Navigant Research Blog

Even If It Doesn’t Survive, the Tesla Vision Has Already Won

— December 14, 2017

Whatever the ultimate fate of Tesla as a business, the vision of its founders seems assured to come to fruition. They set out nearly 15 years ago to build an electric sports car that would show a skeptical public that EVs aren’t the car form of broccoli (good for you, but not much fun). The envisioned electric car would be a gateway to electrifying all transportation.

With every new job at an EV maker, we are moving closer to that goal. Sales of the Chevrolet Bolt EV climb steadily with each month, Nissan is about to launch the second-generation LEAF, and more options will arrive in the coming months. Perhaps most importantly, the future combination of automated driving and electrification will provide great synergy in making transportation clean and safe.

The Bolt and LEAF are examples of automakers taking inspiration from Tesla and mixing traditional expertise in mass manufacturing and support. These automakers and most others are now aggressively developing and planning deployment of automated EVs like the Chevy Bolts being tested in San Francisco, California by GM unit Cruise Automation.

Can Tesla Stay Afloat?

Sadly, Tesla’s own quarterly financial statements don’t bode well for the brand that kick-started this next era of mobility. The company has shown an inability to execute on the core task of profitably building consistently reliable, high quality products to customers. The 3Q 2017 report showed the company was spending more than $2,000 per year per vehicle providing service while only generating $1,000 in revenue. Given the reduced maintenance an EV should require compared to an ICE, this is a clear indicator of Tesla’s spending on honoring warranties. As the in-service vehicle fleet grows, this problem will grow rapidly unless the company can come to grips with the basics of mass manufacturing.

As Tesla attempts to ramp up production of the Model 3, it must first address these challenges—or the reputation the brand has built around Elon Musk’s cult of personality will be squandered.

The Quandary of Some Typical Tesla Customers

Take, for example, a Northern California couple that can afford to buy a Tesla, including the Model X they own. He loves technology and is the definitive early adopter, often buying the latest life-enhancing gadgets. His CEO wife is far more pragmatic, though she also appreciates what technology can do to make life easier and better. She wants to replace her current premium German performance car with an EV when the lease is up in the next month. On the surface, another Tesla would be the obvious choice, but they’ve had numerous issues with it that have taken multiple service trips to resolve. Some issues, like an Autopilot system that has a predilection for randomly shooting toward guardrails, remain unresolved.

They looked at the 2018 LEAF this week, and she is seriously considering it. While it lacks the performance of the Tesla, she expects it to be far more reliable, coming from a company that knows how to bend and weld steel. Despite the problems with the Tesla, her husband wants to stick with the brand to support the vision. Fortunately, he’s in a financial position where he can do that. Most of the car buying public can’t afford to be so tolerant.

If Musk wants Tesla to remain a viable business after he rockets off to Mars, he needs to start listening to frustrated Tesla owners like this pragmatic CEO rather than reveling in his adoring fans.

 

The Demise of the Uber Leasing Program

— August 22, 2017

Recently, Uber announced that it will discontinue the vehicle leasing program it has offered to drivers for the past 2 years. Average losses of $9,000 per leased vehicle were cited as the reason, but this only serves to highlight the problem that independent transportation network companies (TNCs) like Uber, Lyft, and Didi are likely to face as the transition to automated vehicles (AVs) begins. Companies that currently operate with minimal physical assets, relying instead on independent contractors, will face a huge challenge surviving as standalone businesses when confronted with building or buying massive fleets of costly AVs.

The leasing program was designed to provide drivers operating on the Uber platform with access to new, well-maintained vehicles at a relatively affordable price that also included unlimited mileage and free maintenance. For passengers, knowing that a ride won’t be a broken-down rattle trap makes using the service much more appealing. Many of the drivers operating on these services don’t have the financial wherewithal to get a loan or a lease on a new vehicle, so the program seemed like a great path toward earning more money.

Since Uber doesn’t manufacture vehicles, it has to acquire them before leasing them to drivers. Wall Street banks loaned the company $1 billion in 2015 to get the program launched, but Uber’s lack of vertical integration means added costs at every level in the value chain. Losses originally projected to be about $500 per leased car increased 18-fold. This is not a formula for a building a sustainable enterprise.

Not Just Uber

Uber is not the only company acquiring cars. Following General Motors’ (GM’s) $500 million investment in Lyft in early 2016, the automaker launched Express Drive to provide low cost rentals of GM cars to Lyft drivers. Unlike Uber, GM has a ready supply of relatively new off-lease vehicles available. GM tapped this supply for Express Drive as well as its more traditional carsharing service, Maven, that also launched in 2016.

Like most other automakers, GM has a captive finance arm through which it could fund the program at lower cost than Uber. Repurposing off-lease vehicles for these mobility services reduces the supply of used vehicles in the market, helping residual values. Having these relatively new vehicles in the field also exposes people to contemporary GM products that may have a marketing benefit. The network of thousands of GM dealers can provide maintenance and repair services, something for which a TNC would likely have to pay a premium. In spring 2017, GM added Maven Gig, which provides similar low cost rentals to drivers on platforms beyond Lyft.

Vertical Integration Is Key

GM may be losing some money on the current Express Drive and Maven Gig programs. However, unlike the TNCs, the automaker is profitable and can afford to subsidize this effort. Doing so also helps to reduce potential losses in other parts of the business. For a TNC without this level of vertical integration, it’s unlikely such a program would aid in reaching net profitability in any realistic timeframe.

The same factors that benefit an automaker in this regard also come into play when looking at the deployment of automated mobility services. If Uber has to pay Volvo or some other automaker for very expensive vehicles, plus cover insurance maintenance and fuel, even eliminating the cost of drivers may not lead to profits. It’s likely that only acquisition by an automaker can save TNCs from extinction. Yet, that may only happen if their inflated valuations collapse.

 

Utilities Bet on Open Standards for PEV Charging

— August 10, 2017

Electricity as a transportation fuel has only been used in a few mass transit platforms like light rail that are large-scale megawatt consumers. These platforms have highly predictable load patterns, and these electricity consumers are generally visible to utilities because their load is large enough to require utility coordination on infrastructure development. The next step in transportation electrification, happening now, is the advent of light duty, individually owned plug-in electric vehicles (PEVs). This is a step toward less predictable load shapes and less load visibility (not good from a utility perspective), but also one toward increased load and theoretically highly flexible load (which is good).

Understandably, utility interests in this new load have varied largely as a function of expected PEV adoption in a utility’s territory. Since the emergence of mass market PEVs in 2010, many utilities were skeptical of the potential for PEVs, in part because many initial market adoption forecasts turned out to be highly optimistic. However, with over 6 years of market development in the books that have witnessed marked advances in PEV capabilities alongside reduced costs—exemplified by the Chevrolet Bolt and Tesla Model 3—utilities are coming around to the realization that a PEV strategy is a must. The latest example of this need is an investment from Energy Impact Partners (EIP) in the EV charging services company Greenlots.

This investment is an important indicator of utility interests because EIP is a utility investment group that represents a network of 47 utilities in 12 countries and this is its first investment regarding EV charging services. The investment is especially significant because Greenlots, which offers EV charging and energy management solutions, is one of the more vocal proponents of an open standards-based approach to charging network development.

In a sense, Greenlots is championing a system analogous to cell phone services in which the equipment (cell phone) is not tied to a service provider (e.g., Sprint, Verizon, etc.), allowing charging station owners to switch between service providers as they see fit. This is not the way PEV charging services originated. Many early installations were and continue to be tied to a manufacturer’s hardware and management software platforms. When or if these manufacturers fail (as happens with emerging markets), their installed equipment can become ineffective.

Beyond the concern of stranded charging units, the evolution of PEV charging encompasses a variety of services for which no one company is likely to have the best solution. Therefore, vendor lock-in could be detrimental to preventing obsolescence. Equipment-agnostic services can include the dynamic management of PEV load in time with grid operator pricing signals, the discharging of power from vehicle into infrastructure, vehicle energy information interfaces for consumers, and streamlined payment and transaction management systems, among others. Flexibility among major consumers (utilities, energy service companies, and/or property owners) to pick among such solutions can reduce costs while enhancing the ability to share data from multiple services.

 

Beyond Ultra-Fast Charging: Part 2

— June 1, 2017

The potential of automated drive has produced many a report theorizing about the likely impacts of automated drive technologies on the transportation system, the built environment, and more generally, society. Navigant Research is no stranger here; however, our tack is far more conservative than some others. The basic theory most of these reports (including ours) supports is that automation adopted primarily in passenger mobility schemes will drastically reduce transportation costs and increase passenger convenience. This leads to more transportation overall with higher dependency on automated light duty vehicles, but also less use (proportionally) of alternative transportation modes (bike, bus, rail, air, etc.).

The above means that automated vehicles are likely to be highly utilized and therefore automated mobility fleet managers are likely to desire durable vehicles with limited downtime for maintenance or refueling. To be competitive for automated services, battery EVs (BEVs) would have to rely on ultra-fast charging, which would make batteries less durable. Otherwise, they would require more advanced battery systems or significant increases in battery size (to bring charge rate [kW] and battery capacity [kWh] closer to a 1:1 ratio), either of which makes them more expensive.

More Pollution Regulations Are in the Future

At the same time, cities (where automated mobility services are likely to emerge) will probably adopt regulations limiting polluting vehicles within certain geographic boundaries. If they don’t, the ultimate impact of automation is likely more fossil fuel consumption. In such an environment, plug-in hybrids (like those employed by Waymo) may have the upper hand. Alternatively, this could be an opportunity for battery swapping.

Battery swapping notably has a poor record, but many of the barriers to battery swapping as a solution for the passenger BEV market don’t apply with automated mobility fleets. Battery swapping in part failed as a global strategy because it depended on OEMs agreeing on a common battery pack. In a managed fleet with vehicles from a single OEM, this is no longer a problem.

Is Battery Swapping the Answer?

Battery swapping solves reliability concerns, as the charge rate can be managed to optimize life and the battery can be enrolled in revenue generating grid services when off the vehicle. This would also make transportation electrification’s impact on the grid gentler. Additionally, swapping is a faster solution than the fastest wired or wireless charging solution and (as Tesla showcased) faster than liquid or gaseous refueling.

The last advantage is that in fully automated services, range is not as big of an issue as it is when there is a human driver. Theoretically, battery swap packs could be built smaller and added to the vehicle in increments to satisfy certain uses. As an example, instead of having two or more 200-mile battery packs per vehicle, managers could instead employ three or more 100-mile battery packs, which would further reduce overall system costs and risk.

It will be some time before such a solution might be employed. It is a later consideration in the evolution of mobility automation business models. The priority considerations are the development of the automated drive technology itself and the regulations to permit driverless vehicles. It is likely that initial services will leverage conventional refueling and/or recharging infrastructure until reliable business models have been produced. After that development, then competition within mobility services will drive such innovations.

 

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