The bets of major companies from Honda to Toyota are being tested as demand for electric vehicles increases
Global spending on electric vehicles jumped 53% last year to $388 billion
Global spending on electric vehicles continues to rise, according to a new Bloomberg NEF report on investment in the energy transition, reaching $388 billion in 2022, up 53% from the previous year.
With this outcome for the year 2022, the total value of electric vehicle sales in the passenger car sector has so far exceeded $1 trillion.
This number can be viewed in several ways, the most important of which is that if an automaker misses out on a proper EV strategy, it will be missing out on a share of the trillion-dollar revenues over the past decade.
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This number may seem large, but it is not compared to the total value of car sales in the world, which amounts to about $2.5 trillion annually. Thus, during the past 10 years since the advent of electric vehicles in the modern era, the total value of vehicle sales has reached approximately $25 trillion. Hence, the cumulative value of electric car sales is rather modest, while the total profits generated from them are much less.
Production cycles that do not keep pace with development
Despite this, growth rates seem important, as 60% of total spending on electric vehicles was spent during the past 18 months only, while this year will set new records, as sales of electric passenger vehicles are likely to easily exceed the $500 billion threshold. This segment has now become an important and very fast growing part of the global auto sales.
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The automotive industry operates on long-term production cycles. While some believe that there is a constant influx of new vehicles, many of them are nothing more than cosmetic upgrades to existing models, or what is called in the industry a "facelift". In order to understand production cycles and what goes on after them, it is important to take a look at vehicle production lines.
Unforgiving economics
Companies that manufacture cars in large quantities develop production lines to match the models they produce for a period that usually ranges between 6 and 10 years. This development process takes many years and costs billions of dollars, so that the product lines are versatile, allowing automakers to use different bodies to meet a wide range of consumer preferences. These lines also allow the same manufacturing components to be used on many models, which is a necessary part of the unforgiving economies of mass-produced vehicles around the world.
The growth of electric vehicles is outpacing the proliferation of battery charging points
Long development cycles mean that any mistake a car manufacturer makes takes a long time to see its full impact. Electric car sales crossing the trillion-dollar mark may be the point at which it becomes clear that some automakers may have bet the wrong way.
Alarm bells in Japan
Japanese car companies provide an illustrative case in this regard. Combined, Japanese brands sold less than 5% of electric vehicles purchased worldwide last year, and none of them made it into the top 10 largest electric vehicle brands by volume. This was not a problem during 2019, when electric cars accounted for only 2.6% of global car sales, but what is worrying is that it will often approach 18% of sales in 2023.
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As for China, the picture appears sharper, as it is estimated that the percentage of electric vehicle sales will exceed 30% this year, compared to only 5% in 2019, and this is a huge change that is not understood by the time period of the natural cycle of manufacturing vehicle production lines. The share of Japanese car sales in the Chinese market declined to 21% of new car sales last year, instead of 25% in 2020.
Today, Japanese car companies seem to have sounded the alarm, as Honda is moving to update its electric vehicle strategy, while Toyota has appointed new management that promises to apply the "electric vehicles first" policy.
Investing bets put to the test
It will take some time to adjust course, as Toyota said it will not have a new platform ready to produce electric vehicles until 2027, and while the company may accelerate the pace of its launch, this highlights the timelines according to which traditional automakers operate.
Nevertheless, Toyota may succeed in its endeavors. The company has shown an amazing ability to adapt throughout its 85-year history. But the most important point here is that the next car manufacturing cycle is absolutely vital in terms of turning the track. If you fail to reach the goal, there will be dire consequences.
Toyota is investing $5.6 billion to produce electric car batteries in America and Japan
Many other automakers are in similar situations, generally aiming to launch their model lines between 2026 and 2028, and it will take a few years to see if their bets are correct.
future challenges
There are still many future challenges in light of the boom in electric car sales. Despite the significant recent growth, only about 3% of the 1.3 billion passenger cars expected to be on the roads around the world by the end of this year will be electric vehicles. Also, increasing demand is putting real pressures on battery supply chains and public charging infrastructure.
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Electric car charging rate is 80%
Nevertheless, the first trillion dollars highlighted in the Bloomberg NEF report marks the beginning of a tangible impact in the auto sector. Electric vehicles have dominated consumer consciousness and the enthusiasm of industry observers for years, but now they command a real market share.
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