Driving the future: supporting a rapid transition to electric vehicles

This transition will create a range of challenges and opportunities for stakeholders across the entire vehicle lifecycle – including manufacturers, financiers, motor dealers, EV infrastructure players, repairer networks, and insurers. Importantly, this ecosystem sits within a broader operating context of government policy, targets and incentives, which – as we have seen from other markets – is the biggest single influence on EV take-up rates.

This first article in our Driving the Future series summarises the current state of the EV market in Australia, and utilising lessons learned overseas outlines some of the key considerations for the automotive ecosystem as it begins to navigate this new EV landscape. Future articles will deep dive into a number of EV aspects including key impacts for the automotive industry, insurance pricing and underwriting developments, and climate and ESG considerations.

The switch from Internal Combustion Engine (ICE) vehicles to EVs - including both plug in hybrid vehicles (PHEVs) and battery electric vehicles (BEVs) - is an important part of Australia’s shift to a net zero economy. EVs are a critical component of the Commonwealth government’s targeted 43% reduction in emissions by 2030, with Labor’s policy modelling assuming significant growth in EVs - from about 2% of new car sales currently up to almost 90% by 2030, and with EVs forecast to represent about 15% of total registered vehicles by that date.

The Commonwealth Government has outlined a number of key initiatives in support of meeting this target, including making EVs cheaper (with planned exemptions on FBT and import tax), increasing the number of models (and therefore choice) available, mandating targets in government fleets, and significant investment in charging infrastructure. State governments have also developed various incentives and investment programs.

Within this backdrop, there are important considerations across each stage of the EV life cycle, some of which are discussed below.

Manufacturing

Major vehicle manufacturers globally have adopted EV-centric strategies, including some that will entirely phase out ICE vehicles, although in the short-run many are facing supply chain disruption and resource constraints. Both retail and commercial consumers are showing strong demand for EVs, especially in Australia.

Manufacturers have been incentivised to supply vehicles to markets with fuel emissions standards (noting that Australia is currently the only OECD nation outside of Russia to not have such standards). If recent indications that the Commonwealth Government is looking again at the issue turn into actual emissions standards, this may shift supply back to the Australian market, accelerating the adoption of EVs.

Purchasing

For the dealer network - which traditionally has relied on profits from financing, servicing and repair income streams to subsidise vehicle sales - EVs present challenges given they are likely to require less service and repairs. In addition, some OEMs are pursuing direct sales channels for EVs while maintaining traditional dealer channels for ICE vehicles. Dealers will need to adapt their business models in response to these new customer relationship and profit stream dynamics.

Operating

There is still a long way to go before the wide range of operating infrastructure needed to support adoption of EVs is adequately established in Australia. While the need for charging networks has captured a large part of EV infrastructure discussions to date, we believe the implications for other elements critical to a functioning EV market, including repairs, roadside assistance and insurance, are less well understood.

End of Life

There are a range of end of EV life considerations, including recycling and disposal. CSIRO research[1] shows for electric batteries alone, while their waste is growing at a rate of 20 per cent a year, only two per cent of these batteries are recycled. Insurers also have a key role to play in this aspect, with EVs changing end of life dynamics. Safe disposal of written-off EV bodies is another area that needs scoping out before a commercial local industry in this area can be developed.

State of the market

EVs make up a small but rapidly growing number of cars on the road in Australia. According to the Electric Vehicle Council’s State of Electric Vehicles[2] March 2022 report, EV sales tripled in 2021 to almost 21k (2%) of total sales compared to 2020’s 7k (0.8%) of total sales, with more choice in terms of models and lower prices and state and territory government incentives generating market demand.

The report shows more than 30 EV models were available in 2021, with this number likely to double in 2022. While Teslas made up 60 per cent of sales last year this mix will change as more brands continue to enter the market. The report notes, “strong consumer demand saw some popular models selling their full annual allocation within hours of being made available for purchase. Rising sales and long waiting lists emphasise that further growth in Australia is inhibited not by a lack of consumer demand, but by supply constraints.”

Australia’s current level of EV sales compares poorly to other countries, with EVs now accounting for >10% total sales in sixteen countries (the top fifteen being European, followed by China in sixteenth)[3], with Norway leading the way at levels now well in excess of 80%. It is notable that Norway has achieved this in a relatively short period of time (from 3% in 2012 to 83% in 2021), supported by a compelling range of tax and other incentives. In China, EV penetration is growing rapidly (from 5% of total vehicle sales in 2020 to 11% in 2021). In terms of vehicle numbers, Chinese demand is already significant - according to the Global EV Outlook 2022[4] , published by energy consultancy IEA, more EVs were sold in China in 2021 (3.3 million) than all the EVs sold in the world in 2020, outstripping Europe (2.3 million EV sales in 2021) by a significant margin.

EV Infrastructure

The building blocks of EV infrastructure go beyond simply installing charging infrastructure across the nation. (It is worth noting that advancements in charging technology continue to reduce concerns of home electrical upgrades being required). Other systems we have come to rely on within our historic ICE vehicle environment - such as roadside assistance, parts, repairs, finance and insurance - need to be adequately evolved to support EVs.

At the moment, the services component of the EV market is tightly held, with EV manufacturers adopting vertical integration models and taking a greater stake in associated sub sectors, such as repair shops, salvage providers, battery disposal operators, roadside repairers and insurance.

Parts supply is also a weakness, exacerbated by existing global supply chain strains, with spare parts expensive and difficult to access[5]. Although there is an argument for establishing an EV parts industry in Australia, in reality the tiny nature of the market here may make it uneconomic.

The nature of repairs also complicates these processes. For example, in an EV controls are integrated into one panel in the vehicle, so it is not usually possible to replace just one component. Existing networks of repairers will need to upskill and expand in order to meet increasing volumes of EVs, requiring substantial investment in both specialist equipment and training. It is also worth noting insurers’ existing relationships with preferred mechanics, who are authorised to do repairs on their policyholders’ vehicles, will also need to be reconsidered as more EVs drive on our roads. Insurers may have less reliance on these mechanics as their policyholders switch from ICE vehicles to EVs.

Insurer considerations

The immature nature of the repairer market in the EV sector is negatively impacting vehicle owners at present, with anecdotal evidence suggesting owners are finding it challenging to get their cars repaired in a timely fashion because there are relatively few specialist EV mechanics. It also has serious consequences for insurers and their policyholders, with higher repair costs, as well as higher towing costs - particularly in regional areas given fewer repairers exist, translating to higher claims costs and in the long-term higher premiums, all other things being equal.

However, recent analysis by Finity, to be published in our Optima series later this year, shows that insurers are currently charging premiums for EVs at a similar level to ICE vehicles. This may be explained by a lower frequency of claims due to the improved safety features of new vehicles, but given the lack of EVs on the road there is currently not enough data to be certain about this. We think that it is more likely that insurers are currently adopting a ‘wait and see’ approach while the size of the market is still small relative to ICEVs, and as they gain more data to learn how the differing forces at play ultimately impact on claims frequency and costs. Complicating this picture are higher transitional costs in the short-term, with overseas insurers experiencing additional costs associated with the lag in repair and other infrastructure networks catching up to vehicle demand. As the market reaches a commercial size we expect better data from increased experience to firm up any pricing differential between EVs and ICE vehicles. While we are yet to see insurers charging markedly higher insurance premiums, insurers can only sustain premiums lower than claims costs in the short run.

Conclusion

While the transition to EVs is inevitable, we expect the speed of this transition in Australia to ramp up quickly given new government targets and planned incentives. To support this transition, each of the infrastructure building blocks will need to be properly considered and evolved to support EVs alongside ICE vehicles. The advent of EVs will create both challenges and opportunities for each stakeholder group in the automotive ecosystem. For insurers, understanding the implications for EV repairs across the range of parts and labour influences at play is particularly critical for future claims management and pricing. This is undoubtedly challenging in the short-term, but will become easier as EV penetration increases and more vehicle, driver and claims data becomes available to inform good decision making.

We look forward to further exploring the impacts, challenges and opportunities that EVs bring in future editions of our Driving the Future series.