Earlier this decade, there was no lack of hype around electric and hybrid cars. Sales were expected to take off, driving demand for lithium, nickel, cobalt and a host of rare earth elements above supply.
That was, in part, motivation for a rare earths bubble, but demand have remained manageable as high sales of electric vehicles have failed to materialise. In reality, electric and hybrid cars have gained traction only gradually as the range of EVs grew and as hybrids struggled to make dramatic improvements in fuel efficiency resulting from advances in internal combustion, particularly diesel engine technology.
Sooner or later, however, a combination of improving technology and pressure from legislation forcing changes in buyer choices should result in electric vehicles merging into the mainstream. A sure sign that the day is drawing nearer would be when established main brands set targets for themselves.
Well, this week Volkswagen did just that. The Financial Times covered an announcement made by Herbert Diess, head of the VW brand (the largest part of the VW Group), that the brand would sell one million electric cars by 2025 and leapfrog Tesla as the world’s premier volume EV manufacturer. As part of VW’s central plan, the FT reports, the firm is going to sell electric cars at the price of today’s diesel models and intends the entire electric fleet to be profitable from day one.
The drive for volume so far has not come from Western brands like VW or Tesla, but rather from China, motivated by chronic air pollution. A separate FT article explains how China, already the world’s largest purchaser of electric vehicles with sales of more than 300,000 last year, has set an ambitious target for cumulative sales of EVs to reach more than 5 million by 2020 in the country’s 13th five-year plan.
That is indeed ambitious. Last year China sold 28 million cars, so even allowing for growth in the meantime, Beijing is looking for at least 15% of the market to be electric within two to three years. Interestingly though, the two stories probably say as much about the reliance VW has on the China market as they do about the rise of EVs.
According to MarketWatch, VW’s brand-new car sales increased to 2.9 million in China in 2016, making the country VW’s biggest source of growth. VW and its domestic partners have some 10% of the Chinese market. If Beijing has mandated five million EV sales by 2020, that means half of VW’s EV target sales for 2025 will already have been met by China five years before that deadline.
On that rate of growth, China could be the source of all VW’s EV sales by 2025. This raises the question of whether VW’s one-million target by 2025 is too modest or is purely a response to Chinese pressure to raise the percentage of EV sales in the country. Even by its own admission, VW is fixated on implementing a cost reduction program in the run up to 2020, and only after that is the company expecting to roll out this new range of EV vehicles.
If VW is to meet both deadlines, its Chinese car plants will be turning out a range of EV equivalents for the Polo, Golf and Passat models long before the end of this decade. So it may be VW’s intention to use China as the proving ground for its new range, a move Beijing would probably encourage in view of the support it has given the battery industry in China over recent years. It clearly favours developing local strength in depth for an industry that has promised much and may only now be on the cusp of delivering.