How Western Automakers are Cutting EV Costs to Compete with China

How Western Automakers are Cutting EV Costs to Compete with China

The electric vehicle (EV) market is heating up as Chinese manufacturers are offering low-cost models that challenge the dominance of Tesla and other Western brands. To survive in this competitive landscape, major U.S. and European automakers are racing to lower their EV costs and achieve price parity with fossil-fuel vehicles.

China is the world’s largest EV market, accounting for over 40% of global sales in 2023. Chinese EV makers, such as BYD, Nio, and Xpeng, have been expanding their presence in Europe and other regions, offering affordable and attractive models that appeal to cost-conscious and environmentally aware consumers.

According to a report by BloombergNEF, the average price of a battery electric vehicle (BEV) in China was $27,000 in 2023, compared to $40,000 in Europe and $46,000 in the U.S.. The price gap is partly due to the lower cost of batteries, which make up around 40% of an EV’s cost, as well as the economies of scale and government subsidies that Chinese EV makers enjoy.

The arrival of lower-cost Chinese EVs has put pressure on Western automakers, who have struggled to keep up with Tesla, the leading EV maker in the U.S. and Europe. Tesla’s Model 3 was the best-selling EV in the world in 2023, with over 800,000 units sold. However, Tesla’s market share has been eroding as more competitors enter the fray, especially from China.

Western Automakers Seek to Reduce EV Costs

To compete with Chinese EVs, Western automakers are trying to reduce their EV costs by developing more affordable models, forming partnerships, and improving their battery technology.

Europe’s Stellantis and Renault are among the automakers that are working on developing more affordable EVs, which are more expensive than combustion-engine equivalents. Stellantis, the merger of Fiat Chrysler and Peugeot, plans to launch 10 new EV models in 2024, including some that will cost less than 20,000 euros ($24,000). Renault, meanwhile, aims to launch a new EV platform that will enable it to produce EVs for less than 20,000 euros as well.

U.S. giants General Motors and Ford have also broached the possibility of partnerships that could lower EV costs. GM, which plans to launch 30 new EV models by 2025, has said it is open to collaborating with other automakers on batteries, platforms, and software. Ford, which has launched its Mustang Mach-E and F-150 Lightning EVs, has said it is evaluating its battery strategy and has started a dedicated team to design a lower-cost EV that could compete with BYD.

Both U.S. and European automakers are also investing heavily in battery technology, which is the key to reducing EV costs and increasing performance. They are exploring ways to use common cylindrical cells, which are cheaper and more widely available than the pouch or prismatic cells that most EVs use. They are also developing solid-state batteries, which are expected to offer higher energy density, lower cost, and faster charging than current lithium-ion batteries.

Western Automakers Face a Delicate Balancing Act

While reducing EV costs is crucial for Western automakers to compete with Chinese rivals and meet the growing demand for zero-emission vehicles, they also face a delicate balancing act between lowering prices and maintaining profitability.

According to a study by AlixPartners, the average operating margin for EVs was -3.9% in 2023, compared to 4.8% for combustion-engine vehicles. The study also projected that EVs will not reach price parity with combustion-engine vehicles until 2027, and that EVs will account for only 12% of global vehicle sales by 2025.

Therefore, Western automakers need to find ways to reduce their EV costs without sacrificing their margins, which are already under pressure from the COVID-19 pandemic, the global chip shortage, and the regulatory requirements for emissions and safety. They also need to differentiate their EVs from the Chinese models by offering superior quality, design, performance, and customer service.