The 5 basic cost-out steps applied to the electric car

I’m an electric car enthusiast. I have already decided that the next car I buy (or rent, although I leave that for another post) will be 100% electric. But as I have a limited budget, I follow with great interest the evolution of costs and/or prices in a sector in full expansion. And it is extremely interesting to see the movements of the different manufacturers to accelerate the learning curve that leads to cost/km parity with internal combustion cars.

In the cost-out, as in any complex issue, it is highly recommended to start from a very simple and common sense structure. Here are 5 simple steps to implement a cost reduction program:

  • Define the cost reference, measurement criteria, scope, tools, etc.: nothing can be measured without standards and references.
  • Define product cost structure: grouped by systems or families so that it can be spread out to a high level of detail.
  • Identify the reduction levers: also known as cost drivers or cost levers. This is probably the most important phase.
  • Capacity to operate at each lever: basically knowing if we can work internally (redesigns, process improvements, etc.), either through suppliers (renegotiation of prices, volumes, redesigns, etc.) or through innovative initiatives (new technologies, joint ventures, etc.).
  • Action plan: specific actions with measurable objectives and plans.

Let us now look at some examples of the emerging electric car industry:

  • Cost structure: according to data published by Bloomberg e Irena in 2017, we can roughly assume that the battery pack represents 50% of the total cost of an electric car. Another 20% is in the rest of the material (chassis, engines, bodywork, etc.), 15% labour, 10% depreciation and 5% powertrain.

If we focus on the battery pack, a rough approximation would be that half of its cost is material and the rest labour, depreciation and others.

  • Identify levers and room for manoeuvre:
    • It is obvious that the first lever is the price of materials, which accounts for 25% of the total cost. It is a complex, volume-dependent lever that is managed by the mining sector that is a capital-intensive sector with long-term business cycles. We can highlight 3 possible ways of acting:
      • Vertical integration: due to its complexity and capital requirements, it is not a viable option at this moment.
      • Investments in mining companies: a minority option at the moment but already being carried out by some manufacturers such as Toyota.
      • Long-term supply agreements: this is the most used because it ensures volume at a stable price, although it eliminates potential benefits due to higher than expected cost reductions. Recently BMW, VW and others have concluded long-term agreements for both cobalt and lithium.
    • The second lever to explore is the rest of the cost of the battery pack (25% of the total cost). Again, similar strategies are applied to the previous point:
      • Vertical integration: Tesla with its Gigafactory is the best example. It tries to accelerate the learning curve and gain a competitive cost advantage by making the batteries itself. We’ll see if it sets a trend, although with the manufacturing problems it’s having, it’s clearly not an easy strategy to implement.
      • Long-term supply agreements: this has been the industry standard until now. Tesla with Panasonic, Nissan/Renault with LG, etc. It allows to obtain improvements associated with volume, but it does not differentiate from the competition.

I am sure that this is only the beginning of what will be many movements to reach the $100/kWh target. At stake is a juicy potential market of up to 100 million new vehicles per year.