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Colliding with Reality

The problem with electric cars.

Oct 25, 2010, Vol. 16, No. 06 • By JONATHAN V. LAST
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By comparison, the Leaf is a world-beater, unless you look at the fine print. It might have a 100-mile range, but it takes 20 hours to charge on a standard 110V outlet. The good news is that you can charge the Leaf in just 8 hours if you have a 220V outlet—and even faster if you can find one of the “quick charge” stations that EV evangelists promise will mushroom across the country some day. There are currently 500 charging stations in the United States—400 of them are in Southern California.

Cost estimates for expanding this imaginary infrastructure run to the hundreds of billions of dollars. But using one of those fast-charge stations could adversely impact the car’s battery life in the long term. And you have to be careful, because in a world where gas cars often carry a 10-year/100,000-mile warranty, the Leaf’s warranty is 3 years/36,000 miles.

The market for high-price, low-performance vehicles is finite. To get a sense of scale, there are about 250 million cars, SUVs, and light trucks on the road today. Somewhere between 10 million and 17 million new vehicles are sold each year depending on gas prices, the economy, etc. The Volt, meanwhile, will offer 10,000 units for sale next year. The Coda will have 14,000 this year. And Tesla, for all its hoopla, has manufactured about 1,300 cars to date.

A number of studies have examined people’s willingness to buy EVs in the near and medium term. Most analysts predict that about 400,000 EVs will be sold annually by 2020. But to get to even this modest number we must stipulate that gas prices sharply increase, battery costs significantly decline, and that—this is the niftiest part of all—EV sales from 2017 to 2020 magically increase by 300 percent.

Still, if you grant all of those assumptions, the total number of EVs on the road in 2020 will be in the neighborhood of 1.1 million. Which means that the sales of all electric cars in America will combine to average 110,000 units a year for the next decade. Last month Ford sold 47,433 of its F-series pick-up trucks.

The principal problem for EVs is cost. The Boston Consulting Group figures that the exorbitant prices of EVs won’t be attractive to the average consumer until oil goes above $280 a barrel. Oil has never approached even half that price. And if EVs were to take off, they would create a problematic loop for themselves: The more electric cars, the less demand for oil, and the lower the price of gas—making EVs even less competitive. Any way you look at it, the electric car is a lousy business to be in, which probably explains why the federal government is elbow-deep in that business. 

In an attempt to fulfill President Obama’s EV goal, the government has been doing everything it can to get electric cars on the road. It started by goosing the supply side of the equation: Ford was given a $5.9 billion loan through the Advanced Technology Vehicles Manufacturing Loan Program while Nissan was given $1.6 billion. Another $2.4 billion in outright grants was doled out to component makers from the stimulus package.

The government is backing up its bet by tinkering with the demand side, too. If you buy an EV, the feds give you $7,500 and rebates for purchasing home charging kits. Some states have their own incentives to sweeten the pot. California, for instance, adds another $5,000 in cash back. The Golden State even throws in a carpool sticker so that EV drivers can use the HOV lanes whenever they want.

In individual cases, the government is in even deeper. The Volt, for instance, received $240 million in Department of Energy grants; part of a $14 billion loan given to GM to retool production facilities; $150 million in stimulus to the Korean company that makes the Volt’s battery; and $1.5 billion in incentives earmarked for consumers. (All of which leaves out the $50 billion bailout of General Motors.) Just to be clear: The feds were not a bunch of sap investors. When the government took over GM in 2009, a task force reported that the Volt “will likely be too expensive to be commercially successful in the short term.” The green-eyeshades at the White House kept it anyway.

At Tesla it’s even worse. Musk made his fortune the Internet way. He didn’t create a product he could sell to consumers at a profit. Rather, he founded two websites which were bought out by bigger websites, minting him $22 million, and then $160 million, in rapid succession. And he’s brought the Internet ethos to the car business. The production costs of a Tesla Roadster are reportedly $95,000. Many of the cars were pre-sold at $92,000. But Musk never planned to make a profit selling the Roadster: The cars were a bridge to the real money. In 2009, the government loaned Tesla $465 million. At the time, the entire company was valued at $500 million. That year Tesla produced 800 cars.

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