Who Killed the Electric Car? Economics.

Chris Haak

In spite of the relentless hype that the electrification of the automobile has generated over the past few years, culminating in the nearly-simultaneous launches of both the Nissan Leaf EV and the Chevrolet Volt extended-range EV, a new report by J.D. Power and Associates (via CNNMoney) seems to drop a wet blanket on the EV’s prospects for success over the next decade.  In short, the notion that the mix of new-vehicles will be anything other than very heavily weighted toward internal combustion is little more than a pipe dream.

Power projects that hybrids and plug-in vehicles of any kind will make up just 7.3 percent of global automotive passenger-vehicle sales in 2010.  Even more dramatic, though, is the fact that the majority of that number is comprised of hybrids like the Prius, Camry Hybrid, Fusion Hybrid, et al – in other words, cars that aren’t plugged in ever.  If you take those non-plug-in hybrids out of the mix, it drops to between one and two percent of the US market.

Considering that the US, along with Japan, is one of the markets that have embraced hybrids more than others (Europe still loves their diesels), it seems likely that in a global view, PHEVs and EVs would be holding an even smaller market share than they do in the US.  In developing nations, like India, where cheap transportation is the key, and cars like the $2,500 Tata Nano are extremely simple – and certainly have no electrification other than their standard vehicle electrical system that powers the starter and runs accessories, if any.

It seems that the issue is one of economics.  Fuel prices are relatively inexpensive in the US, and the payback period of a hybrid (the point at which lifetime fuel savings exceeds the upfront differential in the car’s cost versus a comparable non-hybrid vehicle) often exceeds the length of tme that people own or lease a new car.  According to Power, among the group of US consumers who claim to be initially interested in buying a hybrid vehicle, once those consumers learn of the $5,000 price premium on the hybrid model, half of them run away and look at non-hybrid cars.

The higher that global petroleum prices go, the shorter the payback periods, and the more economically viable a hybrid or EV becomes.  With the volatility of oil prices over the past several years, we may be one price spike away from again seeing waiting lists for the Prius and others.

Another factor that could swing the pendulum more in favor of EVs is if there was some sort of technological breakthrough in hybrid technology that allowed manufacturers to add the technology to cars with a much smaller premium.  Battery technology is improving by leaps and bounds, and the software to control the application of power and manage the complex battery packs improves all the time, so this could potentially happen.

The third variable cited by J.D. Power is government incentives.  The Federal government already offers a sizable $7,500 tax credit on vehicles such as the Leaf and Volt, bringing the Volt’s price premium versus the similar non-hybrid Cruze down to a more palatable level from the roughly $16,000 premium separating the cars without the tax credit ($41,000 for the Volt versus $25,000 for a loaded Cruze).  Some state governments are joining in on the act, as are come local municipalities, and even a few companies offering incentives to purchase hybrids or EVs.  Google offered employees $5,000 toward the purchase of a hybrid car for years, but discontinued the program a little while ago.

Consumers are also concerned about the long-term economics of cars with large, expensive batteries.  As anyone with a laptop or cellphone can tell you, batteries eventually lose their capacity to hold a charge, and have to be replaced.  That potential replacement cost is apparently weighing on some consumers’ minds, and may potentially harm resale value.

Finally, there’s the issue of “range anxiety,” a term that General Motors is working on trademarking in its drive to market the Volt, and appeal to potential Leaf intenders who may be put off by that car’s 100-mile range, followed by a multi-hours recharge to continue driving.  More than five decades after the creation of our interstate highway system, and three-quarters of a century after Route 66 was first established, Americans still embrace the romance of having the potential to hop into their car and drive anywhere they want to, stopping only for a few minutes every few hours to top off the gas tank.  For this reason, the Volt’s “backup” gasoline engine is probably more appealing to Americans, though its nearly $10,000 price premium over the Leaf certainly goes on the Leaf side of the ledger.

The lesson in all this is that, amidst hype, take a step back, and consider whether the economics of an electric car make sense to you.  If they do, and you’re not concerned about range (or it’s a second, or third car in your fleet), then go for it.  If the economics don’t make sense, just sit tight to see if they ever do (such as with better tax incentives, higher oil prices, or a lower price premium for the technology).  Or, you could always embrace the EV as part of your contribution to improving the environment and reducing our country’s petroleum addiction.  For some, that might be an invaluable benefit of the EV.

Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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1 Comment

  1. If the only incentive for buying a car was the economics of it, then everyone would buy a Dodge Caliber! Why people buy a $40,000 car when they could happily drive a $30,000 car! Some people like to pay $1000 for leather seats, or $10,000 more for getting to 60MPH in 5 seconds! People pay more for organic food. No one questions the economics of these decisions. Similarly, I don’t think any company advertised EV as a way of saving money. EV just uses zero or very little gas. That is what is important for many drivers (for reasons you mention in the article), and they are willing to pay more for it.

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