Five Ways Automakers Make Some Electric Cars Profitable

Big, gas-guzzling cars are often more profitable for automakers than are cars that drive on electricity, due in large part to the persistently high costs of batteries. So it’s not all that surprising that some automakers have spent years delaying more aggressive pushes into electrification.

But the world is changing, and consumers are increasingly interested in driving electric cars, while automakers continue to be required to meet environmental mandates. Battery costs are also steadily coming down, but it will still take many years for most competitive electric cars to have the lower manufacturing costs associated with traditional internal combustion vehicles.

The analysts at McKinsey recently published a report to help automakers that are struggling with the potentially expensive prospect of adding more electric-car models to their lineup. The researchers give a handful of suggestions for how automakers can adjust and adapt to offering electric cars, while also trying to turn a profit.

The tips seem mostly directed at big automakers that are still offering just a few electric car models. New figures out from EV-Volumes suggest that Tesla’s Model S and Nissan’s Leaf were the bestselling electric cars of 2016, followed by BYD’s Tang and GM’s Chevy Volt.

All of those automakers have been pretty aggressive about jumping into electric cars, but other manufacturers have produced a limited number of models that are largely being used as “compliance cars,” to meet stricter state regulations.

Currently, the overall electric car market is still pretty small — at 773,563 models sold worldwide last year — so automakers can still define, or redefine, their electric car strategies. However, they should act fast, before companies like Tesla, Nissan and GM corner the market.

Here are five suggestions from McKinsey for how to make the transition to electric cars more profitable for automakers.

1) Start by offering lower-range, cheaper urban electric cars: Even though Tesla started out selling expensive luxury electric cars, McKinsey analysts argue that automakers are currently missing out by not offering more low-cost, low-range electric cars. There are a variety of types of electric-car buyers, says the report, starting with early adopters that are willing to spend on the Model S or even the Roadster, Tesla’s first expensive electric sports car.

But the next wave of electric car buyers, referred to as “near-term electric car buyers,” are likely to more interested in electric cars that cost far less and are designed primarily for use in urban areas. Members of this demographic tend to live in cities and only travel 25 to 35 miles on average per day. These cars would be cheaper because they would have smaller battery packs and driving ranges.

Automakers focused on Europe and Japan already offer some of these electric models, which on the low end used to be called “neighborhood electric vehicles.” French giant Renault has been selling the small Zoe, which has a 22-kilowatt-hour battery pack, for some time now, while Nissan’s early Leaf models were low-cost and had relatively low range.

But these automakers are clearly caught in a bind when their cars have minimal range and are being compared to longer-range electric vehicles from the likes of Tesla and GM. Nissan and Renault subsequently launched their own versions of those cars with bigger batteries and higher costs.

2) Package competitive electric cars with new business models: If automakers plan to make electric car models that have big batteries, long ranges and high costs, they should start offering those types of higher-end cars today to new types of customers through alternative uses like ride-hailing and car-sharing, according to the report. Electric cars can have higher upfront costs than internal combustion cars, but their total cost of ownership, considering the cost of electricity versus gasoline and maintenance, can be lower.

The report contends that companies like Uber, which manages ride-sharing services, or Zipcar, which maintains car-sharing fleets, would be well served by buying up electric cars and using them in fleets. They could save money that way.

At the same time, automakers should be more creative in terms of both partnerships and new business models, embracing these new forms of “mobility,” a buzzword heavily favored these days by car companies. Automakers should be able to shift their electric-car launch strategies from selling a car, to selling services, to selling a package in between, depending on demand from customers, notes the report.

3) Education and communication: While between 30 percent and 45 percent of consumers in the U.S. and Germany say they’ve considered buying an electric car, less than 5 percent of consumers are actually buying electric vehicles, the report found, according to surveys.

That’s a large gap. It highlights how only about half of consumers say they understand how electric cars work. Through more education and marketing, that gap between interest and purchase could be made much smaller, and automakers should make efforts to create communication campaigns to figure out this problem.

Tesla seems to be well aware of this issue, because the notion is at the core of why the company insists on selling its cars out of its own Tesla stores. At Tesla stores, potential customers can learn about electric cars and battery technology, and have a hands-on experience with electric-car technology. Tesla doesn’t want its cars sold at traditional dealerships where electric cars are sold alongside traditional cars and often go ignored by dealers.

The report also found that consumers who are interested in electric cars are more fearful about range issues compared to consumers who have actually purchased an electric car. That implies that once someone owns an electric car, range anxiety is diminished. Communication campaigns explaining how charging works and where it’s available could be helpful in overcoming this barrier.

4) Know your demographics: In the same way that there’s a lack of lower-cost, lower-range electric cars out there, the report contends that automakers need to target electric-car models to other types of buyers. There are a whopping nine types of buyers, say McKinsey analysts, including: status luxury enthusiasts, risk-averse greens, mainstream mobility seekers, mass premium seekers, low-cost performance, urban families, trendy families, high-tech status seekers, and feature-focused buyers.

If automakers can customize and sell to these different verticals, they could uncover major opportunities that their competitors are missing out on.

5) Don’t hide in the sand and ignore electrification: The auto industry is undergoing a huge shift, not just in terms of battery technology and electric vehicles, but also with autonomous car tech, car-sharing tech, and connected cars. All of these investments together mean that car companies could become very capital-constrained.

However, the report says that automakers can’t rely on just internal combustion cars for long. Electric car tech could be disruptive to internal combustion cars as autonomy, connectivity and sharing are all reinforcing electrification. For example, a connected or autonomous car could make it easier to charge a car efficiently.

At the same time, battery costs are coming down significantly, and by 2025 to 2030, electric cars will “reach true price parity” with traditional internal combustion engines, notes the report. That’s just under a decade in the future.