Deep Dive: Electrification of the Mobility Sector

Deep Dive: Electrification of the mobility sector

Global demand for mobility will continue to increase due to a growing world population and rising global trade. We are used to being able to travel anywhere and having anything and everything delivered to our doorstep within a few days at the push of a button. Yet, we’ve also come to terms with the fact that we cannot continue to burden the earth to this extent. Without a change in energy sources in the mobility sector, energy consumption and CO2 emissions will increase immeasurably. Today, the entire transportation sector is powered almost exclusively by fossil fuels, contributing to 16 percent of global greenhouse gas emissions and 23 percent of CO2 emissions . 

The electrification of the mobility sector is one of our biggest levers for reducing CO2 emissions quickly and effectively. 

The history of the electric car

The concept of the electric car is by no means new. In fact, the first engine-powered car was an electric vehicle developed in Scotland in 1825 that reached a maximum speed of 12 mph. It took 60 years for the famous three-wheeled, gas-powered Benz Patent Motor Car to be introduced in 1886 . What many don't know: By 1900, there were actually more electric vehicles on the road than gasoline cars. 

Until 1920, the electric car was a serious competitor to the internal combustion engine. But in the end, the internal combustion engine was able to prevail due to the higher cost, weight and complexity of recharging electric cars at the time. 

Thanks to advances in battery technology and strong support from various governments, electric cars are now experiencing a rebirth. US entrepreneur and Tesla CEO Elon Musk plays a crucial role in this development. Tesla is one of the key drivers of the transition towards e-mobility, triggering change in a very traditional, conservative industry.

By now, almost all major car manufacturers have come to terms with the fact that the future lies in electric engines. A total of 28 new electric car models have been announced to launch in 2022. Volkswagen sold almost 300,000 electric vehicles in 2021, which equals the amount of cars sold by Tesla in Q4 alone.

"We are at the advent of exponential adaptation of e-mobility." - Frank Thelen

We believe that e-mobility is on the verge of mass adaptation and will disrupt entire industries. Developments in the electrification of the mobility sector are accelerated by several drivers, which we present in the following hypotheses. 

Hypothesis 1 

A transformation is inevitable. The battery electric engine is the most efficient of the currently available alternatives for cars. 

The reason why the battery-electric engine is so popular is a matter of physics. If you look at the overall efficiency of different drive technologies, the battery-powered electric car is winning in the well-to-wheel analysis, in which the efficiency is analyzed from energy generation to the wheel set in motion.

The classic internal combustion engine, powered by gasoline or diesel, comes in at 24 percent efficiency. Internal combustion engines powered by hydrogen reach only 18 percent. Hydrogen as a fuel for an electric motor increases the well-to-wheel efficiency to 29 percent. 

An electric motor powered by electric batteries has by far the highest energy efficiency. There are only minor energy losses due to conversion steps. Electric cars thus perform significantly better than any other form of vehicle, with an overall efficiency of 74 percent.

The high overall efficiency compared to the combustion engine has a direct influence on the energy consumption and thus on the operating costs of an electric vehicle. While a modern diesel consumes about 38 kWh (taking into account the calorific value of 9.8 kWh/l ) of energy per 100 km, electric cars consume only 14 kWh. Considering the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) consumption and the current price of electricity or diesel in Germany, the price difference between a diesel-powered Golf and the electric version (ID3) is 22 percent. (Combustion engine €5.46, electric car €4.46, diesel price: €1.40/l, electricity price €0.3189/kWh). Of course, in terms of sustainability, the question remains how the necessary energy is generated. But here, too, the electric drive is clearly ahead, as it has the potential to use sustainably generated, renewable energy, while the fuel for an internal combustion engine can so far only be obtained from petroleum or from biomass in a scalable manner, which is associated with high land consumption. 

Another resource-saving feature of electric cars is their simple design. With only around 20 moving parts , electric motors require far less maintenance than internal combustion engines with almost 2,000 moving parts . This means fewer repairs, fewer spare parts and no oil changes. Recuperation, the recovery of kinetic energy by the electric motor, also puts significantly less strain on the brakes. All these features result in advantages for the electric vehicle owner compared to owners of a classic combustion engine car.

In view of the international energy and climate targets, we are convinced that the mobility sector urgently needs to be electrified in order to not only achieve the targeted CO2 neutrality, but also to reduce overall energy requirements. 

Hypothesis 2:

Expected advances in battery performance and capacity will enable increasingly longer ranges for passenger cars, which will, over time, allow other applications.

Currently, crude oil is the primary source for most transportation. The above-mentioned advantages of battery-electric drives on the cost side as well as on the emissions side will, in our estimation, lead to mass adoption in the coming years. 

Especially for regular cars and trucks, the gravimetric and volumetric energy density of batteries is already advanced enough for an efficient use. 

Even though many drivers currently still express concern about the range of electric cars, there is already traction in the market today. In 2020, 2.7 percent of newly registered cars worldwide were pure electric vehicles (BEVs) and 8.7 percent were plug-in hybrids (PHEVs). The new Mercedes EQs shows that the range issue will no longer be a problem in the medium term: With 108 kWh battery capacity, it has a WLTP range of 769 km.

However, while the number of e-cars on the road has increased noticeably in recent years, there are still hardly any electrically powered trucks. One reason for that could be that existing truck OEMs have long assumed that building electric trucks was physically and economically impossible due to low gravimetric energy density and high cost.  

When Elon Musk unveiled the specifications of the Tesla Semi truck in 2017, skeptical voices were raised: The battery needed to electrify a truck would have to have at least 1000 kWh of power, resulting in a weight of 25 tons . However, these assumptions are based on battery technology from 20 years ago. Today, the weight of a battery with an output of 1000 kWh would be only 5 tons , and this development is expected to continue. Regarding the critics' assessment of the power required, in an interview, Elon Musk indicated that the standard-range Tesla Semi with a 450 km range should be able to cope with a battery with 500 kWh capacity due to its efficient design. 

Although the Tesla Semi was introduced in 2017, there are still no significant numbers of Tesla trucks on the roads. The reason for this could be the extreme shortage of batteries. For one Tesla Semi truck with 500 kWh battery capacity, Tesla can build 10 Model 3 Standard Range with 50 kWh battery capacity. Following its mission to accelerate the transition to sustainable mobility, Tesla is unlikely to build the Semi in significant numbers until enough batteries are available. 

In the meantime, however, the established truck OEMs have also recognized that the future will also be electric in the truck sector. Daimler Trucks has unveiled its eActros, a model that will have a battery capacity of up to 420 kWh , giving it a range of 400 km . The Traton Group, which includes the Scania, Traton and MAN brands, aims to have 50% electric-powered cars among all Scania vehicles sold by 2030, and at least 60% of MAN's vans and 40% of its long-haul trucks should be zero-emission by then. 

Where battery demand leads to scarcity in one place, it brings increased supply and new opportunities in another. The entire micro-mobility segment from eScooter to eBike can be traced back to advances in battery technology in recent years. It was only as a result of the automotive industry's increasing demand for batteries and the resulting reduction in costs, which according to Wright's Law goes hand in hand with increased unit sales, that this form of mobility became viable. 

Soon batteries will also be used for small aircraft, such as the Lilium Jet, and small ships. However, we do not see a battery-electric future for long-haul flights. Here, batteries would account for about 20 times the weight of the aircraft and about twice the volume as things stand today. Even with improved future technologies, we do not believe that any practical application will be possible. A similar picture is emerging in the shipping industry. With 200,000 metric tons of ship weight and 72,000 metric tons of battery volume required, the lithium content alone would be about 1,080 metric tons (1.5 percent), which would cause significant problems in raw material supply and battery cell assembly. Hydrogen could provide a remedy here, at least in theory. Because of its low volumetric density, its use on long-haul flights is also impractical. The energy density of ammonia is also insufficient for this purpose.

Hypothesis 3: 

As adaptation progresses, the prices of electric cars will continue to fall. By 2025, full electric vehicles will be cheaper on average than cars with internal combustion engines of comparable classes.

Electric cars are simpler in design than internal combustion cars. The advantages of this simple design and the significantly lower number of moving parts (around 20 in the electric motor versus almost 2,000 in the combustion engine) have already been outlined above. The critical point, however, is the batteries. According to research by Cairn, Tesla is currently paying $142/kWh for a battery pack, well below the industry average of $186/kWh . For the standard-range Plus Model 3 with 50 kWh battery capacity, this equates to $7100, accounting for just under 18 percent of the $39,490 retail price. Right there is the biggest lever to make electric cars more affordable. Tesla unveiled a strategy at its Battery Day 2020 to get to $100/kWh. 

According to a Bloomberg study , battery prices per kWH will reach $94 in 2024. The battery for the Tesla Model 3 Standard Range with a range of about 400 km would then only cost $ 4,700, allowing the purchase price of an electric car to drop to the same level as an internal combustion engine, but with lower maintenance costs for the reasons already described. This is Wright's Law in action: For every doubling of kWh of battery capacity produced, prices per kilowatt-hour fall by 28 percent, according to ARK.

Currently, the limiting factor for batteries is energy density, but with the expected advances, this won’t be a problem for long in terms of adaptation. Today, the energy density of conventional Li-ion batteries is still significantly lower than that of conventional fuels (270 Wh/kg compared to 9,800 Wh/liter for diesel). However, the significantly higher overall efficiency of electric engines evens it out. Internal combustion engines can use a maximum of 35 percent of the energy from a liter of diesel, while for batteries this figure is 97-98 percent. In addition, numerous research teams are looking for new forms of electric batteries with higher energy density. We see great potential here and have taken a closer look at the developments in this area in our battery deep dive .

In the field of battery technology, innovative approaches promise further cost reductions in materials. Replacing expensive and rare raw materials such as cobalt with cheaper materials such as nickel on the cathode side and silicon on the anode side will make battery technology increasingly cost-efficient.

Tesla's strategy to reduce the cost of batteries addresses precisely these points: Cobalt already makes up less than 3 percent of the Tesla battery. In the future, there will be no cobalt used at all. The substitute nickel is not only cheaper and more sustainable due to its threefold higher availability, but also has less supply chain risks due to better global distribution. Another key factor in cost reduction is vertical integration .

As demand for batteries continues to rise, many automakers are entering into partnerships with battery producers. Volkswagen, for example, has entered into a joint venture with battery producer Northvolt in order to secure sufficient batteries for the coming years and to support the supplier in expanding its capacities.  

Assuming that prices for gasoline and diesel will continue to rise due to increasing CO2 taxes, while electricity prices remain the same with the expansion of renewable energy, there will be an additional financial incentive for consumers to switch to EVs. 

Hypothesis 4:

OEMs and utilities are starting to identify the development of charging infrastructure, an important driver of e-mobility, as an opportunity to position themselves in an emerging market. 

Another key factor for the adaptation of e-mobility is the charging infrastructure. This is primarily due to the currently still low range of electric cars and the relatively long charging time. The established automakers have not seen themselves as responsible in this regard, just like they are not responsible for gas stations. Tesla, on the other hand, has been expanding a network of Superchargers since 2012 and even offered its customers free charging in the beginning. This was a strategic decision, because access to a charging infrastructure plays a major role in the purchase decision. Recently, Tesla announced that it would now make its charging stations available to all electric cars , generating a new revenue stream. With over 25,000 charging stations worldwide, they have the largest fast charging network. In Germany, besides Tesla, it was initially mainly the electricity providers and local municipal utilities that provided charging columns. This created a problem similar to something we recognize from mobile communications, namely charging station roaming . To use public charging stations, you need a contract with the local mobility provider. If you want to use different operators in other locations, you need to pay charging pole roaming fees, which unnecessarily increase the cost of charging. So when planning a longer trip with an electric car, you would have to get several charging cards and apps and register with different providers to be able to charge carefree. A simple and cost-effective solution is needed here. To further promote the expansion of the charging infrastructure, there are now various government subsidies that also apply to the purchase of private charging stations for your home. 

In order to enable a transformation towards e-mobility in the cargo sector as well, a charging infrastructure with a very high power connection is needed. To address this issue, Volvo has formed a joint venture with Daimler Trucks and Traton. The goal is to build a charging infrastructure for electric long-haul trucks and coaches in Europe. Combined, they plan to invest 500 million euros to build 1,700 charging stations within the next 5 years.

Major oil companies such as Shell, Aral and BP have also now recognized the opportunities in this emerging market and are investing in charging stations at their service points. Shell wants to become a leading provider of charging infrastructure and plans to expand its range of charging stations from the current 60,000 units worldwide to 500,000 by 2025. Volkswagen has entered into a partnership with BP and its subsidiary Aral to jointly build a European infrastructure with up to 18,000 ultrafast charging stations. 

For electric mobility to be entirely sustainable, the electricity needs to come from renewable sources. Currently, the majority of charging stations are fed from the general electricity mix. In 2020, the share of renewable energy in the electricity mix was 47% . This share will gradually increase over the next few years. In the meantime, the adaptation of the electric car is expected to significantly increase the demand for electricity. The challenge is that the electricity for the charging process must be available at all times and cannot be intelligently controlled and adapted to the availability of renewable electricity. Again, Tesla is leading by example. They announced on April 22, 2021, Earth Day , that all Superchargers will be powered by renewable energy before the end of 2021.  This was made possible with the use of photovoltaic systems and batteries at the charging stations, which decouple the charging station from the power grid and make it self-sufficient. At high utilization rates, this strategy can even bring cost advantages over operating the charging stations via the power grid. Where this is not possible, the purchase of certificates can at least provide compensation.

Hypothesis 5

Regulatory support in the largest automotive markets provides additional incentives for adaptation.

The EU recently outlined in its Fitfor-55 plan that internal combustion engines will effectively no longer be eligible for registration in new cars from 2035. Since the CO2 tax has come into force at the beginning of April 2021, prices for diesel and gasoline in Germany have risen by 7 to 8 cents. This trend will continue in the coming years. Many automakers have now set their own targets to accelerate the end of the internal combustion engine. General Motors wants to stop building combustion cars from 2035 and be CO2-neutral from 2040. Volkswagen plans to stop selling cars with internal combustion engines by 2035, at least in the EU, and Daimler has set a goal to deliver only zero-emission cars from 2029.

China is at the forefront of promoting e-vehicles. Whether it's solving a fast-growing pollution problem, reducing dependence on imported oil, or simply claiming leadership for the next era of global mobility, China is currently leading the way with more than half of global EV sales. The country is also driving the electrification of other vehicle types, such as buses and two-wheelers, and accounts for more than 99 percent of the world's electric vehicle fleet. To achieve their goal of becoming the undisputed electric car champion by 2025, China is taking a two-pronged approach, offering subsidies to electric car buyers and requiring auto companies to collect credits that can be transferred or traded when they sell electric cars. (Deloitte )

The US-government ist also supporting the adaptation of e-cars. President Biden's "American Jobs Plan" includes $174 billion to subsidize electric vehicles and EV charging stations, $80 billion for mass transit, and another $80 billion for rail (caranddriver ). To meet his goal of at least 40% electric car share of new cars sold in 2030, President Biden has now unveiled a subsidy that supports electric cars with up to $12,500 . 

New players in the market

The most progressive developments in this area are being triggered by new players and innovative startups that are taking advantage of the technological upheaval to move into a market previously dominated by industrial conglomerates. Tesla serves as a prime example of this development, which as of today (March 2022) is worth more than the large traditional German companies VW, BMW and Daimler combined. 

Two startups that are also getting a lot of attention right now are Lucid Motors from the U.S. and Rimac from Croatia. Lucid Motors has just started delivering the first few cars in October 2021 , still the company has already reached a $24 billion valuation via a SPAC deal. With the Lucid Air, Lucid is primarily focusing on the premium segment and therefore regards companies like Mercedes and BMW as its competition, rather than Tesla. Whether Lucid manages to successfully scale production remains to be seen. Tesla's production hell in 2018 showed that scaling production at high volumes is not easy. 

Scaling up production is one thing that Rimac Automobili won’t have to worry about. The e-car manufacturer from Croatia is on the same price level as Bugatti, and only small numbers are produced by hand. In our eyes, the new Rimac Nevera model is a masterpiece of engineering and proves that electric cars can be superior to combustion engines in every dimension. With an acceleration from 0 to 100 within 1.97 seconds, the Rimac Nevera is the fastest accelerating certified car. The Rimac Nevera also set a new world record of 8.6 seconds for the quarter mile, pushing internal combustion engines such as Bugatti or McLaren off the throne. The car has 1914 hp, powered by four electric motors, and a maximum speed of 412 km/h. Since Rimac is not focusing on the mass market, production costs are not a factor. With an MSRP of 2.4 million euros , Rimac can implement what is technologically possible. 

By building record-breaking e-racecars, Rimac has now made a name for itself in the automotive industry and become a supplier of powertrains and battery packs to Porsche, Daimler and Co. This is a development that would have been inconceivable before the advent of e-mobility in the combustion engine industry, which is dominated by the large German automakers. 

The Asian market is also positioning itself firmly in the field of electromobility with strong players such as Nio, BYD or XPeng. Thanks to government support, the electric car market in China is growing rapidly. In 2020, 1.3 million electric cars were sold in China. This represents 41 percent of global sales, which makes China one of the most important markets for electric cars. Nio plans to be one of the first Chinese automakers to expand into Europe, opening a branch in Norway in September 2021. This means more competition for the German established OEMs. 

Summary & Outlook:

The electrification of the mobility sector is inevitable and imminent. It will not only transform the automotive sector, but will also have a significant impact on other industries such as the oil and gas industry, the supply industry and even the real estate and insurance sectors. The German automotive industry is now beginning to catch up, while other industries still have the opportunity to respond to the upheavals and adapt their own business models accordingly. If policymakers also set the right course now, the transformation to e-mobility could come faster than expected. 

Key success factors for the rapid adaptation of electromobility are advances in battery technology and performance, the associated cost regressions, the development of a charging infrastructure, and the subsidies and incentives from policymakers that can be expected at least in the medium term. We also believe that automakers who consistently focus on e-mobility will have decisive advantages, particularly in terms of platform architecture. 

Developments in the automotive sector will also have an impact on other forms of mobility, which we discuss in more detail in our Deep Dive article on Shared Mobility . 

Overall, with all the challenges facing traditional companies and SMEs, the changes in this area are more than desirable as they will no longer harm the planet to the same extent and enable more sustainable and affordable mobility in the future.