The Struggle to Mainstream Electric Vehicles

“Fiat Chrysler CEO Sergio Marchionne told the Brookings Institution audience in Washington, DC regarding his company’s 500e EV: ‘I hope you don’t buy it, because every time I sell one it costs me $14,000.’ The reason the 500e exists is to meet zero-emission rules in California and elsewhere that might impose similar mandates. The company’s plan is to sell the minimum number of EVs it is required by law to sell, at whatever financial loss the company must bear, and then not to sell one more. Marchionne also said that if automakers are forced to suffer losses on EVs in order to satisfy political policies, then the companies will be back in Washington asking for new bailouts.”

Nissan (NSANY-OTC), the manufacturer of the LEAF electric vehicle (EV) has been the number one seller in the U.S. The June auto sales figures showed that Nissan sold 2,347 LEAF vehicles, up 5.5% over the sales for June last year, although they were down 770 units from May’s sales results, which was the record month for sales.  June marked the 16^th straight month of record sales compared to the prior year month.

Year-to-date, LEAF sales are up almost 30% from the same period for last year.  So far in 2014, Nissan has sold 12,736 LEAFs versus 9,839 sold last year. Given its strong sales performance, one has to wonder about the latest announcement of the replacement battery pack pricing for the LEAF. 

The company announced that the replacement lithium-ion battery pack for the LEAF will sell for $5,499, after credit of $1,000 for the old pack that must be traded in, plus installation fees and taxes. Nissan estimates installation will require roughly three hours of labor that based on labor rates of $90 to $120 per hour, adds another $300 to the cost.  Nissan also introduced a special installation kit to make the battery pack “backward compatible” with 2011 and 2012 models. That kit costs $225.

The most interesting development is that the replacement battery pack will use new chemistry to address consumer criticisms of vehicle performance. The 24 kilowatt-hour battery pack will employ new heat-tolerant chemistry cells that reduce the loss of capacity batteries normally experience when operating in very high temperatures. The new battery chemistry cells will be deployed in all future LEAF vehicles starting with the 2015 model, now on sale.

The new battery chemistry cells, however, will not extend the battery’s range or improve its performance. LEAF advocates call the new battery the “lizard battery” because it is more capable of resisting the damage from very high temperatures. Unlike other EVs, the LEAF uses positive cooling for its battery, meaning it sheds heat to the air rather than to either cooled air surrounding the battery pack or liquid coolant circulating through the battery pack itself.

Battery capacity loss in extremely hot regions such as Arizona, Texas and Southern California has been a primary complaint of LEAF owners in those areas.  Nissan anticipates these new battery chemistry cells will overcome consumer criticism and hesitancy for purchasing a LEAF. Auto analysts had been speculating that Nissan might introduce a higher capacity battery, but there was no hint of this in the company’s announcement. Nissan recommends replacing the battery pack when it falls to 70% of its initial capacity. The new sales plan replaces a lease plan Nissan had introduced in June 2013 that drew substantial criticism from vehicle owners.

Nissan is providing a financing plan for replacement battery buyers. They would pay $100 a month for five years and then own the battery pack outright.  The replacement battery pack is warranted for eight years or 100,000 miles against defects from manufacturing. It has a five-year or 60,000 mile warranty against loss of capacity beyond nine out of 12 bars of capacity, or roughly 70% of the original capacity.

Analysts estimate that Nissan is losing money on the replacement battery pack based on the pricing. They assume the company is counting on very low replacement demand initially and that future economies of scale in battery making will improve profitability, especially as EV sales grow. As of the end of June, Nissan has sold 125,000 LEAFs worldwide, with 56,000 in the United States. (We have not been able to find any statistics on how many LEAFs were purchased by government agencies.)

Commentary from Nissan sales executives about their June results referenced the strong sales they experienced in Texas now that the state has introduced a $2,500 tax subsidy for the purchase of EVs, except for the high-priced Tesla (TSLA-Nasdaq) vehicles. According to comments from Toby Perry, Nissan’s director of EV Sales and Marketing, “Since the Texas state incentive went into effect in May; we’ve seen a big jump in LEAF sales in the Austin, Dallas and Houston markets. Our dealers are telling us that they saw more traffic in their stores, and they had their best LEAF sales performance in the last weekend in June.”

As the market leader in plug-in EVs, Renault-Nissan CEO Carlos Ghosn has been a strong proponent of EVs and has made bold predictions about future growth for this market segment. In 2011, Mr. Ghosn predicted that his combined companies would sell 1.5 million EVs by 2016.  Late last year in an interview with the Financial Times, Mr. Ghosn admitted that his forecast would not be met; not because the vehicle was too expensive, but due to a lack of EV-charging infrastructure.  “I don’t think the main issue today is the cost of the car,” he said. “The main issue is infrastructure. It is normal. I would not buy a gasoline car if there were no gasoline stations.”

With average daily commutes well under 30 miles a day, most EV owners don’t need to charge anywhere during the day, but that doesn’t’ eliminate the ‘range anxiety’ in potential EV buyers. Research by many automakers shows that the installation of public charging infrastructure is as much about providing a perceived solution for range anxiety as it is for providing a place for EV owners to plug in.

The presence of public charging stations is akin to the comfort that comes for owners of typical autos by gasoline stations being nearby.  This auto research suggests that more car buyers would purchase EVs if they knew they could recharge in an emergency away from home. This means that more charging stations are needed along with stations that can quickly charge cars.

Drivers do not want to be held captive for hours to recharge their car when the time to fill-up at a gasoline station is merely minutes.

Exhibit 12.  2013 Fiat 500e Electric Car Source:  autoblog.com

We wonder what market research Fiat Chrysler (FIATY-NYSE) did. Its CEO Sergio Marchionne told the Brookings Institution audience in Washington, DC regarding his company’s 500e EV: “I hope you don’t buy it, because every time I sell one it costs me $14,000.” The reason the 500e exists is to meet zero-emission rules in California and elsewhere that might impose similar mandates. The company’s plan is to sell the minimum number of EVs it is required by law to sell, at whatever financial loss the company must bear, and then not to sell one more. Marchionne also said that if automakers are forced to suffer losses on EVs in order to satisfy political policies, then the companies will be back in Washington asking for new bailouts.

In his Financial Times interview, Ghosn said, “We will not be there (his 1.5 million car sales target for 2016).  “At the speed right now, I’m seeing it more four or five years later.  We have to admit, it is slower than we thought. But it is slower for the reason that we thought infrastructure building would be faster.  It is not.”

After learning about making aggressive forecasts, Ghosn seems to have learned the classic point about forecasting – give a volume but not a date. In speaking during a CNBC interview when opening Nissan’s Smyrna, Tennessee EV plant, he said, “We are now on a trend of 3,000 cars a month in the U.S., which is about 36,000 cars (per year). The next step is moving up to 4,000 a month which is going to be approximately 50,000.” The LEAF has yet to sell 3,000 cars in any month, and still seems to be dependent on tax subsidies, which probably is a reason why it priced its replacement battery pack as cheaply as it did, attempting to dispel EV critics who said replacement battery packs would cost upwards of $10,000.

A writer on the web site Inside EVs speculated that the LEAF’s price needed to be cut from its current $32,000 level to under $25,000 in order to boost sales to the 3,000 cars per month level, or the second generation LEAF needed to be able to comfortably deliver a minimum of 125 miles on a single charge with the vehicle priced at the current level.

Maybe one of the challenges for EVs is that competitive vehicles without range anxiety are making huge mileage improvements. Mercedes-Benz (DDAIF-OTC) recently demonstrated a diesel-hybrid sedan that traveled 1,200 miles on a single tank of fuel, or 60 miles per gallon.

With competition like that, it is reasonable to predict that EVs will remain a niche vehicle market segment and not likely to revolutionize the automobile business. Will that mean automakers will fall short of attaining President Barack Obama’s 54.5 miles per gallon CAFE standard by 2025? Remember, in calculating that standard, EVs are counted twice while hybrids are counted 1.6 times a conventional internal combustion engine vehicle.

Look for more government money to go to charging stations, subsidies for EV purchases, easier access to high occupancy vehicle lanes, and possibly clean vehicle mandates, much like renewable fuel standards.

Maybe Mr. Marchionne will change his mind about selling more 500es.