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As tighter regulation and better technology accelerate the rise of electric cars, carmakers will need to be ready.

Ford CEO Mark Fields proclaimed in January 2017 that the “era of the electric vehicle is dawning”. By his reckoning, the number of models of electric vehicles (EVs) will exceed that of cars powered only by internal combustion engine (ICE) within 15 years.

At present the number of EVs on the road remains low, at only 1% of cars worldwide. Analysts had predicted that the proportion of EVs on the road would increase to about 4% by 2025. More recently Morgan Stanley said that by 2025, EVs will make up 7%. Exane BNP Paribas goes farther, putting this number closer to 11%. Still, as carmakers announce huge expansions in their EV production, these figures may fall short of the mark.

Ford plans to introduce 13 electric cars in the next five years. Volkswagen, set to begin a major push in 2020, has pledged 30 new battery-powered models by 2025, with EVs accounting for up to 25% of its sales. Daimler is targeting up to a fifth of sales coming from EVs by the same date.

Twin forces are behind this revolutionary trend in automotive: First is the need to comply with emissions regulations. Pure EVs as well as hybrids have what it takes to meet Europe’s emissions targets. They are expensive to produce; however cheaper approaches such as stop-start technology and weight reduction will no longer be sufficient, due to more rigorous testing protocols.

Carmakers outside Europe also have reason to pivot to electric sooner rather than later. China, spurred by government quotas, is ahead of the curve. More than 400,000 pure EVs were sold in China last year, making it the world’s biggest market for EVs. America, even if Donald Trump rolls back regulation, is poised to follow suit – at least in certain states. As The Economist reports, “California, which accounts for one in eight cars sold in America, is allowed to set tougher environmental standards than the national ones. It, and seven of the other states that have adopted its emissions rules, have a target of 3.3m EVs on their roads by 2025.”

Cheaper and more powerful technology, specifically with regard to batteries, is the second major driver. As carmakers are required to produce more cars that release little or no carbon dioxide into the atmosphere, consumers will increasingly want to buy them. They will become more affordable. Better batteries will last longer, addressing the problem of limited range, and charge much more quickly. There is also growth in the number of charging stations.

Carmakers will initially suffer a blow to their cash flow and profits. EVs are not yet profitable, due to the still-high cost of batteries, as well as R&D and restructuring. Carmakers with robust margins and rich customers, such as Daimler and BMW, are better positioned. Mass-market carmakers face a rougher road. On the upside, as battery costs fall, EVs could become more profitable than ICE cars. They are simpler mechanically, requiring less equipment and fewer workers. This transition will not be an easy one, but for the sake of competition if not conservation, it is a necessary one.

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