Future Shock

When Americans elected Barack Obama president of the United States, they also signed their consent to undergo shock treatment.

As the nation's dependence on foreign oil goes unabated, the White House has prescribed an attitude adjustment. To reverse this trend and ensure the U.S. remains a global economic power, the Obama Admin. is compelling auto makers to put 1 million electrified vehicles on the road by 2015.

Against this backdrop, wary industry observers and insiders give voice to an undercurrent as negative as the electrons that stream from a lithium-ion battery.

American consumers are hard-wired to repel premium pricing, critics say. But the market assumption, which is polarizing the auto industry the way doctors are divided over the efficacy of shock therapy, suggests the public readily will embrace an expensive product that behaves like no other.

The Obama Admin. believes “deep-down, almost zealot-like, in changing the types of vehicles we drive,” says a source close to the workings of the president's auto industry task force. “And they believe it's for the best.”

In addition to the $25 billion loan program the Bush Admin. extended to auto makers and suppliers under the Advanced Technology Vehicle and Manufacturing Incentive Program, the Obama White House has amped up the pressure through the American Recovery and Reinvestment Act. It features:

Elon Musk has become a beacon of hope for EV proponents. The founder, chairman, CEO and product architect of Tesla Motors Inc. has big dreams and projects a pragmatic bluntness that both inspires and intimidates.

Musk also is a lightning rod for skeptics who claim the burgeoning EV market is no place for a startup. But he can boast 5-year-old Tesla is the only production auto maker in North America or Europe that sells highway-capable electric vehicles at retail. And even though its roadsters start at $101,500, Tesla's track record was impressive enough to entice Daimler AG to take a 10% stake in the California-based company.

“Gas prices are going to rise,” Musk says. “People should have absolutely no question about that. You're talking about something that is a limited resource, where production is more or less constant and demand is rising like crazy.”

Musk points to growing throngs of consumers in India and China, already home to 40% of the world's population.

A 2007 study featuring 2002 data and published in “The Energy Journal” showed the vehicle populations in China and India were 20.5 million and 17.4 million units, respectively. The U.S. ranked first with 233.9 million, followed by Japan, Germany and Italy, whose fleets ranged from 76.2 million to 37.7 million.

But by 2030, the study says, China's vehicle population is expected to hit 390 million units, overtaking the U.S. for first place. The U.S. is expected to have a fleet of 314 million vehicles, while India is a projected third-place finisher at 156 million.

“And all those cars are going to use gasoline, or most of them,” Musk warns. “The demand on oil is going to be astronomical.”

By 2030, according to 2008 data from the U.S. Department of Energy's Energy Information Admin., the world's known oil reserves also are expected to be depleted by 55%.

Charles Gassenheimer, CEO of U.S.-based lithium-ion battery producer Ener1 Inc., offers a more near-term outlook. While he supports Obama's electrification push, he warns of “rampant inflation” after Washington's planned economic stimuli are implemented.

“And inflation speaks directly to commodities pricing,” Gassenheimer says, projecting per-barrel oil prices will more than double current levels within three years. “So, we've got a 2- to 3-year window to get more fuel-efficient cars on the road before gas prices start spiking.”

Ford Motor Co. Chairman Bill Ford tells Ward's electrification is “absolutely the right way to go for society because at the vehicle level it's clean technology without the use of oil.”

Ford, Musk and General Motors Corp. product advisor Bob Lutz are among an expanding list of high-profile auto executives who favor a gas-tax hike. They say the measure would put consumer buying patterns in sync with EV rollouts, thereby avoiding a scenario where the pricey products would sit unwanted on dealer lots.

A similar strategy was implemented in Europe in the 1970s. Fuel was highly taxed, but diesel less so than gasoline.

As a result, diesel-powered light vehicles, about 30% more fuel-efficient than conventional gasoline engines, today dominate Europe and create a more fuel-efficient fleet, despite the fact diesel engines are inherently more expensive to manufacture.

However, proposing such a tax hike in the U.S. surely would induce culture shock, industry observers warn.

“It's not the American way,” says Brett Smith, director-automotive analysis at the Center for Automotive Research.

“Any politician who even breathes that would be committing political suicide,” offers John Wolkonowicz, a senior analyst with IHS Global Insight in Lexington, MA.

Historically, when pump-price spikes forced car buyers to examine their consumption, Americans “have traditionally either downsized or right-sized,” Smith says. “They haven't chosen the technology route to become more fuel efficient.”

Through April, despite continued buzz about the next jump in gasoline prices, hybrid-electric vehicle sales represented less than 2.5% of the total market, according to Ward's data. That's the same level recorded in August 2008, some six weeks after regular-grade climbed to its all-time-per-gallon peak of $4.11.

Not even the current downward market trend seems to account for the malaise. While total light-vehicle sales were off 37.3% through April, compared with like-2008, HEV deliveries were down 40.3%, according to Ward's.

Meanwhile, sales of small cars outperformed the market, falling 31.8% through the first four months of this year.

Even in the frenzied days before and after the July 17, 2008, gas-price milestone, there was no run on hybrid vehicles. Sales for the month dipped 16.3%, compared with like-2007.

But deliveries of Lower Small cars such as the Toyota Yaris, as defined by Ward's segmentation, soared 24.4%.

Complicating the case for electrification are recent trends in internal combustion engines. Ted Robertson, chief technical officer and executive vice president-new product creation at Magna International Inc., says efficiency improvements of 10% to 15% are on the horizon.

“The internal combustion engine has got all kinds of efficiency potential and we're just tapping that now,” Robertson says.

And there is no discernable hue and cry for EVs on the showroom floor.

“I have seen consumers making very conscious choices about their vehicles, and more are considering and purchasing smaller vehicles,” says Annette Sykora, 2008 chairwoman of the National Automobile Dealers Assn. and proprietor of a Ford Motor Co. store in Lubbock, TX.

More disturbing for industry stakeholders, Sykora suggests, is a parallel trend that sees consumers attempting to ride out the storm.

“I think it is so important we continue to remind our regulators and elected officials that if consumers cannot purchase the type of vehicle they want or need, they will simply hold onto their old vehicle,” she says. “Mandating what our manufacturers must build without proper consideration of consumers intentions won't help our economy.”

Meanwhile, Carlos Ghosn, chairman and CEO of the Renault SA/Nissan Motor Co. Ltd. alliance, has said EVs will make up 10% of the world vehicle market within the next decade.

By 2020, 50% of all the new vehicles sold in Japan will be electric, according to the Japanese Ministry of Land, Infrastructure, Transport and Tourism.

Half a dozen time zones to the west, Spain plans to hit the million-EV mark in 2014, one year before the U.S.

“This is as real as it gets,” Gassenheimer says, having just cut the ribbon in May on an Ener1 plant. Located in Indiana, it is the first volume-production lithium-ion cell-and battery-pack assembly site in the U.S. The site has capacity to produce 15,000 EV packs annually, or 150,000 HEV batteries.

“The world is going to need more capacity,” says Gassenheimer, whose EV customers number 15, including Fisker Automotive Inc., which is considering Ener1 as a battery source for the Fisker Karma HEV, due in second-quarter 2010.

A Ward's survey reveals more than 30 road-going EVs and plug-ins are proposed for distribution globally by 2012. Expected prices range from a $101,500 Tesla to sub-$30,000 levels for the Nissan EV.

“Our goal is not to charge price premiums,” says Larry Dominique, Nissan North America Inc. vice president-product planning, The Americas. “Our expectation is that at the end of the life of owning this vehicle, it will cost you less to own and operate than an internal- combustion vehicle.”

However, Ghosn “has been pretty emphatic that we need to be a profitable company and our goal is to make money,” Dominique adds.

While the players include startups from Aptera Motors to Zenn Motor Co., the major auto makers dominate the market.

The proposed Chrysler LLC-Fiat Auto Group alliance promises one EV, likely a roadster, next year. But their plans, laid bare by an application for emergency aid from the Obama Admin., suggests four more could follow by 2015.

Toyota and Ford Motor Co. each have two in their respective pipelines, including a plug-in Toyota and a battery-powered Ford Transit Connect commercial vehicle. The Toyota is expected to debut this year in a test fleet, while the Transit — which will be available for purchase — will launch in 2010.

BMW AG is sorting through prospective lessees for a 500-unit fleet of its Mini E all-electric prototype, with the first vehicle reportedly delivered in Los Angeles May 23, while Nissan promises a no-compromise EV car late next year.

GM is expected to be first out of the chute with a mass-market EV, the Volt sedan, which also arrives late next year.

Jon Bereisa, GM's director-advanced engineering, powertrain and fuel-cell propulsion systems, is shepherding the Volt's launch. He also was a key contributor to GM's EV1 electric-car program.

“I like to say, ‘We've got the band back together, only this time we have an audience,’” he jokes. The EV1 was celebrated as a technological triumph and maligned as a market flop — a failure that led the auto maker to pull the plug in 2000 after recording just 1,101 deliveries during a 4-year run, Ward's data shows.

“We made a conscious decision when we started out on the Volt pathway that we were not going to do what we did with the EV1, which is keep it a secret,” Bereisa says. “We would just let everybody in at different steps and stages of progress as we were making it and get a lot of information out there in a variety of media and ways.”

GM learned other lessons from the EV1, which is why Bereisa has doubts about the chances of success for EV startups.

“From capitalization and engineering resources, always the incumbents have an advantage. The trick is for the incumbents to have their own technology department and not kill it.”

To jump-start the EV market on the road to profitability, other industry insiders say the trick is to satisfy the consumer.

“First thing you need is enough energy onboard,” says Magna's Robertson.

Magna is a key supplier to Ford's planned Focus EV program, set for launch in 2011. Li-ion batteries are the hands-down technology of choice to power today's EVs, Robertson says.

“Second thing is you need to have the right technology that is safe and durable and will meet customer expectations.

“The third aspect is going to be cost.” Robertson says. “Right now, at the volumes of production, this Li-ion battery technology is expensive, just like flat-screen TVs, or any new technology.”

The standard thinking follows that volume production will bring cost down. But it's not that simple, GM's Bereisa says. “It would be a big misnomer for me to say (cost) is driven by volume,” he says. “It's not. It's really driven by material and design.”

Bereisa points to the evolution of fuel-cell technology as an example. “Our biggest challenge, when we started out, was platinum,” he says. Early designs called for high-priced platinum in amounts that would make good paperweights.

So fuel cells were designed to require less platinum to reduce cost. Batteries are no different, Bereisa says, noting nickel-metal-hydride batteries contain pricey materials such as cobalt, chromium and pure nickel.

“Li-ion has things like carbon, manganese, lithium salts, basically low-cost underlying materials. Now, if I can add low-cost underlying materials when I automate a process, I can get down to the materials floor.”

This critical mass can come when volumes hit 1,000. “In other cases, it may take as much as a million,” Bereisa says, adding Li-ion gains start to come when volume climbs into six figures.

Adds Gassenheimer: “Demand is not the issue here. If Obama wants to put 1 million electric cars on the road by 2015, which he does, the ability to supply these batteries is the critical issue.”

And also to charge them. Futurist and author Joel Barker agrees with the president's vision and says the infrastructure shift required to support large numbers of EVs and plug-ins is less onerous than the proposed move to a world powered by hydrogen.

“The gas station of the 20th century is the electron station of the 21st century,” Barker says.

Gassenheimer goes one further, suggesting the number of gas stations might even dwindle and create opportunities for other retailers. Rapid-charge stations could be located in parking lots.

“I can envision a special lot within a Wal-Mart or a Costco or a Starbucks or a McDonald's, where you pull in and you hook up and you go shopping or get your burger or go get your coffee,” he says. “How many retailers would love to know that a customer has an incentive to stay in their store for 20 minutes?”

Enter Better Place, a California-based supplier of electric-vehicle services.

With close ties to Renault-Nissan, Better Place already is setting up charge stations around the globe. In North America, they are located in San Francisco and Toronto, but Israel is really ground-zero, where the company plans to have hundreds of thousands of charge stations installed by 2011.

“Ours is a distinct model from that standpoint, because we think you need a ubiquitous network of charge spots, whether it's at your home or the airport or a restaurant or a mall parking lot or work,” says Jeff Curry, product marketing director for Better Place.

But what will consumers make of a vehicle that moves silently through the street? Will they miss the revving of an internal-combustion engine?

Gassenheimer speaks in terms that can only be described as shock and awe.

“Let me tell you, my friend, having driven a BMW M5 for a couple of years, the Fisker Karma, which is the size of a BMW 7-Series, is by far one of the most exciting cars I've ever driven,” he says. “Like you're in a rocket ship.”

Gassenheimer sees the industry headed for prosperity, thanks to the Obama agenda.

“He's on the right track,” Gassenheimer says of the president. “He wants to drive this industry, not just because he wants to get us off foreign oil, but because when we go back to $150-per-barrel oil, he realizes that will cost the U.S. economy trillions and trillions of dollars.”

But Wolkonowicz maintains the American public is not really plugged in to saving the planet. Not yet.

“Except on the two looney-bin coasts — I happen to live on one of them — nobody cares,” he says. “People say, ‘Yeah, I'd like to help the environment.’ But ask them to pay one penny extra and they lose interest.”
— with Byron Pope and Christie Schweinsberg

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