The Business Times

Carmakers starting to see improving margins on electric cars

Executives from Ford to Volkswagen sounding upbeat about profitability

Published Fri, Apr 2, 2021 · 05:50 AM


AUTOMOTIVE chief executives have warned for years that making electric cars would devastate profits. They're now saying the margins on them may not be so bad after all.

Executives from Ford to Volkswagen have made bullish statements on their electric forays in recent weeks, forecasting that battery-powered cars will be as profitable as combustion-engine models around mid-decade.

Until recently, automakers at times openly lamented the massive cost of developing electric drivetrains and retooling factories. They built half-heartedly designed electric vehicles that were limited in range and expensive to make, with Fiat Chrysler's former chief executive going so far as to plead with customers not to buy a model that lost the company money. Now that manufacturers are churning out models purpose-built to be electric and benefiting from falling battery prices, the math is looking much better.

Volkswagen (VW) CEO Herbert Diess said during a March 16 earnings call: "There are even signs that the EV business could be at least as good as the business with conventional cars."

The German manufacturer is a prime example of how much things have changed. In 2015, VW admitted to rigging millions of diesel engines to hide how dirty they were. It's now the top EV maker in Europe after developing a standardised platform to underpin dozens of new electric models.


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Mr Diess is betting that platform sharing and greater control over batteries - VW plans to have six cell factories across Europe - will bolster profitability. The company plans to use its massive scale - it owns a dozen brands, including Porsche and Audi - to pool resources and drive down costs.

The group's main VW brand expects EV margins to hit a tipping point around 2025. Returns for the ID.4 SUV, which is just starting sales, will be "more or less similar" to a comparable combustion model, said the brand's CEO Ralf Brandstaetter.

The group's budget businesses will take longer to make money, said Arndt Ellinghorst, an analyst at Sanford C. Bernstein. He estimates that battery prices would have to drop to US$60 per kilowatt-hour from current levels of roughly US$140 per kilowatt-hour for the likes of Skoda and Seat to profitably make EVs.

For General Motors CEO Mary Barra, EVs offer a way to expand the automaker's market share in the US. GM sent its stock price soaring in January when it said it wanted to phase out gas and diesel cars by 2035.

Ms Barra said during GM's Feb 10 earnings call: "Especially if you look at in the United States on the coast, we don't get what I would say is our fair share of the market."

EV margins will match what they are today for combustion-engine cars by the "mid or later part of the decade", she said.

BMW is introducing an electric-focused platform by mid-decade and expects it to deliver returns on par with combustion-engine models.

The fact that BMW is sticking to its long-term margin target shows that the manufacturer is confident on EV profitability, the company's chief financial officer Nicolas Peter said Wednesday.

The reduced complexity of EVs means less spending on drivetrain parts, while the electric transition has forced automakers to raise efficiencies, he told reporters.

Ford shares also have surged this year as it has announced plans to invest US$29 billion in electric and self-driving vehicles by 2025. Its European executives recently surprised JPMorgan analysts by expressing confidence in reaching a 6 per cent operating margin target even as it retools factories and shifts to offering only fully electric passenger vehicles by the end of the decade.

Ford's Europe management team struck "a decidedly upbeat tone with regard to the financial impact of electrification", and suggested that pricing and margins for the new Mustang Mach-E will be strong, JPMorgan's Ryan Brinkman wrote in a March 23 report.

While subsidies have helped buyers afford purchases in markets including Germany and France, EV sales also are strong in the UK, where aid isn't as generous.

"Consumers are getting used to high BEV prices from the beginning," said Juergen Pieper, an analyst at Bankhaus Metzler, referring to battery-electric vehicles. "That 'premium status' might hold for a long time." BLOOMBERG

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