Finding the Right Market for the Electric Car
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The economics of the electric car rest on a flawed model; namely the ownership model. When an individual purchases a car, one takes a stake in the continued value of that car. When we pay a big premium for a vehicle, we expect that it will remain valuable for some time. For a new electric car, the battery accounts for a significant amount of the entire price. For example, the Focus Electric by Ford (NYSE: F) sells for $39,200, and according to CEO Alan Mulally, the battery accounts for $12,000 - $15,000, or 30 – 40%, of the entire retail price, before subsidies. And battery prices are falling fast – costs are down by 30% since 2009 and should continue falling. While this is great for future buyers of batteries, it's terrible for people who own, or are considering owning, a battery today. A vehicle is a big investment for most families, with Americans owning new cars for an average of six years. It's very difficult to sell a product to someone when the most valuable part of that product will lose value so quickly.
Tesla Motors (NASDAQ: TSLA) has approached this problem by selling ultra-luxury cars. This allows them to cultivate a clientele that is not very price-sensitive, and also creates the potential to bring battery costs as a percentage of total costs down, as other systems in the vehicle come with a big price tag. Tesla is also offering its customers the option to pre-purchase a replacement battery after seven years for $12,000. Compared to the $109,000 sticker price of the car, this is a relatively small price to pay to ensure that the vehicle keeps its value. But even if this solution works for Tesla, is it scalable?
Private venture Better Place takes the idea of a pre-paid battery replacement to new heights. The group proposes regularly replacing battery packs at “switch stations,” swapping depleted batteries for freshly-charged ones as needed. Switch stations would store many batteries onsite and use massive mechanical claws to remove and insert battery packs. Consumers would own their cars, but lease the batteries, paying a subscription that covered all aspects of getting a full battery. The major problem with this approach is the massive capital costs: each switch station costs upwards of $500,000. Since all costs are planned to ultimately be recovered through battery subscriptions, this means that each individual switch station must service a very large number of customers before the project was profitable. Better Place has suggested that to get around this, it could start out by providing services to large, centralized customers like car-sharing services. But a car-sharing service would make the business model redundant: Better Place allows people to own cars without owning batteries, but firms like Zipcar (NASDAQ: ZIP) share the entire car in the first place.
Earlier this year, Zipcar launched a pilot program using electric cars in Chicago, planning to add 25 electric vehicles to its fleet through 2012. I think this bodes well, and believe that Zipcar and other sharing services will be the primary market for electric vehicles in the near future. In a business model that sells transportation as a service, the depreciation of assets like the battery don't factor into a customer's decision. The car-sharing company can mitigate this depreciation by spreading out their purchasing. Whereas an individual needs to buy one car to last several years, fleets with hundreds of vehicles can slowly phase in newer models, charging less for vehicles as they age. Zipcar and its competitors don't need to worry as much about the resale cost of the electric vehicle, because with regular and professional maintenance they can use the car over its entire lifecycle. Car-sharing is a natural fit for electric vehicles: the typical trip in a Zipcar is well within an EV's range, the requirement to return the car to a particular place reduces the necessity to build out excess recharging stations, and down-time between customers can be used to recharge the vehicles.
Using traditional EVs also saves car-sharers from having to deploy the expensive infrastructure of the switching method, and allows them to take full advantage of existing technology and vehicle options. Better Place's plan not only includes costly stations, but since the group uses a sole-provider approach for its vehicles, their stations can only accommodate the models that Better Place has custom-ordered from its manufacturing partners: a grand total of three. Car-sharers face no such restrictions, and indeed for its pilot program Zipcar plans on buying regular, marketplace Chevy Volt gas-electric hybrids from General Motors (NYSE: GM).
If successful among car-sharing services, further expansion markets could include taxis and rental services. These markets would provide electric vehicles a long runway of growth, during which we might expect battery costs to begin stabilizing, and recharging stations to proliferate. This, finally, would make electric vehicles make sense for the mass market.
Daniel Ferry owns shares of General Motors Company and Zipcar. The Motley Fool owns shares of Ford, Tesla Motors , and Zipcar. Motley Fool newsletter services recommend Ford, General Motors Company, Tesla Motors , and Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
