Russell Hensley, McKinsey: a strategic view of EV growth

EV Update speaks to Russell Hensley, expert principal for global consultancy firm McKinsey. Contrary to some industry sceptics, Hensley is upbeat about the drivers for electric transportation

Based in McKinsey’s Detroit office, Russell Hensley advises a wide range of leading players in the automotive industry. For the last three years, Hensley has co-led McKinsey’s work on the implications of climate change for the automotive sector. Concentrating his initial focus on carbon dioxide emissions, his interests have expanded more recently into the field of electric transportation. Under Hensley’s guidance, McKinsey has just completed a comprehensive research appraisal of the future electric vehicle (EV) market. The upbeat findings of the study suggest major urban centres will drive growth in the EV sector.

According to your own research findings, the immediate future of electric transportation looks more positive than many sceptics would have us believe. What are the drivers that provide you with such confidence?

There are four primary forces at work here, namely regulation, technology, macroeconomics and demand. One of the first we consider here is regulation. Looking into the future, the regulatory trends on emissions are forcing the industry to move significantly. Those forces differ globally. From a carbon dioxide perspective, for example, Europe and Japan currently lead the way in terms of the stringency of tailpipe emissions. The US, despite becoming more stringent, still lags somewhat.

In Europe, for instance, come the end of this decade you’ll need to come up with an alternative to even the most advanced hybrids. The proposed regulation of 95 grammes of CO2 (carbon dioxide) per kilometre for a fleet average by 2020 is at the limits of the capabilities of most advanced internal combustion engines. The 2015 regulation in Europe of 130 grammes of CO2 allows some innovation headroom for advanced internal combustion engines to get below it. But once you start advancing to 95 grammes – and they are even discussions to bring it into the 70s by 2025 – then you have little option but to move to a different solution. It would look like the forerunner at the moment is electrification.

Another main driver is technology. Significant investments have been made in battery technology, particularly lithium ion, over the past decade. For instance, the venture capital destined for this technology in 2005 was roughly half a billion US dollars, with that increasing to 1.2 billion dollars in 2007. As a result, the technology has really advanced.

There are also a number of tailwinds in terms of the macroeconomics, namely a likely continued increase in the price of oil. In addition, the changing profile of global demand bodes well too, thanks to a shift in mix from suburban to urban populations and the subsequent shorter commuting distances. In the relative short term, electric vehicles will work well for those using cars over shorter distances.

So you expect to see EV growth driven by high population urban centres then?
Yes, that’s right. Driving in urban settings tends to be over shorter distances and [to involve] quite a lot of stop start.  Where electric vehicles often do well is over such distances where braking can help to rejuvenate energy, whereas the internal combustion engine tends to be more efficient on the highway in more steady state conditions.

As a second factor, cities also provide the ability to regulate within a defined area. You can run a controlled experiment if you will. Obviously, it’s still very early in the development of vehicle electrification. So cities can provide a controlled environment to develop a better understanding of things like driving habits, charging habits, etcetera.

Our study looked at Paris, New York and Shanghai in an attempt to get a sense of different consumer markets around the world. The findings suggest that New York could lead the way, with plug-in hybrid EVs and all-electric vehicles accounting for 16 percent of all new cars sales by 2015. The research suggests that Paris could have around 9 percent and Shanghai at about 5 percent at that time.

Are there enough early adopters to push EVs into the mainstream, or will it require more consumers to get on board?

My sense is that early adoption might get us to the 10 to 15 percent mark [of all new car sales] within the next decade. It will be led by consumers who are either sympathetic to green issues or who like to be viewed as technically savvy. Many of these are willing to deal with some early inconveniences, such as limited charging infrastructure.

To take EVs to the mainstream, however, will likely require the electric experience to be on par with or better than for more conventional vehicles. That makes a more expansive network of charging infrastructure a key element to support mass adoption in the future.

The availability of different models and derivatives of EVs will also have to improve to cater to the differing tastes of a broader consumer base.  And so will the economics. Incentives, such as [up to] $7,500 tax break in the US, will remain key to help drive early adoption in addition to the cost of batteries being reduced. As the scale of battery production increases and the cost of batteries come down, and make the overall economics of EVs to look more favorable.

There’s also the herd mentality to consider. As consumers see more electric cars being used by the population, it will enhance their confidence as people see EVs being more widely accepted.

Your research refers to the need for automakers to ‘segment’ the EV market. Can you explain what you mean by that?
Our perspective is that segmentation of consumers by range will be fundamental in the future. Traditionally automakers have not segmented the market on this basis. However, in the case of EVs, we believe that a different approach will be required driven primarily by the range of the EV being driven by the size of the battery which in turn drives the economics. Today, when you buy a vehicle you’ll get a range anywhere between 350 to 450 miles per tank of fuel. So range, and any associated range anxiety, has never really been a consideration in terms of segmenting potential buyers. So, going forward, EVs are likely to be designed with ranges that suit specific consumer missions, hence missions will be used as a segmentation criteria.

Range anxiety is actually a very interesting phenomenon. If you independently tracked how far consumers drive in their cars, it's often less than what they believe, suggesting a certain conservatism. Most car users repeat the same routes time and time again as they play out their periodic routine. By using technology like cell phones to vehicle usage patterns, automakers can use these inputs to better design EVs to suit the specifics needs of consumers, assuming the segment to be of significance. For users, as well, the information can inform them about what particular electric vehicle to buy or lease. 

You mentioned the financial incentives available earlier, but you also see non-financial incentives as critical to early take up. What kind of measures do you have in mind?
There are a number of non-financial levers that are being considered: for example, the quantity of charging points within a few blocks of your home; planting a certain number of trees for every vehicle sold; a free one-year metro card for buyers to use on public transport; low emission vehicles zones or parking spots in certain parts of the city; metre charging nearest to the public school or park.

The challenge behind this whole question of incentives is that many of the early adopters—the green auto aficionados on one side or the tech folks on the other—would have bought an electric vehicle regardless of the financial incentives. It’s a significant challenge to design the incentive system such that it creates most impact from a societal standpoint.  The idea of non-financial incentives is an important one and requires that we think through how people use their vehicles and how this can be made most convenient.