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What could lead to an electric vehicles inflection point?

Traditional auto manufacturers and middle distillate refiners should be wary that a niche technology could be about to snowball into full-scale disruption

Clayton Christiansen's classic business book The Innovator's Dilemma argues that value to innovation is an S-curve, with a long initial phase of relatively slow value growth followed by an explosive ramp-up once the disruptive innovation reaches an inflection point. Data from China and the US and China suggest that electric vehicles (EVs) might be at least close to hitting said point.

"If you look at how policy is currently lined up, … EVs will be taking a 20% market share for new vehicles in China by 2025," says Hui He, senior researcher and policy analyst at the San Francisco-based International Council on Clean Transportation (ICCT). The ICCT analyses policy to suggest likely outcomes, and the data says the 2025 outcome is likely. In August, Chinese EV sales hit 100,000 units, a new monthly record, putting cumulative EV sales for the year to date at 600,000. The most optimistic forecasts for full year 2018 sales were just shy of 1m at the start of year but may now need to be revised to at least 1.1m and even as much as 1.3m, as, like in the US, Chinese auto sales tend to be at their strongest in the year's final four months.

In a Chinese new vehicle market expected to reach 29.2m units this year, EVs may take a 3.8% market share. Next year, with a forecast 1.7% increase to 29.7m new vehicles, EV sales could top 1.6m, or a 5.4% market share, and well on target to reach 20% by 2025 if not before.

Staying alert

The key to achieving a disruption innovation break-out is maintaining high annual growth rates once overall volumes grow to material levels. In the Chinese EV market's infancy, 100% year-on-year growth rates were unsurprising. But the market, even at much higher sales levels, is still maintaining a 45% growth rate.

The ICCT's He sees two key Chinese aims in fostering the rapid adoption of EV—the first being reduced air pollution, and the second developing world-leading EV car makers. What established auto manufacturers and the refiners that supply their fuel may have underestimated, says He, is China's history of supersizing markets through bold policy initiatives.

China's EV market also merits drilling into the headline figures. "A lot of analysts look at the quantity of EVs being sold, but it is also important to look at types," says He. "In China's Tier 2 cities outside the mega-regions, 70% of EVs sold are dedicated electric ultra-minis. They have more limited range, but are cheap, and the growth rate has been incredible." China has, in effect, two separate EV car markets, and, according to He, adoption rates in the Tier 1 cities have been lagging their smaller counterparts. When Tier 1 cities start to catch up, that could extend the country's high growth rate for longer.

In the US, EVs' share of the new vehicle market looks set to surpass 2% this year, with a 75% annual growth rate. In California, their market share was close to 5% in 2017, and will climb above 8% in 2018. Relatedly, the US' EIA predicted that 2019 gasoline demand was expected to be flat for a fourth consecutive year.

Christiansen's book warns that incumbents are often swept away by disruptive innovation, because their need to generate sufficient returns leads to a focus on improving their existing mass-market products. By the time the S-curve's inflection point means new technology can start to generate attractive returns, they cannot match new entrants focused solely on the disruption.

In October, the CEO of German auto firm Volkswagen, warned that traditional manufacturers had reacted "too late" to the advent of EVs—although whether it was entirely an admission of impending defeat or political positioning to try to avoid more stringent emissions standards by enumerating the various threats to the industry, and consequent vote-losing job losses, is not entirely clear. Either way, middle distillate refiners should be on their guard that they too are not caught unawares.

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