Economies of Scale of Electric Vehicles
It is interesting to read through an analysis titled “More Wasteful with Electric Cars” (Kompas, 6/10/2022) and an op-ed, “Considering the Purchase of Electric Vehicles” (Kompas, 10/10/2022).
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The relatively more expensive price of electric cars overshadows the advantage of electric cars’ daily operating costs, which are actually much lower than conventional combustion-engine cars that use fuel.
The operational and maintenance cost (O&M) of conventional cars is actually 300 percent more expensive than electric cars or the O&M cost of electric cars is about 76 percent lower than conventional cars over a period of five years. The O&M cost of an electric car for five years is Rp 23.3 million, while the O&M cost of a conventional petrol car is much higher at Rp 97.3 million.
However, the initial investment cost of an electric car is much higher than that of a conventional car. Electric cars have an average price of Rp 617.6 million, while the average price of fuel-powered cars is Rp 420 million. As a result, the total cost of ownership (TCO) of electric cars for five years is Rp 640.9 million and that of conventional cars is Rp 517.3 million. This means that the TCO of electric cars is 24 percent more expensive than fuel-powered cars.
Electric cars do not need lubricant, just like fans.
It is understandable that the O&M cost of electric cars is much cheaper than conventional cars. This is because a car with an internal combustion engine that processes fuel into motion energy has a very large number of moving parts, around 2,000 units, while in electric cars there are only 20 units. Electric cars do not need lubricant, just like fans.
Assuming that the cars purchased by the public during the survey above were purchased last year or in early 2022, for conventional petrol cars, the budget is Rp 420 million, which is approximately the price of the 2021 Toyota Innova, which has a tank capacity of 55 liters or more than 550 kilometers (km) mileage once the tank is full.
Meanwhile, a budget of Rp 617 million is about the price of Nissan Leaf Electric, with a lithium-ion battery with a capacity of 40 kWh and a mileage of 311 to 400 km. Alternatively, the Hyundai Ioniq Prime type has a 38.3 kWh battery and a mileage of 373 km.
This multipurpose vehicle (MPV) comparison between electric cars and conventional fuel cars is more or less apple to apple; because in terms of type, passenger capacity and mileage (full tank/fill in full capacity), they are not too different.
From an institutional economic perspective, increasingly stringent emission regulations by 2030 will encourage a significant increase in the production and sales of electric cars toward economics of scale. Theoretically, in the long run, in line with the expansion of the production scale, the production cost per unit will decrease further, to the lowest point among the previous minimum levels (the “minimum” point). This is, among other things, supported by the development of industrial technology IR 4.0. The decrease in production costs per unit when the scale of production increases until it finally reaches the "minimum" point substantially is economies of scale.
...the cost of manufacturing electric vehicles per unit will continue to decline due to strong demand...
In terms of batteries, for example, empirical evidence shows that the price of lithium-ion batteries tends to decline from US$1,126 per kWh (2010) to US$300 per kWh (2015) and US$150 per kWh (2020) and is predicted to decrease to US$80 per kWh (2030).
Similarly, various factors encourage the production of electric cars at an economical production scale in the long term, especially in 2030 and beyond, so that the cost of manufacturing electric vehicles per unit will continue to decline due to strong demand to the phase of mass consumption.
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> Growing the Allure of Electric Vehicles
Bloomberg, last year, predicted that the production cost of electric cars would be cheaper than conventional petrol cars in 2027. In 2026, larger electric cars, such as sedans and SUVs, will be cheaper to produce than petrol/diesel cars.
The lower cost of battery production and the cost of manufacturing electric cars will make the average price of electricity cheaper. Last year the pre-tax retail price of a medium-sized electric car was 33,000 euros, compared to 18,600 euros for a conventional petrol car. In 2026, both will cost the same, which is 19,000 euros.
By 2030, the pre-tax price of the same electric car will drop to 16,300 euros, while the conventional petrol car will be 19,900 euros. This Bloomberg prediction appears to be closely related to the 2030 Sustainable Development Goals (SDGs) agenda and the commitment to reduce emissions by 45 percent from 2010 levels, according to the Paris Agreement and the results of the COP 26 Summit in Glasgow (2021).
Thus, globally, the year 2030 will be a milestone for the start of the phase of mass consumption of electric vehicles. This phase will simultaneously take place in conjunction with the mass production phase, which will allow economies of scale to produce electric cars.
National Ecosystem
Indonesia has several alternative strategies to encourage the production and/or use of electric cars in the mass consumption/production phase to achieve economies of scale.
From the supply side, the best strategy is to build an integrated ecosystem from upstream to downstream, from nickel/bauxite ore mining, smelters, manufacturing electric batteries (battery packs) to manufacturing electric vehicles.
Indonesia is the only country that has an integrated battery and electric car industry.
Indonesia has the largest nickel reserves in the world to support the production of electric car batteries, in addition to bauxite reserves which are also one of the largest in the world (2.9 billion tonnes) to support aluminum needs in electric car manufacturing.
Thus, as stated by President Joko “Jokowi” Widodo, Indonesia is the only country that has an integrated battery and electric car industry. This was marked by the commencement of the construction of a vehicle battery factory in the Batang Integrated Industrial Area (KIT Batang), Central Java, by the LG Solution consortium in collaboration with IBC and PT Antam.
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According to the President's explanation, nickel mining and smelting are located in Halmahera, the nickel sulfate refining industry and its precursor/cathode processing at KIT Batang, battery cell and battery pack factories in Karawang (operating in 2023) and the electric car factory in Cikarang (already started operating). The production capacity at KIT Batang is planned at 3.5 million units per year or 200 gigawatts per year. Such a large capacity is sufficient to support the production of electric cars at an economical level, both for the national and global markets.
LG Energy Solution in partnership with Hyundai Motor Group is also building an NCMA lithium-ion battery cell factory with a total capacity of 10 GWh or 150,000 units per year with an investment value of US$1.1 billion. This battery cell product is compatible with the platform on Hyundai electric cars.
Hyundai Motor Manufacturing built an electric car factory in Deltamas, Cikarang, West Java, which was inaugurated by President Jokowi on 16 March 2022. This factory is planned to have a capacity of 250,000 units per year and is currently producing the Hyundai Ioniq 5 model. Gradually, this South Korean car brand seems to be securing its supply chain, especially to anticipate high demand in 2030.
Meanwhile, the Wuling Motors factory has been operating since August 2022 and produces Wuling Airev. This Chinese manufacturer will certainly have no problem in supplying batteries with the construction of a battery factory owned by Chinese investors in Morowali, Central Sulawesi. The electric vehicle ecosystem in Indonesia can be built between BUMN (SOE) players and involving all players, both BUMN and private/foreign (national ecosystem). The fast-track option is to acquire electric car manufacturers abroad to build a national electric car ecosystem.
Previously, Indonesia Battery Corporation (IBC) failed to acquire StreetScooter, an electric vehicle manufacturer from Germany, which was later acquired by Odin Automotive. Now, the SOE Mining Holding Company, namely MIND ID, is initiating a collaboration with an electric car manufacturer from the United Kingdom, Arrival Ltd, to build a micro-battery factory and develop electric cars in Indonesia.
The path chosen, which may be a bit slow, is to continue the consortium consisting of PT Pindad, LEN and a number of universities for the development of a national electric car. PT Pindad has made prototypes of electric cars (both commercial and military types) and electric motors which were introduced at the Mandalika Circuit last year.
Demand side
The next challenge is how to start boosting the demand side. Currently, electric car sales are still too low to support economies of scale. Based on Gaikindo data, during the January-July 2022 period, sales of pure electric vehicles or battery electric vehicle (BEV) were 626 units, while total car sales reached 561,287 units. Previously, BEV sales figures reached 812 units (2019), 125 units (2020) and 687 units (2021).
To boost demand, Presidential Instruction No. 7/2022 was issued concerning the Use of Battery-Based Electric Motorized Vehicles (KBLBB) in central government and local administration agencies.
A number of airports are known to have cooperated with transportation companies in the use of electric buses and electric taxi cars
The Transportation Ministry, for example, in addition to having implemented the use of KBLBB within the ministry itself prior to the issuance of the Presidential Instruction, can encourage the use of KBLBB at airports for various operations on airport aprons, as well as providing charging stations. A number of airports are known to have cooperated with transportation companies in the use of electric buses and electric taxi cars for transportation to and from the airport.
That alone is not enough, fiscal and non-fiscal incentive packages are still needed to stimulate the use of KBLBB, including for imports.
As a result, in addition to technology and capital factors, regulations (emissions, taxes) and incentive/fiscal policies play an important role in reducing the use of conventional fuel cars and stimulating the production and use of electric vehicles in Indonesia in order to accelerate the transition to the phase of fairly high mass consumption.
This phase enables economies of scale in the production of electric vehicles in Indonesia. Thus, appropriate institutional design is needed, at the government, market and corporate levels, in order to build an electric vehicle ecosystem toward economies of scale.
Wihana Kirana Jaya
Wihana Kirana
Special Staff to the Transportation Minister
This article was translated by Kurniawan Siswo.
