Where is the Electric Vehicle Market Headed?

Investing in growth markets and new technologies can be a successful strategy, especially over the long term. But that doesn’t mean it can’t be challenging. A case in point: the array of mixed signals investors are hearing about the move to widespread use of electric vehicles (EVs).

On one hand, sales are climbing. By volume, sales of battery electric vehicles increased 42 per cent in Canada in the first three quarters of 2023 over the previous year. For North America, EV sales (battery and plug-in hybrid vehicles) grew by 47 per cent in 2023. In late 2023, Canada joined a number of other countries in finalizing a national EV sales mandate. It requires that 60 per cent of all new light-duty vehicles sold in 2030 must be electric, rising to 100 per cent in 2035.

Yet, at the same time, some North American automakers report that the demand for EVs is slipping, so they’ve cut back on EV factory investments and delayed some new vehicle launches. A recent decision by one car rental company to trim its EV fleet in favour of gas-powered vehicles has also raised concerns about demand.

In response, BloombergNEF (BNEF), a leading provider of data and insights on the transition to a lower-carbon economy, cut its global EV sales forecast for 2024 to 16.7 million units from 17.5 million. And this spring, in contrast to Canada, the U.S. government is expected to relax its tailpipe emissions standard – a key policy tool in boosting EV production and sales – until after 2030.

Given these circumstances, it can be tough to know which way the winds are blowing, says Farhad Panahov, an economist with RBC’s Climate Action Institute – especially when EV skeptics and advocates are each amplifying certain data points that suit their own agendas.

His takeaway? Focus on the big picture.

Bumps in the road

“There is a broad consensus that EVs are the car of the future,” says Panahov. “There might be some slowing, some hiccups in the EV sales adoption curve. The thing to keep in mind is that this is most likely temporary.”

In other words, while the recent slowdown is real, at least for some vehicle makers, it doesn’t signal any wholesale dismissal of EVs as cleaner, more capable successors to combustion engine vehicles. Rather, says Panahov, it likely has more to do with the macroeconomic backdrop, particularly inflation, as well as an earlier spike in battery prices.

Some resetting of overly aggressive expectations is also necessary. After all, investors need to remember opportunities may present themselves at different times along different parts of the EV value chain, outside of automakers. Sectors like mining, which produces critical minerals required to produce batteries; parts manufacturing; infrastructure; software developers and more, are all at different stages of development, creating bumps along the way.

What will drive EV adoption?

A recent RBC Climate Action Institute report underscores some of the most powerful factors that support the long-term trend: $27 billion has been invested in new battery plants in Canada since 2022; more than US$100 billion has been invested in the battery and EV manufacturing supply chains in North America; EV market penetration in much of Europe and China is already significantly ahead of Canada and the U.S.

One of the most important catalysts to watch for in helping push EV sales forward, especially in North America, will be vehicle pricing, says Panahov. Here, action is needed on two fronts to expand what he calls the circle of EV appeal: overall price parity between EVs and combustion engine cars in all market segments, as well as the introduction of many more affordable, lower-end EV models.

An oft-cited benchmark for when EVs hit price parity with conventional vehicles is $100 per kWh – not accounting for inflation. Based on the updated estimates from BNEF, the average EV battery price is expected to fall below that threshold by 2026. This is two years later than previously expected.

Cheaper batteries will also make it easier for automakers to roll out more EV models in lower-price tiers of the market. This will bring EVs into reach for many car buyers who currently have none to choose from when they go shopping for a new car.

“If we see cheaper electric trucks and SUVs, we’ll probably see higher adoption of those. And if we see cheaper EVs more generally, you will see higher adoption at the lower end of the consumer base,” notes Panahov.

EVs and the mass market

More consumer education and increasing familiarity with EVs will be another important catalyst, says Panahov. Right now, for example, many non-EV drivers report in consumer surveys that they are reluctant to move away from combustion vehicles due to a lack of available public vehicle charging stations. Yet, according to data compiled for RBC’s recent climate report, growth in charging infrastructure in Canada has outpaced EV adoption in most provinces, and there is no shortage of capacity for the current number of EVs on the road.

Where issues remain, Panahov says, has more to do with drivers getting used to the process: planning a route, finding a charger, hoping that it’s operating and then making a payment. More experience, coupled with increased standardization and reliability as the charging industry matures, will alleviate these concerns.

Looking at the bigger picture also means more than just long-term thinking. Investors, like drivers, may want to note that the shift to EVs isn’t simply about swapping a gas pump for a charger cable.

Panahov says the evolution of cell phones is a good analogy for what’s happening in the EV market. What began as a new tool to connect people on the move has evolved into a device that plays a role in all facets of our everyday lives. But it wasn’t always seen that way. Many investors and seasoned executives had reservations about the mass appeal of smartphones outside of work.

Therein lies the challenge for investors. There is more to EV adoption than switching vehicles; it requires new infrastructure, new supply chains and potentially a new way to get from one place to another. The potential for autonomous driving and other features will shift the way we look at vehicles. “Cars might change into something else that we’re not really thinking about right now,” says Panahov. “You can’t imagine what it’s going to be.”

With so many moving parts, investing in an emerging area like EVs, was never likely to move in a straight line. Long-term investing requires patience, but the journey to EV adoption may provide several entry points, across several different sectors and industries, along the way.