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    The Evolution of Electric Vehicle Batteries: Part 2

    Veronica Zhang ,Analyst
    March 24, 2017

    This is part two of a two-part series by Ms. Zhang that explores the economics of electric vehicle (EV) batteries, which are rapidly developing, arguably at a quicker pace than stationary battery storage (read Part 1). Part 2 looks at how regulatory policy is on the side of electric vehicles, and how we believe that the adoption of electrification will be an inevitability. Alternative energy is an important part of our natural resources equities investment strategy.

    Regulatory Policy Changes Support Electric Vehicles

    We believe that we are not far from what is likely to be a sustainably, profitable industry. The pace of EV cost cuts, research and development (R&D) support in new tech development, and broad global support for EV augur well for electrification in the coming decades. In Part 1 we explored the basic economics of the EV battery industry and the overarching need for cost reductions; here we take a closer look at the regulatory environment and leading adopters, like China.

    An array of subsidies, tax benefits, and exemptions otherwise applied to traditional, or internal combustion engine (ICE) vehicles is currently being employed to help in the adoption of electric vehicles (EVs) by making their price more palatable to consumers. While government support is significant in China, it varies in South Korea, Japan, parts of Europe (Germany and France), and the U.S.

    China's Favorable Path for EV Adoption

    China, in our view, has led the way in paving a favorable path for EV adoption given its lofty targets for reducing CO2. China currently employs some of the harshest regulations on ICE vehicles. In Beijing, for example, road space rationing (restricting cars that could only enter common road space based on the last digit of the license plate number on certain set days) was a policy implemented and tightly adhered to during and following the Beijing 2008 Summer Olympics as a means to keep pollution in check. EVs in China, however, enjoy an ~30% combined federal/city subsidy, zero tax (~10% of vehicle price), and are exempt from road space restrictions.

    In addition to EV purchase subsidies, China has also rolled out a number of initiatives around the infrastructure development necessary to support electric vehicles on the roads. China has set certain targets for its most urbanized cities and provinces and is nationally aiming to deploy 12,000 charging stations and 4.8 million charging piles by 2020 to help meet its target of 5 million new energy vehicles (NEVs), which includes plug-in vehicles in additional to pure EVs. China moved into the lead in 2016 in terms of EV adoption, and its aggressive government policies are expected to extend this lead in the coming years.

    China Has Highest Adoption Rate for EV (BEV+PHEV)* in 2016

    China Has Highest Adoption Rate for EV (BEV+PHEV)* in 2016 Chart

    *BEV refers to Battery Electric Vehicles (Tesla's Model S falls into this category). PHEV refers to Plug-in Hybrid Electric Eehicles (the Chevy Volt is an example).
    Source: SNE Research, IHS, and Bernstein estimates (2016 and beyond) and analysis. Past performance is no guarantee of future results.

    While EVs will generally comprise approximately 5% of China's total cars on the road, the urban density in cities such as Beijing and Shanghai create economically efficient metros in which to implement local infrastructure conducive for electric vehicles, particularly since EV adoption addresses the mileage issue that is paramount to making the switch from ICE.

    In addition to the Chinese government's support for electric vehicles, its stringent policies toward ICE vehicles appears to craft a compelling long-term case in favor of EV. For example, just meeting the compliance requirements of China's 2020 fuel economy target of a 28% reduction in fuel consumption is likely to add another $1,000 in cost to each ICE vehicle. The cost increase will largely result from hardware upgrades to the emissions systems, as well as more efficient start-stop systems, gear shift indicators, and A/C systems.

    Steady or Not, EV Adoption will Happen: NextEV is a Case Study

    In our December travels to China, we had a memorable meeting with NextEV1 that illustrated the tangibility and inevitability of EV. The startup NextEV is a privately owned Chinese EV manufacturer and current participant in the Formula E series (the EV equivalent of Formula 1). In October 2016, NextEV opened its U.S. based headquarters in San Jose, CA, and is among a handful of Chinese EV companies tapping into Silicon Valley's engineering and software expertise. While NextEV intends to launch a cheaper competitor to Tesla's Model X in a year, it recently unveiled the Nio EP9 electric supercar, currently dubbed the world's fastest electric car (0 to 100km/h in 2.7 seconds, with a top speed of 313km/h; by comparison, Tesla's S P90D pulls 0-100km/h in 2.8 seconds, with a top speed of 249 km/h).

    While NextEV's business model may seem nearly identical to Tesla's, there is a key differentiator: the NextEV consumer does not pay for the battery pack up front. This results in significant savings on the purchase price and, thus, makes pure EV instantly competitive with ICE. NextEV retains ownership of the battery and charges the consumer based on usage, employing vehicle telematics (the technology of sending, receiving, and storing information relating to vehicles via telecom devices), a fee conceptually similar to paying for gas and maintenance on an ICE vehicle. With continued declines in lithium-ion battery costs, the economics work for this type of business model, whereby the company assumes the liability of an increasingly cheap asset, but enjoys the rental economics benchmarked to the relative cost of a more expensive alternative.