Wednesday, February 28

Electric car batteries are getting more expensive than ever. Bad news for your expansion

Not only is the supply chain broken and making it difficult to produce vehicles (a gap of 25 million is already estimated by 2030), rising costs and excess demand have pushed up car prices. The perfect context for the electric car to have its expansion even more difficult.

economy of scale. Ever since Henry Ford promoted mass assembly, automobile production has been based on economies of scale. This basic theory suggests that costs will tend to fall the more units of the same product are manufactured. It is one of the reasons why manufacturers agree on their own synergies and why the differences between models of different brands are getting smaller and smaller.

The costs. The formula is very simple. The cost per finished product is the division of the fixed and variable costs of the production process by the number of cars produced. In very short accounts, it would be necessary to add the cost of machinery and installations (fixed costs) and that of raw materials or energy (variable costs).

The sum of both costs and their division by the number of products produced will give us the unit manufacturing cost. In this way, you can put a price on it and study the benefit that can be obtained from its sale to the public.

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The expansion. However, in practice, this is not so simple when a new product is put on the market. In the case of the electric car, it will be necessary to have the necessary number of clients who contribute money with the first units to finance greater production. Such increased production will facilitate the arrival of cheaper, more affordable and mass-buyable products.

It is not surprising that as European anti-pollution standards have been defined, manufacturers are interested in selling larger, heavier and more expensive electric vehicles. Ford, on the other hand, has been totally transparent and has confirmed that its combustion vehicle division (Ford Blue) will be the one that finances the electric car division (Ford Model e).

goodbye to theory. But the theory is just that: theory. The breakdown of the supply chain or the war in Ukraine are factors that, to a greater or lesser extent, escape the industry. The same happens with the rise in the price of raw materials that puts at risk a reduction in the cost of electric vehicles in the short term. The result: electric cars will remain expensive.

The batteries. The rise in the price of raw materials puts batteries back in the eye of the hurricane. At the end of 2021, it was already reported that the price of manufacturing batteries for electric cars was falling but that its decline was slowing down. A component that represents 40% of the cars of an electric vehicle.

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Now, Morgan Stanley points out that the cost of lithium (almost five times higher than a year ago) will cause a 25% increase in the price of batteries, which will result in higher costs for the vehicle manufacturer, lower margin of benefits and a higher price for the consumer. The demand, in addition, has multiplied in the last five years.

Not only lithium seems to complicate the transition to electric cars. The price of nickel is also skyrocketing and even a few weeks ago the London Metal Exchange, the world’s largest futures market for these raw materials, had to be suspended.

The sword and the wall. Obviously, all this dance of figures and prices should have an impact on the final consumer. The potential buyer is between a rock and a hard place. Institutions are pressing to manufacture more electric cars and put obstacles to the use of combustion vehicles. Prices are not going down as fast as they should. And, in the middle, the final consumer.

The great dilemma of electric car manufacturers now: lower price or increase autonomy

The expansion of the electric car to put smaller, more versatile vehicles on the market at more affordable prices than the current ones. It is something that Wayne Griffiths, CEO of Seat, has been warning about for some time, but which, for the moment, seems to have a complicated future in the short and medium term.

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