Electric vehicles are here and large-scale adoption is … near?

| Podcast

While the internal-combustion engine dominates car design, its existence contributes to global warming and detracts from electric-vehicle (EV) development. Things like carbon emissions, the complexity of design, and battery development are slowing down the widespread adoption of electric vehicles. But they don’t have to. Russell Hensley, co-leader of the McKinsey Center for Future Mobility in the Americas, joins McKinsey editorial director Roberta Fusaro to discuss what can be done to encourage manufacturers to produce and consumers to embrace electric cars.

After, hear Alan Murray, CEO of Fortune Media, talk about his search for the soul of American business in an excerpt from our Author Talks series featuring his book, Tomorrow’s Capitalist (Hachette Book Group, May 2022).

The following transcript has been edited for clarity and length.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

So close, yet so far away

Roberta Fusaro: We’ve all heard how the electric vehicle is coming. But so far, the adoption has been relatively slow. What’s keeping suppliers from producing more electric vehicles?

Russell Hensley: That’s a multibillion-dollar question. We are certainly in the decade of the EV. But the vast majority of vehicles on the road today are powered by internal-combustion engines. And one side effect is the emissions of carbon. It’s quite complex to actually design, develop, and produce electric vehicles at scale when you have a vehicle fleet so dominated by the internal-combustion engine, and all the systems in the world for mobility have been indexed toward the internal-combustion engine.

Roberta Fusaro: What are some of those complexities?

Russell Hensley: There are several forces at work in the EV industry: regulation, economics, technology, and the consumer, who has to appreciate and adopt the new technology. If it wasn’t for the regulators, we probably wouldn’t be talking about electric vehicles today. We’ve got regulation that promotes the adoption of electric vehicles.

Second, the technology: over the past 20 years, we’ve seen the rapid adoption of mobile electronics and, with that, the development of batteries and energy storage. That application has paved the way for huge advances in energy storage and batteries that are suitable for applications in vehicles.

We’ve got a combination of regulations aiming to reduce carbon, electric vehicles being part of the solution, and batteries being a critical element of the electric vehicle.

Roberta Fusaro: What’s keeping consumers from driving EVs?

Russell Hensley: Adoption has not gone faster because there is a hesitation in pivoting from something that is so trustworthy in the internal-combustion engine to something that is a relatively new technology. And, with vehicles being the second-largest investment that a household makes, it’s obviously a decision that takes much consideration.

Global adoption of EVs

Roberta Fusaro: How popular is EV adoption globally? What are the data around EV adoption across the globe?

Russell Hensley: If you take the global lens, electric-vehicle adoption differs quite significantly by region. Europe and China have similar adoption rates as a percent of volume, running somewhere close to 20 to 25 percent of new vehicles sold. But then, in the US, we have tended to be slower in terms of adoption, with something like 5 to 7 percent of new vehicle sales being electric in the US. There are a number of reasons why that is the case. If you look at the makeup of new vehicles sold in the US, a large proportion of them are actually pickup trucks and SUVs.

A 4x4 future

Roberta Fusaro: How is the industry focusing on electrifying trucks and SUVs—since the demand is there?

Russell Hensley: It’s somewhat easier to make the physics work and the economics to box with a smaller vehicle, which requires a smaller battery and has different demands based on the use cases than, say, for a pickup truck. That is changing quite quickly.

We are beginning to see the first introductions of electric SUVs and pickup trucks and will certainly see more in the next 12 to 18 months from the Detroit Three. These types of trucks will begin to accelerate adoption, if consumers and business owners adopt them.

Toward the end of the decade, about half of the new vehicles sold in the US, typically around 17 million units a year, will likely be powered by an electric motor and battery. Therefore, we will be catching up with the other regions around the world. We may lag at this point, but it’s going to change once you get the electrification of the more popular models in the US.

Toward the end of the decade, about half of the new vehicles sold in the US … will likely be powered by an electric motor and battery.

Russell Hensley

Battery blues or boon?

Roberta Fusaro: Batteries seem to be the core challenge and also the core opportunity. Why is it so hard for manufacturers and producers to source the raw materials, or generate the batteries as quickly as we need to?

Russell Hensley: You have to have the production facilities to build not only the vehicles, but also the batteries that go into the vehicles. And that’s where battery gigafactories come into play. Gigafactories, by default, will have a tremendous appetite for raw materials. Those raw materials often come from challenging places in the world. That has to be addressed either through links within the ecosystem between the industry and mines, or a very creative way of recycling the materials that exist in vehicles on the road.

Roberta Fusaro: What are the challenges related to battery application in EVs?

Russell Hensley: The challenge when you put batteries into the automotive application is the magnitude of the battery. It’s a large energy storage device that will go through multiple cycles in its life, and it contains precious metals.

But it means ensuring that the chemistry is stable and ensuring that the battery can go through the multiple cycles of charging and discharging over the life of a vehicle. A typical vehicle will last 16 to 17 years in the US, so it’s a tall order.

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We’re still in our infancy. That said, the 2020s will be the decade of the EV, and we will see this adoption go from 5 percent to 50 percent of new-vehicle sales, and gradually penetrate the fleet as the economics become more competitive and the model availability expands.

With the popularity and the increase in demand for electric vehicles, so goes the demand for the raw materials that go into the battery, which creates another challenge. Some of these materials are quite costly and are only found in certain parts of the world, which makes it quite challenging for the US to ensure energy independence.

Roberta Fusaro: What can you tell us about the cost of these EV batteries?

Russell Hensley: In terms of the battery cost, ten to 15 years ago, we were looking at $1,200 per kilowatt-hour, making the economics simply not feasible. Given major investments and significant advances in technology and chemistry toward the lithium-ion we see today, we see battery costs that are more like $100 to $125 per kilowatt-hour at the cell level.

That’s a tenfold decrease, highlighting the huge advances in technology enabling us to put a battery in a vehicle and for the unit economics of that vehicle to make sense. Again, that’s easier said than done.

The net-zero imperative

Roberta Fusaro: What can the EV industry as a whole do to mitigate obstacles related to sustainability?

Russell Hensley: The auto and mobility industry must find multiple solutions that mitigate threats toward sustainability. One critical step will be to ensure that we can reuse the materials that actually go into vehicles. The amount that you reuse or recycle—be that from the battery, from the vehicle body, from other elements of the vehicle—all needs to be maximized such that we reuse the materials as opposed to looking for new sources in the ground.

Sustainability is critical. Adoption of techniques associated with the circular economy are key, which would help to move the mobility of people and goods toward that wonderful goal of net-zero emissions.

Breaking down barriers

Roberta Fusaro: So given all the challenges that the players in the EV ecosystem face, how can they start to remove some of these obstacles? What can they do to ensure that all the players in the ecosystem are moving their agendas forward?

Russell Hensley: There are a number of things that have to happen. First, we have to design, develop, and produce a range of models that consumers find appealing. And that is increasingly the case. We discuss the uptake of different segments like pickup trucks in the US, which are very, very popular. You will have to have electric pickup trucks if there is going to be full adoption.

Second, those models have to be economically viable for the industry. That means that the costs of the battery have to be at a certain point where the unit economics pencil out and you make electric vehicles profitably.

To my earlier point, this has been quite challenging, as we’ve been at higher levels on the battery cost curve, which are now coming to be at a point where we’ve got economic equivalence between an electric and an internal-combustion-powered vehicle, in terms of the economics for the industry.

Third, you need talent that knows how to design, develop, and produce these vehicles at scale. Batteries, electric motors, and software systems that run these vehicles are all relatively new. And capabilities that come from the talent need to be developed too.

There is also the education of the sales channel, and the dealer that is selling an electric vehicle, which is completely different from traditional-vehicle sales. We also need the charging infrastructure to give the consumer confidence that they can charge at home, at work, or independently—therefore, reducing or eliminating range anxiety, which is something that we’ve had in the early days of adoption. There’s an education that’s required of the consumer.

There’s also a whole new set of protocols that you need for people like fire departments that deal with accidents. Dealing with an electric vehicle that has crashed and has got a chance of a thermal event is a whole new training that the folks have to go through.

The ecosystem is quite extensive when you begin to think about it. And it starts with an incentive, which is what you’re seeing from some of the regulations that have been released over the past 24 months that apply to charging infrastructures and purchase incentives.

Roberta Fusaro: How can governments help accelerate the development of a network for charging electric vehicles? Are there other levers they can use, or other ways that they can get folks fully on board with EVs?

Russell Hensley: The way to create a tailwind and expand the infrastructure is to initially incentivize it, because it’s a costly proposition until scale is realized. It’s not necessarily obvious where you build out a charging infrastructure. The answer to those questions depends on the use case that you’re trying to address, whether it’s a fleet of vehicles, a retailer trying to serve their consumers, or serve the fleet of vehicles that’s delivering groceries these days. It’s quite complex.

And it will require quite significant funding to ensure that we have the coverage that’s required in a very different world compared to the one we have today, where a gas station resides on most well-traveled corners and where you can fuel your vehicle in less than ten minutes and then drive four-hundred-miles-plus without any thoughts for range anxiety.

Roberta Fusaro: We talk a lot about talent gaps and talent shortages nowadays. What are the skills gaps right now around electric vehicles?

Russell Hensley: Like most industries, there is this digitization of the development process, the product and the environment in which the product is used. So at the end of the day, much of this transition comes down to software and having the talent that understands how to engineer and deploy the software.

And that’s from an industry that has been fundamentally based around mechanical systems and some electrical systems for 130 years. Now it’s pivoting to software-driven vehicles that have multiple electrical systems supported by mechanical systems.

There are three best practices that I’ve seen companies do. First, they’ll make an anchor hire of someone who has a high profile within software engineering. They’ll hire a high-profile software engineer and build around that anchor person. That would be one strategy.

The second one is you actually “aqui-hire.” You find companies that are software-led companies which you can collaborate and partner with and potentially acquire.

The third piece of the puzzle is, instead of using human capital to design and develop your software, you use machines. Probably, a combination of those three things is probably the way that you address the talent challenge.

Production differences

Roberta Fusaro: Thinking about how electric vehicles are produced versus traditional vehicles, what are the key differences, if any?

Russell Hensley: There are several fundamental differences. Probably the most obvious one is the powertrain, with one being powered by an internal-combustion engine that uses gasoline and the other being powered by an electric engine and supported by a battery.

In their simplest form, electric vehicles can be more efficient in terms of production. You don’t necessarily need the same amount of labor hours to assemble because there are fewer components and there are fewer moving parts.

Roberta Fusaro: What are the implications for, say, the Detroit Three manufacturers that are used to doing things one way and now have to shift to a different model?

Russell Hensley: Ultimately, quite a few years down the road, we will have vehicles that drive themselves, which are so-called Level 4 (L4) or Level 5 autonomy. You’ll be able to do what you want with the time you are being transported, as you will not have any need to consciously drive your vehicle. You can obviously use that time to be productive or not. It’s an incredible opportunity. As we move toward such vehicles, mobility has the opportunity to become much safer. These vehicles are far less likely to crash into other objects, as the technology and advances in the vehicle intelligence systems will be quite profound. So, we move toward huge societal benefit in terms of reduced carbon emissions and far safer vehicles, ideally with far fewer accidents and far fewer fatal accidents.

Roberta Fusaro: I don’t want to feed the hype cycle around EVs, but if you’re looking into your crystal ball, when and how do you think we might reach the tipping point for electric vehicles and maybe even autonomous vehicles?

Russell Hensley: The tipping point for EVs has happened, given the economic parity we see in multiple use cases. There will be challenges and they will be of significance. But we’re past the tipping point.

There’s one use case with huge tailwind that favors electric vehicles. It’s fleets—medium and even large size. It’s often more economically beneficial to have an electric fleet, assuming that you have the charging infrastructure and the reliable vehicles that fit your use case. Today, there is significant demand for such vehicles, and a shortage of supply of smaller or medium-duty vehicles to move goods.

Roberta Fusaro: What can you tell us about autonomous vehicles?

Russell Hensley: If you think about autonomy and autonomous vehicles, it’s critical to talk about the use case and the level of autonomy. But what I think you’re referring to is Level 4, Level 5, which, in layperson’s terms, can translate into hands off and mind off. So you are not engaged at all in the direction or the speed of the vehicle.

Roberta Fusaro: So my trip to Canada would be completely anxiety free. I would just be sitting back.

Russell Hensley: It would be anxiety free because it would also figure out where that charging station is. So all you have to do is pack your cheddar cheese and Branston sandwiches and you’re all set. Maybe throw in a bottle of ginger beer to wash them down with. And now you’re going to ask me what Branston is, aren’t you? It’s like Marmite but it’s not.

Roberta Fusaro: I don’t know what Marmite is either.

Russell Hensley: Marmite is a delicious, British savory food spread based on yeast extract, made from by-products of beer brewing. I’m not sure what the marketing folks would think of that.

But with regard to autonomy and autonomous vehicles, it depends on what the situation is. We expect autonomy for on-street parking. It’s here today and we’ll continue to see it grow. That’s an L4, autonomous on-street parking. In the next couple of years it will be there on scale.

Within a few years, depending on the geography you’re in, you’ll see highway pilots and urban pilots for passenger cars. It’s a few years out. If we’re looking at driverless trucks on the highway, you’re looking at a similar time frame, maybe 2027–28, depending on the geography.

You have some regions that are more conservative than others in terms of the regulations and some that are really leaning into autonomy because, among other reasons, we have a shortage of drivers, given the increase in the movement of goods. And autonomy is one of the solutions to help ease that challenge.

Roberta Fusaro: Russell, I’m sorry to say that we’ve come up against time. But you’ve given me and our listeners lots to think about. And now I have to go off and Google Marmite and figure out what’s in there. But I did want to thank you for joining us on the podcast today.

Russell Hensley: Thank you. It’s been a wonderful time chatting through these things. And who knows? Maybe in a few years we’ll be talking about cars that run on Marmite.

Lucia Rahilly: Just like tomorrow’s electric cars, tomorrow’s companies might also be plugged in—to the importance of social responsibility, that is. Alan Murray, CEO of Fortune Media and author of the book Tomorrow’s Capitalist, explains why.

Alan Murray: Over the past decade, I started noticing a change in the way that business leaders were talking about their companies and how they led their companies.

Starting about a decade ago, I began to hear a different emphasis on the social impact of business. There was a broad sense that companies weren’t doing as much as they needed to, to ensure their positive impact on society. And that’s really what finally exploded a couple of years ago in this stakeholder capitalism movement.

All of us know that there are thousands of ways in the short term that you can enhance a company’s profit at the expense of society, at the expense of employees, at the expense of the long-term survival of the company.

As companies focus more and more on wanting to be around for ten years or 20 years or 30 years or a hundred years, those things start to disappear. You realize that you can’t be a successful company if the planet is on fire and social division is causing the political order to break down, you can’t be a successful company.

As a journalist who was always trying to get CEOs to talk about controversial issues about ten or 15 years ago, I noticed they were not going to talk about social or controversial political issues that didn’t directly affect their company. And that started to change maybe six or seven years ago. Marc Benioff of Salesforce was one of the leaders in this movement when he spoke out against the religious-liberties law in the state of Indiana that was seen as being discriminatory toward gay and transgender people.

Now we’ve seen an explosion of it. In some ways the most striking example is the one that just happened. Putin invades Ukraine, and within 15 days you had 300 companies who had come out and said, “We’re not going to do business there anymore.” CEOs are learning that the option of just saying nothing is going away.

The question about globalization is one of the most interesting questions about the future of business. If you look at the last quarter of the 20th century, a lot of these companies gained their success and their heft and their profits by pursuing an active policy of globalization.

Now we’ve had about a decade of retreat. The war in Ukraine only adds to that, and the issues I’m talking about only add to that. There is a question of “Can these companies stand for globalization and, at the same time, support their own values?” I think that’s going to be one of the big tensions of the future.

I was having a conversation last week with the CEO of one of the big four accounting firms. He said that even in their tax work, it used to be a question of “What are we allowed to do?” And in the past couple of years, more companies have been asking, “What’s the moral thing to do? What’s the right thing to do? What should we do?” Not just “What does the law allow us to?”

These pressures are not going to be reversed, and companies are going to have to figure out how to deal with them. I’m skeptical because I’m a journalist at heart, but I’m convinced that something very real is going on.

In March 2020, when the pandemic hit and companies realized that the economy was going to take a sharp move downward, my first instinct was to say, “All this stakeholder capitalism stuff is going to go out the window because people are going to be afraid of the bottom line and the effects on the bottom line.”

The pandemic, in a way, was a stakeholder crisis. Leaders said, ‘We have to make sure our people are safe and our customers are safe.’

Alan Murray

What stunned me was the exact opposite happened: the pandemic, in a way, was a stakeholder crisis. Leaders said, “We have to make sure our people are safe and our customers are safe.”

That was probably the moment where I said, “Wow, this is real. This is not ephemeral. This is not a fad. This is a dynamic driven by fundamental business forces. And it’s not going to go away.” It may not solve our problems as quickly as we needed to, but it’s not going away.

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