Electric vehicles are being built because governments are mandating that automobile manufacturers build and sell electric vehicles. However, that does not mean consumers will buy those high-cost vehicles, particularly when the attributes of electric vehicles, which include low vehicle range and limited trunk space, cannot compete with those of petroleum-fueled vehicles. This means electric vehicle manufacturers are building vehicles the public is not interested in and are losing revenue as a result. For instance, Tesla Motors, an electric car manufacturer, recently indicated they would not earn a profit until 2020, two to three years later than expected. Low oil prices are exasperating the problem for electric vehicle manufacturers because consumers are purchasing roomy, powerful and safe petroleum-powered vehicles such as SUVs and pick-up trucks instead of government sanctioned electric vehicles. Additionally, the New York Times recently reported that electric vehicles retain the lowest resale values – at around 20 percent of purchase price – at the end of 5 years.[i]
State Mandates
A number of states (California, Oregon, New York, Maryland, Massachusetts, Vermont, Rhode Island and Connecticut) have mandates that set a floor for the electric-vehicle market. These mandates have made the United States the world’s largest market for electric vehicles with about 90 percent of them sold in these 8 states. The goal of these mandates is to have 3.3 million electric vehicles on their roads by 2025.[ii]
California mandates that a certain percentage of cars sold in the state must be electric (zero-emission) vehicles. They started with 2 percent by 1998 and increasing to 10 percent by 2003. To help automakers fulfill the mandate, California created a zero-emissions vehicle (ZEV) program where car companies could buy ZEV credits if they did not meet the mandate from auto manufacturers who exceeded the mandate.
The program was slow getting off the ground, but, in 2010, automakers began selling mass-produced electric vehicles, starting with the Nissan Leaf. Companies such as Tesla and Nissan reaped hundreds of millions of dollars from selling credits to auto manufacturers that did not fulfill their quotas.[iii] In the third quarter of 2014, for example, Tesla Motors earned $76 million on ZEV credits.[iv]
California along with the Federal government provided cash incentives to electric vehicle buyers, offsetting partially their high cost. California also allowed those buyers access to high-occupancy vehicle lanes so they could bypass rush hour traffic. California then helped other states to design programs that included incentives such as rebates, free city parking and in some places free charging.
Despite the revenues that Tesla is reaping from selling ZEV credits, it now does not expect to become profitable until annual auto sales reach 500,000, which may be in 2020, although expectations were that it would be sooner—in 2017 or 2018. Because of capacity constraints, Tesla delivered 33,000 of its Model S sedans in 2014, less than the 35,000 originally expected. But by 2020, the company expects to be making its own batteries at a factory being built in Nevada and producing its lower-priced Model 3. For this reason, it expects sales to increase to 500,000 cars, which would make the company profitable.[v]
GE Reduces Battery Production
General Electric just announced that it is cutting production and drastically reducing its staff at a battery plant in New York State that opened in July 2012. GE invested $170 million in the plant and expected to create 450 jobs by 2015. Rather than turning it into a billion dollar business as it originally thought, GE announced to its employees last week that it will be reducing the production rate at the plant and moving many of the employees elsewhere in the company, affecting about 400 employees. The employee transfers will begin on February 2 and others will be transferred through the end of March.[vi]
GE had predicted the business would reach $500 million in sales by 2015 and $1 billion by 2020, selling 10 million battery cells a year at full capacity. President Obama heralded the technology during his visit to Schenectady in 2011. GE received over $25.5 million in federal tax credits to open the plant. New York provided $15 million — $12.5 million from Empire State Development to help with renovations, site work and fit-up and $2.5 million from the New York State Energy Research & Development Authority. The Schenectady County Metroplex Development Authority awarded GE $5 million to help with project costs–a grant that will not have to be repaid, given GE’s commitment to retain the jobs.
GE will keep a core team of about 50 employees at the plant, but felt it needed to downsize and re-examine the technology due to weak demand for the product late last year. GE bought the technology from UK-based Beta R&D, which pioneered the development of sodium metal halide batteries in the 1980s, refined the technology, and began production in September 2011, before it officially opened the factory. GE hailed the technology as a breakthrough due to its energy density, low toxicity and ability to be used at any temperature anywhere in the world.
But, here again, because of low market demand, we see that governments are not good at picking winners in the technology field.
Conclusion
Recent events have made it more difficult for auto manufacturers to sell their electric vehicles. Their high cost, limited range, lack of trunk space, and other attributes have made it difficult to compete against petroleum-powered vehicles. Now, with the huge reduction in oil and gasoline prices, it is even more difficult to find buyers for these vehicles. State mandates, such as California’s ZEV program, are keeping the electric auto manufacturers in business. But as Tesla has found, the sales volume needed to make a profit is not yet there. While Tesla is building its own battery factory, GE has found that it needs to re-evaluate its battery business. Here again the government picked a winner that looks like it just may be a loser.
[i] New York Times, Low Gas Prices, Incentives Change Math for Electric Vehicles, January 21, 2015, http://www.nytimes.com/aponline/2015/01/21/business/ap-us-on-the-money-car-choices-.html?_r=1
[ii] Washington Post, Why cheap gas can’t kill the electric car, January 16, 2015, http://www.washingtonpost.com/opinions/why-cheap-gas-cant-kill-the-electric-car/2015/01/16/131341ba-9c10-11e4-bcfb-059ec7a93ddc_story.html
[iii] Clean Technica, Nissan, Tesla, and Fiat Sell the Most ZEV Credits in California, October 24, 2014, http://cleantechnica.com/2014/10/24/nissan-tesla-fiat-sell-zev-credits-california/
[iv] Driving the nation, Tesla ZEV revenue increases as hybrid sales stall, http://www.drivingthenation.com/lou-ann-hammond/tesla-revenue-increases-as-hybrid-sales-stall-its-not-easy-being-green-on-driving-the-nation/
[v] Bloomberg, Musk Says China’s Sales Fell, No Profit Until 2020, January 14, 2015, http://www.bloomberg.com/news/2015-01-14/musk-says-tesla-s-china-sales-fell-no-profit-until-2020.html
[vi] The Daily Gazette, GE to power down Schenectady battery plant, January 20, 2015, http://dailygazette.com/news/2015/jan/20/ge-reduce-battery-production-schenectady/?free
