Drive the streets of Silicon Valley and you’ll see disproportionate numbers of electric cars gliding around. The wonders of both computer technology and electric vehicle technology appeal to the same brainy, forward-thinking people. But when it comes to making the products more universally accepted, they are anything but similar.
“Moore’s Law,” named for Intel co-founder Gordon Moore, postulates that microchip performance doubles every two years without an increase in cost. However, the same law that drives down the price of your iPhone does not apply to the lithium ion batteries that are at the heart of electric vehicle technology.
John Paul MacDuffie, professor of management at Wharton, says battery technology has been slower to evolve. While electric cars have made meaningful progress in recent years, they have not yet reached the price point that will put them in most driveways around America. “The moment for a tipping point for electric vehicles is not here — yet again.” But there are also “some developments that make me think it’s not back to zero.”
Wharton’s Mack Institute, where MacDuffie is director of the Program on Vehicle and Mobility Innovation, held a forecasting challenge in 2016 to predict when electric vehicles, as well as self-driving vehicles, will reach the point of mainstream adoption. The questions included projections of sales and covered such models as the Nissan Leaf, the all-time best-selling electric vehicle in the world. Relatively speaking, it’s a modestly priced electric vehicle which is benefitting from federal and state subsidies. But Leaf sales are dropping instead of increasing, clearly not at all what Nissan was expecting, MacDuffie notes.
Meanwhile, Tesla has had more encouraging news. The company will come close to its projection of 80,000 units sold in 2016, MacDuffie says. Elon Musk’s company has been ambitious, projecting it will make 500,000 cars per year by 2018.
“The industry may decide to back away from all the things they’ve been investing in for the last five-to-eight years.” –John Paul MacDuffie
Another question in the forecasting challenge was about whether battery prices would drop to a certain level, and another was about policy changes, which largely stalled during a presidential election year, MacDuffie said. It turns out that, generally, for the questions on the challenge, “more of them have been trending toward the ‘no’ end of the answer rather than the yes.” The Mack Institute plans to do the challenge again this year.
Three Stumbling Blocks
There are three moving but related parts to the electric car purchasing value proposition, says Rahul Kapoor, also a professor of management at Wharton. Kapoor has been collaborating on the forecasting challenge with MacDuffie and Wharton management professor Philip Tetlock. The first is the price of the car itself. With cost-benefit analyses, that price is still high — for instance, the Tesla Model 3 will have a starting price of $35,000 — and gas prices are still relatively low, providing less financial incentive to go electric, Kapoor notes.
The second is consumer “range anxiety,” which is the phrase used to capture concerns that drivers would be left stranded by the side of the road because the electrical charge on their car would not be strong enough to get them where they were headed. The Tesla Model 3 will have a range of about 215 miles, much more than models like the 2017 Nissan Leaf, which offers 107 miles of range.
“You can solve the range anxiety problem,” Kapoor says. But “that’s raising the price of the car itself.”
So, a significant development for electric vehicles recently has been the creation of models with longer ranges, says John Voelcker, editor of GreenCarReports.com, who acknowledges that the new Tesla model is a big improvement. The range of most electric cars has been enough to get to and from work and to do some errands, but “if I have to take my kid to the hospital in the middle of the night, I might not have enough battery. That just wipes out consideration.” But a 200-mile range may be enough to eliminate that range anxiety. The Chevy BOLT EV, a 2017 model, has a rated range of 238 miles. It isn’t high technology — it’s a much bigger battery, says Voelcker.
The third challenge, according to Kapoor, is the charging infrastructure, which has not emerged as quickly as expected. In an article that Kapoor wrote with Ron Adner for the November edition of Harvard Business Review, “Right Tech, Wrong Time,” they note that it isn’t just the power or price of a technology that determines whether a product catches on. It’s also the “ecosystem.” For instance, while HDTV technology was developed in the 1980s, it took about 30 years to create the infrastructure to support that technology going into homes nationwide, they say.
In this case, as good as electric cars have become, charging stations have not become universal, they write. Existing gasoline-powered cars, meanwhile, have shown “robust resilience” as they show better emissions performance, Kapoor says. Thus, the value proposition for electric vehicles is not improving at a high enough rate, at least for the mainstream market, he adds.
In Voelcker’s view, a lot of people erroneously treat an electric car like a piece of consumer electronics. Lithium ion batteries are far different from microchips, he said.
“You can solve the range anxiety problem. But that’s raising the price of the car itself.” –Rahul Kapoor
Nevertheless, they will advance in efficiency much more quickly than gas-powered cars going forward, and there has been notable success in efficiency over the years, even if it so far falls short of sending electric cars into the mainstream. For example, in 2012 a Tesla with a 60 kilowatt-hour battery pack sold for $65,000; today, a 2017 Chevy Bolt EV with the same size battery pack costs about $37,000, before government incentives. “Now you can get the functional equivalent of a Tesla, from Chevy, for the price of a Nissan Leaf six years ago. That’s pretty rapid advance,” Voelcker points out.
The most inexpensive electric cars are in the $20,000-$30,000 range, and Voelcker predicts that manufacturers will follow the Tesla model of offering a range of battery sizes. “There are people who think 100-120 miles really is fine.”
Odds of Reversals?
More generally, the electric vehicle industry has benefitted from government standards pushing for cleaner vehicles, as well as subsidies. Both have had the blessing of President Barack Obama, but observers say President-elect Donald Trump may be unfriendly toward such initiatives.
The EPA enacted restrictive fleet mileage requirements during the Obama administration as it emerged from the automakers’ bankruptcy cases, MacDuffie notes. The requirements are that the average fuel economy of new cars and trucks, regardless of their power source, must be 54.5 miles per gallon by 2025.
If the new EPA administrator decides to back off from those goals, “it won’t happen immediately, but the industry may decide to back away from all the things they’ve been investing in for the last five-to-eight years,” MacDuffie says. Or they may decide they expect the political pendulum to swing back, and to continue those efforts, maybe only in their labs on a long-term basis, but to continue them nevertheless. “It may be more of a slowdown than a wrench in the works, full-stop.”
Observers also say electric vehicle sales have benefitted from robust — and often inconsistent — government subsidies, including a federal tax credit of up to $7,500.
Although Tesla has come under scrutiny for the subsidies that apply to its sales, the federal subsidy only covers the first 200,000 vehicles sold by any given company, MacDuffie points out. Last year Tesla sold roughly 50,000 vehicles. After this year, it will be getting close to the subsidy cap, he adds. Chevy, too, will be ineligible for subsidies over the limit before too long.
MacDuffie also explains that it is unclear what will happen to state subsidies in the Trump era. If a new EPA administrator wants to prevent states from doing anything to promote electric vehicles, “a lot of mischief could be done in that area. But there is a states’-rights logic to some of the opposition to the strong federal government role. It will be very spiky.”
State-specific emissions requirements, such as those in California, are a “back-door” way for states to force automakers to innovate, regardless of what the federal government does, says Arthur van Benthem, a Wharton professor of business economics and public policy. Meanwhile, renewable energy in theory should mesh with Trump’s agenda, which includes creating high-skill jobs in the U.S., and rules that support renewable energy have proven popular to voters in states that supported Trump, he adds.
What’s more, it would not be easy to cancel President Barack Obama’s Clean Power Plan and fuel economy standards that favor electric vehicles, according to van Benthem. While Trump’s administration could defund the EPA to make it harder to check compliance, “I don’t think it’s very likely most of these regulations will disappear from the books in the next couple of years,” he adds.
“The problem is not that the car companies don’t want to build them, but that people don’t want to buy them.” –Morris Cohen
Van Benthem also notes that the government may have been too aggressive in subsidizing electric vehicles, which have been treated as zero-emissions vehicles even though they run on fossil-fueled grid power. There’s a good rationale for the government to support building up clean energy technology, but “we’ve probably gone a little too far in picking a winner and blindly subsidizing fully electric vehicles.”
As far as subsidies go, “it’s more about the option value for the future than rewarding actual zero-emissions vehicles today,” van Benthem says. In the future, wind and solar could make up a larger share of grid power, which would help electric vehicles realize their zero-emission potential.
The bottom line, however, seems to be that until the price of electric vehicles come down, people will be reluctant to buy them, since most are unwilling to pay a premium for green technology, according to Morris Cohen, a professor of operations, information and decisions at Wharton. People are driven to buy a car, he says, to get from one place to another. Still, Cohen is guardedly optimistic about the industry as more manufacturers offer electric vehicles, including some high-performance models.
“Basically, the problem is not that the car companies don’t want to build them, but that people don’t want to buy them,” Cohen notes. “They’re more expensive for the same function of car.”
Article by Knowledge@Wharton