President Barack Obama announced the next steps to help General Motors and Chrysler Monday—after about six weeks of deliberations by the president’s auto task force. One of the advisors to the task force, the Boston Consulting Group, recently issued a report, “The Comeback of the Electric Car?” HybridCars.com Editor Bradley Berman spoke with Xavier Mosquet, the lead author of the report. His views might reveal how fuel efficiency, hybrids and electric cars could play a role in the car manufacturers’ recovery efforts.
General Motors and Chrysler have both used plans for electric cars, in various stages of development, as evidence of an ability to turn the companies around and to demonstrate technology leadership. While it’s uncertain how the task force is responding to BCG’s guidance, the consulting group is clearly skeptical about the business case for electric cars.
Bradley Berman: There’s been a lot of recent news and excitement about electric cars, despite the current environment of low gas prices. What message do you think the consumer is taking?
Xavier Mosquet: I think consumers are saying, “This is great. I want a cheap, long-range, comfortable, electric vehicle.” What nobody is telling these people is the true additional cost of an electric vehicle. Unfortunately, this is far higher than people will be able to afford. I’m not suggesting that we should not do some of it. But the environment is clearly not set for big development of electric vehicles.
In your forecast, under the most likely scenario for the North American new car market in 2020, you have 29 percent as either hybrids and plug-in hybrids, with another 3 percent as full electric vehicles. How do you describe that growth pattern?
For North America in 2020, we believe 25 percent of the vehicles will be [conventional] hybrids. Out of the 25 percent, we believe two-thirds will be mild hybrids, carrying an additional cost of $1,000 to $1,200 versus a typical comparable car. And one-third will be full hybrids. So, if you look at the full hybrid market, it will probably be around 1.5 million full hybrids [out of a projected North American market of 20 million].
Well short of, for example, Toyota’s goals.
We may be wrong. It may depend on how high the fuel prices will be. It will depend on whether or not there are tax incentives. And it will also depend on what the next CAFE standards are. There is an extreme pressure on carmakers to average out the cost of vehicles to meet higher standards. For example, they will have to subsidize electric cars by increasing the cost of their traditional cars, because somebody will have to pay for it.
That’s the theme of your report, that somebody has to pay for electric cars and hybrids. And that costs are not reflected in the purchase price, that there are very low profit margins or that automakers are selling the cars at a loss.
The evaluation we made with automakers and suppliers is, that if you look at the current costs, and look at what it can be—unless there’s a major technological breakthrough—those technologies will remain a lot higher in cost. And they you’ll need relatively higher fuel prices for it to be attractive to consumers. A lot depends on that.
And yet there is a mad rush toward electric-drive vehicles, including hybrids.
If you look at the report, hybrid vehicles versus advanced diesel vehicles become more [cost] efficient at $160 per barrel. We were close to that last summer. This triggered a crisis. But right now, we are $45 or $50. You look at a full electric vehicle, if you just look at the cost of ownership, it’s $280 per barrel [to make them reasonable].
I see a lot of figures going back and forth on battery prices, but we tend to come back to the hypothesis in the report, there’s no new news. People speak about leasing batteries. Leasing is fine, but with leasing, you still need to pay for the batteries.
You have the cost of batteries pegged at $2,000 per kilowatt-hour.
You’ve probably seen GM’s assertions that the battery costs for the Chevrolet Volt are $500 to $700.
I don’t think this is the current cost of those batteries. This may be one of the projections. I think it’s low.
It makes the Chevy Volt seems completely crazy if you’re right. [Note: At $2,000 per kilowatt-hour for batteries, the $40,000 Volt will come with a $32,000 battery.]
Yes and no. In terms of price, yes. It makes the Chevy Volt expensive. But through CAFE regulations, a carmaker will have interest to have more Volt-like cars on the street, if he wants to be able to sell SUVs and trucks. There’s no question that a GM or a Ford wants to meet the regulations, so they’ll have to have extremely efficient vehicles, to get CO2 credits to compensate for the light trucks they will sell.
Do you believe that Toyota is making money on Prius?
I don’t believe they are. I’m not saying they are losing money.
The fact that they are planning to introduce 10 more hybrids globally by 2012, does that strike you as odd if they are losing money?
If you want a cheap way to be fuel efficient, buy a car that’s half the size. Hybrids cannot compete with that. Most of the countries where gas prices are high, people drive smaller cars. The other thing is that diesel has been a fuel-efficient solution. That’s what many governments have been using as a solution. In Europe, for instance, there’s going be fewer hybrids, because diesel has already met the fuel-saving standards of the hybrids.
Do you see US consumers easily adopting smaller cars, especially considering that EVs, as your report says, will be primarily city [subcompact] cars?
Starting with the oil spike in 1973, every time there is a surge in oil prices, there is a surge in small cars. Last year was another one. People are very quick to adjust. If one way or the other, the gas prices are higher, it’s pretty sure that people would turn to smaller vehicles. The problem is—we’re seeing it right now with trucks and SUVs—as soon as gas prices go back to normal standards, sales shift again to larger vehicles. I believe through gas prices or different mechanisms, we’ll have to force the consumer into better buying patterns. I’m pretty sure we’ll see smaller cars in the US, notably in city environments, because this is where from a functional standpoint, having a smaller car has quite a few advantages. So, it’s not painful for the customer.
We’ll also probably see different business models in larger cities like New York and Chicago. Some cities may subsidize the use of electric vehicles—not necessary in ownership but something that can be shared or rented. You need a grid and a system for it to happen. I don’t think it works for a private investor, so I’m not sure there’s an actual profitable business model for a private investor, but for a city which is concerned about displacing environmental problems, and want the city to be a healthy place, I think this is a great solution.
In the report, you say that utilities don’t have much to gain from electric cars.
First of all, it’s a small [amount of energy that would be used by electric cars.] Unless people only charge at home at night, for those who have a garage, the infrastructure costs are high, as high as $20 billion to $25 billion. Somebody will have to pay for that, if the utilities will have to do it, it’s not a good return. The other thing, people who think about different business models, believe that to make it attractive, you probably need to subsidize the cost of electricity. So if you are a utility, what’s your incentive?
Given all of these factors, what’s your view of the amount of public money that’s being put to battery development and adoption of electric drive vehicles since Obama took office?
It depends on how serious we are about the planet. This is not about an economical choice. It will be in 50 years, when we run out of oil. This is going to start to be serious. But in a way, we could start in 20 or 30 years. Why do we want to start earlier? It’s not about money. This is where there hasn’t been enough discussion. It’s about spending money to be more environmentally friendly, because we think we have to do something about greenhouse gas emissions and make our cities healthy. It’s not about saving. It’s about spending more.
[These advance auto technologies] are not cheap, but many of things we do for safety and health are not cheap. You could compare it to a health care system. A health care system is not cheap, but do we want to go without it?
How do you reconcile the crisis facing the auto industry, and the full-speed-ahead approach for the most expensive technologies?
We need a clear path forward. That’s not only true for the carmakers in Detroit. We are putting demands on the automakers for spending that will not necessarily have good results. That’s not specific to GM or Chrysler. All of the OEMs have the same problem. They’re struggling today with having to fund technology developments which nobody knows when and how big the market will be. My recommendations to the carmakers and the suppliers that work with them is spread the risk. Try not to develop one technology for each of you. Work together, and at least they reduce the cost. They may reduce the upside for each of them, but they will reduce the downside if those technologies have slow adoption rates.
I would suggest to the government, and with a lot of humility, is to give loans. And we can also give grants.
Grants that require teaming?
Grants that require teaming so that it’s effective for the country. And if those technologies for any reason have slow adoption rates, it’s not too heavy on the profit and loss of the car manufacturers.
What’s been the reaction to Boston Consulting Group’s report on electric cars?
Two-fold. We’ve had a few people debating our hypothesis about the long-term costs of batteries, and coming up with more aggressive evaluations. That’s why we’re checking around the world. So far, we haven’t found strong evidence that the costs are different [than our current evaluation]. The other thing is a lot of extremely positive reactions, saying it was about time that someone shows the reality. Because otherwise we’re not making the right decisions.