As the global movement towards net-zero carbon emissions gains momentum, the use of electric vehicles is expanding fast. By 2035, Goldman Sachs research projects that EV sales will account for around half of all new car sales globally.

Even though the EV industry is facing some major headwinds, such as rising electricity costs, inflation in the materials used to make battery parts, and government programmes like the Inflation Reduction Act (IRA) in the U.S. and Europe’s answer to the IRA, Goldman Sachs strategists believe that technological progress will eventually win out in the long run.

According to predictions made by Goldman Sachs Research, EV sales will more than double to 73 million units in 2040 from just 2 million in 2020. In the meantime, it is anticipated that EV sales will increase from 2% to 61% of all automobile sales globally over that time. In many developed countries, it is projected that the share of EV sales will be well over 80%.

In the team’s analysis, Goldman Sachs equity research strategist Kota Yuzawa stated, “We expect the automobile industry to undergo a major transformation between 2020 and 2030, driven by the increasing adoption of vehicle electrification and autonomous driving.” As environmental regulations tighten and electrification technology advances, the EV industry’s growth will not slow down. Nonetheless, the sector’s revenue sources will drastically alter.

According to Goldman Sachs Research, the way the sector generates revenue will change as the ecosystem develops. Despite a decline in sales of products related to gasoline engines, strategists predict that EV sales will increase by 32% per year over the next decade. Operating profits for the global auto industry are expected to rise from $315 billion in 2020 to $418 billion in 2030, while profits for electric vehicles are expected to rise from $1 billion to $110 billion.

The market for EV batteries, which can cost up to 40% of a car’s price, is consolidating in the meantime. Estimates from Goldman Sachs Research indicate that the top five battery manufacturers will hold more than 80% of the worldwide market share in 2020. The top five automakers, in contrast, controlled nearly 40% of the global market. Battery manufacturers now have more sway over pricing, which helps them outperform competitors in terms of revenue. Finished car assemblers are hurrying to create vertically integrated production and joint-venture facilities in an effort to rebalance their pricing power with battery makers.

Government policy is positioned to alter supply networks at the same time. According to Goldman Sachs Research, the U.S.’s Inflation Reduction Act (IRA) aims to boost domestic EV assembly as well as the location of battery assembly and material production, despite the fact that the supply chain for four major components of batteries is concentrated in China. Companies will not be permitted to export batteries to the United States using the Chinese battery supply chain under this arrangement.

The EV industry is currently facing certain difficulties. EV prices are falling, which might hurt the sector’s profit margins. According to strategists at Goldman Sachs Research, the race to transform energy has also generated “greenflation,” as the demand for batteries is driving up the cost of essential components used in their manufacture. “Given that initial costs for an EV are higher than those for an internal combustion engine (ICE) vehicle, lowering the costs via technological innovation (in areas such as batteries and semiconductors) is a major premise for more widespread uptake of EVs,” they wrote. They anticipate battery prices to rise by 6% in 2023 compared to the previous year.

Now, EVs do not offer as much of a price advantage over conventional vehicles. Since crude oil prices have lately stabilised at about $80 per barrel and electricity rates are rising, EVs no longer have a cost advantage. According to Goldman Sachs Research, EVs need to achieve a payback period (the amount of time it takes for the cost of owning and operating an EV to become equal to that of an ICE vehicle) of approximately three years. This is based on the experience of hybrid vehicles. According to analysts, electric vehicles will cross that threshold in 2027. Goldman’s strategists observe clear indications that the March 2023 IRA official announcement will favour producers of EVs, battery-related goods, and EV components that are moving forward with domestic production in the U.S.

Given these difficulties, Goldman Sachs Research predicts that the sector will depend heavily on technological innovation. Strategists predict that the EV battery market will expand significantly in this decade, helped in part by the launch of novel cell designs and the research of new materials. They believe that as engineers develop ways to make electric cars lighter, powertrain components and thermal management will become more effective, lowering power consumption. They added, “Technological breakthroughs will be necessary to overcome this type of near-term noise.”