Electric mobility after the crisis: Why an auto slowdown won`t hurt EV demand

In 2019, electric mobility seemed poised to reach a tipping point. With more than two million electric vehicles (EVs) sold around the world, electric cars accounted for a record 2.5 % of the global light-vehicle (LV) market.¹ Then the COVID-19 pandemic hit, endangering lives, shaking up supply chains and workforces, and shutting down factories. The economic slowdown has significantly disrupted the auto industry, causing rapid declines in LV sales.

Given the disruptions, previous predictions about EV growth are now obsolete. To create more accurate forward-looking perspectives, we examined the emerging developments that will shape the market over the coming years. We then conducted separate analyses of the EV markets in China, the European Union, and the United States, since trends might vary significantly by region. One of the most striking findings: the EV market is much more likely to see a quick recovery and strong growth in China and Europe than in the United States. Over the long term, EV market share is also more likely to increase in China and Europe.

Positive momentum in China and Europe; slowdown in the United States

Given the regional differences in the spread of COVID-19 and varying government responses, we conducted separate analyses for the three key markets that represent 94 % of global EV sales: China, Europe, and the United States.

Of course, we cannot be certain that the predicted developments will materialize as expected. Therefore, we created different scenarios for each region. In one, the overall LV market recovers quickly from the impact of the COVID-19 crisis, and growth in EV market share accelerates. In the second scenario, the overall LV market is slow to recover, and growth in EV market share slows. Based on our analyses, we expect that the positive-growth scenario is most likely in China and Europe. In the United States, by contrast, we expect that the slowdown scenario is the most likely.

China: Quick recovery, with sales accelerating by late 2020

China is by far the largest EV market in the world, with 1.2 million EVs sold in 2019. The country’s quick containment of the COVID-19 pandemic and its economic rebound have contributed to a robust, developing EV ecosystem. Many EV start-ups are pushing new, mostly locally designed EV models into the market.

China also benefits from government policies designed to support EV growth. Some of them were in place before the pandemic, partly because officials were concerned that EV market-share growth decelerated from 2018 to 2019. For instance, China had established strong federal-fleet-emission targets and created a system in which OEMs received emission credits for passenger cars, based on various features, such as energy efficiency and vehicle range. In addition to those policies, the government is attempting to stimulate EV sales by extending purchase subsidies of up to 22,500, which were about to expire, through 2022. The government has also recently exempted EVs from the purchase tax.

Even with those incentives, the COVID-19 crisis has significantly affected EV sales in China. Only 100,000 units were sold in June 2020, compared with 196,000 in June 2019. That said, the EV market share in China has slightly increased to 4.4 % in June 2020. Government incentives may contribute to even stronger market-share growth in the second half of 2020. For instance, China has long had license-plate quotas to limit the number of new vehicles on the road to reduce pollution. In several large Chinese cities where EVs are already popular, local governments are limiting new license-plate registrations to EVs and lifting restrictions on the purchase of new EVs.

Overall, we expect that the number of EVs sold in China to potentially increase from 1.2 million in 2019 to between 2.4 million and 3.5 million in 2022 about 300,000 more in the most likely scenario than predicted before the COVID-19 crisis. With that shift, the EV market share in China would rise to 11–14 %, from 5 %.

Beijing’s policies toward stimulating electric mobility in recent years have also helped create a crowded market, with numerous domestic EV makers and start-ups. The pandemic is likely to hasten consolidation of Chinese brands in 2022 and 2023. For instance, a Chinese EV maker planning its entry into the US market recently announced the suspension of its operations because of funding and operational problems brought on by the COVID-19 crisis. Several other players could follow, leading to consolidation and a smaller number of strong EV players in the Chinese market.

Europe: Positive momentum, with emission regulations potentially pushing market share higher by 2022

Despite the COVID-19 pandemic, European leaders have maintained a strict fleet wide CO2-emission target of 95 grams of CO2 per kilometre by 2021. Many major European-based OEMs have publicly committed to reaching that target and have rolled out an unprecedented number of battery-powered-EV and plug-in hybrid-EV models. By our count, they introduced 42 models in the first quarter of 2020 alone.

European governments have introduced new purchase subsidies, tax breaks, or a combination of incentives to encourage EV adoption and promote green mobility. While they implemented those policies to improve emissions, they are also responding to increased consumer concerns about sustainability and environmental issues. The incentives (such as Germany’s subsidies toward the purchase of an EV), combined with the increase in EV models, has led to soaring consumer demand—despite the continued COVID-19 pandemic. For example, vehicle registrations for plug-in hybrid EVs and battery-powered EVs in Germany in the first half of 2020 increased by 200 % and 43 %, respectively, over the first half of 2019.

While the rebound from the COVID-19 crisis will differ by country, we expect that Europe is likely to make a quick recovery. Overall, European EV sales will potentially increase from 600,000 in 2019 to between 2.0 million and 2.9 million in 2022. Europe’s EV market share is also increasing, in line with trends that were occurring before the COVID-19 crisis. The market share rose from 3 % in 2019 to 7 % by June 2020. By 2022, we expect that EVs may have a 12–15 % market share in Europe slightly higher than the precise projection in the most likely scenario.

United States: Stagnating sales, potentially pushing 2022 market share below precise demand scenarios

The US EV market looks vastly different from that in China or Europe. As in China, EV sales in the United States had been slowing before the COVID-19 crisis, with annual growth decreasing from 80 % in 2018 to 12 % in 2019. The country’s slowing economy during the pandemic and the subsequent decrease in consumer spending are contributing to a lacklustre EV market. Moreover, low demand for oil and bottomed-out oil prices make ICE vehicles cheaper than EVs to operate in the United States, since gasoline taxes are relatively low compared with those of most other countries. Recent regulatory changes are also stymieing the large-scale adoption of EVs in the United States. The US federal government plans to decrease the fuel-economy standard to 40.4 miles per gallon by 2026 and is relaxing CO2-emission targets. Although some states have adopted a stricter low-emission standard, such as the one in California, the current regulatory environment will provide fewer incentives for purchasing or manufacturing EVs.

Long-term market dynamics

In addition to evaluating short-term changes, we also wanted to understand long-term trends for EVs. Would they see continued worldwide growth? And would regional differences continue to persist? If the current tailwinds for EVs in China and Europe persist, electric mobility could emerge from the COVID-19 crisis in an even stronger position than precrisis estimates had predicted. In fact, regulations and incentives will likely propel EV market share in China to roughly 35 to 50 % and in Europe to 35 to 45 % by 2030, with the post-COVID market environment making the aggressive scenario more likely.

There is more uncertainty about long-term trends in the US market because of regulatory headwinds and macroeconomic challenges; these could also change in the next 12 to 18 months, since the economic and regulatory outlook is also highly uncertain. While the EV market shares in the United States will likely increase, the pace of its growth will likely be slower than seen in China or Europe, only reaching around 15 to 35 % by 2030. The exact developments will largely depend on oil prices and monetary incentives for EV purchases, since the market is highly responsive to changes in those areas.

McKinsey