Auto sector shifts into a new gear

The number of electric vehicles on our roads is steadily increasing as the industry gets to grips with its sustainability challenges.

The world’s highest profile electric vehicle (EV) manufacturer Tesla is seldom out of the news. Yet it produces a fraction of the number of cars made by mainstream producers. Moreover, EVs represent just around 2% of sales across Europe. What’s holding the market back?

“Even with subsidies – and a relatively high oil price – costs are still significantly higher than conventional vehicles,” says Jens Brokate, automotive industry specialist at ING. “We don’t expect the gap to be closed until sometime between 2020 and 2024, depending on market developments.”

A second, and no less important factor, is the lack of public charging infrastructure. “If you own an EV you have to plan your trip to include charging stops,” says Brokate. “It’s an additional hassle that drivers of conventional vehicles don’t have to worry about.” Private charging infrastructure also remains a challenge; many city dwellers do not have a garage and are therefore dependent on curb-side charging facilities, for example.

The auto industry is aware of the need to overcome these challenges if EVs are to go mainstream. “A large part of the cost issue will be addressed simply by increased volumes and lower costs as technology improves,” says Brokate. “At the same time, advances are taking place in terms of charging infrastructure.” For example, BMW, Daimler, Ford, and VW have joined forces to create the IONITY network, which will install a network of 400 high-power EV chargers across Europe by 2020.

China could hold the key to EVs becoming mainstream technology. The country already accounts for two thirds of global EV sales and is committed to a charging infrastructure network that will support rapid growth. “The switch to EVs is part of China’s five-year plan, both because of the importance of addressing air pollution in the country and the prospect of becoming a leader in this new industry and generating significant exports,” explains Brokate.

How sustainable are EVs?

For many people, there’s an assumption that EVs are inherently more sustainable. “The reality is more complex,” says Brokate. To understand the impact EVs have on the environment it is necessary to consider three types of pollution.

The first is local air pollution. “EVs have an immediate advantage because they emit significantly less pollutants in operation,” says Brokate. “That means there are no NO2 emissions and no particulates as residues of combustion, all of which are a major challenge in most European cities and have significant health consequences – European regulations specifically target such emissions.”

The second type of pollution relates to noise. EVs are extremely quiet when driven. “I see the difference between conventional vehicles and EVs in terms of noise as similar to the ban on smoking in pubs and restaurants,” says Brokate. “At the time of introduction, most people didn’t anticipate the impact it would have. But it has transformed going out and few would want to reverse the change.” He believes the widespread adoption of EVs will have a similar transformative effect on people’s enjoyment of cities.

The third type of pollution – the impact on the climate and sustainability more generally – is the most difficult to quantify. “It is necessary to consider the entire supply chain associated with EVs, including energy sources and the raw materials used in manufacture,” says Brokate. In terms of energy, it’s important to note that most produced in the European Union comes from fossil fuels, including coal. An EV, assuming it does not charge as it drives, therefore simply shifts the location where pollution is produced.

The importance of batteries

Any analysis of the sustainability of EVs must consider battery production. “Most studies show that EVs have a breakeven of around 150,000 km in terms of CO2,” explains Brokate. “Given that is usually the lifespan of a car, and that batteries may need to be changed before then, it can be hard to justify EVs on CO2 grounds.” Advances in battery technology could extend lifespans significantly in the coming years, however.

Environmental pollution is not the only sustainability measure that is important to battery production. Cobalt, lithium and nickel are essential raw materials for cell production. They are often mined in countries with lax environmental standards and, in the case of cobalt, child labour. “Mining in developing countries can be challenging and the battery industry is seeking to address these challenges through various initiatives,” says Brokate.

Daimler and Volvo are now members of China’s Responsible Cobalt Initiative, which plans to use blockchain to track cobalt from artisanal mines to batteries. A digital tag will be given to each sealed bag of cobalt using a mobile phone, along with details of the weight, date and time; this will be updated by a trader and at each successive stage in the supply chain. “OEMs and battery developers are also decreasing the amount of cobalt used in batteries,” says Brokate.

There are also considerable industry efforts to find ways to reuse lithium-ion batteries. Tesla’s Powerwall business, which currently uses new batteries, will ultimately give cells a second life for less-demanding energy storage associated with solar or wind-generated electricity. Recycling lithium-ion batteries is currently at an earlier stage, though Belgium’s Umicore has developed a process to recover metals from electric car batteries.

While challenges associated with energy sources and battery production might appear to indicate that the environmental benefits of EVs are marginal, Brokate says that much contemporary analysis effectively compares apples with oranges. “Given the high cost of the technology, most EVs are currently high-end vehicles but are compared with the average conventional vehicle. If you compare a Tesla X with a compatible vehicle, such as a BMW X5, it has a significant CO2 benefit.”

Addressing the supply chain

While the impending switch to electric will do much to improve the sustainability of the auto sector, cars are much more than just their drive trains.

One company hoping to shake up one of the least sustainable parts of the auto supply chain – tyres – is Black Bear. The Netherlands-based company, founded in 2010, has developed a unique process for producing carbon black from tyres (a fine powder used to provide structure in the manufacturing of tyres and as a colourant by the plastic and paint industry) while tackling the 1.5 billion tyres that reach the end of their life every year.

Black Bear’s process lets nothing go to waste. The steel is extracted from the tyres, while the rubber is shredded and then carbonised. This produces oil, which Black Bear plans to sell, and gas (which it uses to generate energy) as well as carbon black. Getting the latter into a useable, high quality form is essentially Black Bear’s major breakthrough. Every kilo of carbon black produced by Black Bear saves 5kg of CO2 compared to virgin carbon black production.

Black Bear’s recent €16 million funding round, which ING Sustainable Investments participated in, will fund processes refinements and the worldwide roll-out of the company’s technology.

Car sharing

Technology is not only changing how vehicles are powered but also how we use them. ING’s recent ‘Car sharing unlocked’ report notes that cars are parked 95% of the time – just 0.13% of all passenger cars in Europe are shared. The inefficient use of private cars is not just a missed opportunity for owners but a significant waste of resources.

Car sharing is gaining interest across Europe, particularly in major cities, but it still faces several barriers on the road to success. The user experience needs to improve and make car sharing more straightforward in order to gain demand. On the supply side, platforms and technology development – including autonomous cars after 2025 – will help to generate trust among car owners and encourage them share, according to the report.

Ultimately, ING expects a transformation in our car use, with a 7.5 million shared car fleet in Europe by 2035, up from an estimated 370,000 currently.

Cars are not the only vehicles…

While cars are the largest component of vehicles on the EU’s roads at 252 million, there are also 31 million vans, six million trucks and 725,000 buses, according to the European Automobile Manufacturers Association.

A recent report by ING on the prospects for alternative fuel trucks in Germany, where 70% of freight is by road, showed that based on existing technology electric drivetrains and batteries are a suitable technology for local delivery vehicles and some niche heavy truck segments.

However, the benefits of a move to electric for most heavy trucks are more doubtful. The cost of charging infrastructure, the cost, weight and volume of required batteries and the time taken to recharge them increases tremendously with size, making them unviable.

As pressures grow to improve sustainability, alternative technologies may be deployed. “While fuel cells that use hydrogen are extremely expensive for passenger vehicles – cars that would sell for €20,000 with a conventional motor cost around €60,000 and have no real benefits over EVs other than recharging times – they could be viable for trucks,” says Brokate.

Funding the future

As the auto sector increases its focus on sustainability, it is taking advantage of innovations in sustainable finance.

In January, ING collaborated with Toyota Financial Services and three other banks on the carmaker’s first euro green bond. The €600 million bond will be used to make environmentally-friendly vehicles more accessible to consumers. “We are proud to support Toyota’s low-carbon strategy and to be recognized as one of their banking partners with noted expertise in socially responsible investing,” says Christophe Dugardyn from ING’s debt capital markets team.

In May, VW subsidiary Volkswagen Immobilien became the first real estate company to issue a green schuldschein, a type of debt financing privately placed to investors and popular in Germany. ING was an arranger of the €100 million deal, which had seven, 10-, 12- and 15-year tranches. The proceeds from the transaction will be used to finance suitable green projects that comply with the ICMA Green Bond Principles and the proof of sustainability issued by oekom research.

MANN+HUMMEL became the first automotive supplier to tap the green schuldschein market with a €400 million issue in October. ING acted as issue facilitator with two other banks; environmental, social and governance rating firm Sustainalytics certified the issue. Klaus Pahle, head of the schuldschein desk for ING Wholesale Banking Germany and Austria says that the green schuldschein enabled MANN+HUMMEL “to attract new and, in particular, international investors”.

And in November, ING closed a €170 million two-year green loan to support the expansion of Samsung SDI’s electric vehicle battery factory in Hungary. Samsung SDI Hungary will produce EV batteries primarily for VW and BMW as they accelerate their transformation towards e-mobility. The factory will employ 5,000 people and reach its full capacity in the next two years.

Accelerate to a new auto sector

While EVs have taken longer to gain mainstream appeal than some observers expected, change is now occurring.

Almost all mainstream manufacturers plan to release electric vehicles in the coming years and many have committed to eliminating petrol and diesel engines by a specific date. As awareness of the health and environmental hazards associated with pollution grows, pressure will no doubt increase on other vehicle segments.

At the same time, interest in car sharing – especially among young people who do not own a car and live in cities – is growing. It seems certain our roads will look quite different in just a few years.

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 Sector expert Automotive

Jens Brokate

Sector expert Automotive