Can Electric Cars Catch On?

Brittney Barrett |

electric car 2012Electric vehicles have been fascinating consumers and investors since the first whispers of their development. Early reports on the Nissan Leaf and Chevy Volt seemed to entice both potential buyers and analysts who imagined a speedy embrace of the new technology. Investors also flocked to shares of Tesla (TSLA), the maker of luxury electric sports cars, on enthusiasm for the general concept for e-vehicles. Fuel saving measures and a smaller carbon footprint would seem enough of a draw considering the high price of fuel, but drawbacks, from a short battery life to a high price tag have made electric vehicle buyers in the U.S. and abroad wary of the purchase.

Consumers in China, in spite of a government push toward electric vehicles and massive subsidies, have also been resisting the movement toward electric cars. Even the Prius Hybrid, which accounted for around 3 percent of total car sales in the U.S. last year, has been cast off by China. Only a single Prius was sold last year and chances are, the plug-in version expected for early next year, will not take off either. Many car companies had anticipated that China would be the primary demographic for the sale of electric vehicles as a result of the green initiative, but the hopes for that seem to be dimming.

Are Electric Cars Headed to the Green Graveyard with Solar Energy?

Some are likening the electric car revolution to the lack of take off for solar energy. Bolstered by government support, subsidies and green jobs initiative being pushed by the Obama administration, Solar and other types of alternative energy were lauded as the future of energy production. Higher costs, that proved stubborn to fall as a result of a tepid public embrace, kept shares of most solar companies from thriving. Nearly all people and businesses in the United States continue to run on fossil fuels as alternative energies have proven too pricy. The inability to compete fiscally has outweighed their appeal to the environment and the tax benefits offered by the U.S. government.

The same thing is happening now as car companies from Toyota (TM), to General Motors (GM) and Nissan (NSANY) are releasing newer models of the electric vehicles but the fish aren’t biting. A lack of cost effectiveness is the primary reason for this. Hybrid vehicles, like the original Prius, were lauded for being simultaneously fuel efficient and comparable, in terms of pricing, to other cars on the market. Companies naturally assumed that the embrace of the Prius represented a desire among consumers to become more green. The functionality and price tag of the new crop of plug-ins; however, is not the same as the original hybrids. The newest versions of the Volt and Leaf are retailing around $40,000, before the addition of a super powered charger. Couple this, with the fact many of these vehicles can travel less than 40 miles without needing a recharge and consumers have lost interest.

The Reinvention of the Combustion Engine

So what are people buying if not electric vehicles when they go new car shopping? Automobiles with internal combustion engines. The fuel efficiency of external combustion engines has risen tremendously in the last several years. Even if consumers are coming in to take a look at an e/v, they often leave with a traditional car that possesses improved mileage. To put it into perspective, General Motors has moved about 5,000 Volts off its floors as opposed to 1 million of the 40mpg Cruze. That’s a 200-1 ratio. At half the price and with attractive mileage, consumers, looking for an everyday vehicle that works with their life and their check book, will go for a combustion engine with potential for great mileage.

"Until electric does have the ubiquity of plugging, it's not going to have an appeal to 100 percent of the customers," said Ford Chairman, Bill Ford. "While that's happening, we want to make our other technologies as fuel-efficient as we possibly can." The better the improvements in fuel economy, the more reluctant consumers will be to make the switch the pricier electric vehicles. One chief incentive behind the improvements in fuel-economy is the new federal requirement that an automaker's fleet average 54.5 miles per gallon by 2025. This push has led the number of gas-powered models with 40-plus mpg in domestic showrooms to triple during the last five years. Surely, the initial intention of the rule was to push companies and consumers towards e/v and hybrids, but it has instead benefited the interest in combustion engines.

Exception to the Rule

The one exception to this appears to be the Tesla. With the Tesla, there is a physical component that adds to the appeal of the car. Additionally, the core customer base for the Tesla is less affected by economic tightness and thereby more willing to embrace a vehicle that may not be their primary automobile. Chances are, those who have made the early orders for the Tesla roadster, priced at $109,000, have several other cars in their garage and aren’t looking for the same things in their electric vehicle as the average consumer.

How Will Car and Battery Makers Be Affected?

So what impact does this have on the car and battery producers that have invested so much in the revolution? According to Bloomberg New Energy Finance, automakers have committed to making 839,000 plug-in cars by 2013. Nissan also has plans to display three electric vehicles, in addition to its leap, the Pivo3 compact, the ESFLOW sports car, and the Townpod compact. The Pivo3 offers the added appeal of coming equipped with automatic parking feature that allows it to identify a parking space and drive itself to the spot after the driver has left the vehicle. Like an all electric car, this seems to be an excellent idea, but it falls victim to similar problems. Just as the e/v requires very regular charging in a society with few plug-in options available, the “automatic valet” feature, will not be rendered effective until the parking lots are made to coincide with them. A write-up in Car and Driver describes it like this: “The 3 will return to the parking lot’s exit to meet its driver when summoned via smartphone. The catch is that this can only happen in AVP-friendly parking lots of the future, so don’t expect this to happen anytime soon. Like the two previous Pivos, this one is more fantasy than anything else, but it’s always fun to dream.”

Several years ago, the government and automakers had a dream about electric cars filling the roads, but it won’t be a reality until proper infrastructure is in place and the vehicles become more pragmatic. In the short-term this might negatively impact the bottom lines of car companies who have spent millions on research and development, thus far without a substantial payout. The fact is though, that many of these companies did not over commit in terms of their production promises and therefore will not be hugely affected from the electric flop.

The recent weakness in sales have not discouraged companies from continuing to explore the field. Toyota plans to introduce the Aqua compact hybrid, a plug- in version of its Prius hybrid, and the FT-EV III, an all- electric car, at an upcoming Tokyo car show. Toyota, of all the companies competing in the emerging subset, seems to have the best understanding both in terms of what consumers what and when they will be ready for it. Toyota has had tremendous success with the Prius, it is the best selling hybrid on the market, and its expectations of a lukewarm reception during the first few years of electric cars has tempered its approach and lowered its risk. "Pure battery electric cars will most likely remain a niche for some time to come," Toyota’s U.S. national manager for advanced technology Bill Reinert said, "The market for these products is nearly all regulatory push, not market pull." Toyota, like many other companies is spending on the ideas but merely wetting their feet in terms of production strategies.

The same can’t be said for battery makers, which seemed a direct and effective entry point into the electric car craze. Now with ten factories creating batteries, and newer, faster options being created by Chinese engineers before they can get the others out of the factory, many of these companies will be unable to stay competitive. The number of available batteries for 2012 is twice the number of electric cars automakers have pledged to produce. Unless electric cars are able to account for 10 percent of total industry sales, battery makers from Ener1 Inc. (HEV), which has failed to attain major vehicle deals, to A123 (AONE) will struggle to stay relevant and stay in business. The weak sales have likely illuminated the importance of cost-effectiveness for the major automakers and they’ll be more likely to purchase batteries from Chinese competitors who are able to produce the components more cheaply.

It will be interesting to see whether the battery companies, even with their healthy government grants, will be able to stay in the game long enough for the development of the infrastructure that could help electric cars gain widespread appeal.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TM Toyota Motor Corporation 122.81 1.35 1.11 430,986
NAO Nordic Amern Offshore Ltd Reg S (Marshall Islands) 3.45 0.20 6.15 117,168
TSLA Tesla Motors Inc. 192.29 -0.86 -0.45 3,193,659
GM General Motors Company 36.42 0.12 0.33 14,512,255

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