New Delhi: Moody’s Investor Services says global automakers are going to generate low returns on battery electric vehicles (BEVs) in the coming years, although the sale of these vehicles is going to rise to 17-19% by the end of the decade.

In its report released on Wednesday, the rating service estimates that by 2025, around 7-8% of global auto sales will comprise of electric vehicles. However, production of zero emission or low emission vehicles requires lots of capital investment, which pushes returns below the low profit margins on traditional internal combustion engine vehicles.

Moody’s senior vice-president and lead auto analyst Bruce Clark said, “One of the auto industry’s major areas of focus for the past 10 years has been improving fuel economy and preparing to meet increasingly burdensome emission-reduction rules, and battery electric vehicles are an extension of this. But BEVs will require significant capital investment by automakers, generate low returns until the early 2020s and face hurdles to achieving broader consumer acceptance." He added the acceleration of electrification plans and the growing focus on BEVs is being driven by government environmental policies, as well as media and capital market attention garnered by Tesla.

Moody’s expects BEVs to represent approximately 7-8% of global new vehicle sales by the mid-2020s, up from less than 1% currently, and rise to 17-19% by the end of the decade as battery costs drop, driving range improves and charging infrastructure expands. Automakers will also rely on other alternative fuel technologies, including hybrids and fuel cell electric vehicles, to meet emission requirements.

Moody’s estimates that manufacturers lose between $7,000 to more than $10,000 per electric vehicle sold in the US. It expects these cars will remain unprofitable into the early 2020s. Profitability will depend on reduction in battery costs, technical improvements that lead to longer driving ranges and increased scale of production.

It says that there are certain markets in which BEVs may gain notable penetration over the long term. These include India, Korea and Canada. Current BEV penetration in these markets is very small, with India at the lowest. Nevertheless, the small size of these markets relative to the US, Europe, China and Japan will limit their impact on the trajectory of global BEV demand and on the credit impact that BEVs have on automakers’ credit ratings.

Moody’s expects Tesla will sell about 200,000 Model 3 vehicles around the world this year and up to 300,000 Model S, X and 3 vehicles in the US.

Electrification will require considerable capital investment by automakers, but returns on such vehicles are lower than on internal combustion engines, which are already low, said Clark. Moreover, the investments in electrification will occur at the same time the industry is spending on other rapidly developing technologies—notably autonomous driving, connectivity and ride sharing—further pressuring returns.

Auto manufacturers will also need to invest in multiple propulsion technologies simultaneously in case market conditions shift, increasing the risks associated with electrification and heightening the need for strong balance sheets and ample liquidity.

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