Car buyers shun electric vehicles not named Tesla.

Tuesday, 21 January 2020

Regulators are demanding zero-emission vehicles. And manufacturers are scrambling to provide them, spending billions on electric-car development.

Ford says a third of its vehicles will be electric by 2030. Volkswagen plans to sell a million EVs annually just two years from now. At Volvo, half its offerings will be electric by 2025. By the end of this year, most major automakers will be offering at least one EV.

And buyers? So far, they're not on board.

Despite the debut of 45 pure electric and plug-in hybrids in the United States last year, only 325,000 plug-in passenger vehicles were sold, down 6.8 per cent from 349,000 in 2018. That is just 2 per cent of the 17 million vehicles of all types sold in the United States in 2019. Numbers for California aren't available yet, but 112,961 EVs were sold in the first three quarters of 2019, up only 5.6 per cent from the year-earlier period.

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'The number of battery-electric models available more than doubled last year, but EV sales didn't budge much. That's troubling,' said Mark Wakefield, who runs the automotive practice at consulting firm AlixPartners.

Troubling, because while carmakers finally turned serious about electric vehicles, going all in on new electric versions of best-selling SUVs, pickups and muscle cars - consumers so far aren't playing along. That puts hundreds of billions of capital investment at risk.

Why the disconnect? 'Manufacturers all over the world are trying to answer that question,' said Eric Ibara, market analyst at Kelley Blue Book.

Volkswagen is betting big on an electric future, with its long-awaited ID.3 EV part of its strategy.

EV weakness wasn't confined to the United States. Sales of 'new energy vehicles,' most of which are electric, declined 4 per cent in China last year, to 1.2 million vehicles. (That was less of a drop than China's overall auto market, which fell 8.2 per cent to 25.8 million vehicles, according to the China Assn. of Automobile Manufacturers.) The EV hit was blamed mainly on severe cuts in consumer subsidies that kicked in last June.

European sales for 2019 are not yet final, though they, too, are expected to be disappointing. This year should be far better, said Viktor Erle of EV Volumes, a market research firm based in Sweden, as strict greenhouse gas emissions rules phase in, with severe financial penalties for automakers that don't meet government goals.

The financial damage from EV overreach could be severe. Global automakers will spend US$225 billion on EV development between now and 2023, according to AlixPartners. But with overall auto sales falling in China, Europe and the United States, automakers face a 'profit desert' for several years - or longer, if customers don't come around.

The numbers in the United States look especially grim. Tesla remains the exception. U.S. sales of the Model 3 grew by 14 per cent in 2019, to 159,000, according to InsideEVs. Global Model 3 deliveries more than doubled, to 300,600, with a big push in Europe.

If it's not a Tesla, it really doesn't sell well. Big things are expected from the company's small Model Y SUV.

That helps explain why Tesla's stock price has rocketed US$100, or about 25 per cent, since the start of the year. Tesla still struggles to make a profit, with losses every year since the stock went public in 2010. And deliveries of its older Model S and Model X luxury cars are down three years running, with a precipitous 33 per cent decline in 2019, to 66,600. But the Model 3 was once again the best-selling compact luxury car model from any automaker - remarkable considering the small share of EVs in total car sales.

Tesla was expected to suffer as new EV competition came online, but that's not been the case. Some analysts think buyers don't necessarily want an electric car when they buy a Tesla - they primarily want a Tesla, which has replaced the latest iPhone as the coolest accoutrement in Silicon Valley and similar cultural enclaves around the world.

Dealer enthusiasm, or the lack of it, also continues to be an issue. A Sierra Club secret shopper survey of 909 dealerships around the U.S. released in November found that 74 per cent weren't selling EVs at all. Servicing cars is more profitable than selling new cars at most dealerships, and EVs require a lot less maintenance than combustion engines So, EV proponents say, there's less incentive for dealers to sell EVs.

In its report, the Sierra Club also noted that dealer attitudes toward selling EVs ranged from uncooperative to warm and welcoming.

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Dealers in California, under zero-emission mandates from the state, are reporting greater buyer interest in EVs. But dealers aren't on the hook if the mandates aren't met. The manufacturers are, and if they fall short, they have to buy emissions credits from companies that hold a surplus. Right now, that's mostly Tesla.

'Not all dealers are loath to sell EVs, but for many it is a more arduous process,' said Jessica Caldwell, market analyst at Edmunds. 'Consumers are likely to have more questions not only about the technology, but on financial matters, like how federal tax credits work. For car dealers, time is money, so anything slowing down the process isn't perceived favorably.'

It's not surprising that dealer enthusiasm varies according to geography, said Scott Keogh, head of Volkswagen's North America operations. In an interview with The Los Angeles Times at November's L.A. Auto Show, he said suburban buyers are more likely to shop for EVs. Fewer urban customers have garages to install overnight chargers, he said, and range is a serious concern in rural areas.

Volkswagen has made perhaps the industry's most serious commitment to EVs in the wake of the diesel emissions cheating scandal. It plans to launch three all-electric models in the United States over the next three years, including a crossover SUV by the end of next year and an electric take on the vaunted VW microbus in 2022. The company is investing in dealer training, and despite a risk to maintenance revenues, Keogh said dealers can still make good money.

Like any car sale, 'it's instant cash flow,' he said. 'And the (profit) margins from a dealer perspective are going to be quite good' on EVs that appeal to customers. Or so he's telling VW franchisees.

Price remains a serious issue too. It costs manufacturers more to produce an electric car. Battery cost is the main reason. Internal combustion powertrains cost automakers an average US$6,500 per car, according to AlixPartners; the average for an EV is US$16,000. Battery pack prices are declining, the firm said - but at a rate of 4 per cent a year. It will take a major development in battery technology to cause battery prices to plunge. In the meantime, EVs are money-losers for all major automakers, including Tesla.

As the market grows, economies of scale will help bring the cost down. But beyond the Model 3, EVs aren't scaling quickly. Wakefield predicts global EV sales per model will average 14,000 in 2022, versus about 90,000 for internal-combustion models.

Larger SUVs and trucks like the forthcoming Rivian may tap into Americans love of larger vehicles to fire up EV sales.

Continued enthusiasm for EVs among European and Chinese car companies in particular reflects the more aggressive climate-change policies in those countries. 'The politicians have been very firm that they want to more away from petrol and move toward electric vehicles,' said Erle of EV Volumes.

But carmakers are plowing ahead with EV expansion in the United States as well, betting that the trick is to connect Americans' love of larger vehicles with electrification.

'In the U.S., we expect no fewer than 25 new EV models to debut in 2020 - 16 battery-powered EVs and nine plug-in hybrids,' said Garrett Nelson of CFRA research. Nearly two thirds of those, he said, will be SUVs or crossovers.

Those include the Tesla Model Y compact SUV, the Volvo XC40 compact SUV, and the Polestar 2 compact SUV (Polestar is an all-EV arm of Volvo). Toyota's RAV-4 compact SUV, the best selling non-truck in the United States with 448,000 sold in 2019, gets a plug-in hybrid version this summer.

Ford's new Mustang Mach E crossover electric car, and an all-electric high-end pickup truck and a similar SUV from American startup Rivian, are creating excitement at auto shows around the world. Both are scheduled to go on sale by year's end. Porsche started selling its Taycan all-electric sports car in California last December.

Perhaps the best indication of how all-in automakers are on EVs is their plan to launch all-electric versions of gas guzzlers. Ford plans an electric version of its F-150 pickup truck - the best-selling vehicle in the United States for years - in 2021. And General Motors has said it will sell an electric version of the discontinued Hummer in 2022 under the GMC brand.

'Maybe those will light the flame,' said JMP's Osha.