Understanding the cost dynamics in the EV industry

Over the past four years, the electric vehicle (EV) industry has experienced exponential growth. It transformed from a small niche market to stealing the global spotlight of the automotive industry. Although exciting, fast market growth can have challenging cost implications. 

Understanding electric vehicle costs associated with this growth can be complex as there are various aspects that need to be considered. Engineers & designers determine the factors of EVs through their decisions on vehicle design, component selection, and technological innovations. 

In this blog, we’ll highlight how each factor influences the complexity of electric vehicle costs, including ways of reducing costs in EV production.

The complexity of electric vehicle costs

The entire economics of EV production is impacted by a number of factors which in turn, affect electric vehicle costs. Since EVs use a distinct set of components and technologies than traditional internal combustion engine vehicles, the cost structure of electric vehicles can vary. Below, we’ll break these down into three sections:

Vehicle design

A significant aspect affecting EV manufacturing costs is the vehicle’s design. Decisions made during the design stage have a big impact on the cost structure of electric vehicles.

Material selection:

Carbon fiber is an example of a lightweight material, used in the production of EVs, that has proven to boost efficiency and range. Even though these materials perform better than the conventional steel and aluminium used in combustion engine vehicles, they cost a lot more.

Aerodynamics:

By using sophisticated aerodynamics in combination with lightweight materials, the vehicle can increase its range. However, these design improvements can raise EV manufacturing costs due to their complexity and extensive testing.

Temperature control:

To prolong battery life, managing the EVs internal heat system effectively will enhance performance and possibly preserve the battery life for longer. The initial costs of engineering these heating designs increase as they are more complex than traditional combustion engine vehicles as they don’t rely on batteries.

Structural design:

The number one priority in building any vehicle is safety. Ensuring the safety of EVs demands extra engineering and manufacturing time, as all safety elements must seamlessly integrate with the EV components and materials. This added complexity ultimately increases the overall electric vehicle cost.

Component selection

Another important electric vehicle cost analysis is the component selection. Specialized parts like batteries, electric drivetrains and sophisticated control systems are usual requirements for EVs. However, getting these components to the automakers can also raise the costs of EV production.

Battery:

In an EV, batteries are the main source of expense. The lithium-ion battery actually makes up for 50% of the value of an EV today. Research in making improvements in longevity, energy density and production are all expensive investments. 

(ref: https://www.pwc.com/us/en/industries/industrial-products/library/electric-vehicles-supply-chain.html)

Electric drivetrains:

Although they are more expensive than their conventional internal combustion engine counterparts, electric motors and inverters are essential. Investing in modern technologies and enhancements for these can be pricey, but unavoidable.

Supply chain:

Various EV components are built from raw materials. For example, EV batteries are built using lithium, nickel, cobalt and manganese – all of which are mined from specific locations around the world. Unfortunately, they are not readily available materials unless production is located in the country of origin. Sourcing them and planning the logistics to transport them consist of a variety of complexities that increase and alter the cost structure of electric vehicles considerably.

(ref: https://www.nrdc.org/bio/jordan-brinn/electric-vehicle-battery-supply-chains-basics)

Innovations of the future

Further cost factors in the electric vehicle market are influenced by the leaps and strides made in technological innovations. Numerous improvements have the ability to save costs and boost efficiency. Pumping money into the research and development of these innovations can be costly, but once the market can find solutions to this, then the overall costs should fall.

Battery technology:

This is a constant area of innovation, and although advancements in battery technology might lower the overall cost, investing in the research and development needed for this is an expensive endeavour. According to consumers, battery life and range is the key concern when purchasing a new EV. The table below shows the anticipated improvements for the new lithium manganese iron phosphate (LMFP) batteries which could power the future fleet of EVs.

(ref: https://www.greenmatch.co.uk/electric-vehicles)

Manufacturing processes:

Due to the battery component and its raw materials, EV manufacturing costs are the highest part of production when calculating electric vehicle costs. However, these costs are expected to fall as adjustments are made in the supply chain, and other production methods simplify, like introducing the centralized vehicle architecture, over the next few years.

(ref: https://tinyurl.com/5n98way5)

Material innovations:

Currently, the materials used in the design of an EV, such as carbon fiber, are lightweight and durable. This has a huge impact on the performance, safety and efficiency of the vehicle. One major enhancement for using light materials is allowing the electric car to travel further. Increasing this range offers more assurance to the consumers, by reducing the fear of running out of power. However, research and design developments into other more optimized materials is another continuous cost factor in the electric vehicle market.

Infrastructure:

Purchasing public charging infrastructure is a necessity to continue operating electric vehicles on the roads. The charging stations can be expensive to install and operate. With the growing demand for EVs, more charging stations will need to be installed to accommodate consumers. However, innovations in fast charging and wireless charging could alter the route moving forward.

To help understand all of the complex details and materials used in EVs, Caresoft’s Iceberg 3.0 software can offer unparalleled insights, by capturing detailed information on every component implemented in a vehicle and identify areas for improvement or upgrades.

Cost comparisons in the EV sector

To understand the cost comparisons in the EV sector, we need to look at the global EV market. Below is a table showing the sales per region in 2022, and 2023 and what’s projected by the end of 2024, as well as the market share compared to petrol or diesel engines.

(ref: https://www.greenmatch.co.uk/electric-vehicles)

Even though EV sales are increasing, the market share still significantly favours internal combustible engine (ICE) vehicles, so why aren’t more consumers switching over to them? This comes down to the cost factor for the consumer. Electric vehicle costs are still high for brand-new EVs compared to your average petrol-based vehicle. However, that price gap is decreasing as two important factors come into play – the continued innovation of more efficient batteries and the used EV car market expands.

It’s clear that EVs benefit from a reduction in fuel costs. Half as much can be spent on charging a medium-sized electric automobile at home as to filling up a petrol-based vehicle. Approximate fuelling costs for a petrol or diesel-based car in 2024 is anywhere between $0.15 to $0.20 per mile. Whereas charging your car from home is $0.05 per mile. In some cases, energy suppliers can offer special tariffs that allow consumers to charge their cars from home, overnight, for less than 3p a litre. 

(ref: https://www.energysage.com/ev-charging/electric-vehicle-charging-cost/)

The cost comparisons in the EV sector fluctuate annually. Considering that the market value of EVs is approaching $700 billion and that technology and component improvements are ongoing, it is evident that EVs have a bright future. However, one core challenge remains – manufacturers need to develop innovative solutions for durable, long-lasting batteries, to help lower the upfront cost for consumers, as this hurdle can slow the market down to the pace of a traffic jam.

(ref: https://www.fortunebusinessinsights.com/industry-reports/electric-vehicle-market-101678)

EV pricing strategies

The methods used by manufacturers of electric vehicles to determine their prices are referred to as “EV pricing strategies”. These tactics take into account several variables to establish a price that will cover manufacturing costs whilst remaining competitive in the market and turning a profit. 

Consumers could benefit if an EV industry cost breakdown helps reduce the following aspects:

• Lowering the cost of EV production, including research and development costs. 
• Competitive pricing so that consumers are attracted to the market and can make informed choices.
• Incentives and discounts: Utilizing government rebates, promotional discounts and incentives to boost customer interest in EVs.
• Reducing costs per unit by modifying prices in accordance with production volume.

Reducing costs in EV production

Manufacturers are focussing heavily on reducing costs in EV production to increase the accessibility of electric vehicles by the consumer. By 2027 experts estimate that EV production will cost less than their internal combustible engine counterparts. 

The move towards a global charging standard will reduce costs to the consumer. Although currently, it may be delaying purchases among prospective buyers whilst customers hold back, hoping these standardized options will come to fruition soon. 

Post-pandemic, electric vehicle costs were impacted by supply chain restrictions that resulted in exaggerated pricing across the auto sector. This had a considerable impact on the affordability of EVs. Further price reductions could be made when inventories and stockpiles are replenished again.

(ref: https://tinyurl.com/4yaf84j5)

Furthermore, recycling and reusing used EV batteries and components can help create a “circular economy”, by lowering the demand for newly mined materials. However, manufacturers need to find solutions for better methods of recycling as only less than 1% of lithium batteries are currently recycled.

(ref: https://www.nrdc.org/bio/jordan-brinn/electric-vehicle-battery-supply-chains-basics)

Conclusion

Navigating the ever-changing terrain of electric vehicles requires a deep understanding of the cost dynamics of the EV business. The cost factors in the electric vehicle market show that the design of the car, the choice of components and materials used, and the technological advancements all have a major impact on the costs of EV production. From an operational standpoint, consumers are demanding better battery technology before making the switch from internal combustible engines, to electric vehicles. Addressing these cost restraints will be essential for attaining a wider market adoption and trust in the technology moving forward.

If you’d like to get in touch with one of our experts here at Caresoft, we invite you to contact us.

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