Bidness Etc

BidnessEtc takes a look at the factors capping electric car sales and how, over time, sales could catch up to conventional vehicles

From premium electric vehicle brands like the Tesla Motors Inc (TSLA) Model S to cheaper mass market brands like the Nissan Motor Co Ltd’s (NSANY) Leaf, green car buyers now have a lot of options that suit different budgets. But the big question still remains; will there ever be enough green cars on the roads to match up to conventional gas-powered vehicles?

In a recent announcement, General Motors Company (GM) said it would miss its 2017 goal of putting 500,000 electric vehicles on the roads as early demand for plug-in vehicles is still well short of company expectations.

GM said it has only pushed out 180,834 electric vehicles to buyers since inception – as even some of its most popular plug-in brands have been slow to sell. The Chevrolet Volt for example – which is the most popular plug-in hybrid in the country after Toyota Motor Corp’s ™ Prius – saw sales dip 18.5% last year.

The downward pressure on electric car sales seems to have carried over to the current year as well. According to data from Inside EVs, 23,339 plug-in cars were sold in the US through March this year, up from 22,671 last year.

However, this year’s total includes 2,681 units of the BMW i3, which was not available in the US in the first quarter of 2014. This makes it pretty obvious that sales of electric car have not really taken off as expected. This could be a worrying sign for electric car makers given that they make up less than 0.5% of the entire auto industry, on the basis of sales.

The Eroding Fuel Cost Advantage

The direct correlation between fuel prices and demand for electric cars is no secret. As fuel prices started to fall last year, it made less sense for car shoppers to opt for electric cars that often cost twice as much their gasoline counterparts.

While plug-in vehicles cost higher up front, they offer lower running costs – an advantage that has become less significant now that fuel prices are down nearly 50%. Car shoppers no longer feel the need to line up for a time-consuming recharge in an attempt to dodge the higher running costs of a gasoline-powered car, especially when those costs are no longer that high.

In fact, larger American automakers like GM and Ford Motor Company (F) are already enjoying stronger profits from increased sales of high-margin gas guzzling SUVs and trucks in the current low fuel-cost environment.

While lower gasoline prices will not last forever, the connection between fuel prices and demand for electric vehicles clearly highlights the risk that electric car makers face, such as demand that they cannot control.

Then there are disruptive electric car makers like Tesla, which are already setting a precedent about how an electric car that offers more than just an alternate-fuel based powertrain can generate demand independent of fuel prices.

Tesla Buyers Do Not Care About Cheap Fuel

Tesla currently only sells just one model – the Model S – but sales for the full-size four-door sedan have taken off from only a few thousand units in its launch year in 2012, to over 31,000 units globally last year. Despite tumbling gas prices, Tesla said it sold a record 10,045 Model S units in the first quarter this year – well ahead of analysts’ expectations and the company’s own guidance of 9,500 units.

Part of the upbeat sales performance was due to an update Tesla released last year that upgraded the sporty sedan to all-wheel drive functionality for improved speed, performance and handling.

As it stands, Tesla’s upgraded Model S P85D is the fastest four-door production sedan on the market – offering much more to a car shopper than just an-electric powertrain, or cost savings. It is not surprising that some analysts are already modeling in strong initial sales of the P85D which costs north of $120,000 at a time when gasoline prices are down below $2 a gallon in some states.

Global Equities Research Managing Director, Trip Chowdry believes Tesla’s P85D accounted for 30% of Tesla’s record first quarter sales this year.

It has to be kept in mind that even Tesla’s Model S which starts at over $74,000 (before factoring in federal tax credits) does not exactly target car shoppers who care much about cheaper gasoline anyway.

While that does not take credit away from Tesla for offering superior value to customers relative to competitors, it does make the comparison with more mass-market brands somewhat unfair, given that these brands cater to different market segments, which respond differently to factors like fuel prices.

The Nissan Leaf for example – the best-selling mid-range EV brand in the US – sold slightly more than 4,000 units in the US in the first three months of the year, down 20% from the same period last year. The slump in sales comes right after Nissan posted 2014 as a record year for the Leaf with deliveries clocking in at 30,200 units, up more than 33% over 2013.

However, Tesla will have to find a way to get past similar constraints – given that fuel prices remain suppressed for another two years at least - when it launches the mass market electric Model 3 sedan in 2017. It is expected to cost half as much as the Model S, and will be targeted at cost-conscious users.

Electric Future

Undeterred by diminished demand for plug-in vehicles, automakers are making bold bets that underscore serious long term upside potential for this market.

Even though GM has acknowledged it may miss its 2017 plug-in sales target for electric cars, the company is intent on realizing an “electric future”. In its annual sustainability report released Thursday, GM said, “The company believes the future is electric, with billions (of dollars) of investment to support an all-in-house approach to the development and manufacturing of electrified vehicles.”

America’s largest automaker is building a second generation Volt which it expects will help revive sales for the iconic brand, and is preparing to roll out a 200-mile range Chevrolet Bolt EV in 2017. Tesla expects to roll out its first electric crossover, the Model X, in the third quarter this year, and will go up against GM’s Bolt with the mid-range electric Model 3 in 2017.

Analysts believe it could take several years – if not decades – for electric cars to become truly mainstream and grab a decent share of the auto industry. The wheel has started rolling amid some ambitious predictions by automakers that are putting long term sales prospects ahead of short term headwinds.