In the automotive market, we see that the biggest number of units sold come in the low- and mid-priced ranges. Millions of Toyotas are sold every year while top level BMWs sell in far smaller numbers. But an interesting situation is playing out in the electric vehicle, or EV, space. Despite a high number of lower-priced EV and plug-in hybrid electric vehicle, or PHEV, offerings, automakers are being forced to discount these cars and sell them below cost in some cases. And while this is happening, Tesla Motors (NASDAQ: TSLA ) can't produce its Model S (costing two to three times as much) fast enough to clear its back orders. Let's take a look at why people want the expensive EVs but not the more fairly priced offerings.
Detroit's all-electric play
Despite the popularity of Tesla's all-electric Model S, the only all-electric offering from Detroit's Big Three is the Ford (NYSE: F ) Focus Electric. With an estimated range of 76 miles according to the EPA, the Focus Electric comes in with a far smaller range than the Model S, which boasts over 200 estimated miles of range. Along with significantly less power than a Model S, a price point in the $30,000 range, and an appearance that barely differs from the gas-powered Focus, the Focus Electric clearly signals it is competing for the middle class buyer and is not targeting the same performance levels as the Model S.
In an effort to spur sales, Ford slashed $4,000 off the Focus Electric's list price back in July, cutting it from $39,995 to $35,995. However, even at this price point the electric hatchback still has a premium of $10,000 or greater when compared to the gas model.
A primary factor hurting sales of the Focus Electric is the relatively low range. Despite the average American's daily drive being well within the Focus Electric's range, range anxiety still grips buyers preventing them from buying the car. In this case, Tesla has inadvertently managed to provide a real life example of range versus sales.
When the Model S was first announced, a version of the car was available for just under $50,000 (after federal tax incentives), setting the Model S up to have a major selling point by being available in the sub-$50,000 segment. Even with a 40 kwh battery pack providing an estimated 140 miles of range (nearly twice that of the Focus Electric), the base version of the Model S was by far the worst seller of the model's battery options, collecting only 4% of Model S reservations. Ultimately, orders for the 140-mile range Model S were so low that Tesla cancelled that version and gave the few who did reserve it a free upgrade to the 60 kwh version (electronically limited to 40 kwh but buyers could upgrade later if they choose to).
Based on the failure of the Tesla Model S 40 kwh version -- and considering that many Model S buyers are wealthy enough that the EV could even be used as a second car, yet they still chose higher range options -- it is pretty reasonable to assume that a range around half of that offered by Tesla in a car priced at a significant premium to its gas equivalent would have difficulty selling. For electric cars to be seen as practical by the general population (even though the range of a Focus Electric could serve the needs of a majority of them) the market seems to have reached a consensus of demanding more than 140 miles of range.
Range extension solution
General Motors (NYSE: GM ) has taken a different approach to the matter. Instead of producing a low-range all-electric, GM has instead produced the PHEV known as the Chevrolet Volt. I personally drive a Volt and I would definitely say it's a nice car overall. However, not everyone's commute fits within the Volt's 38 mile all-electric range, so these owners would still use some gasoline. Additionally, the presence of the internal combustion engine removes one of the key selling points: the fewer moving parts of an all electric vehicle make for lower maintenance costs.
Would I say the Volt is a failure? Not by a long shot. It serves the needs of many people who want to eliminate range anxiety or regularly travel on long trips but would still like to cut fuel consumption for shorter distance driving.
But the biggest benefit for GM and Ford is not going to show up in earnings in the short term. The Focus Electric and Chevrolet Volt allow Ford and GM to test and improve a technology that someday could power a profitable line of cars. This again comes with a real life example where Toyota lost money on its Prius program in the beginning but today the Prius is one of the company's top sellers leading Toyota to expand the Prius from a single model into an entire Prius lineup.
We want range
Although the average consumer probably does not need the range of a Tesla Model S, most are comforted by the fact that it's there. The automobile has always represented a symbol of freedom in the public's imagination and a range limit of 140 miles or less has not sat well with buyers, even when offered in an otherwise highly popular vehicle. Unless Ford or GM wants to move their EV offerings to a higher price level where more range could be added, selling an all-electric with a range under 100 miles is not likely to produce much profit for the auto giants in the near term.
However, a forward-looking view from Detroit is positive and shows that they are committed to the R&D it will take to remain competitive. After all, in the auto industry, those who stand still get left behind. In the next few years, Tesla is expected to launch its third-generation sedan into the $30,000 price range targeting a range of 200 miles. Auto industry investors are advised to keep an eye on EV developments whether or not they have any positions in Tesla.
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