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The Disconnect With Electric Cars

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Automakers have spent billions of dollars, euros, and yen and won to produce EVs and FCVs, fervently hoping they’ll earn a return on that investment. So far they haven’t netted a nickel, and there’s nothing on the horizon to suggest they soon will.

Sales of electric cars are low in numbers but growing by big percentages. Even so, automakers are losing money on every one they sell because they cost too much to make.

Now, a new batch of hydrogen fuel-cell vehicles are about to hit the market, and we can expect the same results. They’re even more expensive than EVs. How do we balance society’s need for cleaner air with business’s need to turn a profit? We better figure it out because what we’re doing is not sustainable.

The pro-EV crowd argues this is just the price of progress. Give it time, they say. Battery costs will come down and the public eventually will buy these cars in big numbers. In the meantime, Fiat-Chrysler CEO Sergio Marchionne sarcastically advises customers not to buy his EVs because he loses $14,000 on every one. I actually had one EV proponent tell me that if an automaker lost $1 billion on its electric cars “that’s not a very big number in the grand scheme of things.” I guess that’s easy to say when it’s not your money.

How long can automakers afford to “give it time?” EV sales are nowhere near what proponents promised five years ago. Back then President Obama even pledged to have one million EVs on the road by 2015. Oh well. The real eye-opener is that EVs have failed to catch on in Europe, where fuel prices are twice as high as in the U.S., or in China, where incentives for EVs are twice as high as in the U.S.

Unfortunately, it was the car-buying public that misled the EV champions. Based on public polling, EV proponents were convinced consumers would actively consider purchasing an electric car and were willing to pay more for one.

But I learned a long time ago you need to pay attention to what people do, not what they say. The public always tells pollsters what they think is the politically correct thing to say, and then go out and do whatever they think will give them the most pleasure. Just look at the unprecedented levels of horsepower and performance offered on today’s conventional cars. Guess what? The public is happily paying more for that.

Now we’re about to get fuel cells. Not because of public demand, but because the California Air Resources Board has jiggered the game in their favor. California virtually created the global EV market on its own, by mandating that automakers must generate zero emission credits if they want to sell conventional cars in the state. Since California accounts for 10% of the U.S. market and since 10 other states have adopted that mandate, and since the U.S. market is the most profitable in the world, most automakers have to fall in line.

Not unexpectedly, the ZEV program is horrifically complicated. You practically need a Ph.D. in government regulations to wade through the Byzantine maze of procedures, timetables, exclusions, additions, revisions, updates and definitions. Even CARB’s own staffers struggle to keep up with it all.

But you can’t blame CARB. It’s following the mandate set by the California legislature. And the legislature is just trying to make the air clean for its citizens. Who can argue with that?

No one will disagree with the goal but there is a big problem with the economics. An electric car like the Nissan Leaf generates three ZEV credits. A fuel-cell car can generate seven credits. As one industry insider told me, “This is our choice. We can lose $14,000 on every EV and get three credits, or we can lose $50,000 on every fuel-cell car and get seven credits.”

This has disaster written all over it. Automakers have spent billions of dollars, euros, and yen and won to produce EVs and FCVs, fervently hoping they’ll earn a return on that investment. So far they haven’t netted a nickel, and there’s nothing on the horizon to suggest they soon will.

How long will automaker boards of directors, who have a fiduciary responsibility to spend the shareholders’ money wisely, approve additional billions in spending knowing there will never be a return on that investment? The ones with deep pockets might, knowing they can financially cripple their competitors.

But that’s what this is devolving into: a complicated scheme that is forcing automakers to lose money on cars the public has largely ignored and is not making the air any cleaner. Does anyone actually believe this is going to work?

Discuss this Blog Entry 21

on Jun 27, 2014

Preach on, my brother!

on Jun 29, 2014

John
This is the free market at work. Nobody held a gun to the head of manufacturers that did this. Will be interesting to see who will end up the winners.

on Jun 29, 2014

The state of California absolutely has put a gun to the head of manufacturers. The zero-emissoin vehicle mandate requires automakers to sell EVs whether consumers want them or not.

on Jun 30, 2014

Same old smirky and minion like press. I know many people are weak and need to suck up to some vested interest because left to their own devices in a merit based world they would be the weaklings we would all have to carry. The car companies that try to sell EVs are and will make money on them. Even as incentives get removed this will be true. The estimate is that battery prices will be below $300/kWhr by 2017. This aside, no product is profitable immediately. More specifically, no hardware product that requires large captal investment for factories is profitable for quite some time since the factory is charged against the cost of the vehicle. Overhead in the form of useless suits with large talking heads is a strain on profitability too. However, if one looks at the cost of labor and materials to build the vehicles it is clear that they are and will be profitable. For example, the Volt, which GM said some time ago cost them $24K for parts and labor (likely less now as battery prices have come down), and they sell it for about $35K. How is that not profitable? It is profitable, except that the talkingheads take their cut and the factory needs to be paid for. That will happen once GM sells about 75K units. So probably this fall. The Fiat guy is a moron since he is disingenuous about profitability. They could be profitable if he wanted them to be, but then he would have to produce more and sell more, in places other than California. He is intentionally making the car unprofitable so that he can support the fascist of the oil industry as a good Italian should. After all, they were the originators of fascism. Bottom line is that this profitability argument is disingenuous and untrue if one considers that the same is true for every vehicle, except that the car companies try to sell large amounts of other vehicles and they have not been trying to sell large amounts of electrics. The other false logic that gets applied to this same argument is that consumers are not buying the cars, but yet, until recently very few were available, and with the exception of Tesla and Nissan, no one is serious about selling them in quantity. Then, because Tesla is a luxury car and Nissans Leaf is somewhat ugly, many people would not choose them. The Chevy Spark EV is not available except in California, the Fiat is not available except in California, and the Ford EVs are way overpriced (Typical for Ford). Not all dealerships sell and support the vehicle either. For instance for me to buy and get serviced a Leaf, I would have to drive 50 miles, because the nissan dealer down the road from me doesn't have any and won't service them. So in this limited market and under the circimstances, EVs have sold exceptionally well. When the car companies want to be profitable at this business they can be. If they don't want to be then they will go away, and should. Like GM and Fiat should die because they are slow and stupid and support our continued dependence on oil.

on Jul 2, 2014

I don't know where you saw the Volt's costs you posted but they clearly don't include design or development costs. The $35k sale price doesn't all go to GM either.

on Jun 30, 2014

Drew,
No manufacturer is forced to sell unless they choose to sell. Overall, it must be profitable or they would not comply. There is no gun.

on Jun 30, 2014

The gun is there, if not in profit, for sure in principle. If you want to play in our market, you have to produce and sell a specific type of vehicle at a loss. This vehicle's sales will only make up 5% or less of your total sales by volume in our state and you will make money on your other vehicles, but on this vehicle that you must sell, you are forced to take a loss.

They may still be profitable in the state of California, but the state and its legislators have put a gun of "principle" at the least to manufactuers.

on Jun 30, 2014

Well said is228979.

on Jul 2, 2014

Who died and made California President?

Seriously, how did California/Governator get so much power/say-so in this industry? It doesn't make sense to me.

on Jul 2, 2014

It's right there in the article: California accounts for 10% of U.S. auto sales — in 2013, that's around 1.6 Million vehicles (cars and light trucks). California is also the most-populous state in the U.S. estimated at 38,041,430 in 2013 by the U.S. Census Bureau; that's 12% of the U.S population. What company can afford to ignore those numbers? It's that old adage: "Where does an 800-pound gorilla sit? Anywhere he wants."

on Jul 2, 2014

Take a way the tax-subsidies to those that purchase them. That will drive their sales even lower. It's not an equal playing field.

on Jul 2, 2014

is228979, The subsidies are there to give EVs a level playing field against oil. Oil has massive external costs that are not in the price of gasoline and diesel. Military costs, according to RAND, total $80 billion per year, exclusive of wars. It's pretty clear that the Iraq war was fought because of their oil. That cost us $2.1 trillion with at least another trillion yet to be spent for treating the tens of thousands wounded soldiers for the rest of their lives.

When you buy gas, you pay nothing for this.

According to the World Health Organization and the American Lung Assoc., tens of thousands of Americans die prematurely every year from exposure to internal combustion pollution. Millions get sick, but don't die.

When you buy gas, you pay for nothing for this.

The environmental damage to our air, water and land also runs in the tens of billions per year.

Again, you pay nothing for this damage YOU help cause when you burn gas.

Here in CA, we have progressive leaders who understand that we have to get off of dirty energy as soon as possible. To that end, they subsidize clean technologies. I would be willing to remove all subsidies for EVs and renewable energy the day all the external costs of dirty energy are internalized in the price of a gallon of gas or a kWh of electricity. Until then, it is fair that we create subsidies for clean tech.

on Jul 2, 2014

I'm no greenhead, but EVs have to come in order for us to limit heat growth to 2 degrees- carbon consumption must and can reduce over the next 20 years - current economics don't reflect the true cost of carbon consumption and battery costs must drop dramatically, but in the meantime EV ownership is more of a style statement than a meaningful impact on the environment

on Jul 2, 2014

GIVE ME A BREAK. ELECTRICITY AND HYDROGEN ARE NOT ENERGY SOURCES, THEY ARE ENERGY TRANSPORT MEDIA. Electricity comes primaily from COAL fired power plants and hydrogen comes from REFORMED NATURAL GAS, both processes which are energy intensive and high carbon producers. Add to that, batteries are among the most environmentally hazardous, resource consuming items imaginable. Wait until we need to dispose of millions of metric tons of those every year. All electric and hydrogen cars do is use more engergy and produce more carbon than if you just burn gasoline in an engine in the first place and make the tree hugging Socialist idiots feel better about themselves.

on Jul 2, 2014

willys36, Coal is now less than 40% of the American grid. Last year, more renewable energy was added to the grid than any other source, including natural gas. Studies have looked at the well-to-wheels pollution of EVs charged from the national grid, and even taking into account the pollution from coal and NG, EVs are still significantly cleaner than the most efficient ICE car.

More importantly, the EV owner has the choice to use renewable energy (RE) to power the car. No ICE vehicle can do this. I installed a solar PV system on my house in 2002, then bought my first EV. For over 12 years, I've been running my home and car on sunlight. There are now tens of thousands of Americans doing the same. Soon, there will be millions.

As for the batteries, if you'd care to do even minimal research, you'd learn that modern LiIon batteries are very safe and non-toxic. The batteries will be used in the cars for about a decade, then they will be used for stationary energy storage for many more years before being recycled and the elements used to make new batteries.

In other words, everything in your post is wrong.

on Jul 7, 2014

Well said Paul.

on Jul 2, 2014

Thank you for your comments but I stand by everything I posted. True, coal is going away which is a shame considering the US coal reserves dwarf any other energy source in the world, but 40% is not an insignificant number. That means nearly half of your miliwatt cars are still coal powered. Your contention about batteries flies on the face of many press reports on their problems but you must consider the source of the reports; press gets just about every fact in a story wrong it seems. all the new fancy battery technologies are; uneconomical by orders of magnitude; and dangerous (exploding, disposal etc.) I don't know where you live but trust me, in Bakersfield wher I live, I don't have enough roof top to supply 1/10th my transportation fuel. And I too installed solar panels last month to defray my increasing electric bill (increasing because of government regualtion and taxes, not because of utility costs). I suspect that is the case for the vast majority of American citizens who want to drive nice, big V8s and travel more than 20 miles away from home sometine in their life times. My roof panels would not have been installed without the 30% tax reduction I got. The only way solar, wind, etc., boondoggles are attractive is with government subsidies. Another technology you probably like is ethanol alcohol for fuel. Again this is totally impractical and depends heavily on government subsidies. Fact is that tree huggers don't like to address is ethanol consumes more total energy than it provides; it requires much more water resources and huge tracts of land (endangered species habitat for you radical environmental types). In California we are suffering a major draught and water prices have gone up 10-fold. The Federal water project is giving farmers zero allocation of the water they paid for. Thousands of acres of the best farm land in the world are going out of production due to lack of water. It would take a farm the size of the entire state of California to replace hydrocarbon tansportion fuel for the ccountry. There was study in ASME magazine a few years ago that determined we would need 600 new nuclear plants to replace transportaion fuels in the US. Trust me, windmills and solar panels (talk about destroying endangered species habitat, solar and wind are the kings of that endeavor!!) will never do the job, assuming we want to continue a lifestyle better than the 18th century provided. But then if we go back to that technology, life span will regress to about 40yrs so we will eliminate the pesky humans much more quickly and preserve wonderful perfect nature.
Not to worry, I am rich, have a good job and can buy whatever I want. My goal is to leave this world having laid down the largest carbon footprint possible. I know I can never approch the ones produced by Hussein, Algore, Uncle Joe, SanFranNan, Dirty Harry, et al, but I am doing my best!

on Jul 7, 2014

It seems you are declaring EV's to be a market failure, based upon previous estimates. As you correctly surmised these estimates were based on wishes and desires not reality. The fact reality doesn't match these wishes is no surprise to anyone.

Rogers in the Diffusion of Innovation gave us an adoption curve. WE are in the first phase, innovators, next comes early adopters, then early majority so on and so forth. The hockey stick rise in adoption doesn't come until early majority, which for vehicles, is several years away at least.

EV's are on track, have not failed the open market. Things are as one would expect, if you base your projections on something valid.

on Jul 8, 2014

This article is Detroit-centric, and is written from that narrow and parochial perspective.
The economics mentioned are auto industry costs. And by implied proxy, economics of the petroleum industry. The article does not consider the economics of electric utilities, and least of all the economics of automobile OWNERS. It also does not mention any overall economic considerations for the US at large.

Car buyers are concerned less with the health of car companies, and more with their own monthly payments. In particular, the total cost of ownership for their own vehicle.

Since these concepts may be difficult for auto-centric folks to comprehend, let me translate it from California language into Detroit vernacular. "We you big customer. You our bitch. We pay, you do. So shut up and do what we say. If you whine too much, then we get another bitch."

Put another way, yes California is holding the gun to the head of Detroit. Several shots have already been fired, and several large sections of scalp have already been removed. Witness the lopsided ratio of luxury cars in LA: Lexus and Infiniti versus Cadillacs and Lincolns.

This article complains about California laws that favor EVs. There's a quick way for Detroit to avoid this problem: simply stop selling cars in California. Many CA residents believe this has already happened.

Companies like Tesla and Nissan are actually listening to their customers and building the products that they want. This is called capitalism. Get with the program, Detroit. Do something new. Live in the now, man !

on Jul 9, 2014

@John McElroy, this article reads like it's reporting on the EV industry of 15 years ago. Where have you been lately?

Tesla is not in this game to lose money. Like all startups, the first few years are very tough, more so in the automotive industry than almost all others. Despite that, they've already had a profitable quarter, have a low burn rate, and are racing toward the capability of producing 500,000 pure electric vehicles annually.

Nissan is also changing the world with their all electric car, which was developed as much for the developing world as for their existing big markets (Nissan's stated goal for the Leaf).

BMW famously committed over $3bn to not only electrification, but industry-leading light-weighting that dropped 1,300 lbs off the i3 compared to what it would weigh in steel. Real progress. And they just upped the ante on that effort, will triple production and bring carbon parts to their other cars because of the competitive advantage the lighter weight gives them.

The other manufacturers drag their heels and will soon find their market share continue to erode as more consumers continue to realize that driving electric is just like paying $1 per gallon for gas.

I have yet to give anyone a drive in one of my electric cars who was not astonished at how good they perform and how economical they are to operate.

Clearly John, you need to spend more time in a Tesla. The future has arrived.

on Jul 10, 2014

Where have I been lately? Hmmm....let's see: test driving every electric and plug-in available in the market. Interviewing EV experts at automakers and battery companies including national laboratory and academic researchers. Talking to government agencies from around the world responsible for implementing EV infrastructure. Oh yeah, and reading a bunch of policy papers.
I am completely up to speed with what Tesla, Nissan, BMW and everyone else is doing. And the point I made in the article still stands. Every automaker is losing money on its EV program and is unlikely to keep shoveling big money into a money loser. --John McElroy

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