Beatrice Lang
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles, with battery costs being a significant factor. Despite this, the demand for EVs is increasing, and sales are rising. While EVs are less profitable than internal combustion engine (ICE) vehicles, they have the potential to become equally or more profitable in the future. This is due to anticipated cost reductions in battery technology, power electronics scale economies, and indirect cost reductions from increased production. OEMs can also reduce costs by pursuing strategic decontenting and dedicated EV platforms, which could make EVs more profitable than ICE vehicles. However, the current challenge for automakers is to balance consumer demand for longer ranges with the high cost of batteries.
| Characteristics | Values |
|---|---|
| Current profitability | Minimally profitable or losing money depending on the model |
| Cost of production | More expensive to manufacture than gas-powered vehicles due to spiking battery costs |
| Consumer preference | Limited willingness to pay a premium for EVs |
| Sales | Expected to hit 13% globally in 2022 |
| Future profitability | Expected to be profitable by 2025 |
| Current market leader | Tesla |
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What You'll Learn
- Electric vehicles are currently more expensive to manufacture than gas-powered vehicles
- The cost of lithium, the main ingredient in batteries, has skyrocketed
- OEMs can reduce their EV costs by pursuing strategic decontenting
- The future looks bright for electric-vehicle growth
- Tesla has used its profits as a weapon in an EV price war
Electric vehicles are currently more expensive to manufacture than gas-powered vehicles
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles. This is mainly due to the high cost of batteries, which are the most expensive part of an EV. The cost of lithium, the main ingredient in EV batteries, has skyrocketed due to the high demand and limited number of working mines. Batteries can cost manufacturers anywhere from $13,000 to $25,000 or more, which is often more than the total vehicle cost for cheaper gas-powered cars.
The high cost of manufacturing EVs has led to lower profitability compared to gas-powered vehicles. In 2019, McKinsey conducted a study analyzing the profitability of EVs and found that they were approximately $12,000 more costly to produce than similar-sized gas-powered vehicles, making them less profitable. However, the study also suggested that it is possible to design a profitable EV that would be cost-competitive with gas-powered cars by the early to mid-2020s.
To reduce the cost of EVs, manufacturers can consider strategic decontenting, such as using more basic vehicle electronics, straightforward body styling, uncomplicated seat designs, and simplified interior trim. These design approaches can result in component savings of 20 to 30 percent. Additionally, optimizing the EV platform by reducing the number of components and requiring less capital in EV-only plants can further lower manufacturing costs.
While the initial cost of purchasing an EV may be higher, it is important to consider the long-term savings. EVs offer significantly lower maintenance and fuel costs compared to gas-powered vehicles. In 2020, the Department of Energy calculated that EV owners could save up to $14,500 in fuel costs over 15 years compared to a gas-powered car. Additionally, EVs have lower maintenance costs, as they do not require oil changes or spark plug replacements, and their regenerative braking system reduces the need for brake pad replacements.
In summary, while EVs are currently more expensive to manufacture than gas-powered vehicles due to battery costs, there are ongoing efforts to reduce manufacturing costs and improve profitability. The industry is working to bring down battery costs through chemistry and scale improvements, and OEMs are exploring ways to optimize EV platforms and designs to reduce expenses. As a result, it is expected that EVs will achieve cost parity with gas-powered vehicles and become equally or even more profitable by around 2025.
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The cost of lithium, the main ingredient in batteries, has skyrocketed
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles, with the cost of lithium, the main ingredient in their batteries, skyrocketing. This is due to demand far exceeding the supply that can be extracted from existing mines. In 2022, lithium prices reached a high point, with prices closely following raw material prices.
Lithium-ion battery packs, which are one of the most efficient energy storage devices worldwide, are costly. In 2022, they could cost up to $25,000, with prices driven by the cost of raw materials and components. However, in 2023, there was a 14% drop in price to a record low of $139/kWh, driven by a fall in raw material and component prices as production capacity increased.
In 2024, lithium-ion battery pack prices dropped even further to $115/kWh, the biggest annual drop since 2017. This was due to cell manufacturing overcapacity, economies of scale, low metal and component prices, the adoption of lower-cost lithium-iron-phosphate (LFP) batteries, and a slowdown in electric vehicle sales growth.
Despite the recent drop in prices, the cost of lithium-ion batteries remains high, impacting the profitability of electric vehicles. In 2022, electric vehicles were minimally profitable or even losing money, depending on the model. The high cost of manufacturing, driven in part by battery prices, made it challenging for electric vehicles to compete with traditional gas-powered cars.
However, industry experts believe that electric vehicles can become profitable in the future. By reducing battery capacity to meet the average consumer's needs and adopting cost-saving measures in design and manufacturing, companies can make electric vehicles more affordable and appealing to customers. With continued advancements in technology and manufacturing processes, as well as increased production capacity, it is expected that battery costs will continue to decrease over the next decade.
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OEMs can reduce their EV costs by pursuing strategic decontenting
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles, with battery costs being the largest single factor in this price difference. The cost of lithium, the main ingredient in EV batteries, has skyrocketed due to high demand and limited supply. As a result, most original equipment manufacturers (OEMs) do not make a profit from selling EVs, and these vehicles often cost $10,000 to $12,000 more to produce than comparable internal combustion engine (ICE) vehicles.
However, OEMs can take several steps to reduce their EV costs and improve profitability. One strategy is to pursue "strategic decontenting," which involves simplifying vehicle design and reducing non-essential features. This approach can lower production costs by several thousand dollars per vehicle and can be achieved through the following measures:
- Using more basic vehicle electronics with fewer powered options.
- Straightforward body styling and lighting.
- Uncomplicated seat designs and simplified interior trim.
- Eliminating extra displays, buttons, switches, wiring, modules, and unnecessary structural components.
- Reducing overall design complexity.
In addition to strategic decontenting, OEMs can also pursue other cost-saving measures, such as partnering with competitors to share research and development (R&D) costs, production costs, and EV platforms. By collaborating and sharing resources, OEMs can reduce the financial burden associated with transitioning to electrification.
Furthermore, advancements in battery technology and increased production volume are expected to drive down battery costs in the future. This, combined with the growing consumer demand for EVs and supportive government regulations, will help make EVs more profitable for OEMs in the long run.
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The future looks bright for electric-vehicle growth
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, even if from small bases. The number of new models from a growing cadre of automotive OEMs makes finding a suitable EV easier: in 2018 alone, OEMs launched about 100 new models and sold two million units globally.
Performance improvements continue with respect to range, performance, and reliability. Regulations in major car markets—China, the European Union, and the United States—are also compelling OEMs to produce more EVs and encouraging consumers to buy them. For example, China's automakers are working towards a country-wide mandate to have 40% of their sales from electrics by 2030.
While EVs are currently more expensive to manufacture than gas-powered vehicles due to spiking battery costs, the industry is working hard to bring down these costs. Experts believe that cost reductions of $5,100 to $5,700 per vehicle are possible through strategic decontenting, simplified assembly, and increased volume production. These cost savings could be passed on to consumers, making EVs more affordable and attractive.
In addition, OEMs can further reduce costs by pursuing strategic decontenting, such as using more basic vehicle electronics, straightforward body styling, uncomplicated seat designs, and simplified interior trim. These design approaches can extract component savings of 20 to 30 percent. Optimizing battery capacity based on consumer travel patterns can also reduce costs without sacrificing functionality for most consumers.
With these advancements and improvements, the EV industry is on a path toward increased profitability and growth.
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Tesla has used its profits as a weapon in an EV price war
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles due to spiking battery costs. This has resulted in lower profitability for EVs compared to traditional internal combustion engine (ICE) vehicles. However, there is increasing consumer demand for EVs, and sales are rising fast. Most major markets have consistently registered 50 to 60 percent growth in recent years.
Tesla Inc. has been a key player in the EV market, and its CEO, Elon Musk, has strategically used the company's profits as a weapon in the EV price war. Once a money-losing enterprise, Tesla has transformed into an industry leader in profit per vehicle. In the third quarter of 2022, Tesla earned $15,653 in gross profit per vehicle, more than twice that of Volkswagen AG and four times that of Toyota Motor Corp. Tesla's superior profitability has allowed it to aggressively raise prices on its popular vehicles, such as the Model Y SUV, challenging the strategies of established automakers.
In China, the end of central government subsidies has intensified the market share war among EV manufacturers in the world's largest EV market. Tesla's price hikes have impacted startups, such as Xpeng Inc., which now faces pressure to cut prices. Xpeng's gross profit of $4,565 in the third quarter was significantly lower than Tesla's, and the company reported a net loss of $11,735 per vehicle. Vietnamese EV startup Vinfast has also responded by offering price promotions to compete with Tesla.
To maintain its competitive edge, Tesla has invested heavily in new manufacturing technology and supply chain optimization. By bringing battery manufacturing in-house and standardizing vehicle designs, Tesla has improved its economies of scale. This strategy of using production-cost advantages to fund price cuts is not new in the auto industry, as seen with Henry Ford's Model T in the early 20th century and Toyota's lean production system in the 1980s and 1990s.
While the current landscape favors Tesla, analysts warn that the global EV market may soon face overcapacity, with production exceeding demand. By 2026, North American EV demand is predicted to reach approximately 2.8 million vehicles annually. Despite this, Tesla's financial prowess and strategic pricing moves have undoubtedly shaped the EV price war, forcing competitors to adapt and respond.
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Frequently asked questions
Electric vehicles (EVs) are currently more expensive to manufacture than gas-powered vehicles, making them minimally profitable or even unprofitable. However, they have the potential to become profitable in the future as production costs decrease and demand increases.
The high cost of lithium batteries makes EVs more expensive to produce than gas-powered vehicles. Batteries can cost manufacturers anywhere from $13,000 to $25,000 or more.
Several strategies can be employed to reduce the cost of producing EVs, including:
- Strategic decontenting: OEMs can reduce costs by using more basic vehicle electronics, straightforward body styling and lighting, uncomplicated seat designs, and simplified interior trim.
- Purpose-built EV platform: A dedicated EV platform can be simpler to assemble, reducing capital investment and fixed costs.
- Battery cost reduction: As demand for lithium batteries increases, the number of working mines is likely to increase, which could help to drive down the cost of lithium.
Consumer preference for EVs is increasing, with global sales expected to hit 13% in 2022. However, consumers have a limited willingness to pay a premium for EVs, which impacts their profitability compared to gas-powered vehicles.
Tesla has been a leader in EV profitability, earning more money per vehicle sold than its global rivals. Other companies, such as General Motors and Ford, are working towards achieving solid EV profitability in the coming years.
