Best 5 Ways Automakers Can Make Electric Cars Profitable

Big, gas-guzzling cars are often more profitable for automakers than are cars that drive on electricity, due in large part to the persistently high costs of batteries. So it’s not all that surprising that some automakers have spent years delaying more aggressive pushes into electrification.

But the world is changing, and consumers are increasingly interested in driving electric cars, while automakers continue to be required to meet environmental mandates. Battery costs are also steadily coming down, but it will still take many years for most competitive electric cars to have the lower manufacturing costs associated with traditional internal combustion vehicles.

The analysts at McKinsey recently published a report to help automakers that are struggling with the potentially expensive prospect of adding more electric-car models to their lineup. The researchers give a handful of suggestions for how automakers can adjust and adapt to offering electric cars, while also trying to turn a profit.

The tips seem mostly directed at big automakers that are still offering just a few electric car models. New figures out from EV-Volumes suggest that Tesla’s Model S and Nissan’s Leaf were the bestselling electric cars of 2016, followed by BYD’s Tang and GM’s Chevy Volt.

All of those automakers have been pretty aggressive about jumping into electric cars, but other manufacturers have produced a limited number of models that are largely being used as “compliance cars,” to meet stricter state regulations.

Currently, the overall electric car market is still pretty small — at 773,563 models sold worldwide last year — so automakers can still define, or redefine, their electric car strategies. However, they should act fast, before companies like Tesla, Nissan and GM corner the market.

Here are five suggestions from McKinsey for how to make the transition to electric cars more profitable for automakers.

1) Start by offering lower-range, cheaper urban electric cars:

Even though Tesla started out selling expensive luxury electric cars, McKinsey analysts argue that automakers are currently missing out by not offering more low-cost, low-range electric cars. There are a variety of types of electric-car buyers, says the report, starting with early adopters that are willing to spend on the Model S or even the Roadster, Tesla’s first expensive electric sports car.

But the next wave of electric car buyers, referred to as “near-term electric car buyers,” are likely to more interested in electric cars that cost far less and are designed primarily for use in urban areas. Members of this demographic tend to live in cities and only travel 25 to 35 miles on average per day. These cars would be cheaper because they would have smaller battery packs and driving ranges.

Automakers focused on Europe and Japan already offer some of these electric models, which on the low end used to be called “neighborhood electric vehicles.” French giant Renault has been selling the small Zoe, which has a 22-kilowatt-hour battery pack, for some time now, while Nissan’s early Leaf models were low-cost and had relatively low range.

But these automakers are clearly caught in a bind when their cars have minimal range and are being compared to longer-range electric vehicles from the likes of Tesla and GM. Nissan and Renault subsequently launched their own versions of those cars with bigger batteries and higher costs.

2) Package competitive electric cars with new business models:

If automakers plan to make electric car models that have big batteries, long ranges and high costs, they should start offering those types of higher-end cars today to new types of customers through alternative uses like ride-hailing and car-sharing, according to the report. Electric cars can have higher upfront costs than internal combustion cars, but their total cost of ownership, considering the cost of electricity versus gasoline and maintenance, can be lower.

The report contends that companies like Uber, which manages ride-sharing services, or Zipcar, which maintains car-sharing fleets, would be well served by buying up electric cars and using them in fleets. They could save money that way.

At the same time, automakers should be more creative in terms of both partnerships and new business models, embracing these new forms of “mobility,” a buzzword heavily favored these days by car companies. Automakers should be able to shift their electric-car launch strategies from selling a car, to selling services, to selling a package in between, depending on demand from customers, notes the report.

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