21 02 2019

Electric cars are too expensive

Thomas Edison and an electric car in 1913 Thomas Edison and an electric car in 1913 https://commons.wikimedia.org/w/index.php?curid=971201

Electric vehicles are presently ridiculously expensive. Could be the cost of the battery, couldn’t it? That is only part of the explanation. The other is scale: the production volume is too low to secure economies of scale. And to this comes a lack of competition: existing car producers are not really interested in selling quantities, as they will cannibalize their own profitable traditional car business. The answer is regulation and more competition. Not more subsidies.

I have made a quick and dirty (and absolutely unscientific) comparison of prices between electric and conventional cars, based on the announced prices on the car companies’ websites in different countries. Apart from the battery, electric vehicles should be cheaper to produce, as an electric motor is much simpler, there is no complicated gearbox (only one gear, you switch to reverse by changing the direction of the electric current), no exhaust pipes, no catalytic converter, no engine cooling system etc. How much cheaper the electric vehicle is to produce is difficult to say, but according to Bloomberg New Energy Finance, it may be around 4-5,000 USD in savings for an average car. So we would expect the price of an electric car to be the price of a comparable conventional car, plus the cost of the battery pack, minus 4-5,000 USD (we shall use 3,000 USD in savings in the following to take a conservative estimate).

And how expensive is the battery pack? That is a commercial secret, but it seems that at end 2018 the price of the batteries was around 150 USD per kilowatt-hour (kWh). Then the batteries have to be put into a battery pack, which in most cases includes a liquid cooling system so the batteries don’t get damaged by excessive heat during fast charging and discharging, estimated to cost around an additional 40 USD per kWh. This gives us a total cost of the battery pack of around 190 USD per kWh (Bloomberg New Energy Finance thinks it is only 176 USD, but let us stick to the 190 USD). So for a car with a 40 kWh battery (like the Renault Zoe or the Nissan Leaf) that would add around 7,600 USD to he price. From this should be deducted the savings as it is cheaper to produce.

Let us start taking a look at the VW Golf that exists in both conventional and electric versions.

As it can be seen, there is a solid price premium if you want to go electric, from 23% in the US to 47% in Germany. Not a big surprise the Germans haven’t flocked to the eGolf. The car companies will probably argue that the electric cars have more extra options included (this obscures any comparison), but that can’t explain the enormous difference.

By Vauxford - Own work, CC BY-SA 4.0.By Vauxford - Own work, CC BY-SA 4.0.

 It does not look much different if we take a look at the Renault Zoe, the most popular electric car in Europe (it is not sold in the US), and compare it to the somewhat similar Renault Clio.

Seems Renault has the same strange policy as VW to rip of the customers in their home market.

A comparison between the Nissan Leaf and the somewhat similar Nissan Pulsar gives similar results (not included here). But let us take a look at one of the latest entry in the electric vehicle market, the Hyundai eKona, which has been much lauded and includes a bigger battery pack giving it a longer range (64 kWh for a range of more than 400 km), something the Nissan Leaf 2.0 failed to do, when it was introduced in 2018, deceiving many of its loyal customers.

By EurovisionNim - Own work, CC BY-SA 4.0By EurovisionNim - Own work, CC BY-SA 4.0

The price comparison below indicates that Hyundai is not really serious either in pushing for a mass market for electric cars. They treat the UK and US markets a bit more gently, but go for a rip off of their German and French customers.

 

You may ask why the car companies are doing this. Do they really not want to sell electric cars? The short answer is no. They are happy selling conventional cars, which produce the revenue for their business, but at the same time they want to have a toe in the electric car business. And as it is an industry with few companies involved, all have the same motivations and there seems to be a tacit agreement not to rock the boat too much. They are embracing the future, but very slowly. Perhaps hoping the future will never come, perhaps just trying to stretch the high cost of developing the electric cars over more years.

That the emerging electric vehicle industry has a problem with too small scale is obvious. But how can it be, when electric vehicle production apparently is soaring: Half a million plug-in vehicles produced in 2015 and more than 2 million in 2018? This is so because production is scattered over many producers, and none of them have until recently had a scale that is worth mentioning. Take the case of the pioneer Nissan Leaf, until recently the world’s best-selling electric vehicle. Around 87,000 Nissan Leafs were sold in 2018. Sounds as a lot, but for the car industry this is nothing. For a comparison, almost 1.2 million Toyota Corollas were sold that same year. The Leaf doesn’t even appear on the list of the 100 most sold cars in 2018. Number 100 on that list is Roewe RX5, a gasoline SUV you have probably never heard about, produced by the Chinese company SAIC, which sold 234,000 units in 2018 (exclusively in China).

More than half of all electric vehicles are presently produced in China, but also there the production is spread out over an incredible number of vehicle manufacturers. The best-selling electric car was the BAIC EC-series, a tiny city car with low range, which sold 91,000 units in 2018. The Chinese company BYD, which has electric buses on the street in many parts of the world, is often mentioned as a rising star. But truth is, they are mostly producing gasoline and hybrid cars. Their best-selling purely electric car, BYD e5, sold only 46,000 units in 2018.

There are subsidies for electric cars in many countries – or tax exemptions. However, as shown above, the subsidies seems to have been appropriated by the car manufacturers through excessive pricing. More subsidies are not likely to change that. What is needed is more competition.

Now, it is difficult to promote competition when the barriers to competition are inherent in the industry structure. The other tool possible is regulation. California has a regulation system that has inspired a similar system in China. Automobile manufacturers in China shall from this year produce a minimum percentage of low-emission vehicles. If they fail to do so, the companies have to either pay a fine or buy credits from other companies that are over-performing. This system gives a clear advantage for zero-emission vehicle producers. How well it will work is yet to be seen. But some sort of regulation is no doubt the way forward.

The other hope for faster change is that serious competition will come from companies outside the car industry, or that some of the existing companies break ranks and try to scale up production radically, even if it implies losses in the short run. We shall take a look of that in the next article.

To read the nex article, click here.

 

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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