Cheap EVs Depend on Platforms
EV platforms are in the news lately and it’s worth discussing why that’s critical for electrical vehicle adoption.
First, let’s hear from the late Sergio Marchionne, former head of Fiat Chrysler Automobiles (FCA). In 2015 he gave a presentation, Confessions of a Capital Junkie, arguing for automotive industry consolidation but also giving us some insight into the costs of developing new vehicles. He wrote, albeit in presentation form which I have lightly formatted and edited for clarity:
Auto industry’s capex and R&D requirements have grown significantly over the past years and going forward, new technological challenges will continue to raise the bar on capital requirements. Product development costs are consuming value at a much faster rate than in other industries and high operational leverage amplifies profitability swings across the cycle resulting in structurally low and volatile returns.
Why did this happen? OEMs spend vast amounts of capital to develop proprietary components, many not really discernible to customers. One industry solution focuses on reducing the number of active platforms and increasing scale and some OEMs are trying larger scale commonization across diverse brands while others through one-off co-operations, JVs and other equity tie-ups. But all this has produced poor results so far, as OEMs’ returns and valuations are still depressed.
Why haven’t these approaches provided a significant lift to returns? Large scale organic reduction in platforms hasn’t worked because of a reluctance to replace old, less costly architectures, it is an option available only to hose OEMs with existing scale across platforms, top hats, and regions, and it requires strict discipline to avoid upward standardization and over engineering.
In other words, he’s arguing for commonality but warning that it falls short when manufacturers don’t really, truly commit to it because it needs really large scale to work. How much can it theoretically help? Marchionne notes “potential commonality up to approximately 45 to 50% of total development cost.” That’s huge but to get there you need, to quote the stereotypical car salesman on the television commercials, “VOLUME! VOLUME! VOLUME!”
This brings us to Volkswagen. In early 2012, VW showed off their new Modular Transverse Matrix (in German, MQB) platform in the form of the Mk7 Golf. You can read more about MQB in Máté Petrány’s July 2013 Jalopnik article Volkswagen Plans To Take Over The World By Being Clever And Cheap. This thought isn’t original with me but to first order approximation, Volkswagen effectively only builds one car: MQB. As David Tracy notes, MQB currently represents 80% of VW sales volume.
And now here comes the functional equivalent for electric cars, the MEB platform. I highly recommend David Tracy’s excellent article on Jalopnik, The Fascinating Engineering Behind VW’s Electric Car Platform of the Future for all the delicious engineering details. David writes that VW plans to build 150,000 electric cars in 2020. This roughly equals Tesla Model 3 production for 2018 but whereas Tesla is as of yet unable to profitably produce a $35,000 Model 3, VW could, according to Reuters, sell an MEB car for something like $23,000. What VW is saying publicly is that they expect to price the Golf-like MEB compact car, generally known as the I.D. Hatchback or I.D. Compact, roughly similar to a diesel Golf. That’s right in the heart of the mass market. Of course MEB doesn’t stop there because VW is estimating that they will produce more than 1 million MEB cars PER YEAR starting in 2025. This sort of pricing is what volume production of a flexible platform can get you.
And wait, there’s more! Various outlets are reporting the VW and Ford will soon announce a deal that will include Ford licensing the MEB platform. This would be a huge win for Ford since they would be able to skip the massive platform development cost and take advantage of the common platform’s volume when buying from suppliers. Although Ford has at least one EV in development, a performance SUV supposedly based on Mustang styling cues, they have not announced a volume product at the lower end of the market similar to the Hyundai Kona or Chevrolet Bolt.
And just today, General Motors announced the existence of a new electric vehicle architecture.
Cadillac will be GM’s lead electric vehicle brand and will introduce the first model from the company’s all-new battery electric vehicle architecture, GM’s foundation for an advanced family of profitable EVs.
The flexible platform will provide a broad array of body styles and will be offered in front-wheel, rear-wheel, and all-wheel configurations.
Its most critical components – including the battery cells – are being designed for maximum usability across all programs. The battery system will also be adjustable, based on vehicle and customer requirements.
The trend here is starting to become visible. Manufacturers in the luxury space can probably get away with relatively low volume electric platforms because they’ve got pricing power. But on the volume end of the market profitability is likely to depend on having an extremely flexible, super high volume platform you can use to drive down engineering and unit costs to make the price of the battery tolerable within the overall price of the vehicle. In other words, the customer doesn’t care if half of the cost of the vehicle is in the battery as long as the total price of the car is affordable. Things are looking good for VW, Ford, and now GM. But what about the other players, including Marchionne’s own FCA?
