The slow birth of the electric car

Tesla is releasing the Model S into a market that isn’t ditching gas anytime soon

Tesla Motors Model SThe electric car company, Tesla Motors, plans to unveil a new prototype this week, the Model S. Judging by the early photos leaked on the Internet, it will have all the sleek, sports-car looks the company is known for, but with one very important difference: the price tag. Unlike Tesla’s US$109,000 electric Roadster, the new car will cost less than US$50,000, the company says. That’s still pricier than your typical four-door family car, but cheap enough for Tesla to move beyond selling cars to Hollywood celebrities and start courting the all-important mainstream customer.

So far, Tesla is little more than a fringe player in the auto industry. It has a 1,000 person wait list for its Roadster, but that says as much about how slowly the cars are being built than it does about demand. Since its launch in 2006, Tesla has delivered just 250 Roadsters, which it now makes at a rate of 20 per week. Tesla is also not making money yet, and late last year had to borrow $40 million from investors. It says it could be profitable by later next year.

Since Tesla and competitors like Fisker Automotive set up shop in Silicon Valley, Calif., there’s been a lot of talk that they could one day unseat Detroit by leading the industry into the age of electric cars. The Model S, when it hits the market in late 2011, will be an important test of not just the company’s ability to become an industry contender, but of just how ready the driving public is for an all-electric car. The company is breaking ground, and a lot of other car makers will be cautiously watching to see what happens.

In California last week, U.S. President Barack Obama announced US$2.4 billion in spending for the development of electric car technologies. To drive his point home to the masses, he also appeared on The Tonight Show with Jay Leno, where he declared the electric car the future of the America auto industry. For a country notorious for its obsession with SUVs, muscle cars and all things gas-powered, it was a dramatic signal. But there are still some very tough questions about just how easy and realistic the transition will be.

Take, for instance, how reluctantly hybrids—the first step towards an all-electric vehicle—have been embraced by American drivers. In recent months, hybrid sales have tanked (along with those in the rest of the auto industry). The best selling hybrid, the Toyota Prius, still accounts for only a tiny fraction of all cars sold. (Toyota has sold roughly a million of them in the past decade, while it has pumped out a hundred times as many conventional cars). At G.M., less than 2 per cent of all Chevy Malibus sold last month were the hybrid version. Chrysler recently closed an entire hybrid plant.  At the end of the day, auto makers have only grudgingly been offering hybrids to a population that’s proven to be very unenthusiastic about buying them.

Sales aren’t likely to pick up in a meaningful way anytime soon. Car companies are having a hard enough time selling massively discounted new, gas-powered vehicles. (The Detroit Free Press recently noted the average cost of a used 2008 Honda Accord EX sedan was $21,544, while a new 2009 model was $80 less.). Add to this the fact that gas is cheap again and environmental concerns have taken a back seat to economic ones, and selling pricey hybrids is like trying to sell caviar on the sinking Titanic. The only auto segment that seems to hold a lot of promise lately is ultra small, cheap vehicles, like India’s $2,000 Tata Nano, which was unveiled this week.

What this suggests is that any real growth in the electric car industry could be over a decade away. At the very least, a number of important factors need to change—the price of oil, for starters. Oil prices need to rise back to at least the level they were at last summer ($140 a barrel) for car buyers to start worrying about fuel efficiency. (The price of oil is now at about $50 a barrel). Even at $170 a barrel, the cost of ownership of a hybrid only matches that of an advanced diesel car, according to a recent report by the Boston Consulting Group. The cost of batteries also needs to fall dramatically for fully electric cars to be competitive with hybrids. Batteries now cost an estimated $14,000 for each electric car.

Even if government steps in with big subsidies, the cost of electric cars remains problematic. G.M. has promised to mass produce an electric vehicle, the Volt, by the hundreds of thousands. “Even at that volume, and sharing platform costs with the [electric] Chevy Cruze which is planned in the 300,000+ unit volume range, the Volt will still be priced at or above $40,000, making it one of the more expensive Chevy’s ever produced,” wrote Darryl Siry, an analyst with Peppercom Strategic Communications and a former Tesla Motors executive.

With all these challenges, it is likely that even by 2020, the internal combustion  engine will remain  “the dominant technology,” according to the Boston Consulting Group. That’s unlikely to change even if oil prices skyrocket to $300 per barrel, it notes. All told, the group estimates that by 2020 there will be 1.5 million electric cars in Japan, China, Western Europe and North America—or just 2.7 per cent of the total market. Most of those cars will be small, urban vehicles (which are cheaper to build).

Tesla’s Model S will no doubt grab some well-deserved attention this week. The company has also slowly been building a retail front, with plans to open stores in London, Chicago, and several other U.S. cities.  And this month, it announced it will start selling cars in Canada. But even as the world’s auto makers promise to follow with their own electric cars, this will be only a cautious first step in what’s sure to be the very slow birth of the electric car.