Navigant Research Blog

In China, EVs are Not Necessarily Green

— January 2, 2013

Tesla Motors opened its Beijing showroom in early November, and the company’s China-based website went live in December, allowing Chinese citizens to place deposits on the Model S and the yet-to-be-launched Model X.   China’s luxury vehicle market is second only to the United States in sales, so Tesla should do well in meeting its goals to sell 5,000 PEVs in Asia annually.  Tesla’s move to access the market is one of many to be made in coming years from global automakers looking to shop PEV technology in the country.   While the adoption of PEVs anywhere is seen as a good thing for reasons both environmental and economic, in China’s case it may be a detriment.

In most regions, PEVs reduce emissions when compared to conventional gasoline and diesel vehicles on a per-mile basis.  This is due to both the significant energy efficiency improvements of electric motors over conventional internal combustion engines, and increasing penetrations of cleaner burning fuels (natural gas) and renewable resources (wind and solar) to replace coal in the overall electric grid.

The Coal Factor

As PEV’s made their first sales in the United States, some questioned whether PEVs actually reduced emissions compared to conventional and/or advanced fossil fuel burning vehicle technologies, given the increased emissions stemming from PEV development over conventional vehicle manufacture and the mix of generation resources on the grid. Results of studies in the United States have shown that PEVs do reduce emissions over conventional vehicle technologies, but it depends on the mix of generation resources used to power the grid.

Though China has made significant advances in developing wind and solar power, the country’s grid is dirty, being predominantly powered by coal.  While China is making strides in substituting cleaner fuels for power generation, the amount coal consumed will likely continue to climb as energy demand continues to grow.  The EIA reported in 2011 that around 70% of China’s primary energy use stemmed from 4 billion short tons of coal, roughly half of worldwide coal consumption.

Contributing to the severe pollution problems, in no small part, is China’s escalating number of vehicles in use.  In our report, Electric Vehicle Market Forecasts, Navigant Research estimates that in 2013 China has the second highest number of light duty vehicles in use, at more than 108 million.  While the combustion of gasoline and diesel are still harmful to the environment – combustion of either fuel produces fewer emissions of CO2 and other harmful gases/matter per million BTUs produced than coal.  Paradoxically, driving on electricity sourced from the coal-powered grid, rather than on advanced gasoline or diesel technologies probably worsens China’s dire pollution situation.

Though China promises to be a significant market for PEV automakers, it’s not quite apparent that PEVs will help the country reduce its dependence on fossil fuels.  Increased investment in natural gas and renewable resources for electricity generation, rather than coal, will make the potential environmental benefits of PEVs a reality.  At the same time, emphasizing increasing fuel efficiency through hybrid gasoline and high mileage diesel vehicles purchases will be a tangible and certain way to reduce vehicle emissions and overall pollution.


Betting Against Elon Musk

— July 9, 2012

The excitement surrounding Tesla Motors has once again spiked.  The delivery of the production Model S’s (Model Esses? Models S?) has begun – a milestone that many thought questionable.  Telsa Motors has pushed many in the traditional automotive world to reconsider Tesla’s future, as evidenced by significant investments from Toyota and Daimler and the surprisingly buoyant stock price.  Tesla has the well-deserved spotlight, and is gaining momentum.

All this gives further bravado to the deservedly proud Tesla founder Elon Musk, who never shies away from the media’s microphone.  During the Model S delivery event on June 22, Musk proclaimed: “In 20 years more than half of new cars manufactured will be fully electric,” Musk said. “I feel actually quite safe in that bet. That’s a bet I will put money on. … It’s probably going to be in the 12- to 15-year time frame”.  Well, Mr. Musk, I’ll take that bet (though admittedly, my cash reserves will likely dictate a smaller bet than you might be thinking).

Our most recent report on plug-in electric vehicles (PEVs) has the market for battery electric vehicles growing at a very rapid pace (32% compound annual growth rate between this year and 2020).  This pace of growth is likely unsustainable as the market becomes increasingly mature, but let’s for the sake of argument assume that this remains unchanged through 2032 (20 years from now).  This would put the BEV market at about one-third (5.0 million) of the total market in 2032.  But 32% growth for 20 years?  That’s pretty unrealistic.

Let’s assume the average growth is still a strong 10% (what automaker wouldn’t love 10% growth every year for the next 20 years?).  At 10% growth, the market for BEVs would be about 574,000 vehicles in 2032.  However, our forecast for the growth rate between 2019 and 2020 is 8%, which would translate into 480,000 vehicles when extrapolated out to 2032.  Even if the current vehicle market has seen its peak and is now on a downward slide, a one to two million vehicle market by 2032?  This also seems unrealistic.

Annual BEV Light Duty Consumer Vehicle Sales Forecasts, United States: 2012-2032

(Source: Pike Research)

Finally, for purposes of comparison, hybrids have been sold in the U.S. since 1999.  The hybrid market share 12 years later (2011) is 2.1%, or 268,807 vehicles.  Granted hybrids and BEVs are different animals with different lifetime costs and limitations, but one would expect that if BEVs will reach 50% market share in the next 15 years, hybrids would at a minimum have broken the 5% mark (they haven’t).

What would it take for Musk to be correct?  I would speculate that the U.S. market would have to see the confluence of three forces sometime early next decade:  First, automakers will have to diversify their product offerings rapidly, particularly into pickup trucks (which are 14% of the total vehicle market) and SUVs (which are on the way), increasing the appeal of BEVs in middle America and smaller cities.  Second, we would likely have to see an oil shock that makes any gasoline fueled vehicles extremely expensive to operate (gas prices reaching perhaps $8 to $10/gallon in current dollars).  Finally, battery recharging will have to have less impact on consumers, including higher powered wireless charging, improved DC fast charge times, and even fuel cell range extenders (on their way in the next decade).

While clearly some of these market forces are coming and we are seeing wider proliferation of BEVs, I think it’s a safe bet that we won’t hit that 50% market share by 2032, let alone by the middle of the next decade.  But I would be very interested to get some more details on why he’s so optimistic (and hopefully it’s for reasons other than pandering to shareholders).


Tesla, the Darling First Child

— June 21, 2012

Though many startup companies in the electric vehicle (EV) industry have either struggled to survive produce a profit, or insure investors of their products’ worth (or all three), one company has consistently bucked the trend of disappointing news: Tesla Motors.  In 2008, the company first began selling its first-generation all electric Tesla Roadster and since then has placed more than 2,000 of the high end EVs worldwide.  The Roadster is largely credited for restarting the EV revolution, and since its debut, no other manufacturer has been able to replicate a model with similar electric range and style.

The company struggled to make its first deliveries, but has largely overcome its early production troubles.  By all accounts, it is not just surviving; it’s thriving.  Recent news items include preorders of next year’s Model X all-electric crossover, netting the company more than $40 million overnight.  In other company news, Tesla will begin repaying $465 million to the U.S. Department of Energy (DOE) in December and has decided to begin deliveries of its more than 10,000 reserved Model S sedans one month earlier than previously forecasted.

Amid this good news, don’t forget that Tesla has never made a profit and by some current estimates, its 2Q 2012 will be its most unprofitable quarter since it went public in 2010.  However, starting a car company from scratch requires an enormous investment, and Tesla is not anticipated to earn a profit until 2Q 2013.

Having an estimated date for profitability is more than quite a few upstart EV makers and their upstart suppliers can boast.  No doubt, the promise of profitability is making Tesla attractive to investors.  Bursting Tesla’s balloon a bit, John Petersen, in a guest post on Greentech Media, describes the company’s growing popularity in the last 2 years as part of a “hype cycle,” in which interest in a company grows before an event and recedes afterwards.  For Tesla, the Model S may be that event.

Or, it may not be for two important reasons: 1) Tesla is the darling first child of the EV revolution and 2) the company continues to push the EV envelope.  People like the underdog, and despite being the first child, Tesla has kept the underdog image as the big auto makers, GM, Nissan, and Toyota, have crept into the company’s EV space.  The Model S may also be considered the company’s equivalent of Apple’s iPhone 4s, and the Model X (due out in 2013) would be the iPhone 5; meaning the hype is not going away with the Model S.

Tesla’s Model S deliveries begin on June 22.  As is customary with Tesla, a great deal of publicity has surrounded the event and the company has even put a ticker on its website, counting down the seconds to the moment that CEO Elon Musk will hand deliver the keys to the first owners.  The magnitude of this fanfare and its fan following is not uncommon among new PEVs, but it isn’t the end of the Tesla hype machine.  Let’s hope the Model S delivers on all its grand expectations, but let’s also be mindful that this is only one of potentially many new models to be delivered by the darling first child.


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