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Sunday, 18 August 2013 22:00

Far from electrified? Tesla aside, analysts still cool on EV market

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Tesla Model S Tesla Model S COURTESY PHOTO

As most of the automotive industry suffers through capacity constraints as it ramps up production volumes, one market segment that’s had the exact opposite problem is battery electric vehicles.

But it seems that situation could be starting to turn, at least for one company in the nascent electric vehicle (EV) sector.

1Tesla (Nasdaq: TSLA), the disruptive Palo Alto, Calif.-based car manufacturer, finds itself in the position of being the black swan of the EV automakers.

“We have production constraints, not demand constraint,” Elon Musk, the company’s outspoken chairman, CEO, and product architect said earlier this month in a call with analysts to discuss the company’s second quarter earnings.

Musk said that while the vast majority of Tesla’s suppliers are able to meet the company’s needs, some are having difficulty and a very small amount are completely unable to fulfill their obligations.

Tesla, the much-hyped manufacturer of luxury EVs — the base Model S starts at $69,900 and the Performance model goes for $94,900 — sources components from dozens of companies, including at least three Tier-1 suppliers in West Michigan, according to recent industry reports. Holland-based Gentex Corp. supplies its auto-dimming rearview mirror, ADAC Automotive provides the exterior mirrors, and the interior mirrors come from Magna Mirror.

The problem of production constraints for the niche EV maker flies in the face of both the conventional wisdom and the initial forecasts done by automotive analysts. IHS Automotive initially forecasted that Tesla would only sell about 3,000 units over the lifetime of its Model S.

In the second quarter of 2013 alone, the company reported it sold 5,120 units. In fact, Tesla outsold a key competitor in the luxury market, the Audi A8/S8 (3,551 units), and approached the volume of the BMW 7-series (5,926 units).

“It’s tough to forecast a disruptive event,” said Mike Wall, a Grand Rapids-based analyst with IHS Automotive.

Technologies like EVs and start/stop mild hybrid systems are all part of the diverse strategies OEMs are taking to meet mandated fuel economy standards that will gradually increase to 54.5 miles per gallon by 2025.

While production constraints are increasingly more common for the traditional automakers, the EV segment continues to suffer from overcapacity, particularly in the battery segment.

The slow sales have automakers revisiting their sales strategies for plug-ins and EVs.

General Motors announced this month that it would cut the base price of the Chevrolet Volt in an attempt to juice sales. Lopping $5,000 off the price of a Volt — it will now start at $34,995 not including a potential $7,500 federal subsidy — will likely cause a short-term bump in sales, said Mike Omotoso, senior manager of global powertrain forecasting at LMC Automotive.

But that bump doesn’t change the fact that the range-extended hybrid vehicle manufactured in Michigan still faces stiff competition from other similar vehicles — or that comparable gasoline-powered vehicles remain much cheaper than the Volt.

“(The Volt) is underperforming and that’s part of the reason why they lowered the price,” Omotoso told MiBiz in an interview at the Center for Automotive Research Management Briefing Seminars at the Grand Traverse Resort.

“The sales may still not get to the level GM had hoped,” he said. “At the end of last year, they hoped to sell 45,000 units, and we don’t think they’ll get to that level even with that price reduction because there’s still competition from the Nissan Leaf, the Ford Focus EV, the Honda Fit and other vehicles as well, (including the Toyota) Prius plug-in.”

Through July, GM sold 11,643 Volts for the year, up from 10,666 units in the first seven months of 2012. Initial projections were for the company to sell 60,000 units per year.

Expensive plug-in hybrid vehicles such as the Volt ran into a series of headwinds, including their high up-front cost and the lack of available charging infrastructure.

“And there’s still competition from gasoline-powered vehicles that are getting better fuel economy all the time and those are at a much lower price level than the Volt even with this price cut,” Omotoso added.

The slow growth in volume for the Volt and other vehicles in the EV niche has implications for the West Michigan base of advanced battery suppliers, including Johnson Controls Inc. (JCI) and LG Chem Michigan Inc., which supplies GM for the Volt. Both suppliers operate battery facilities in Holland that are nowhere near capacity, and analysts expect that phenomenon to continue for the foreseeable future.

A key finding of a 2013 study by Automotive World showed EVs will account for less than 5 percent of the light vehicle market by 2020. EVs currently account for less than a percent of global sales, according to LMC Automotive.

“Lithium (battery) technology is something that we see is going to continue to be part of the market, but it’s going to grow at at fairly slow pace because the economics are still pretty challenged,” said Craig Rigby, vice president of product management and strategy for Johnson Controls Power Solutions, a division of JCI. “But we are committed to participating and being part of that.”

JCI’s 185,000-square-foot Meadowbrook plant in Holland began producing batteries in 2010. Rigby told MiBiz that currently there are 130 people working there spread over three shifts.

The company has approached local governments for permits for potential future expansions at Meadowbrook, but it has yet to move forward because the existing facility still has capacity.

“We are not at full utilization today,” Rigby told MiBiz. “What we are doing is scaling our investment. We have the facility and we have put a certain amount of capacity in. We are going to scale our investment to make sure we are not getting too far ahead because that doesn’t make sense.”

He would not go into specifics regarding the factory’s current output.

Rigby pointed out that JCI does manufacture a considerable amount of products beyond the lithium-ion batteries for EVs and plug-in hybrids. JCI is also producing batteries for use in mild hybrids, commonly known as “start-stop” systems, that are predominantly sold in the European market.

Start-stop systems — which the company is projecting to be implemented in 80 percent of cars in Europe by 2018 and 35 percent of American cars by that time — require a strong battery because the vehicle’s engine shuts down as soon the driver pulls to a complete stop and starts back up as soon as the foot is taken off the brake.

Omotoso of LMC Automotive said in a presentation that start-stop technology can result in a 4 percent to 8 percent fuel efficiency gain, but he’s not expecting the systems to gain much traction in the U.S. because “the feeling of … stopping and the engine shutting off is still alien to most American drivers.” He said start-stop is one of a handful of examples of new technology being used to eke out more efficiencies from traditional internal combustion engines.

Until the automakers drive down the electric vehicle payback period from its current 10-plus years to a more acceptable three to four years, the segment will remain a niche market, he said. LMC Automotive projects gasoline engines will remain the “dominant” powertrain source for at least the next 10-15 years, Omotoso said.

“There’s plenty of room for improvement with traditional powertrains that we might not need alternative powertrains after all,” he said.

LG Chem’s $300 million plant, located just a few miles from JCI’s Meadowbrook facility, just started manufacturing batteries that it plans to send to General Motors for use in the Volt. As MiBiz has previously reported, shipments from the Holland facility could start by late September or early October, according to LG spokesman, Randy Boileau. The plant, idled by low demand, faced an investigation by the federal government into its misuse of funds stemming from a grant received through the American Recovery and Reinvestment Act.

Myriad factors contribute to the relatively low demand for EVs, experts say. There are only roughly 17,500 charging stations nationwide, compared to more than 130,000 gas stations nationwide, according to LMC Automotive, and charging takes a period of hours, not the minutes it takes to fill up a gas tank.

Then there’s the issue of cost. Even with a $7,500 federal tax credit available on select EVs, the price premium for battery electric powertrains ranges from $8,000 to $15,000, Omotoso said.

IHS’s Wall said the goal for battery manufacturers going forward needs to be “double the range and make it half the cost.”

Even with gas flirting with the $4-per-gallon mark this summer, experts say expensive fuel is doing little to sway most automotive consumers’ purchasing decisions.

“Gas prices are not working in favor of electric vehicles,” Wall said. “It’s not enough to move consumers.”

Wall said that Tesla is by far the furthest along in building up the needed charging infrastructure. By fall of this year, Tesla is planning to have “supercharging” stations — places to plug in a Model S that will provide half of a charge in about 20 minutes — around most major metropolitan areas in the U.S. By 2015, Tesla aims to have 98 percent of America and parts of Canada covered with the quick-charging stations.

There is also the issue that much of the manufacturing of lithium-ion batteries has been taking place in Asia — the Tesla Model S uses batteries made by Panasonic in Japan, and the Volt to date has been supplied by LG Chem in South Korea. A report by the Journal of Power Sources found the costs of bringing that manufacturing to America would be fairly negligible, and that rising wages in Asia may make it more beneficial to manufacture here.

Wall argued it is not necessarily a bad thing if volume is low in America. Instead, the focus must be on profitability.

“Chinese labor only gets you so far,” Wall said. “The logistics involved are expensive.”

MiBiz Managing Editor Joe Boomgaard contributed to this report.

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Editor’s note: This story has been changed from its original form. A previous version misstated the start date of advanced battery production at Johnson Controls Inc.’s Meadowbrook facility in Holland.  

Read 3493 times Last modified on Tuesday, 20 August 2013 10:49
Nick Manes

Staff writer

nmanes@mibiz.com

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