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The electric vehicle rush started too early

by

Bloomberg

By BMW AG’s high standards, 2016 wasn’t great. While it was a record year in terms of sales, the profit margin of its car business was the lowest since 2010 at 8.9 percent. The company missed analysts’ estimates, and the share price dropped. So CEO Harald Krueger’s decision to reaffirm the firm’s “Automated, Connected, Electrified and Shared” strategy raised more than a few questions: It was the reason for the drop in profitability, after all.

The hyped-up electric vehicle revolution, driven by a fear of being left behind and overzealous regulation, may be forcing car companies to make expensive mistakes. The modern electric vehicle is conceptually inconsistent with how people want to use cars, and in many countries the environmental effect of switching to EVs is negligible.

BMW wants electric vehicles to make up 15 to 25 percent of its sales by 2025. But the Bavarian firm has only sold 70,000 i-series plugin cars since 2013. That didn’t go a long way toward covering the €4 billion ($4.3 billion) research and development cost.

Other companies that are investing heavily into EVs aren’t selling many, either. Renault-Nissan had a target of 1.5 million electric cars for 2010-2016, but, according to Bloomberg Intelligence, it only sold 28 percent of that number. Despite all the subsidies and tax breaks, EVs only make up about 1.2 percent of the global market. In relative terms, the market is growing fast — the EV share was just 0.1 percent in 2011 — but in absolute terms, there are too few EVs on the road to justify the attention they’re getting.

To spend heavily on electrification, companies have to believe forecasts from experts who don’t have skin in the game. McKinsey, for example, recently put out a report arguing that consumer interest in electric cars is growing. All automakers need to do is keep up incremental improvements and advertising more to increase awareness.

That could turn out to be wishful thinking, because the modern EV caters to a specific-use scenario that increasingly doesn’t work for today’s consumers.

The most long-range electric cars can go 400 km on a charge under perfect conditions. They take hours to charge at most of the currently available stations, and even the minimum of 30 minutes one needs to spend at a Tesla Supercharger is a nuisance on long journeys. The cars, however, are fine for someone who lives in the suburbs (in a single-family home, so charging at night isn’t a problem) and works nine to five in the city, where the car can be hooked up to a charging pole during an office shift.

The existing infrastructure is sufficient to support that kind of lifestyle. In Germany, there are just 3 EVs for each available public charging position, and even in Norway, where EVs take up a quarter of the market, there are 13 of them per public charger. On a recent trip to Amsterdam, I noticed that spots next to charging poles — from which gasoline-powered cars are barred — were often the only ones available.

The problem is that this is an increasingly outdated scenario. People use public transportation more often than they used to, even in the United States, where it’s not well-developed. They drive less in cities, and the cities themselves are trying, often successfully, to make residents use bicycles. Younger professionals choose housing to shorten the commute, causing the rapid gentrification of many an inner city. They use ride-sharing and car-sharing schemes.

Even if carmakers can incrementally improve the driving range, it won’t catch up with that of gasoline-powered vehicles without an engineering breakthrough. Nor will fast charging be possible at most stations with the current battery tech. “Range anxiety” is not an accurate term: It’s a technological problem, not a psychological one. It’s not enough to drive down battery cost: Producers have been good at that, but the flexibility that comes with a long range and immediate refueling is at least as important to consumers.

The hype, the optimistic predictions and the regulatory pressure have made it necessary for carmakers to roll out and sell EV models based on the current, underdeveloped technology. They’re already in fierce competition. Governments push for more charging infrastructure, utilities are working on coping with different energy demand patterns, McKinsey is calling for awareness-raising ad campaigns. But even from an environmental point of view, this rush is probably not justified.

In countries where most of the world’s population lives, the energy mix used in power generation makes sure an EV leaves about as much of a carbon footprint as a gasoline-powered car. In most of Europe, it’s about as “green” as a non-plug-in hybrid, such as a Toyota Prius.

Only where utilities use a lot non-fossil energy sources (hydro in Brazil, nuclear in France) are EVs truly environmentally friendly. In the U.S., a Prius is at least as easy on the environment as a plug-in, and in a state that uses a lot of coal to generate electricity — such as West Virginia — an EV’s carbon footprint isn’t much different than a traditional car’s.

It’s probably too late now, but pushing harsh environmental regulation further into the future would probably allow car manufacturers time to develop technology that would offer consumers the flexibility they seek. It would also mean mass production of EVs wouldn’t start until more energy comes from sustainable sources — that is, until it starts making more environmental sense.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti.