility will have been largely determined. Every link along the automotive value chain will have been reshaped. We expect that market leadership will be divided among a more even mix of new EV-only players and incumbent OEMs, and be determined by how well the companies manage their portfolios across regions and scale up their production, distribution, and services.
