While discussing electric vehicles, people will often ask questions about the puzzling manner in which the auto industry approaches EVs. Some common questions include: · Why do most EVs look funny? · Why are there no long-range EVs competing with Tesla? · Why doesn’t anybody make a $20k EV for the masses? · Why do I not see EV ads – or, why do the ads not make sense? · If EVs are so great, why doesn’t everybody drive one? (This one is rarely a direct question, but often implied by other questions) Good answers to these questions can be kind of difficult, because it requires one to understand the auto industry first. That means there’s going to be a very large wall of text below. Fortunately, it is optional reading. I’ve tried to at least break it up; the sections below are 1. Executive Summary 2. Auto industry background 3. Automaker strategies to maximize profits 4. Risky strategies that automakers avoid 5. How automakers are responding to EVs 6. Specific automaker examples I have been thinking of writing a post like this for about 2 years. I mostly put it off because it seemed daunting to do a bunch of research to make sure everything I write is correct and documented. I finally decided it wasn’t going to happen that way; so everything below is just written off the top of my head without research. Sorry - please let me know if you see mistakes. 1. Executive Summary No conspiracy theories are required to explain the current state of the dysfunctional EV market. While there really are groups trying desperately to discredit EVs, simple self-interest of the players given their industry parameters is sufficient to explain why the cars are low-volume, often funny-looking, and have no or strange advertising. Automakers have been capable of making good EVs for some time, have some incentives to do so and clearly have the means to do better. They are not trying to do better; the main reasons are: · Uncertainty about demand; killer in a high-capital, long-turnaround, low-margin industry · Dealers (their only legal sales channel) are unwilling to spend more time selling new technology that will result in lower profits for them (dealer profits primarily come from service, not new-car sales) · Cost. This could be addressed with high-performance or luxury halo vehicles, but for some reason automakers have been in the mistaken mindset that EVs are only for highly cost-conscious eco buyers. The media certainly has played a role in perpetrating this myth. · The above issues mean the cars are, currently, low-volume. There is no clear direct way to profit on low-volume cars (especially ones with new technology that are expensive to build), so automakers have to employ “tricks” like using the cars for brand image, to attract new customers, or justify credits. This is why EVs look and are advertised differently than mainstream ICE vehicles. The market is evolving. While a lot of automakers are currently ignoring EVs or going a simple compliance route, Tesla has shown the cars can sell and be profitable (on features other than eco-friendliness, no less), and CARB and CAFÉ rules are only going to get stricter. At some point the automakers are going to figure it’s easier to go to volume and make a profit than to try to keep losses low. Even if they stay compliance, they are going to have to improve the cars to stay competitive and sell enough to make their numbers. Low-cost, high-range EVs are on the way (though volumes and marketing approaches may still be in transition for some time). 2. Auto industry background Here are some key points about the auto industry that will be relevant for our discussion. This is not complete coverage of the industry; only a few relevant aspects that we will refer to later. I am lazy so I will focus on the US market, though much of it is applicable elsewhere. · Mature. The market has been around for roughly a century. Design, engineering, supply chain, manufacturing, advertising, distribution, delivery, warranties – most of it has been very thoroughly explored. While things have changed over time, current “best practices” are well-known and most of the automakers approach things in very similar ways. · Highly regulated. Safety, emissions, dealer relations, warranty and such issues are covered in detail by a mass of regulations. This drives some of the similarities in the cars, which in turn can somewhat reduce innovation since shoppers pay less attention to the regulated details. It drives the costs up (which narrows margins as many consumers are already buying all they can afford). It makes it more difficult to make significant or sudden changes in products. And see the point below about this being a significant barrier to entry. · Commodity-ish. Like any mature, highly regulated industry, the auto industry has some elements of commoditization, where the products from each manufacturer are very similar and compete primarily on price. Commoditization lowers margins a great deal and sets strict parameters on what profit-maximization strategies can be used. The auto industry is not fully commoditized, primarily because it is still an evolving market. New performance technology, better materials, manufacturing and distribution methods, new safety and emissions regulations, all mean the products are constantly evolving. The changes are often small, but an automaker can get a temporary advantage in one area with a new product before others catch up. There is also enough difference in what buyers look for in cars that some automakers can focus on specific niches (though that gets harder as they increase volumes). · Saturated (in the US). Pretty much everybody that wants a car has one, and many people have more than one. There are always people that can’t afford one, but unless somebody makes a cost breakthrough (difficult due to regulations, and competition with used cars) that’s not a market many are interested in chasing. New customers tend to come primarily from young adults buying their first car. (A recent development is that many young adults are waiting much longer to buy their first car). · Very difficult to break in to. Just discovering all the relevant regulations is a very daunting task, much less hiring people to understand and deal with them. You’ll need to spend around a billion dollars to develop your car, and then you still need funds for supplies and distribution before you can see any income. The market is already saturated and low-margin, and the existing players are very defensive; who wants to fund a new entry in to this mess? No wonder Tesla was the first successful US entrant in many decades. Foreign entrants to the market sometimes have help from their national government, or larger industrial parent company, or at least make a name overseas before trying to come here. · Dealers are real customers of automakers. While exact regulations vary by state, in general automakers CAN NOT sell directly to customers. (See the Miscellaneous Note on dealer-automaker history near the bottom of this post for more details). Most automakers HAVE to go through dealers…which means automakers can only make cars that dealers will sell. Automakers and dealers are aligned in many respects; the key difference has been that automakers are more focused on volume whereas most dealers prefer higher per-transaction profits. · Automakers push dealers towards volume. Automakers still have a fair amount of legal leverage, plus competing dealers of a single automaker form a clear commodity market that naturally drives out most dealer profit anyway. So while dealers don’t like it, volume is the primary focus (which is driving a dealer consolidation trend). In the US, most dealer profit comes from service, and then used-car sales, with new-car sales typically barely above breaking even. This means dealers do not want to spend more time and effort on any kind of sale; they like cars that are really easy to sell. And ideally ones that will need service. 3. Automaker strategies to maximize profits Given the industry, what does it make sense for automakers to do to try to maximize their profits? Keep in mind that these are strategies, not cars. Any car's purpose and use can have elements of more than one strategy. · Volume, volume, volume. While the number obviously varies, it typically costs about a billion dollars to roll out an all-new car – that’s fixed costs before you build the first one. If you only sell 10,000 cars, that’s $100,000 in overhead per car! If you sell 1,000,000 cars, it’s only $1,000 per car – much more manageable. In a low-margin environment, getting those costs down are key. So high-volume cars are extremely important to the automakers.o Current EVs are pretty low volume (and most automakers expected them to be lower than they are). Pretty much any new high-priced market would be. So for now, at least, automakers tend to focus on other strategies below for their EVs. This is the short reason why EVs are treated differently than mainstream ICEs. · Brand-building. As Proctor and Gamble and others discovered a few decades ago, you can prosper in a commodity market if you have a strong brand. Especially if you are in it for the long haul, as customers tend to be unreasonably brand-loyal. While some advertising is to drive buying a specific car, some is just to make the brand more attractive so you are more likely to pick their car over a competitor’s similar car. This is a lot of what racing and concept cars are about – making you think more highly of the brand. And much of the charitable and eco marketing.o Halo cars, an example of brand building. Halo cars are low-volume cars which wouldn’t make sense solely based on sales; but are also used to help improve perceptions of the brand. If Dodge doesn’t make a per-car profit on the Viper, they can write off the loss as a marketing expense to make customers think of Dodge as a performance brand. A halo car shows off what the brand can do, often with great looks and performance (though it could be another feature, like extreme offroad/towing ability, or record-breaking MPG). Because it’s not about volume, it can have a high price and low utility (i.e., 2 seats, a small trunk and poor visibility). It is much like a concept car, but by putting it to market it sends a stronger message and reaches a lot more than just dedicated auto enthusiasts. · Traffic-driving. Not everybody is brand loyal; and a surprising amount of car sales are impulse purchases (well, generally they know they want a car; but they often don’t decide which one until they are sitting in a car with a dealer coercing them). Both automakers and dealers benefit from having more potential customers visit showrooms. This is another reason for halo cars – even if most customers won’t buy them, a lot of people with go in to a showroom to check them out. They will be impressed by the automaker. And then, hey – what about that car over there? It looks practical. · Stealing share from others. Given the overwhelming importance of volume, getting more customers is key. In a nearly saturated market, the only real place to get them is from other automakers. Sometimes an automaker times a new development so they can introduce a car with a new feature ahead of others, and steal customers until the other automakers catch up.o Conquest cars, an example of stealing share. A conquest car is a new type of car for a brand to entice shoppers that would normally avoid the brand. The main idea is to win customers from other brands. The easy ideas for high-profit conquest cars have already taken, so often in practice this ends up being a low-profit model, like an eco car or something niche using a new expensive tech. While they desperately want the new customers, it would be counterproductive to cannibalize their existing higher-profit customers. So they try to carefully design the conquest car to make sure it only attracts new customers without diverting their existing customers – this often means a compromise, like reduced performance, utility or appearance. · Versioning. Like any other industry, the automakers want to get the maximum profit from each customer – they can produce cars with a wide variety of capabilities, and various customers can/will spend a wide spread of amounts on their cars. They want to put as much of the good stuff that buying decisions are based on as they can – good looks, performance, high utility, tech features, safety – in to the high-profit vehicles. But because volume is so important, they still want to sell a lot of low-profit vehicles to people unable or unwilling to spend more (often because their competitors are driving prices down doing the same thing). To increase manufacturing volumes while drawing more profits from those willing to spend more, they create versions of cars based on the same platform but that have a lot more goodies rolled in – and more than priced to match for the improvements. Automakers want to simultaneously compete on price with other automakers while enticing some customers to buy the higher-margin high-quality version. Appearance is easy to change (easier than, say, performance or utility) and the thing that consumers are most likely to be willing to give up for a lower price, so low-profit, high-volume cars are often less attractive than their higher-profit versions. Versioning can reduce the cost of any car, volume, halo, conquest, compliance, etc. Think of it as an ROI accelerator by reducing costs. 4. Risky strategies that automakers avoid Here are some strategies that automakers rarely follow because their industry structure tends to not reward them. · Take risks. The market tends towards evolutions rather than revolutions. It can take several years and a billion dollars to roll out a new car – if it’s very different are you sure people will buy it (and remember, you need a LOT of people to buy it)? What will the economy be like when it comes out? Will regulations have changed? What will the competition have produced in the mean time? With so much money at stake for so long, and so much uncertainty, and all for low margins - small changes that you know will help are a lot more likely to get approved than radical departures. · Be a first mover. If you are making any sort of change, you’ll have to bring all of your dealers up to speed. You’ll have to do a bunch of advertising to educate customers. It will take time for them to adapt. You will make mistakes and learn lessons along the way. And after you have spent all that time and money getting the market ready – your competitors will dive in and do the same thing you are doing. No one automaker wants to spend the time and money to get the whole industry prepared for a change. · Build cars their dealers don’t want to sell. The dealers are the only way for most automakers to sell cars, and if the dealers don’t order a particular car, the automaker is stuck – even if not with actual cars, then still with the enormous costs to launch a car. Often the automakers and dealers want to push pretty similar types of cars; the main difference tends to come from regulations where automakers are required to build certain types of cars – but dealers aren’t forced to sell them and customers aren’t forced to buy them. More on this in the next section. 5. How automakers are responding to EVs Elon Musk has said that when compliance cars were first sold in California (1998-2003), he figured electric cars were taken care of. But he grew concerned when the automakers canceled their programs in April 2003 when CARB rules were relaxed. In July 2003 owners that later formed Plug In America held a mock “funeral” for EVs, and Musk was struck by consumers holding a vigil for a product – “a GM product, no less”, Musk wryly noted. He said he knew then there would be a market for a high-quality EV. · Tarpenning and Eberhard founded Tesla Motors in 2003 (they bought the domain teslamotors.com the same month CARB relaxed its ZEV rules). Musk invested in 2004. Tesla announced the Roadster in 2006. · Bob Lutz’s book Car Guys and Bean Counters claims he was furious to learn in 2006 that some startup could make an EV with good performance and range when his team had been telling him it was impossible. He insisted that GM build another EV; he wasn’t really concerned about Tesla, but very concerned about showing up Toyota with its eco-cred from building the Prius. An employee convinced him that a PHEV would solve some problems (infrastructure, consumer reluctance, dealer reluctance) they experienced with the EV-1, and so the Volt was born. · CARB and CAFÉ regulations tightened again. Note that automakers are NOT required to build EVs – or anything at all, as they could always buy credits. However, they are required to meet these extremely complex set of ever-tightening regulations around emissions and fuel economy, and the general consensus is that this is already difficult without hybrids, and in a few years even hybrids won’t be enough. CAFÉ was originally about using less petroleum for national security and economic reasons, so alternatives like CNG might make sense. However, due to CA’s particular problem with smog, CARB rules are more about point-source pollution, which tends to narrow solutions down to EVs and H2. · CARB and CAFÉ are largely the products of well-meaning and hard-working bureaucrats. They are constantly and vehemently opposed by the automakers, who repeatedly say (sometimes honestly, sometimes not) the rules are too complex, too costly, and too optimistic about technology. The bureaucrats are under considerable and very understandable pressure to release “realistic” guidelines; but as they are primarily not engineers or automakers and not flush with time to investigate, it is sometimes hard for them to evaluate the automaker claims. It is common for rules to be relaxed, delayed, or to allow alternative approaches suggested by the automakers. This dynamic is still very much in play, but Tesla’s vehicles have shown that some pieces of what the automakers said couldn’t be done can actually be done, so CARB and CAFÉ may now be a little less likely to give in than they used to be. (However, they do still offer more credits for H2 cars than they do for EVs). · If an automaker doesn’t see a way to make money with low-volume EVs, but figures it is cheaper to build them than buy credits, the simplest way to proceed is with a new type of car – a compliance car. It is solely made to comply with the law; it is not a volume car so the automaker does not expect to make money (though even a technical loss per car is worthwhile; how much depends on the credit value). Now instead of making money on volume, they are trying to lose as little as possible by making low-volume cars. To keep costs down, they will put as little money in to development as possible – just expect a quick conversion of an ICE for a pure compliance play. · Of course, if you are looking to minimize your losses on a compliance car, you might as well dual-purpose the things and try to do something else for your brand. No car is purely a compliance car, just as no production car is completely a halo or conquest car – everything serves as many purposes as possible; these “types” of cars are just simplifying concepts. Can you make it a conquest car and try to capture some customers you never had before? (Automakers doing this all focused on eco customers, even though others might be interested in EVs). Can you make it a halo car and show off how green and/or high-tech your brand is? Remember that dealers don't like doing more work for less money, so they hate compliance cars, and aren't really interested in volume EVs either (if there were any). However, dealers might be interested in conquest cars because at least that's more work for a NEW customer that is in addition to their current customers. And they are likely interested in halo cars; they don't even really have to sell those, just park one in the showroom and when people come to look at it, try to sell them something else. · Very, very roughly speaking, large automakers without much green cred tend to make eco-conquest compliance cars. They tend to be kind of ugly to make sure they don’t cannibalize existing brand customers. High-end and/or small automakers tend to make halo EVs. · Automaker reactions are in flux. I have mostly described the first-generation responses above. As time goes on, automakers will have to do more, both to keep up with tightening regulations and to keep up with the competition. 6. Specific automaker examples They are not all taking the same approach, but so far none of them have really tried for a volume car – as you might expect in a conservative industry where demand was an unknown and nobody wanted to be the first mover. Nissan and BMW might be laying the groundwork for one. GM sounds like it with the Bolt, but doesn’t have the battery capacity for it really to be a volume car – they are using it to build their brand image. Many automakers first built a conquest car. That’s great, but once everybody has one, they tend to lose their effectiveness so we should be seeing different efforts in the future. · Nissan – the LEAF is largely a conquest car. Nissan announced the LEAF program the month that CARB stopped giving credits for H2 research (maybe late 2008?); it started as a conversion of a Versa. (The production LEAF platform clearly came from the Versa’s platform, but it has been extensively modified – Nissan calls it a new platform). They include a DC port. Nissan has been very clear at dealer events that the LEAF was designed to bring in new customers (i.e. from other brands), and help fill in the missing “eco” cred in the Nissan brand. At dealer events, Nissan has been proud of how well this strategy has worked. While it is also a compliance car and Nissan gets many credits for the LEAF, it is not primarily compliance as they sell it worldwide, not just in ZEV states. Credits aside, volume is not high enough that Nissan is likely making money on the car yet, but they may be close and seem determined to get there. Ironically Tesla may have slowed them down; they had planned an Infiniti sedan with the LEAF powertrain but shelved it - likely in anticipation of how it would look once the Model S was released. Their CEO has publically stated that to get larger volume (a key goal of his, so they can make a profit on the cars themselves rather than rely on credits, brand image, etc) they will have to produce better-looking and longer-range EVs. · BMW – i3 is a conquest car, i8 is a halo car. BMW’s Active-E program started the same month the LEAF program did for the same reason. It was a limited-term non-renewable lease of a converted Mini. Then they did the same thing with a converted 1-series. These test programs provided BMW with credits (they got the same credits for short-term test leases that other manufacturers got for selling cars) while they developed new materials, an all-new platform and new manufacturing methods for their “i” vehicles. They even have an optional range extender that turns their BEV into a PHEV, unique in the industry – especially given that they asked for, and got, a special rule to allow BEV credits for the PHEV (largely by limiting power and range in gas mode). They include a DC port. BMW has repeatedly said – not just to dealers, but at consumer events – that the i3 is not meant to attract existing BMW customers. Being an all-new platform and sold worldwide, it is clearly more than a compliance car; given the non-cannibalizing design, it is mostly for conquest (and it is working very well). The i8 PHEV, with its incredible looks, great performance, low utility and high price, is clearly a low-volume halo car designed to draw customers in to showrooms and build the brand. It appears that BMW is serious about their new “i” brand, and while they say they intend to offer PHEV versions of their entire product line, the initial conquest and halo cars neatly work around common dealer objections to selling EVs. Unfortunately BMW claims the “i” and “M” sub-brands will not overlap; they still see “I” cars as primarily for the eco-set and not for performance. · Chevrolet – Spark is primarily a compliance car; production is limited and it is only sold in ZEV states. (Though obviously where sold, it doubles as a conquest car). Lutz was very clear that he wanted the Volt to be a halo car to show GM could out-Prius Toyota; but the price had to be too low to be a good halo car given the Prius as a competitor, and costs were too high to make money so they weren’t excited about volume. They sold just enough Volts to barely claim PEV sales leadership until the Cadillac ELR (based on the Volt) arrived as a better halo car – better looking, more expensive, less utility. When the ELR arrived, GM announced that people should no longer expect the Volt to be the PEV sales leader, and sure enough, sales dropped. Since Lutz left the GM marketing team has seemed very confused about the first-gen Volt. They have clearly not been concerned about sales via the Osborne effect as they have been relentlessly touting how much better the 2016 Volt will be for well over a year now. But margins should be much better on the second-gens that just appeared this week so it will be interesting to see how they handle it. Though note that 2016s are (sigh) limited to CARB states; next March 2017s should (!) show up everywhere. GM is also making much hay about their up-and-coming long-range Bolt BEV; once again clearly showing that building their brand’s image is more important to them than sales of their current offerings. · Mitsubishi – the i-MiEV was a “survival” car. When Nissan and BMW announced their electric vehicle programs, US Mitsubishi dealers started clamoring for an answer from their brand. Mitsubishi had already been working on an electric kei car for the Japanese market. It hadn’t been intended for the US, but at the time Mitsubishi almost had to pull out of the US market and showrooms were nearly empty of vehicles and customers. Mitsubishi adapted the i-MiEV for the US market, included a DC port and made it available everywhere; aside from the Tesla Roadster it was one of the first EVs available. It was not intended as just a compliance car, but is not well-suited to the US market (appearance that plays better in Japan; very small size and short range –OK in Japan where DC stations are everywhere) so volumes have been very low. Mitsubishi has developed an AWD PHEV version of their Outlander CUV that is very popular overseas and could do well here too, but its US introduction has repeatedly been delayed as they can’t get enough batteries to meet demand. · Mercedes/Smart – the B class is a conquest car (low volume, conversion of an existing car, car chosen was not previously deemed suitable for US, typical compliance-car specs, no DC port), the SLS is a textbook halo car. The Smart ForTwo ED is also a conquest car; while technically available everywhere, it is low-volume, low-range, simple conversion with no DC port. · Kia – the Soul is a conquest car. It very nearly matches the LEAF, including a DC port and range above 2015 LEAFs but below 2016 LEAFs. They claim it will be offered everywhere, but was initially offered only in ZEV states. Very recently it became available at select dealers in a couple of non-ZEV states; word is a few non-ZEV dealers are clamoring for it as they see nearby Nissan dealers going gangbusters with the LEAF. · Ford – they are walking a fine line. They desperately don’t want to be seen as compliance car sellers, so their offerings are technically available everywhere – but only advertised in ZEV states, and good luck finding a dealer that offers one (and has it charged for test drives, and doesn’t try to talk you out of it) in a non-ZEV state. To their credit, they do have three offerings – a Focus BEV, and Fusion and C-Max PHEVs. All are very quick conversions (putting batteries in the trunk!) and none offer a DC port. No one car is a big seller, but collectively Ford is moving a fair number of PEVs and they haven’t spent much. It is possible (but only a rumor) they are biding their time and working on a long-range BEV in secret to be a fast-follower and not Osborne their current vehicles before the new car is ready. · Porsche – they are small enough they don’t have to sell BEVs yet, but they do sell PHEVs to improve their fleet MPG for CAFE and have been demonstrating some EV concepts to build the brand. · Volvo – they are small enough they don’t have to sell BEVs yet, but very recently introduced a high-end PHEV version of their new SUV, likely as a brand halo and to increase fleet mpg. · Chrysler/Fiat – their Fiat 500e is a fairly pure compliance car. They converted an existing car, did not include a DC port, and only sell it in California. The Fiat CEO has been very vocal that he does not want to offer this car, and says he is losing a lot of money on each one (of course, it is low-volume; and it is still obviously worth doing for the credits). However, the car is an extremely nice driver, had class-leading range when introduced, and selling dealerships included a nice kiosk with a phone direct to headquarters so potential customers could talk directly to Fiat rather than asking dealers questions about the car. · Honda – their Fit EV was a pure compliance car. They converted an existing car, did not include a DC port, only leased (it was not available for sale) it in California, and stopped making it as soon as they’d sold the minimum number. · Small automakers like Mazda and Subaru – CARB doesn’t apply yet; so they are doing nothing. Well, they did petition CARB to delay the requirements so they could keep doing nothing longer. · Toyota – they have the most to lose as EVs both cannibalize current hybrids that they are the leaders in, and future H2 cars that they hope to be the leaders in. Their 2[SUP]nd[/SUP]-gen RAV4 EV was the strictest example of a compliance car available; it was a quick conversion, had no DC port, sold only at select dealers in 4 metro areas in CA, they stopped producing them when they reached the minimum number, and they went beyond other manufacturers to warn dealers outside of California that they would not honor warranties on RAV4-EVs unless they were in California. They built a Prius PHEV, but it had the world’s lowest EV range, a ridiculously high price, their executives wondered aloud “why they made it”, and was only advertised in California to take advantage of HOV lanes while PHEVs were getting stickers. They have repeatedly trash-talked EVs, both in interview and advertisements, and have helped start an H2 consortium that has hired popular EV industry writers to promote H2.