reprinted from

PRTM Insight
Plugging Into the Electric Car Opportunity
What the new business landscape will look like and how to get ahead
Oliver Hazimeh, Aaron Tweadey, and Robert Chwalik

| First Quarter 2010

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

Over the next 10 years, the electric car will exert a major impact on the business landscape. As demand for battery-powered cars grows, we will see the emergence of a new electricity-based value chain, with abundant opportunities for some companies and major risks for others.

he year is 2020. You are driving your electric car home from work. On the way, you decide to stop at the health club for a workout, figuring youll recharge your car battery at the same time. Using your voice-enabled vehicle communications system, you reserve a charge spot at the station next door to the gym. As you arrive, your vehicle navigation system guides you to your reserved space. The charge-spot control center communicates with your vehicle electronics and confirms your reservation. You plug in your vehicle to the charge spot, press the start charging button on the display, and head over to the gym for an hour. When you return, there are no payment hassles to deal with, since the charge is covered by your electricity service plan. You simply disconnect from the charge spot and are on your way. Various forces are converging to make this scenario a reality well before 2020. As concerns mount globally about climate change, oil depen-

dence, and urban traffic pollution, automotive manufacturers and policymakers are intensifying their efforts to make battery-powered vehicles a viable alternative to conventional oil-fueled cars. The price will soon be right. Depending on government incentives, the total cost of ownership for an electric vehicle (EV) is approaching the cost of owning and operating a car with conventional internal combustion engine (ICE) technology. EV technology and operations advances will continue to bring the cost down even after government incentives end. As this gap closes, EV demand will grow. By our estimate, EVs and plug-in hybrids (PHEVs) could account for nearly 10 percent of new vehicle sales globally by 2020 (Figure 1). Less conservative forecasts peg penetration at 20 percent. Clearly the advent of the electric car will have an enormous impact on automakers.

Key Terms
ICE: Internal combustion engine vehicle fueled by gasoline HEV: Hybrid electric vehicle powered by internal combustion and supported by electric propulsion PHEV: Plug-in hybrid powered by medium-sized battery and supported by internal combustion engine EV: Fully electric vehicle with electrical engine powered by large lithium-ion battery

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80 60 40 20 0

Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

Figure 1: Global Vehicle Forecast, 20102020

Global vehicle sales (millions of units)
100 80 60 40 20 0 2010 2012 2014 2016 2018 2020 49%
ICE HEV PHEV EV

4% 6% 41%

But the implications go beyond just that. As increasing numbers of cars come to rely on electricity instead of oil, there will be a major shift in revenue pools and the emergence of a new US$300B value chain with its own roster of players and one to one-and-a-half million new jobs globally. There will be enormous opportunities for some companiesbut enormous challenges for others. The companies that proactively identify new business models and operational strategies will become leaders of entirely new industry segments. What follows is a brief glimpse of the changes on the horizonand some of the ways companies can capitalize on them.

Shifting Revenue Pools With the rise in EV end-user adoption, revenue pools will shift dramatically downstream, from natural resources like oil to high-tech components like the battery. Important revenue shifts will occur in the three chief parts of the transportation value chain: energy delivery; conversion and propulsion systems; and public and private services (Figure 2). According to our analysis, the revenue shift will amount to $20,000 per vehicle. Energy delivery. As vehicles shift from oil to electricity, the utility companies that generate and deliver the electricity will acquire the

Figure 2: Anticipated Changes in Revenue Pools by 2020

energy delivery Energy Generation and Distribution Fueling/Grid conversion and propulsion systems Components +11 +3 -1 -13 +2 -3 +4 neutral -3 EV Vehicles public and private services Service

Electricity-based value chain Oil-based value chain

Shift in value as measured by total cost of ownership per vehicle (in thousands of dollars)

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

bigger share of the vehicle fueling revenue. As measured by the total cost of ownership, the part of the oil-based value chain focused on energy generation and distribution will lose $13,000 of revenue per vehicle, while the equivalent part of the EV value chain will gain $3,000. And building out the required charging infrastructure will add another $2,000 per vehicle, while the infrastructure providers for the oil-based value chain will lose $1,000 per vehicle. Conversion and propulsion systems. A similar development will occur in the components piece of the value chain, as the companies involved in the production of the internal combustion engine give up revenue to the producers of large lithium-ion batteries and electrical components. This will likely cut $3,000 of revenue per vehicle from the oil-based value chain, while adding $11,000 per vehicle to the electric value chain, most of which will be battery-related. Public and private services. The shift to electricity and EV propulsion systems will drive changes in the element of the value chain focused on services. Companies that, to date, have serviced cars with conventional internal combustion engines will give up revenue to companies able to service electrical drivetrain systems as well as to companies that can provide charging, maintenance, and driver-related services. Overall, the oil-based value chain will lose approximately $3,000 per vehicle, while the electricity-based value chain will gain $4,000. Positioning for Success Theres little doubt that the evolution of the electric vehicle value chain will create a major upheaval for companies in transportation-related industries, posing numerous opportunities and risks (Figure 3). This makes it imperative for

every affected company to scrutinize its strategic positioning. Companies that include EVs in their business plans must identify the many products and services customers across the entire EV value chain will need, and build the operational strategies required to support these offerings. Conversely, companies in the oil-based value chain that view growing EV demand as a threat should reposition themselves to mitigate potential sales declines, lower asset utilization, and technology obsolescence. Energy Generation and Distribution As electricity supplants gasoline as the fuel of choice, utility companies will reap most of the benefitsand oil companies will shoulder most of the risk. Utilities. This development will give utility companies a major new revenue stream: the charging provision market. Since every new EV will require the same amount of electricity as a household, the new revenue opportunity will be substantial. But the rise in the number of battery-powered vehicles could strain electricity grids and require new capital investments. Utilities can avoid making these investments by developing the ability to manage their customers charging needs. Recent advances in smart grid technology as well as strategies that encourage customers to charge their cars at offpeak hours should help. German utility RWE AG is aggressively entering the charging provision industry. The company aims to create an extensive network of charging stations powered by electricity from sustainable energy sources and to spearhead critical standardization efforts. RWE is currently launching test pilots in Berlin and other cities in Germany.

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

Figure 3: Opportunities and Risks Across the Electric Vehicle Value Chain
Energy Delivery

Conversion and Propulsion Systems

Services

Value Gains

Incremental electricity and charge-point sales Capital investment avoidance Utilities Charge hardware and software providers

Sales of EV cells and packs

New service/ content channel co-branding Revenue white spaces

Companies With Opportunities

EV-based suppliers Battery suppliers OEMs

Telecom E-Mobility service providers Municipalities

Value Losses

Reduced gasoline sales Underutilized infrastructure

Technology obsolescence Underutilized ICE assets

Reduced vehicle service demand Underutilized service assets

Companies at Risk

Oil companies Fuel distribution companies

ICE-based suppliers Traditional OEMs

ICE-based services

Charging infrastructure start-ups. This white space is also attracting entrepreneurs and venture capitalists that want to capitalize on the infrastructure build out and shape the industry with innovative business models. A prominent example is the start-up company Better Place, which has attracted more than $400M in venture funding to develop its novel concepts around battery charging and swapping. Other companies are also developing innovative business models, so its not yet clear which concept will prevail.

Oil companies. Without question, shrinking demand for gasoline at the pump will hurt oil companies. For example, in a scenario outlined by the Electrification Coalition, where 2030 EV sales in the U.S. constitute 90 percent of new vehicle sales, the per-day U.S. oil consumption would decrease from 8.2 million barrels to 4.2 million barrels. But the negative impact should be somewhat reduced by overall vehicle growth and by the opportunity to focus on producing petrochemical products. These are more profitable than gasoline and in greater demand inter-

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

nationally (5 to 6 percent annual petrochemical growth compared with 2 percent annual growth for gasoline). Some oil companies will embrace EVs. They will use the opportunity to build attractive new adjacent businesses and move up the transportation value chain. Exxon-Mobil, for one, has developed a new battery film technology critical to enhancing the power and reliability of lithiumion batteries, and expects it to be in electric cars on the market in 2011. Oil companies may seek to leverage its franchise network by including fast-charging capabilities. Conversion and Propulsion The shift of the powertrain, the heart and soul of the vehicle, from internal combustion to a battery pack presents perhaps the greatest opportunities and challenges of the entire value chain. EV manufacturers and component suppliers. Companies that can design and produce largesized lithium batteries and related EV drivetrain will be in a good position to capture these opportunities. Currently, firms across the value chain are racing to develop a battery that delivers the same performance at half the cost. Many of the large automakers, already on the EV bandwagon, are deploying a variety of strategies for tapping into this new revenue stream. Daimler, for example, is engaging in a high degree of vertical integration. The company recently made a $50M investment in EV-manufacturer Tesla Motors and took a 90 percent ownership stake in a joint venture with Evoniks energy division. Ford, by contrast, is relying upon strategic suppliers to develop technologies. Canadian supplier Magna, for example, is playing a major role in developing the drivetrain for the Focus, Fords widely anticipated battery-powered vehicle.

ICE component suppliers. Companies that provide transmissions and other engine components to automakers are at risk as demand for traditional products shrinks. To combat declining sales and underutilized assets, suppliers will need to leverage key assets and core competencies like precision machining, which will allow them to provide the equivalent products and services for EVs. Public and Private Services Battery-powered vehicles present excellent opportunities for service providers in both value chains. EV service providers. Since electric cars require less maintenance, service revenue streams will come largely from other types of services, such as construction, media, retail, and advertising. Imagine ads informing drivers of the nearest charge point and retail outlets like Starbucks or Wal-Mart offering discounts on charges via a green loyalty program. On the domestic front, chargers could eventually be part of every new-home construction, with the general contractor offsetting initial installation and service provisioning costs. And software applications developed for iPod, BlackBerry, or next generation smartphones could notify EV owners when their charge was running low. Nissan is already working with Apple to develop an app that does just that. Traditional service providers. Clearly, conventional car-service centers like Jiffy Lube will see their core revenues decrease significantly. To survive and thrive, these companies should take the steps needed to be players in the EV value chain. This will involve making enhancements to current locations with the equipment and competencies required for diagnosing, servicing, and replacing batteries.

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

Roadblocks Ahead Despite the potential of the EV value chain, some significant barriers stand in the way. Its a classic chicken-and-egg situation. On one hand, consumers wont buy EVs if they are not affordable and if the support infrastructure falls short. On the other, infrastructure providers wont make the needed capital investments unless there is adequate financial potential, vehicle supply, and regulatory stability. Infrastructure. The charging stations and the associated hardware used to distribute electricity require an enormous infrastructure investment. We estimate that more than $35B will be required over the next eight to ten years just to install charging facilities globally. Given the conservative rate of EV adoption and consumer reluctance to pay much for charging services, the ROI on the charging infrastructure will be low. The payback period for a single charging station could take six to seven years, which is a much longer timeframe than typical private investors and shareholders are willing to accept. This scenario raises several questions. Who will make the necessary investments? Are there enough private companies or investors with the required patient capital? Can utilities afford the required infrastructure investment, given current regulatory restraints? Will cash-rich oil companies be able to reinvent themselves and their operational models to deliver the new infrastructure? Will vehicle manufacturers risk expanding production without the required EV infrastructure in place? What role will government assume going forward? The answers to these and many other questions remain unclear. Affordability and consumer expectations. Electric cars require a high-performance battery. Even with anticipated cost reductions, this type

of battery will remain expensive and will translate into a higher-priced vehicle. The first generation of medium-sized electric cars will cost at least $15,000 more than a conventional car. Historically, consumers have been very pricesensitive even when reduced energy consumption lowers overall costs. By 2020, battery prices will come down by 50 percent. Yet no one knows whether these different developments will be sufficient to ensure widespread adoption of electric cars. Additional battery finance models, government incentives, mobility concepts, and consumer education on the total cost advantage will most likely be necessary. Consumers will also have concerns about performance, range, and charging requirements. In our view, people will be willing to pay for new services that enhance the driving experience to offset some of the inherent challenges in electric vehicles. Companies need to develop clear and innovative business strategies to make the most of these opportunities. Integration and alignment. Given the enormous complexity of the EV value chain, a lot is riding on how well the different pieces of the value chain are integrated, from the electrical grid to key vehicle systems. Integration is a tall order, requiring the coordination of a wide array of stakeholders that have not historically worked closely together, including utilities, municipalities, OEMs, and energy distribution technology providers. To cite just two examples: The charging infrastructure needs to be seamlessly integrated with the grid so that, as the demand for electricity grows over time, its easier to manage the grids charging loads. Only if the grid is able communicate with the charging infrastructure and the vehicles will it be able to anticipate peaks of demand and adapt accordingly.

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

Similarly, the charging infrastructure and electric vehicles must be well integrated so that the chargers can interface with cars of all different automakers. That means standardizing charging connectors and communications hardware, software, and interfaces across cities, countries, and regions, which would require substantial effort. Perhaps most important, the integration needs to ensure that consumer experiences around reservations, charging, billing, and adjacent service and content delivery are hassle-free. Driving Change To make the EV a reality, organizations across the value chain must thinkand, more importantly, actoutside the proverbial box. By our analysis, innovative approaches need to occur on three levels: government, individual company, and across the value chain. Government. Since all levels of government worldwide will play a vital role in electric vehicle adoption, the dialogue between government and industry must be expanded beyond tax breaks and subsidies. Discussions need to focus on how the electric vehicle will influence and shape future transportation, energy, and environmental policy. This level of dialogue is critical for ensuring the benefits of the new value chain reach all of its constituents. Like cross-industry coordination, it requires multi-party collaboration, robust information-sharing and portfolio management capabilities, and well-defined governance models. The U.S., German, and Chinese governments have taken steps in this direction. For example, the American Recovery and Reinvestment Act of 2009 allocates $2B to support U.S.based advanced battery system and component manufacturing and supporting software devel-

opment. Germanys federal government, which anticipates one million electric cars on its roads by 2020, has adopted a National Electromobility Development Plan to accelerate the development of EV batteries. Tied to the countrys economic stimulus package, the comprehensive plan includes multiple government agencies and several industry associations. The Chinese government, meanwhile, is providing significant consumer and OEM incentives to fuel EV adoption. It is also planning large-scale test pilots in 13 cities by 2011. Various regulatory mandates to discourage traditional fuel consumption are on the table as well. As the EV market gains traction with end users, industry, and government, the value chain landscape will evolve with a momentum all its own. This young automotive niche, currently on the fringe, will soon power into the mainstream, affecting many consumer-facing sectors. Companies across the value chain that anticipate this quickly-shifting dynamic and strategically plan and deliver necessary new products and services could reap emerging electromobility rewards. Individual companies. A truly operative EV value chain cannot evolve without the development of many new products and services that cater to the EV owner. Any company that wishes to participate must revisit its business and operational models so it can determine not only what offerings it will provide but also how it will provide them. For product companies, this means developing technologies, outlining product road maps, and defining future operational footprints to meet or exceed the performance levels consumers have come to expect from their primary mode of transportation. Similarly, service providers must develop offerings that meet the particular needs of the electric vehicle driver. And, regardless of the offering, companies must develop the R&D part-

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Plugging into the Electric Car Opportunity reprinted from PRTM Insight, Q1 2010

nerships and global supply chain that will enable them to operate at the lowest cost and least risk. General Motors is a good example. In a departure from its usual practice of outsourcing component development and production to suppliers, GM has invested heavily in its own operations so that it can develop and build lithium-ion batteries for the Chevrolet Volt. Even Toyota is bringing the core elements of EV power electronics in-house. Cross value chain. Actions taken by government and by individual companies, however, will not be enough to make the EV value chain a reality. Companies must collaborate across the value chain to develop the integrated system architecture that will provide the EV driver with a standard set of products and services, instead of solutions that vary from city to city. Only by looking across the value chain can individual companies find new opportunities and come

up with the innovations to leverage them. As a first step, therefore, potential EV players must start forging cross-industry partnerships and improving their value chain visibility. Consider McDonalds. The fast-food giant recently began adding PHEV charging stations to its restaurants in the U.S. and Sweden. Coulomb Technologies is providing the charging stations in the U.S., while Elforsk, a division of Swedish energy supplier Svensk Energi, will oversee the charging stations in Sweden with the aid of the Swedish national grid. The advent of the electric car is no longer in questiononly the timetable is. Like any major disruptive innovation, the new value chain will bring numerous white-space opportunities as well as risks. Companies that proactively stake their claim in this new landscape will be the ones leading the way in the next generation.

For more information, please contact: Oliver Hazimeh, PRTM Director ohazimeh@prtm.com, + 1 248.327.2500 Aaron Tweadey, PRTM Principal atweadey@prtm.com, + 1 248.327.2500 Robert Chwalik, PRTM Principal rchwalik@prtm.com, + 1 212.915.2600

Source for all data in charts: PRTM analysis

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