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In a series of guest posts, Assaf addresses — from the perspective both of an EV owner and an analyst — myths about electric vehicles. The first post addressed the life-cycle CO2 Footprint of various types of cars … and … the simple truth (in line with Debunking Handbook guidelines):

Electric Vehicles have lower
(LOWER!)
carbon dioxide implications
through their life cycle

The second post followed up with addressing a series of issues such as the importance of reducing oil demand and other greenhouse gas emissions. The third post addressed a set of questions about the commercial/sales viability. This post focuses on a number of business and consumer value issues.

The main message of this diary-pair is that the reality is far better than what conventional wisdom would have you believe.

We’ve seen this in other fields: CW has such a hold on pundits’ minds, that they are willing to deny reality to its face long after the CW had been debunked. In the EV case, the CW has been that this is a “zombie technology” unworthy of Prime Time – not now, probably not ever. Any sign of life from EVs has been dismissed as artificial, irrelevant to ordinary people, or a sign of desperation. Any negative sign has been seized upon as a treasure: the most hillarious example was the NYT quoting an “expert” proclaiming “a stake in the heart of electric vehicles” because of a viral video of a single Tesla Model S that caught fire following an accident, after over half a billion cumulative EV miles on the road.

Things are not perfectly rosy. But if you’d like my bottom line, it is this:

EVs are very close now, perhaps a single year away, from attaining the critical mass and momentum needed to irreversibly affect the automotive-market economy.

Stuff might still happen. In particular, if the wingnuts succeed in throwing us into a second Great Recession, both oil prices and consumer appetite for novel products will plummet. But if things continue on the trajectory they’ve taken since, say, mid-2012 – then EVs are looking good.Really good.

Today’s serving will deal with EVs’ business viability for automakers, and with their value for consumers.

First some acronyms:

EV – an umbrella term for any vehicle that can drive based on electric power charged from a plug. This includes the “pure” electric-only BEV (battery EV) like the Nissan Leaf and the Tesla S, the PHEV or plug-in hybrid like the plug-in Toyota Prius, and more exotic beasts like the EREV(extended-range EV) like the Chevy Volt, whose gas engine’s passes power to its electric drivetrain, rather than directly move the car.

ICE – internal combustion engine.

Now… for some EV market myths and their dispellation 🙂

1. Market-Viability Myths

 

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Myth: Sales, no sales, it’s all on government life-support. EVs are not market-viable without the huge government subsidies – and they never will be.

This myth tries to explain away the near-doubling of EV sales year-to-date, over 2012. The myth’s obvious grain of truth is government support – up to $7500 from the Federal government for each automaker’s first 200k EVs, plus several thousand dollars in quite a few states, as well as other perks (free L2 charger, free public charging, etc. etc.).

But the basic premise is a huge fallacy: supposedly, ICE cars receive no subsidy. What a sad joke.

Americans might whine about $3.5-4 per gallon prices. But we are paying far less for petroleum than any other industrialized country. Canadians pay about 20% more. For everyone else in the First World, it is at least 1.5x more, usually >2x. Who’s the sucker here? Duh.

Norway, that oil exporter, takes $10/gallon from its drivers, and uses the difference to fund infrastructure and even college education. Meanwhile, in the US the Federal gas tax – specified in cents and not percents, mind you – has not increased for 20 years. The end result? wasteful driving habits, collapsing bridges, and budget shortages because money is siphoned away from other needs, to fund highway maintenance.

By rights, American gas should have been the most expensive in the world. Not only is the US home to a most outsized multi-lane highway system; massive American military presence subsidizes the flow of Persian Gulf oil, some 30% of the world’s supply. Drs. Mark Delucchi of UC-Davis and James Murphy of UMass-Amherst, estimated in 2008 that the long-term US military expenditures due to Persian Gulf oil are $27-73 Billion/year. Considering thatcurrent estimates of the costs of the Iraq war alone are in the trillions, that 2008 article now seems quite a low-ball.

Anyway, as Republicans love to say, “Someone has to pay for that.” That “someone” appears to be the American taxpayer, regardless of how much petroleum s/he uses. Or more precisely, our grandchildren are paying for it, because so much of our Oil-fumed Middle East adventurism was placed on the proverbial credit card.

And we haven’t even mentioned the vast tax incentives and loopholes for oil companies, in return for them continuing to drill and refine petroleum. Mother Jones in its latest print edition, reported that oil companies still get $4.8 billion/year directly from tax credits, nearly half of them going to the 5 biggest companies. Over the past century, they estimate nearly a half-trillion of cumulative tax credits for Oil.

Add to this, the subsidy due to socializing the public-health cost of ICE-vehicle tailpipe and CO2 emissions.

By comparison, the EV subsidies – generous on a per-unit basis, but downright negligible in absolute terms vs. the Oil subsidies – are barely enough to level the playing field. If US gas prices were a more realistic $8/gallon, American consumers would be now falling over each other to get their hands on something that doesn’t run on gas.

Myth: OK, we get it, ICE cars are already subsidized more than EVs. But still, EV makers are losing money and nothing will change that. As those CEOs say, it’s a dead business.

“Those CEOs” are the heads of Fiat and Toyota, who even as they produce limited-edition BEVs for the California market to meet that state’s regulations, take time to diss the technology itself as a loser, and vow not to invest in it more than the absolute minimum.

It is worth noting that

1. Before, during and after their CEO’s rant, Fiat has been bragging about the quality of its 500e subcompact BEV, which received rave reviews. So for some reason, they didn’t just half-ass it.
2. Both Fiat and Toyota have decided to offer very lucrative BEV lease deals to their California customers this year.
3. Toyota is heavily involved in Tesla as an investor and ostensible high-volume manufacturing coach; in fact, the BEV it sells in California – the RAV4 EV – uses a Tesla battery-pack.

IMHO, this is a classic case of “Watch what they do, not what they say.” Both of these ostensibly anti-EV companies are in fact hedging their bets right now. After all, Fiat could have chosen to continue paying EV credits to Tesla or Nissan, instead of “losing money” on designing its own BEV. And Toyota, too, could have continued to pay such credits while offering its RAV4 EV on ridiculously expensive lease deals, like it did until last summer. Surely, investing in Tesla doesnot sound like a ringing “no-confidence” vote in the technology.

But what about those companies that do attempt to mass-produce EVs? Are they losing?

Once again, the basic premise is a fallacy. Embarking upon a novel technology is a major project, and should be viewed as a long-term investment. The question is not “Are we ‘losing money’ right now?” But, “Are we proceeding as planned, better, or worse? If worse, do we still enough momentum and time to be viable?”

Toyota had reportedly sunk billions into developing and refining the Prius. By the lazy-ass measures applied to EV economics now, they were “losing money” on the Prius for several years. Is anyone sorry that they kept at it? By the way, early ICE-hybrid buyers also enjoyed Federal tax credits.

Nissan just launched the Leaf in South Africa, with orders now possible everywhere else south of the Sahara. The Leaf is now available on all continents – making the notion that it’s somehow “struggling” more and more ridiculous. Meanwhile, other makers are jumping in, most notably German companies led by BMW: its subcompact BEV/EREV i3 launching next month and aiming for a market segment between the Leaf and Tesla, already has 8,000 pre-orders in Europe alone, spurring talks about capacity increase.

But if you’re still concerned about EV viability, look no further than Tesla. Yes, its stock is highly speculative; but most professional-speculator $$ was actually betting against it. It’s the idiotic Tesla-Shorters that turned it into such a speculative stock; now their pals in the media are whining about “a stock that out-of-touch with the fundamentals.”

Yes indeed! Let us talk about Tesla’s fundamentals.

If someone told you 10 years ago that a brand-new US automaker will produce, in 10 years’ time, a mass-market vehicle crowned as “Best Car Ever” by multiple independent outfits – you would have laughed that person out of the room. I know I would.

And this maker, in its first year of full-scale production,

• …racks up sales around $1.5 billion,
• …exports thousands of units to recession-stricken Europe,
• …wins the #1 overall sales spot in freakin’ Norway –
• …and has waitlists from here to Hyperloop on its current and future products.
• It is also close to completing the first up-and-down-coast and coast-to-coast routes in its quickly expanding fast-charging network,
• …repaid its Federal loan 9 years early –
• …and has a pot full of money to implement its concrete plans for expanding into higher-volume, lower-price markets.

Analyst whining about Tesla’s stock price “not justified by the fundamentals” is pure baloney. Barring major catastrophe — e.g., another world economic collapse or dozens of combusting-Model-S videos rather than a single one — it is a matter of 4-6 years, tops, before hundreds of thousands of middle-class families, possibly even millions, ditch their ICE and line up to get an affordable Tesla Gen III BEV – with or without Federal subsidy.

Now that’s fundamental. No wonder Stanford University has just awarded Tesla its Entrepreneurial Company of the Year (ENCORE) award.

 

Myth: pure BEVs will never be market-viable, especially in America with its large distances and road-trips. The only EVs worth the trouble for automakers are PHEVs and EREVs.

Well, I could just say “Tesla” in response to this one, couldn’t I?…

Or… present the numbers. Look again at 2013 sales. They are almost precisely 50:50 between BEVs and the rest. Moreover, most of the growth from 2012 to 2013 is due to BEVs –  split rather evenly between Tesla S and Leaf.

Some writers, and many auto executives, try to inject drama and antagonism into BEV vs. EREV/PHEV. Don’t fall for that crap. Most of us are “plug-in hybrid” drivers even if we have a BEV. When we go on road trips too far for our BEV, we use some ICE vehicle – rented, borrowed or our own. So until we get a BEV with a sufficient range/charge combination, our miles will continue to be a mix of electric and ICE.

How we mix it up – a BEV with the ICE miles added on the side one way or another, or getting an all-in-one PHEV/EREV, is a simple consumer choice not an ideological one. Regardless, our vote of confidence in the EV is cast.

Myth: Automakers have a far higher chance of success with EV versions of established models, compared with de-novo EV only models which are simply too risky.

Again, the facts throw this myth out the window, and with this one they are glaring. The 3 most successful EVs are all de novo brands – the Volt, the Leaf and the Model S. Conversely, the Ford Focus Electric has thus far bombed. The Plug-in Prius ebbs and flows, and is still offered only in a dozen states on the coasts, meaning that Toyota itself considers it a “fringe product” rather than part of its main lineup.

Engineering-wise, an EV retooling of an existing ICE model might often be a kludge, leading to reliability and/or consumer-value issues. Marketing-wise, an EV version of an established model must compete with the ICE versions. At every stage – from the executive level to the dealer showrooms – the plug-ins encounter inertia and even resistance inside the company itself, due to a zero-sum mentality. An extreme case is the Honda Accord plug-in, which is priced so ridiculously high (+$10k over ICE hybrid right now), hardly anyone is even looking at it.

2. Consumer-Value Myths

 

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For these myths I am leaving the Tesla juggernaut aside. Clearly, if you can (or decided you can) get a car for some $65+k, either outright or in monthly payment exceeding $1k, your kitchen-table discussions are different from those of most American families. No hard feelings: if you can, go get that Tesla S! You are our battering ram for taking down the ICE sense of smug superiority, and eventually the entire ICE economy.

But here we’ll deal with the consumer value of EVs for the lower 90% of the income ladder.

Myth: EVs will always remain unaffordable niche toys for rich and/or weird people.

As the man said, “The electric vehicle does absolutely nothing for the average consumer.”

The notion that “EVs are expensive” has become a self-reinforcing truthiness, one that supposedly doesn’t even need to be examined against reality. But in fact, it has long expired.

After Federal rebates, the 2013 Nissan Leaf base model costs $21.3k. The base model for a new Chevy Cruze is $19.1k, and for the Honda Accord it is $22.8k. So thanks to the rebates, the Leaf is eminently affordable as an outright purchase (provided you can recuperate that Federal rebate within 1-2 years; if you can buy a new car outright, you probably can:). The 2-seater Smart BEV, sold in 6 states and expanding nationwide in February, sells for $17.5k after rebates.

But very few people who get affordable EVs, buy them outright. One consumer survey found that 93% of those who got EVs during the sales surge of late 2012, leased them rather than buy. Most of us lease our EVs (including us personally).

As this Consumer Reports post explains, leasing – not so popular for ICE vehicles – makes perfect sense for EVs. The root cause is the technology’s emerging nature. It leads to uncertainty about long-term performance and resale value, coupled with a near-certainty that models sold in a couple of years will be substantially better than today’s. Therefore, leasing becomes a win-win-win:

1. Drivers get to sample the latest EV technology every few years, with low cost-of-ownership (see below) and low risk.
2. Automakers net the $7.5k directly from the Federal government, enabling them to offer great lease deals.
3. The Federal government gets to accelerate EV adoption rates, reducing tailpipe emissions and oil consumption.

Lease Cost-of-Ownership Calculation: Example

 

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The current standard Leaf lease is $2k down and $200/month for 3 years. I just checked out the terms for a 3-year lease on a mid-trim Cruze: they are nearly identical. Dividing the down payment over 3 years, the Leaf is less than $100/year more expensive. But let’s give the Cruze this $100/year lead. It will need it.

Assume the leased car drives 10k miles/year. The Cruze’s official economy is 27 MPG: 370 gallons/year, or roughly $1300/year at $3.5/gallon. The Leaf would consume about 2600 KWh to drive 10k miles. The national average electricity price is about a 12c/KWh – so our Leaf charges for about $300/year. On fuel costs, the Leaf is $1k cheaper per 10k miles.

For convenience, someone driving 10k miles/year in their EV would probably want a dedicated L2 charger – so we need to add that cost. For most people, chargers would cost under $1200 (and there are still many incentives that can get you one for free or nearly free). But let’s say $400/year over 3 years.

Adding it all up, our Leaf would be $500/year cheaper than the Cruze over the 3 years.Now, the Leaf is arguably a more upmarket brand than the Cruze. A Honda Accord is perhaps a more equitable analogy. A base-level Accord at 2013 close-out prices, now leases for 2.5k down and $220/month – $400/year more expensive than the Leaf. While the Accord’s gas consumption might be some $100-150/year lower than the Cruze’s, overall the Leaf will be some $800-900/year cheaper to lease than a base-level, closeout Accord.

How’s that for affordable? And this is before mentioning state incentives: in quite a few states, you will get a nice check of a few thousand $$, even if you lease the EV rather than buy it outright. Which has led the decidedly-not-green Wall Street Journal to write a feature about how EVs in some states are practically “for free”.

Suppose you buy an ICE outright, how would that compare with a Leaf lease?

The mid-trim Cruze can be bought for $2k down and $540/month over 3 years (2.9% APR, that’s what the Chevy website gives me). You pay about $4.1k/year more than on the Leaf lease, but after 3 years it’s your car. How much is your car worth? optimistically 60% of its original cost, or $12k. Are we even? No, because meanwhile you’ve paid $600/year more for gas (after deducting the Leaf’s L2 charger cost).

More commonly, people buy ICE cars in payments over 5-6 years rather than 3. The usual tradeoff: more in interest but less per month. The Chevy calculator for 6 years says $2k down, $300/month. We will need to compare this to 2 successive, identical Leaf leases.

The Cruze payments are now almost $900/year higher, and the overall cost is $1700/year higher than two successive Leaf leases (we can now divide the L2 charger cost over 6 years, too). And we haven’t even gotten into the repairs that naturally start racking up after the Cruze’s 3-year complete warranty expires, and accelerate after the 5-year drivetrain warranty is over as well.

Which car is more affordable, again?

Note 1: I’ve done a little sleight-of-hand here, implicitly assuming that the Leaf is your family’s second car. Otherwise, you would need to rent/borrow/whatever an ICE car when embarking on road trips beyond the Leaf’s range. But given the savings, even the Leaf is your only car, and even after those occasional rentals you are at the worst case breaking even, compared with some of the most affordable 5-seat ICE cars on the market.

(note 2: the 2013 Volt comes out to ~$1k/year more than the Leaf, with the obvious upside that it can be your only car, if 4 seats are enough for you)

(note 3: if you’re curious about Leaf vs. Prius, a 3-year Prius lease with $2k down would have payments of $320/month – almost $1.5k/year higher than the Leaf; and the Leaf’s gas savings still more than offset the cost of an L2 charger)

Heck, compact EVs’ lease is even cheaper than owning a middle-aged ICE car!

 

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Suppose you consider a downmarket middle-aged car that depreciates at <$1k/year, compared with the >$3k/year Leaf payments. Its insurance, too, would be ~$500/year cheaper. But on the flip side:

• A 5-10 year old ICE car has worse gas mileage; 20 MPG would be generous. Ding! You save some $1.5k/year on gas with the Leaf (assuming as before, 10k miles/year)
• And the repairs… ugh, the repairs. Look, wrecks is what we’ve driven here before getting the Leaf. $2k/year on repairs would be totally low-balling what we’ve dumped on repairs on 2 different cars aged 5-11 years old, over 10 years (one car at a time). Ding Ding! With a lease you couldn’t care less about repairs.

So leasing a brand-new Leaf would be, on average, at least a couple hundred dollars a year cheaper vs. continuing to drive a typical middle-aged ICE.

The only type of cars cheaper to operate over 3 years than a compact-EV lease, would be some combination of at least 2-3 of the following 4: a total wreck with no depreciation, a car that does very little driving, a highly fuel-efficient used car, and having a “guy” (maybe yourself) who can do repairs for a pittance rather than the typical auto-shop prices.

But if you live in a state with EV incentives, you might find out that leasing an EV is still cheaper than your most cheapo wreck. Do the math!

Myth: Don’t buy EVs! Their resale value is in the dumps.

The Blue Book sages recently made this stern warning. Of course, given that most of us lease our EVs the warning is rather moot. But suppose you drive too much – say 20k miles/year (the typical EV lease is limited by 12k miles/year; but they can probably craft a deal for you for 15k miles).

So you have to buy your EV outright. What happens then?

2011 Leafs have started to trickle into the used-car market. They seem to sell for ~$15k from private hands and $17-18k from dealers. That is definitely a steep drop, and with each tech improvement or price cut to the new Leafs, the used prices fall further.

Let’s assume you get your Leaf – a 2013 base-level plus charging package, the most popular option – for $23k after Federal rebates, because you live in a state with no incentives. You drive it 60k miles over 3 years, and discover it is now worth only $10k.

Are you a sucker?

Not if you count those 60k miles. If you followed the numbers above, vs. the Cruze the Leaf saves $1000 for each 10k miles driven. So you’ve saved $6k on gas alone – even after subtracting our L2 charger cost, you’re still almost $5k ahead, more than offsetting the resale-value loss vs. the inexpensive Cruze.

Now… how about buying that $10k, 60k-mile 2011 Leaf next year? Is it a good purchase?

The Leaf range is guaranteed to be at least 75% of its factory rating for 60k miles. If someone offers you a Leaf at <=60k miles with less range, send them to Nissan to get a new battery, or they have to do some ‘splaining. Assuming you are >75%, the closer the Leaf is to that threshold, the stronger your bargaining power. But should you buy it?

Well, if a depleted-range Leaf fails to meet your needs, there’s no deal. But given that the average American car rarely exceeds 40 miles a day on weekdays, there’s a good chance it’ll do just fine for you. Considering you have only $10k, your ICE competition likely does 20 MPG in-city or worse. So you are looking at $1.5k saved with the Leaf for every 10k miles driven. Plus, the maintenance costs will likely be far smaller. Do your math and decide.

For sure, used Leafs and Volts make an awesome purchase for cash-strapped NGOs and local governments. And needless to say, paying a few thousand dollars extra to get a lower-mileage used Leaf with a lot of guaranteed-range miles still on it, is also a good investment.

(Volt note: I think the Volt does not depreciate faster than ICE cars – for one thing, its battery is much more resilient – but will be glad to learn the reality from anyone who knows it)

Summary of Diaries 3-4

Present-day American mainstream media (MSM) is not known for its high reporting standards. But with respect to EVs’ market situation, our MSM manages to fail even its own low standards, in a jaw-dropping manner:

• EV sales are stuck…. even as they are nearly double last year’s numbers.
• EVs are unaffordable…. even as a brand-new leased Nissan Leaf is, for a large chunk of US households, the cheapest thing they can drive over the next 3 years.
• Investing in EVs is a death wish for any automaker… even as the Big Three are quaking in their boots, for good reason, from an EV company that has sold barely 20,000 cars so far.

…you get the idea. Fortunately, EVs are fast turning from mythical beast about which all kinds of BS can be told, into a daily reality around us that people can see and experience for themselves.

The last installment in this series will deal with EV technology myths. Hopefully by then the US government will be up and running again…