Electric propulsion is not a new invention. The basic technology has been around for a long time, with the first electric vehicles built in the late 1800s and early 1900s. Its common and widespread adoption has been clearly delayed, but it’s finally gaining momentum.  

However, the cost-to-revenue ratio remains a serious challenge for manufacturers. With the many changes necessary to make the inevitable transition to an electric powertrain meaningful and successful, one main problem needs to be addressed because it affects efficiency, costs, and longevity of the vehicles. And that problem is battery packs.  

Batteries and the overall vehicle cost 

According to McKinsey Center for Future Mobility, “Apart from a few premium models, OEMs stand to lose money on almost every EV sold, which is clearly unsustainable. (…) Battery costs represent the largest single factor in this price differential. As industry battery prices decline, perhaps five to seven years from now, the economics of EVs should shift from red to green.” 

The battery pack is the most expensive component of the whole vehicle. It’s very difficult to know the exact price of batteries because most battery transactions are confidential contracts but it’s possible to estimate. And even though the estimates can vary, averaging 30% of the total cost of the vehicle, even moderate savings to this component would have a huge impact on the overall cost of the car manufacture and price.  

Graph adapted from the Financial Times, 2020* 

McKinsey reports that, “A reduction in battery capacity to 40 kWh, from 50 kWh, would save $1,900 to $2,100 today, while the range would still enable most consumers, especially those in urban environments, to complete trips without any sacrifice to their daily routines.” 

New technology makes it possible to reduce the size of the battery and keep the same range. 

Diminishing returns  

Most high-tech goods tend to get cheaper as they are manufactured at increasing volumes. This is also true for batteries but only up to a point. The industry is growing, but that sudden and dramatic early growth means that matching earlier savings will be difficult, and the law of diminishing returns has set in as shown by the flattening curves. 

Looking at the industry trends, it’s easy to notice that when it comes to the price per kWh of power, price reduction curves are going to flatten. It’s not a question of whether battery costs are going to stop declining, it’s a question of when. The reductions are no longer as dramatic as they were only 10 years ago and each year, they get smaller by such small increments as to be almost insignificant. 

Another problem involved in this curve is the technology. According to The Times, “A major technological breakthrough will be required to make electric cars much, much cheaper.” Normally, improvements in technology contribute to a lower price. But this takes time and improvements to the batteries to make them more cost effective has not been dramatic enough to affect the price curve.  

Batteries are hard to improve upon quickly. What’s more, it will take time for innovations in battery technology to make it into viable products and then into vehicles. Therefore, it’s important to keep redesigning engines at the same time to make them more efficient and extend the battery life in smaller increments while hoping for the “major breakthroughs.”  

Current and new solutions 

Current suggestions for optimizing EV costs include decontenting. This can include removing some displays, switches, buttons, wiring, some structural components, etc. Reducing design and feature complexity could also add to lowering the overall cost of EVs. However, any savings achieved this way would not be as substantial as those brought by improvements in battery prices and efficiencies. 

Some suggestions for cost savings include a reduction in battery capacity to still offer consumers the average optimal battery capacity (urban/suburban travel with occasional rural travel). However, that’s hardly solving the problem of range anxiety.   

Manufacturers need to address how their vehicles use energy to meet consumer needs and cut costs. The main place for improvements is the battery pack.  

Battery size, efficiency, and life are the thing to focus on to improve cost reduction and, therefore, profitability. Adopting new technologies that allow for reduced battery use would mean either smaller battery packs for the same range or an extended driving range with the same battery size. These technologies may not be widely used yet due to their very recent development, but they could be a huge step forward for the industry. And if batteries could be used more efficiently and extend driving range by even 15%, it would impact the so-called “range anxiety” and help consumers chose EVs more readily. 

Manufacturers shouldn’t have to choose between sleek design and impressive interior and profit. With the right motor technology, they can reduce the costs of the most expensive component in their vehicles—the battery—and meet consumer preferences for size and range, stop relying on subsidies, and start making profits. 


This blog post was adapted from “Driving EVs to Profitability” whitepaper, which can be downloaded here.  


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