Hobbit Business Review

Some Realism About The Transition To Electric Vehicles

There used to be a commercial for a new microwave where, as the pitchmen described its benefits, a skeptical man in the front row kept mumbling, “But does it brown the food?” I often feel like that when observing discussions about the transition to electric vehicles, because so much verbiage sounds like pitchmen extolling a product while avoiding the critical issue: will consumers prefer them in place of conventional vehicles? The next several posts will address this question in some detail; this post will try to identify the factors that are not important or exaggerated in discussions of the issue.

The first lesson should be that the past failure of electric vehicles to be adopted does not prove that the technology isn’t viable now, but should raise skepticism about claims from advocates, many of whom also gushed about the previous effort to promote electric vehicles in the 1990s. Those were spurred on by the California mandates for ‘zero emission vehicle’ sales, which some assumed would usher in a new era of automobile technology. But similarly, while the views of advocates should be taken with a grain of salt, the same is true for those who automatically oppose EVs. Cherry-picking can allow both sides to support their expectations while avoiding the core issues.

For example, polling of ‘consumer interest’ in electric vehicles is of relatively low value. The cost of telling a pollster that you’re interested in something is zero: the cost of buying an electric vehicle is substantial. The fact that 71% of consumes expressed interest in electric vehicles in a recent survey (citation below) is strongly at odds with the actual market share of about 4%. Even the more conservative Consumer Reports’ survey question, which found “14% of consumers said they would definitely buy or lease an electric-only vehicle if they were to get one today, compared with just 4% in the organization’s 2020 survey” seems contradicted by actual sales.

Tesla’s success has certainly surprised me and is an important datapoint, so to speak, but it is far from definitive in demonstrating the marketability of electric vehicles to the average consumer. Clearly, a combination of early adopters and brand-name enthusiasts explain a good portion of its success, along with the company’s attractive designs. That doesn’t mean they will meet their very aggressive sales targets, especially of the less expensive models.

And the share price of Tesla is not indicative of the company’s potential, but rather about exuberance among investors for the company’s potential. The recent drop in share price should also not be over-interpreted, being in part a reflection of Musk’s Twitter absorption. Sales in the next year, when markets return to normal and the recent price reductions take effect will be much more informative about the company’s future and the potential for EVs to become dominant in auto sales.

Announced plans by governments to ban combustion engines and/or set market share goals for electric vehicles sales are interesting but are suggestive of the difficulty of the problem: if the technology is so attractive, bans and mandates should not be necessary. Bans and mandates are especially problematical because consumer backlash to being forced to buy an undesirable product is all but guaranteed. Telling oil companies not to sell unleaded gasoline succeeded because there was no consumer choice involved, since it was a national mandate. What will California do if people go out of state to buy a gasoline vehicle?

Sales in countries with strong incentives provide interesting insight into what is needed to achieve a certain market share, but the difficulty of quantifying the value of, say, being allowed to use carpool lanes or specially reserved parking spaces makes it hard to know how the resulting market share will translate into sales when they end: not every car can be in the carpool lane. Similarly, when Chinese governments push purchases of locally produced EVs, the sales data do not provide much insight into long-term consumer behavior outside of China (and maybe inside as well). Letting EV owners have access to coveted license plates in urban centers, a common practice in China, means sales do not represent consumer choice but restrictive regulations.

Reported sales during the pandemic should also be discounted somewhat, given the impact of chip shortages on some models. Will more ready availability of conventional vehicles see some rebound in their market share? Maybe, maybe not, but the trend should not be assumed permanent.

The number of announced models or planned sales targets again inform us of manufacturer intentions, not consumer behavior. Aside from the ‘concept’ cars that are often introduced at auto shows with no prospect for commercial production, car companies are constantly planning and even producing models that don’t go very far. If consumer demand isn’t there for any of the models now being planned, they will quietly disappear.

Finally, the rise of competing EVs that might eat into Tesla’s market share is important as they will demonstrate the extent to which Tesla’s brand name is responsible for its dominant market position. In part, this reflects the ‘Silicon Valley can do what Detroit can’t’ myth, wherein the presumption is that the problem is the conservative nature of the automobile industry, rather than the poor performance of batteries. One writer noted that EVs possess great software, but the reality is that an electric motor is not necessary to have good software.

Ultimately, in order to achieve the ambitious goals of many climate change policies, it will be necessary for EVs to appeal to mainstream consumers, not just first adopters and luxury car owners. Which means the crucial factor is what EVs can provide to consumers that oil-powered cars cannot. Stay tuned.

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