When will EV prices be the same as non-electric cars?

2 November 2023 By: Toby Hagon

As prices start to edge down, what are the key factors that will determine when we see electric vehicles reach price parity with internal combustion engine vehicles?

Anyone who’s owned an electric vehicle (EV) will know they are significantly cheaper to keep on the road than a car powered by fossil fuels.

Lower energy costs and minimal service requirements help make them far gentler on the family budget once you’ve parked them in your driveway.

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But there’s no ignoring the often hefty initial purchase price, to the point where for many buyers, they’re still out of reach.

The most basic electric hatchbacks cost about $40,000, which is about $10,000 more than the Toyota Corollas and Mazda3s that dominate at that end of the market.

Electric SUVs that will suit the needs of many families start at about $50,000 and quickly head north from there, again amounting to a higher initial outlay.

So, when will we be able to buy electric cars that are about the same price as the mainstream petrol and diesel options we have today?

Australia’s Electric Vehicle Council expects EVs will reach price parity with internal combustion engine (ICE) vehicles by 2025. While that timeline does seem a little too optimistic for the Australian market, what we can say with certainty is that things are moving in a positive direction.

Heading in the right direction

The good news is EV prices are coming down. Or, at least, they’re holding steady in a market that has experienced broad price rises in recent years.

Limitations to supply of some EVs eased throughout 2023, to the point where some brands are easing up on their production rates. That easier supply also means incentives are being offered, from straight discounts to free servicing and more.

It is also common for car makers to introduce more affordable, lower specification model variants after their initial launch.

Hyundai is a good example, recently introducing a new entry-level model of its Ioniq 5 that is thousands less than other, earlier versions of the model. But at $64,500 before on-road costs, it’s still a lot of money for a five-seat SUV.

Middle ground

The market for medium and large four-door sedans is an interesting case study.

Volumes have been declining for almost two decades, taking with it big nameplates such as the Holden Commodore, Ford Falcon, Subaru Liberty, Ford Mondeo and Mitsubishi Magna.

But when Tesla unleashed the Model 3 in 2019, it instantly revived that market segment - and it did it with a car costing almost $70,000, such was the huge level of interest in the model.

As more EV competition has entered the market since then, and as demand for the Model 3 and Model Y Teslas changes, the manufacturer has been adjusting pricing. It went down in early 2023 and then up again.

Meanwhile, potential rivals from luxury brands, such as the BMW 320i and Mercedes-Benz C200, have also increased in price by about 20 per cent over the past few years. The recent arrival of the BYD Seal – at about $52,000 – has added another highly-specified electric alternative to traditional sedan options.

One thing is for sure though – increases in competition among EV manufacturers and with other rivals in Australia stand a good chance of helping keep prices sharp.

EV affordability is improving

The head of the Electric Vehicle Council, Behyad Jafari, believes affordability will continue to improve as competition ramps up. And he expects more price falls for electric vehicles.

“The cost of electric vehicles is falling dramatically,” says Jafari. “As supply improves, the market gets more competitive and that's some of the reason why we're already seeing prices of models like the Teslas continuing to fall.”

He believes the trend will continue.

“Every day, every month, we're seeing both new cars coming in at even lower price points and more options of different cars coming in at lower price points.”

Look to volume

Jafari says the better-selling electric cars are the ones helping drive down prices, such as the BYD Atto 3, Tesla Model Y and MG4.

He also says the Federal Government’s promised emissions regulations – due to be announced before the end of 2023 – could be a game changer for EVs.

“I think the fundamental piece to getting more competition into the market and keep driving prices down as well as increasing the variety of electric vehicles available in Australia is for the government to implement quite strong fuel efficiency standards.”

If those emissions regulations take a lead from Europe and China, then they will penalise ICE vehicles, thereby forcing prices up and narrowing the EV/ICE gap.

That should also encourage manufacturers to bring in more efficient models and more EVs, which could even provide credits that can be used against those penalties.

China is key

Chinese manufacturers are key to the reduction in the cost of EVs.

Much of the development and manufacturing of EVs is occurring in China, and the country is leading the world in electric car production and innovation. That includes newcomer brands but also the likes of Tesla and Polestar, which produce cars in China.

Volvo and BMW also manufacture some of their EVs in China, despite the more obvious branding links with Sweden and Germany.

Jafari said China’s intense focus on manufacturing is helping lower costs, something that is ultimately a win for consumers.

“China is a major force in vehicle manufacturing, and this has significantly brought down costs.”

He said Chinese car brands had so far been successful at offering budget cars in the Australian market.

Automotive analysts at UBS describe the domestic competition in China as a “price war” that will spread globally.

UBS also believes that the changing dynamic will mean “next-gen EVs from the cost leaders are likely to reach price parity with the ICE cars that are facing higher costs to comply with stricter emission norms”.

ICE vehicles getting more expensive

That’s a key point, because there’s more to the EV/ICE parity debate than electric cars just getting cheaper.

Tightening emissions regulations mean car makers are having to spend more to get engines to comply.

Plus, there’s those yet-to-be-seen emissions regulations that look certain to make EVs more attractive.

Parity may come from lesser-known brands

Recent years have seen the rapid emergence of lesser-known Chinese brands offering EVs, such as GWM and BYD to LDV.

It’s a global trend, one UBS believes will lead to consolidation between existing manufacturers – and the demise of others. The company is forecasting Chinese brands to almost double their market share to 33 per cent by 2030 with Tesla quadrupling its share to 8 per cent in the same period.

Conversely, traditional brands such as Toyota, Volkswagen, Mazda and Hyundai would drop to just 58 per cent of the global market.

That means more affordable EVs could largely come from brands that may be unfamiliar to many Australians.

Top of that list is BYD. In its first year on sale in Australia, it has become the second biggest electric car brand in the country, outdone only by Tesla. It’s also had one of the most successful first years of any new automotive brand muscling into the Australian market.

BYD started life as a battery manufacturer in 1995 and only turned its hand to cars in 2005.

It is now a powerhouse in China and is making an impact on many global markets it enters off the back of competitively priced vehicles that are increasingly delivering what buyers want.

New brands can also attack the market differently, in some cases eschewing the traditional franchised dealership model – whereby dealers buy cars from the importer and manage their own pricing, allowing customers to haggle.

The agency model involves car makers selling directly to consumers, where the dealer acts only as an agent and vehicles are sold at fixed, no-haggle prices.

It’s a different car-buying experience from a dealer, but it does take away the opportunity for consumers to negotiate prices. At a time when supply across the car market in general is improving, stimulating competition, some buyers may prefer to try saving a few thousand dollars at the negotiating table.

Tesla, Polestar and Cupra are among those which have employed the so-called agency model.

Vertical integration

That BYD experience points to an emerging trend in the EV market: vertical integration.

For decades, car makers have outsourced the manufacturing of most components of a car, from electrical systems, instrument clusters and seats to glass, lights, computer chips and tyres. The manufacturer then assembles them without the complexity of specialising in thousands of different bits and pieces.

It’s worked nicely, except that Tesla has shown there are benefits to keeping more of that manufacturing in-house.

Instead of paying a name-brand audio company to develop a fancy sound system, for example, Tesla simply poached engineers from big brands and gave them the freedom to develop a high-quality unbranded system.

Crucially, Tesla also develops its own software and electrical systems, two big-ticket items that also provide the company with flexibility and smarts.

BYD is also deep down the vertical integration path, to the point where UBS research estimates it has a big advantage.

“BYD Seal has about 75 per cent of its value manufactured in-house,” says Patrick Hummel, the UBS head of EU and US autos research.

Crucially, BYD builds the expensive and complex battery pack, not only controlling the flow of technology but also cutting out the margins normally added by a supplier, something that can flow through to the consumer.

“The LFP battery that BYD manufactures in-house is a real asset in terms of the way you can integrate it into the vehicle – so-called cell-to-body design – as well the cost per kilowatt-hour, which is absolutely world-class and resulting in a cost advantage over the legacy car makers of about (US)$3000 per vehicle, just on the battery side.”

For cheaper EVs we need cheaper batteries

By far the single most expensive component of an electric car is the battery pack. It typically weighs about half a tonne, has expensive raw materials and is monitored by advanced electronics to ensure its longevity and safe operation.

Many manufacturers – particularly those from Japan - are working on solid-state batteries, which have about twice the energy density and do not require as precise temperature control as existing lithium-ion batteries.

There are manufacturing complexities, but in terms of manufacturing on a large scale, they should require less raw materials to produce.

Parity in the luxury space

The luxury market is closest to achieving pricing parity because the prices of many luxury vehicles are already around that of some EVs.

The BMW X3 starts at $86,350 before on-road costs, which is only $6000 less than the cheapest iX3 electric alternative. The EV model also gets more equipment, including adaptive suspension and a panoramic sunroof.

The Porsche Taycan starts at $164,400, which is cheaper than the petrol-fed Panamera (from $205,500), which is admittedly a larger car but shares a similarly swoopy five-door body.

Globally, Volvo believes price parity between ICE and EV will be achieved by 2025. But Nissan is one that has a longer time frame, nominating 2030 as the time when it will be selling electric cars for similar money as petrol ones.

EV sales growing fast

Sales of EVs continue to grow fast, roughly doubling each year for the past few years.

But many believe the hard work hasn’t really begun and it relies on a broader selection of vehicles, especially in the ute and four-wheel drive space that Australians love.

“People don't just buy the cheapest new car, people buy the car that's right for them,” says Jafari. “We need electric vehicles that come in all different segments.”

Even then, top seller Toyota Australia won’t be drawn on its EV share by 2030, instead nominating 80 per cent will be either hybrid or electric. Given the brand’s dominance with hybrids, there’s a good chance that will be the focus.

Other big brands such as Hyundai and Kia also think ICE vehicles will still account for more sales than EVs by 2030. But that doesn’t take into account the EV-only brands such as Tesla and BYD (which, to be fair, is also planning an ICE ute) and others likely to tackle the Australian market over the coming years.

Throw in an EV-only Cadillac return, an intense focus on electric from BMW, Mercedes-Benz and Audi as well as Volvo’s imminent switch to electric, and the market suddenly starts to take on more of an EV flavour.

Even Porsche – a brand that’s built its reputation on high-octane excitement – is expecting most of its cars to be powered by electrons by the end of the decade.

“Our future is electric,” says Daniel Schmollinger, Porsche Australia CEO and managing director. “By 2030, 80 per cent is planned to be electric.”

Slow road

But it’ll be many more years until EVs are the dominant force on Australian roads.

There are currently about 150,000 electric cars registered in Australia, with the remaining 20-odd-million all powered by fossil fuels.

So even if the new car market switched wholly to EVs tomorrow, it’d still be close to 10 years until EVs were more prolific.

“In Australia, we sell about one million new cars every year and we’ve got about 20 million cars on our roads, so it takes a while for that shift to happen,” says Jafari, pointing to the used car market as critical for keeping the EV momentum rolling.

Still, the mould has been cast and it’s only a matter of time until electric is the dominant force.