By Oliver Hazimeh, Director, PRTM

The recall of Toyota’s Prius has some observers questioning the prospects for the entire electric vehicle marketplace.  They shouldn’t:  The fundamental forces for electrifying our cars and infrastructure are still in place.

While Toyota (TM) and Honda (HMC) have found success with traditional hybrid electric vehicles (HEVs) that are powered by an internal combustion engine (ICE), with support from electricity, other electricity-fueled cars are entering the scene.  GM is introducing the plug-in hybrids (PHEVs) Chevy Volt, which is electric motor driven, with an ICE to charge the battery.  And, we’re seeing purely electric vehicles (EVs) like the Nissan Leaf.

As these vehicles increasingly become viable alternatives to conventional oil-fueled cars, demand for them will soar. We believe that the electric total cost of ownership will reach parity with gas-powered vehicles around 2018. My firm, PRTM, predicts that by 2020 PHEVs and EVs will constitute 10 percent of new vehicle sales worldwide. This will create a $300 billion electric vehicle value chain with its own players, including energy providers, smart grid technology firms, battery and component makers, vehicle OEMs, and service providers.

What’s Making Electrification Happen

Besides technological and cost advancements, political, economic, and environmental developments are also driving the shift toward electrification:

The Strategic Race:  Electrification is now a race between China, Europe, and the US.   The Chinese see electrification as a way to leapfrog Europe and the US, and they are throwing money at the effort—not only in raw materials, but also in new battery technologies. European governments are also moving aggressively to foster electrification. The US must follow, or risk falling behind. To date, the government has effectively fostered vehicle demand and manufacturing, but we still lag behind in technology development and building out our infrastructure.  The Electrification Roadmap, which we developed with the Electrification Coalition, offers recommendations for the US to reap the economic and environmental benefits of electrification.

The Green Movement: Stricter emissions regulations, as well as desire to preserve the environment will drive the search for cheaper and cleaner sources of fuel. Major automakers have already made electric cars their central focus. To improve fuel efficiency and reduce greenhouse gasses, automakers are currently improving on current gas engine technologies, like using biofuels. Long term, however, it is electrification that will provide the cost efficiencies needed to achieve these objectives.

The Oil Problem: Constant fluctuations in the price of oil—$147/barrel not so long ago, and expectations that the prices will again shoot past $100 a barrel by 2020—are prompting many consumers to think about hybrid alternatives. Incentives in regions with high gas taxes, like Europe, are helping increase demand for fuel-efficient vehicles. An ongoing effort by governments to reduce oil dependence should further catalyze widespread EV adoption.

What’s Holding Electrification Back

Although electrification is inevitable, there are roadblocks to widespread adoption:

Affordability: Costs differences are significant, mostly due to the cost of the battery: The battery in the Nissan Leaf, for example costs about $15,000. With aggressive operational improvements and technology enhancements that are already happening, we expect battery costs to drop 50 percent by 2020. This has to happen for consumers to broadly consider electric. And if it does, total cost of ownership for hybrids, plugins and pure electrics will reach parity with gas vehicles by 2010, 2016 and 2018 respectively. In addition, innovative financing for batteries will help make these vehicles affordable even sooner.

Infrastructure. More than $55 billion is needed to install charging facilities worldwide. And, the ROI is likely to be low, with payback taking six to seven years. Who will make this essential investment—private investors, utilities, oil companies, governments, or some combination—is still unclear.

End to End Adoption: Widespread adoption of electric vehicles is about more than just cars. Success requires collaboration across the entire value chain, among players that traditionally don’t play together: utilities, battery makers, automakers, and local governments. A seamless ecosystem is needed for easy fueling and servicing. Technical integration—plugging the car into an electricity grid and managing the load—is only part of the story.  Harmony among regulators and industry will be crucial to encouraging participation in the electric market, and to have a market that transcends city, state and even national borders.

The tipping point gets closer every day.  Given the number and diversity of the players involved, the consequences of success or failure go far beyond transportation. Electrification could spur the development of entire clean tech sector. But, getting there requires that companies and municipalities across the ecosystem work together. Winning the electrification race will not be a solo effort.

Hazimeh is a Director and head of the global e-Mobility Practice at PRTM, a global management consulting firm.  Oliver can be reached at ohazimeh@prtm.com