Separate EV hype from reality

If you're an auto supplier, the consensus today is that you need to go electric or go the way of the dinosaurs.

After all, every day seems to bring more confirmation that the electric vehicle era is just around the corner. Big automakers are pledging to phase out new gasoline models in 10 to 15 years, the U.S. government is ramping up support for the transition and investors can't get enough of Tesla and newer upstart EV players.

Take a closer look, though, and it becomes apparent that the hype around electric vehicles is outpacing reality in many key areas.

Any idea that roads in the U.S. and other major nations will be dominated by battery-electric vehicles in 20 years' time is fantastical given the substantial obstacles the industry faces and the huge fleets of combustion engine cars on the road today.

This means that suppliers and investors, even automakers themselves, have more flexibility than most assume when it comes to charting the future. That isn't to say that the transition to electric won't happen as pressure mounts to reduce carbon emissions. It will. But the pace of that change will be significantly slower and less smooth than the hype suggests; the industry supporting the internal combustion engine still has plenty of runway.

Perhaps the biggest road bump for BEVs is the lack of consumer enthusiasm to buy them, something that is likely to change only gradually in the coming years. Teslas may now be an everyday sight in affluent coastal cities, but for most Americans, BEVs remain painfully expensive compared with gasoline vehicles. Even if BEVs are cheaper to run, their $10,000-plus higher sticker price is a deal breaker for most families.

The cost of an electric battery pack will continue to fall but likely not fast enough to achieve price parity with most gasoline vehicles before the late 2020s.

The Biden administration's efforts to speed the transition, including through the infrastructure bill's $7.5 billion to build charging stations, will no doubt help. But such funding takes time to result in real change, and political winds can easily shift.

There also may be less to automakers' electric vehicle commitments than meets the eye. Automakers are under intense pressure from Wall Street to announce new electric models, but achieving those goals and having a market for the vehicles is a different matter. It's also important to note that many of those ambitious targets count hybrid cars as electric, even though they produce emissions and share many parts with combustion engines. The pledge by Ford and Stellantis to achieve a 40 to 50 percent zero-emission share of new U.S. car sales by 2030, for example, includes plug-in hybrids and fuel cell cars.

Of the 285 million light vehicles on U.S. roads today, fewer than 2 percent are BEVs. It will be many decades before they outnumber traditional vehicles. Our analysis forecasts that only 26 percent of vehicles will be BEVs by 2040, with gasoline-powered cars making up 48 percent and hybrids accounting for the remainder.

Given this, traditional auto suppliers shouldn't necessarily feel an intense fear of missing out on transitioning their business to electric. Even after the last gasoline-powered car rolls off the line, the need for aftermarket supplies will remain substantial and lucrative for decades.

Suppliers that rush to make the transition now can be faced with a chicken-and-egg problem — the lack of BEV models means that they don't know what exactly to design for. Those looking to service the BEV aftermarket not only face a relatively tiny pool of vehicles right now, but they also have to wait three-plus years before those cars are out of warranty.

While there are some benefits to being an early mover, let's not forget there are also opportunities for those who come later to achieve success by improving on what came before.