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Should Car Companies Make EVs?

Electric Cars Have Generally Been A Big Money-Loser. Why They’re Still The Future.

BY Thom FainFebruary 14, 2019

When GM announced the closure of multiple plants in Ohio late last year, more than a few eyebrows raised when Tesla CEO Elon Musk talked about buying them so they could be refashioned into factories for his lineup of American-made electric vehicles.

Was this a true watershed moment in automotive and a sign that EVs have officially become the heir apparent to gas-powered cars?

Not likely. Musk has yet to act on the idea, combustion vehicles aren’t going anywhere, and Moody’s reports that manufacturers are actually losing billions on making electric vehicles—to the tune of several thousand dollars per car. Even the Chevy Volt—one of the most celebrated of the new generation of EVs—was recently discontinued.

But here’s why even significant monetary losses aren’t enough to derail the electric vehicle revolution.

Profitability Isn’t The Point

Executives at major auto brands used to hope that EVs would just go away. In the mid-20th century, American carmakers invested heavily in the technology, only to produce a handful of models (GM Electrovair, anyone?). In the end, however, Detroit swatted aside the mega-expensive proposition of pursuing EVs for the simple reason that very few people actually wanted one—mostly due to anxiety over the vehicles' mileage range and other technological uncertainties.

These days, those technologies are considerably more certain.

“Today, our research and technology into using data sciences and understanding EV charging behavior makes EV charging very simple for the EV driver,” says Professor Rajit Gadh of UCLA’s Smart Grid Energy Research Center. “It eases the pain that drivers felt when EVs were introduced in the sixties, eighties and nineties.”

These kinds of innovations, coupled with concerns over climate change, have the demand for EVs surging. In fact, the number of EVs sold worldwide rose 77 percent from 2017 to 2018, cracking 400,000 EVs sold for the first time ever, according to Bloomberg. Statista shows even more impressive long-term growth, counting more than 1.9 million electric vehicles in use in 2017 compared to just a shade over 109,000 in 2012.

Design Guidelines (Will Dietrich's conflicted copy 2019-02-07).001 copy

While still representing just a fraction of the auto industry, this trend of increasing demand also means companies can no longer afford to ignore EV technology—no matter what it costs them in the short term.

Spending Money Is A Strategy

In business, sometimes the best move is to take a cue from the Cold War and the board game Monopoly: Spend big and drive the competition into the ground.

It does work. Tesla was roundly ridiculed for its early cash-burning strategy—only to slow down its spending as it achieved market share. Later on, it stunned market analysts by posting a quarterly profit in October 2018 after Model 3 production was ramped up.

And as the bigger auto manufacturers retrofit their traditional supply chains to meet the needs of EV production, industry observers say the massive infusion into EVs will actually enable cheaper technologies in the future—including software, sensors and battery management systems.

In other words, the massive investment required to produce EVs at scale isn’t scaring anyone off. Even Chevy, which discontinued the Volt, did so while simultaneously announcing a massive acceleration in its EV investment.

“Battery technology is advancing, becoming cheaper, lighter, and more efficient over time,” says Gadh. “If technology improves and lowers the cost of an EV, then the savings would benefit both the consumer and the manufacturer.”

The Past Determines The Future

In a very real sense, the repeated fits and starts of the EV industry are more likely to be contributors to its eventual sustained success than evidence of its futility.

Automakers explored EVs in earnest in the 1970s as a reaction to the energy crisis, but those efforts were largely sidelined as the world’s oil markets stabilized. In the ‘90s, GM revived its efforts to create a viable mass-produced commercial electric vehicle in the form of the storied EV1, which was eventually abandoned in 1999.

These two chapters had tech reporters ready to pronounce the electric car as dead as recently as 2007. And then came Tesla, which has unleashed the breakthrough the industry has seemingly always been looking for.

The result? An estimated $255 billion in research and development for autonomous and electric vehicles and more than 200 EV models expected hit the market by 2020, according to AlixPartners.

“The success of Tesla in the USA has resulted in EV startups that have received healthy amounts of funding around the world,” Professor Gadh says. “Now Detroit has also announced a healthy number of electric vehicles. Meanwhile China has a greater number of EVs than even the U.S., and the virtuous cycle of innovation is expected to result in further decline in production cost of EVs worldwide.”

For companies that stay on the EV path, much of that innovation cost is expected to begin translating into profits in the next decade.

The question now is around where this transformation will be centered. According to AlixPartners, there’s fierce competition among Asian, European and American automakers to seek the crown of the electric car market.

“The greater the number of EV manufacturers, the more the competition, the more efficient the supply chains and markets, the faster will be the innovation cycle,” Gadh says. “I believe the 2020-2030 decade will go down in history as the EV revolution decade changing forever the automotive landscape of our planet.”

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