Why Electric Vehicles Won't Dominate Gas Over the Next Decade

Life is tough if you're a Tesla Motors (NASDAQ: TSLA  ) short-seller. I should know -- I am one. 

By all indications, Tesla has the pedal to the metal, and it's presumably leaving all traditional carmakers in its dust and nonexistent fumes. Tesla shares hit an all-time high weeks ago, topping out at a market value of $33 billion shortly after another market-thumping earnings report that saw the company deliver a record 7,579 Model S electric vehicles in the second quarter and earn $16 million in net income on an adjusted basis.

Tesla Model S. Source: Tesla Motors.

Yet the buzz that provided the ultimate spark that pulled Tesla to a new high last week was an upgrade from Deutsche Bank to buy based on its view that the electric-vehicle manufacturer would hit or exceed 1 million units in annual production by 2025.

This upgrade from Deutsche Bank got me wondering what the auto landscape would look like if other electric vehicle manufacturers were able to grow their production at a 32% compounded annual growth rate as Deutsche Bank's projections have implied for Tesla.  

With that in mind, I attempted to calculate what percentage of global market production would belong to EVs by 2025. The results were a bit shocking.

This technological shift may not be as impressive as you think
According to figures from IHS Automotive, global auto sales in 2013 hit 82.84 million, topping the 80 million mark for the first time on record. This represented an increase of 4.2% over the previous year and implies that middle-class consumers in emerging-market economies, as well as in China, are beginning to taste the luxury of owning their own vehicle for the first time.

Since 2010, global auto sales have grown by nearly 10 million, but looking ahead, IHS anticipates that growth from the developing BRIC nations -- Brazil, Russia, India, and China -- could push worldwide sales over the 100 million mark by 2018. Assuming a global growth rate of 3% through 2025, and 100 million global units sold in 2018, we'd be looking at 123 million autos sold in 2025.

By comparison, global all-electric vehicles (not including hybrids) saw unit sales rise to 111,718 in 2013 based on data from EVObesssion, including a 229% increase in the United States.

Tesla CEO Elon Musk. Source: Pestoverde, Flickr.

Assuming all existing electric-vehicle manufacturers (Tesla, Nissan, General Motors, and so on) grow production at the same compound annual rate Deutsche Bank predicts Tesla will grow its production (i.e., 32%), there would be approximately 3.1 million all-electric vehicles being produced annually by 2025.

Another way to look at this is that just 2.5% of the world's auto production is on pace to be 100% electric by 2025 if all other automakers grow their production capacity in line with Tesla's. Obviously, that's a nice improvement from the 0.13% of the market that all-electric vehicles currently make up based on EVObsession's data, but it's a far cry from the dominance that Wall Street and alternative energy enthusiasts have been lauding from this industry. California, for example, adopted a mandate last year to have 15.4% of all vehicles on its roads by 2025 be EVs. 

What's holding EVs back?
The way I see it, EVs have plenty of opportunity to gain market share on traditional gas-powered autos but there are three primary reasons why I suspect they'll only garner a small percentage of global sales.

First, pricing is a big hurdle. Within the U.S. there are a number of tax credits that EV car-buyers benefit from, which they can claim on their tax returns at year's end and which effectively reduce the price of their purchase. However, the truth of the matter is that EVs may not be very affordable when compared to traditional gas-burning vehicles. In many cases, the cost-savings associated with purchasing an EV will only begin to take effect after many years and tens of thousands of miles.

For example, UC Davis in California set up a website allowing users to simulate their commute in an electric vehicle compared to a gas-powered vehicle. This "EV Explorer" project, as EcoWatch noted this month, shows that a 50-mile round-trip commute over the course of a year could save a 2014 Chevy Volt owner about $1,000 in fuel costs compared to driving a gasoline-powered 2014 Ford Focus. However, the base model price for the 2014 Ford Focus is less than $17,000, while the base model 2014 Chevy Volt will set consumers back more than $34,000. In this hypothetical scenario, it'd take the Volt owner more than 17 years to recoup the added costs of buying an EV.

In other words, unless you plan to hold on to the vehicle for a long period of time, an EV may not make sense. 

More along the same lines, even if an electric-vehicle buyer hits the point at which the costs to charge their vehicle versus filling up at the pump sways in favor of buying an EV, the costs to replace a battery cell in today's EVs often runs in the thousands of dollars.


2015 Nissan Leaf. Source: Nissan.

Nissan, for instance, suggests that owners of its Leaf will have about 80% of their battery capacity left after five years and 70% after 10 years. The cost to replace the battery core, and retrofit a previous-model Leaf when that time comes, is about $5,500, the same cost as replacing an engine in a number of comparable gas-powered small cars.. Of course, I'd be misleading you if I didn't mention that things like oil and fluid changes in a traditional engine cost money, too; though few repairs appear ready to wallop consumers in one lump sum as much as an EV battery cell replacement.

Driving radius constraints
Secondly, it's an issue of driving radius. With improved gas- and diesel-engine technology, it's not uncommon for gas- or diesel-powered vehicles to get upward of 30, 40, or close to 50 MPG. By comparison, electric vehicles achieve an MPG-equivalent of between 76 and 121 based on EPA fuel economy estimates found on the Department of Energy's website. However, EVs rarely have the capability to go too far outside of a given mileage radius.

The Tesla Model S is the benchmark for driving range, with its 85 kWH pack allowing the user on a full charge to drive 265 miles, according to EPA ratings. This is one of the primary reasons the Model S has sold well despite its blistering $70,000-plus price tag. Other all-EV automakers boast considerably weaker driving ranges, just 62 miles in the case of the Mitsubishi i-MiEV and 84 miles for the Nissan Leaf, which make them practical only for city-limit driving. That is, of course, unless EV infrastructure becomes widespread enough to make any talk of mileage ranges obsolete.

Where's the EV infrastructure?
Finally, EV infrastructure is a big problem. The world today caters to gas-powered vehicles. Rolling out charging stations and making plug-ins accessible outside a person's home is an enormous expense to undertake. We're slowly seeing it occur in some of the most advanced countries of the world, such as the U.S. and throughout Western Europe. However, emerging market economies, where auto growth is expected to soar in the coming decade, aren't as equipped to implement EV infrastructure.

Tesla supercharger network as of Aug. 17, 2014. Source: Tesla Motors.

Even within the United States, the infrastructure to support EVs is thin. Tesla is trying to change this by building a nationwide Supercharger network that'd allow an owner to get half a charge on their battery pack within 20 minutes. The other option is merely a battery swap for a price that'd be similar to that of filling up your car with a tank of fuel at the gas station. But as of mid-August, just 106 of these stations existed throughout the entire U.S. Not to mention, plug-ins can be difficult to come by for people who live in apartments or condos, effectively removing these consumers as potential buyers.

Reality, meet perception
I'd suggest the lesson both for investors looking to take advantage of the coming EV boom and for consumers who expect alternative-energy vehicles to rule the road sooner rather than later is to keep your expectations well in check. Until we see marked improvements in battery capacity to increase driving range, battery production to make EVs more cost-competitive with gasoline-powered cars, and more geographically diverse EV infrastructure, the likelihood of EVs representing more than a small fraction of the global auto market over the next decade is slim at best. 

This is Warren Buffett's worst auto nightmare (hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.


Read/Post Comments (9) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2014, at 1:45 PM, harley1 wrote:

    AMEN

  • Report this Comment On August 31, 2014, at 4:09 PM, DaveGAus wrote:

    I think the author is grasping onto to his short-seller roots. EV's are anticipating large price decreases by 2017 with the Model III, but the conveniently article ignores this. The article doesn't take into account anticipated increases in gas prices nor really addresses the decreased maintenance costs either. Also, he is implying there is a big problem with driving radius constraints, which is like saying some people won't buy a car because it can't pull a boat. True, but kind of a silly thing to say. There will be certain people who won't purchase an electric vehicle because it doesn't fit their pattern of life (e.g. travelling salesman, etc); however, the other 75% of the demographic are just fine with charging at home, waiting 30 minutes for a free charge, saving 25% on fuel costs, and zipping around at Porsche speed.

  • Report this Comment On August 31, 2014, at 8:54 PM, luckyagain wrote:

    I tried the EV Explore app and found it to be simplistic. It tells you what is happening at this moment with not a mention of what gasoline will cost in the future. Does anyone really believe that gasoline will stay at it current price for the next 15 years? Gasoline prices has had much larger increases than electricity. Why would that change in price not continue?

  • Report this Comment On September 01, 2014, at 2:16 AM, deeageaux wrote:

    Tesla probably is limited to an average 32% growth over the next ten years.

    If VW or GM decided to go all in they can grow much faster. Particularly VW. They can in short order build several Gigafactories and they already have the auto plants.

    I agree they won't but the have the financial muscle to do it if they had a CEO who had the vision and courage to seize the opportunity.

  • Report this Comment On September 01, 2014, at 8:16 AM, bostontrip wrote:

    Definitely a Contrarian's view here. Sorry that hasn't paid off for you. I think it's amazing that someone like Elon Musk comes along, and there are so many people rooting against him. Imagine an American Company that shows how incredible a new technology can be. That these cars can not be "as good" as gasoline powered vehicles, but Better! The reason Tesla has opened their patents is to speed up the adoption of E.V.s These cars will get cheaper. The Charging Network is Growing. Battery Technology will improve. Fuel Cells are not a good idea (sorry Plug Investors) Tesla will be $1000 in a few years. First Mover will be huge in this instance. They will be selling parts to other car companies. Charging for use of their infrastructure, selling batteries to Solar Panel Producers...... I'm glad to say I was an early investor in Tesla...............Shouldn't I be writing an Article for Motley Fool? As to anyone who shorts Tesla... I'm sorry for the BEATDOWN Your Portfolio's about to take!

  • Report this Comment On September 02, 2014, at 12:41 PM, GeneKnow wrote:

    The author makes a few significant mistakes:

    1. Technology. Presuming the next war will be fought with the weapons of the previous war. The Tesla approach to batteires is to replace the older one with an interchangable, newer, better, cheaper one. In 5 - 7 years the battery pack for a model S equivalent will have 2x the capacity and 2x the energy density/kg at a lower cost. Tesla has already suggested it will offer a replacement for the Roadster battery which extends the range by about 30% from the original. Electric motors will continue to increase in efficiency, reduced weight, and lower cost.

    2. Cost. Typically 34% of the cost of a vehicle is made up of fuel and maintenance. About 40% is depreciation. Electric cars will have less than 15% the fuel and maintenance costs (fuel is 28%, maint 6%). Electric cars can expect lower depreciation (40% of the cost) since there are far fewer mechanical parts to wear out. Real cost to own the e-car is about 30% - 40% lower over a lifetime of 6 years. BTW, the replacement battery capability reduces depreciation.

    3. Performance. Tesla's Model S gains buyers because it out-perfroms most cars in its class. As the battery technology improves, this advantage will only become greater since power is the 'common currency' in the automotive world. You can trade power for range, acceleration, weight, etc. Electric cars also have the potential for applying power to each wheel independently, which gas powered cars simply cannot afford.

    4. Committment. Why have the Volt, the Leaf, the Prius - C and Ford C-Max all flopped? Because the manufacturers lose money on every one they sell. The Ford/Toyota/Nissan dealers make far better money on the gas-powered cars. It is too easy to bad-mouth electric cars when your own interest is to sell gas-powered cars.

    Tesla is 'all in' and will win big long term.

  • Report this Comment On September 02, 2014, at 1:29 PM, EFRROS wrote:

    I'm personally waiting for the Gen 3 to be built as it will be more affordable for most people. Will purchase two or three of them for my family! Will keep one gas power car for super long distance driving which Tesla will probably solve with newer technologically advance batteries! Long live electric cars and prosper!

  • Report this Comment On September 02, 2014, at 1:49 PM, SkepikI wrote:

    <Also, he is implying there is a big problem with driving radius constraints, which is like saying some people won't buy a car because it can't pull a boat. True, but kind of a silly thing to say.>

    Making the same mistake the author made and several above made as urbanites....There are still LOTS of places in the US where EV will leave you stranded and gas will not... if you are LUCKY only for a few hours. Range and infrastructure are an issue for a significant chunk of the globe and the US. Unless of course you lived as an urbanite all your life and dont know any better.

    Rough duty finding a charger other than 120v for 60 miles around Stanley ID or Spotted Horse WY...or... but gas and diesel, handy and that is likely to continue for a decade or more at current Tesla and ilk planning horizons. You might well urbanite, protest that not many people live in those places, and you might be sort of right, BUT a lot of us like to GO to those places and only a hybrid makes sense for those treks.....

  • Report this Comment On September 04, 2014, at 8:03 AM, DaveGAus wrote:

    <Making the same mistake the author made and several above made as urbanites....There are still LOTS of places in the US where EV will leave you stranded and gas will not..>

    No mistake. All that is being said is that 54% of the world are urbanites, another huge portion have access to a garage/home charging station, and/or have a second car. Obviously, no one is selling EV's to people who don't fit this mold. Nor are they selling compacts to people who will be towing a boat.

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