CHENNAI: When the automotive industry globally is pretty agog over an all-electric future, Moody’s feels the transition to battery electric vehicles will pressure returns, that are already low, and is a credit negative for the sector.
While battery electric vehicles (BEVs) are just one element of the electrification process, it is the most capital-intensive and technologically complex element of this process. The ratings firm on Wednesday said that production of zero emission or low emission vehicles will involve significant capital investment, which will push returns below the low-profit margins on traditional internal combustion engine vehicles. It will also face hurdles in achieving consumer acceptance, said Bruce Clark, Moody’s senior vice-president and lead auto analyst.
However, electrics will not be restricted only to BEVs but will encompass the entire canvas of alternative fuel technologies—mild hybrids, full hybrids, plug-in hybrids, and finally fuel cells. Returns are highest on internal combustion engines and become progressively lower on mild-hybrids, full hybrids, plug-in hybrids, fuel cells, and finally BEVs, Moody’s pointed out, adding profitability will depend on reduction in battery costs, technical improvements that lead to longer driving ranges and increased scale of production.
Moreover, the investments in electrification will occur at the same time the industry will invest in other rapidly-developing technologies — autonomous driving, connectivity, and ride sharing. Moody’s argues that automakers often invest in multiple technologies simultaneously in order to preserve their operating and strategic flexibility within an evolving landscape. However, major mid-course corrections may be needed as the environment continues to shift, maintaining a strong balance sheet and ample liquidity will be increasingly important.
Amid all these uncertainties, Moody’s expects BEVs will represent approximately 7-8 per cent of global new vehicle sales by the mid-2020s, up from less than one per cent currently. In markets including India, Korea and Canada BEVs may gain notable penetration over the long term. However, current BEV penetration in these markets is very small, with India at the lowest.