Why Electric SUVs will save the American Car Companies, not China Tariffs

By Juan Cole | (Informed Comment) | – –

Joann Muller at Forbes, in a piece on Ford Motor Company’s plans vastly to expand its electric and hybrid offerings, puts her finger on something absolutely crucial.

Ford and other American car companies really, really need electric sport utility vehicles in order to get through the coming years. Some electric sports cars wouldn’t hurt, either.

The lack of affordable electric SUVs has been a real drag on the market in the Midwest, where snowy winters make low-riding sedans impractical and families that can afford them want the bigger vehicles. (They would help the earth if they would use public transport, but this column is about real world behavior).

Here’s the issue, as Muller lays it out with crystal clarity. The profit for Ford and other manufacturers is in bigger vehicles. You can build a much bigger profit margin into an SUV or a truck than into a little Ford Focus. And, American consumers want the bigger vehicles for all sorts of reasons and not just snow or mud.

Sports cars also have a huge profit margin, as with Volkswagen’s Porsche.

The problem is that SUVs and sports cars are gasoline hogs. When gasoline prices are low, as they are now, relatively speaking, that isn’t a big problem. But when they go up substantially, as they did earlier in this decade, it kills SUV and muscle car sales.

In the primary commodities business, whether oil or coffee or iron, prices are typically a roller coaster ride of peaks and crashes. That is why there are often attempts to form cartels in those sectors, as with OPEC, which hope to smooth out the up and down prices (which make it hard to plan and can lead to bankruptcy at low points). The way it works is that usually primary commodities are produced both by companies with low extraction costs and by companies with high overhead. For natural reasons, Saudi Arabia can get a barrel of oil out of the ground and onto a supertanker for about $2 a pop. But if you dig in the North Sea it might cost you $40 a barrel to get the oil out. So when the prices are low, only the companies with low extraction costs can make a profit, but then that reduces supply over time. Assuming demand stays stable or rises, prices will then go back up and the marginal producers will come back on line. But then that process will increase supply and a glut ensues, sending the prices back down sharply.

Crude Oil Prices during the past 70 years h/t MacroTrends

So what Ford execs are telling Forbes is that they know we are in a gasoline price trough right now, and that they know it is highly unlikely to last. Another big run-up of prices is around the corner. (More especially since demand from growing economies such as China and India could well grow significantly as people abandon bicycles for motorcycles and automobiles).

When the price of gasoline goes back up, demand for SUVs and Mustangs will plummet, and Ford will be in trouble.

But there is an escape hatch for Ford and other American automobile manufacturers.

The electric SUV?

You nailed it.

Renewable electricity is the future, and it is highly deflationary because the fuel is free. Renewables now account for 18% of American electricity generation and for the bulk of *new* installations. In Iowa, wind alone will make 40% of the state’s electricity by 2020.

So as we go, over the next decade and a half, to a grid largely powered by renewables, we will escape the roller coaster ride of oil and gas prices and electricity will get cheaper and more reliable. In fact, some towns in Texas are opting for wind power because the utility can tell you the cost of wind for 25 years out (after installation and maintenance, basically 0). No one can tell you the cost of fossil fuels even 5 years out.

Utilities are waking up to the renewables revolution, which will happen long before anybody expects it, and, as Quartz reports, are now actively promoting the idea of electric vehicles, since EVs will be crucial to their own profit margins. They will have to slightly shift their business model, charging not for the cost of fuel to generate electricity but for the cost of construction, maintenance and distribution of wind and solar facilities. EVs will be what they have going for them with regard to growth. And electric SUVs will be even better for their bottom line.

So, an electric SUV like the 2020 Ford Mach 1 or an electric Mustang won’t be vulnerable to consumer fickleness and Ford can count on steady sales year after year, escaping a major challenge to its business model.

And when the future of multi-billion-dollar American corporations depends on something, they will make it happen. Automobile companies used to do sweetheart deals in back rooms with Big Oil. They were an obstacle to the growth of green energy.

But if Ford switches around and takes a stand that is earth- and climate-friendly, that is a bright ray of hope for the future of the planet.

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Bonus video:

The Inspiration Behind Ford’s New Battery Electric Performance SUV | Ford

10 Responses

  1. It’s important to understand that electric vehicles are very sensitive to aerodynamics, and thus making an electric SUV is a serious challenge. The reason is that gasoline engines, while very inefficient in stop-and-go driving, become more efficient on the highway, so ironically they use less energy the faster they go in practice despite the much greater drag from the vehicle’s body. For electric vehicles, energy consumption is much more linear, and the fact that drag increases geometrically with speed directly impacts their range and the number of batteries they must carry. SUVs are expected in real life to be bought in suburban and rural areas and be driven routinely on highways. So the new Jaguar iPace has an unusually large battery pack given its size and frontal area for the range it obtains because Jaguar markets it as “crossover utility vehicle” with a tall body and wagon-like shape.

    This is not an impossible challenge. Mercedes did work some years back on a sort of wagon concept vehicle based on the shape of a boxfish, which obtained a decent 0.19 cD.

  2. The fuel for EVs isn’t free- it’s just paid for largely up front for those installing home solar (assuming you’ve got enough panels and battery storage to be off-grid.)

    The big question is how to replace the gas tax. We’ll still need to repair the roads, and if there are no gasoline vehicles, there’s no gas tax revenue.

    Two solutions that don’t involve putting GPS-based trackers on these cars:
    (1) a “mileage tax” – report your odometer reading to the state, pay the appropriate tax.

    (2) Have the EV chargers add a surtax for road repair. Home chargers could be set up to report usage to the appropriate agency. (Similar to how farming communities distinguish between diesel used for the family truck, which needs to pay the highway taxes, and “red diesel” used for farm equipment or oil furnaces, which does not have highway taxes charged.

  3. As much as I would like to see this shift—and I spent the first fifteen years of my career working to achieve it—the economics are challenging. Based on the BYD e6 and the Toyota RAV4-EV, we can expect a BEV SUV to consume about 55 kWh / 100 miles. For a 300 mile range, that means we need a battery pack in the neighborhood of 200 kWh.

    Current battery pack prices are estimated at an industry average near $300 / kWh, with Tesla possibly breaking below $200 / kWh. That puts the pack cost in the range of $30,000 to $40,000 with Tesla’s cost structure, and around $60,000 for everyone else. Add in the rest of the vehicle and we have prohibitively-expensive SUVs.

    Even with costs projected to fall to near $100 / kWh in the early 2020s, we’re still talking about $20,000 battery packs, increasing total vehicle cost by roughly a third.

    The obvious solution will be to reduce the range between charges in order to have smaller and cheaper battery packs, but history shows that degrading performance is a sure way to just sell fewer vehicles.

    There are other ways out of the cost trap. Variations on ride-sharing and public transit could allow people to share these costs. For instance, GM has been working for nearly two decades on the “skateboard” concept for vehicle architecture, and I can see that evolving toward a model where the expensive components are shared on an “as-needed” basis. With the growing popularity of ride-sharing services like Uber and Lyft, the underlying cultural changes needed for this model to work may be in the works.

    A sure, though painful, path out of the trap is the increasing price—and increasing variability in price—of oil, coupled with increasing global population and demand for fuel. The trend is clear: by the end of the 2030s, crude oil is likely to be consistently above $200/bbl (and probably a more like $400/bbl, as resources become more costly to extract). At such prices, SUVs that cost 50% more than today’s prices might seem like a reasonable trade-off.

    • Your “$300” per kilowatt hour battery pack estimate is out of date already. As Asit Biswas and Cecilia Tortajada write in a Conversation column syndicated here today link to juancole.com,

      “The cost per kilowatt-hour for a battery used in a standard electric vehicle has come down from $1000 in 2010 to $130-150 now. The distance you can travel with a single charge is steadily increasing: some electric cars can be driven for more than 1000km before the battery needs to be charged. . .

      As battery technology improves, costs are coming down. It’s predicted that the total cost of owning an electric vehicle – including charging and maintenance – will fall below conventional car ownership in Europe in 2018. And Nissan estimates that electric vehicles and conventional cars will cost roughly the same by 2025.”

      Future technology always seems more difficult than it is, because breakthroughs haven’t yet been made. Engineers used to write me similar messages in 2005 that renewables would never be able to compete with the concentrated energy in fossil fuels and that solar was 7 times more expensive than hydrocarbons. And last fall in Chile a concentrated solar bid was let for less than 3 cents a kilowatt hour; coal is 5 cents a kilowatt hour. It has only been 12 years. What we do know is that the more R&D money is thrown at these issues and the bigger the consumer market, the faster technology changes, and now that China is in big time along with states like California, things will change faster than we can imagine.

      • Remember, the cost of the battery is a subset of the cost of the battery pack. But the difference is not huge.
        The fact that the Jaguar, with its wretched efficiency, still gets 220+ miles with a 90 kwh battery pack indicates that the situation is not as severe as Tom indicates.

  4. The battery should not be part of the vehicle, standardized, modular, and easily replaceable by a simple mechanical robot, the cars would be cheaper than their internal combustion counterpart and Exxon, etc.. can fill their stations with charged batteries.

  5. While I agree with Juan about the desirability of this transition, the green community is less than convinced that the American car industry is serious. When they talk about future electrification many of the models are plug-in hybrids, maybe even non-plugin models. Even GM which has an excellent EV in the Bolt doesn’t advertise it, and isn’t making it in significant numbers. Mainly they are being pushed by state clean air requirements, and China’s demands on EV content of future imported vehicles.
    Here are some links highlighting the skepticism
    link to graphical.weather.gov
    link to cleantechnica.com

    • They are right to be skeptical, but China is China. Entire global industries are turning from being focused on the American consumer to a Chinese population that’s 4 times the size and doubles its income every 7 or 8 years. The movies you watch are now rewritten to get through Beijing censors. Buick is now practically a Chinese brand with a few factories left making big old cars for old Americans with names that sound like cheese.

      What the green community is probably more concerned about is that no matter how green China can realistically get, once its economy is several times larger than the US, how big a negative impact with it have on the global environment?

  6. In the Northwest, owners need to take a close look at their driving habits. For urban and suburban driving, electric cars make a lot of sense in part because our electricity is cheap. However, hit the road to our many state and national parks and you can put on many miles and camp away from electrical outlets. In addition, cell service can be spotty to nonexistent so if you run out of fuel your ability to get help is impaired. Hybrids are very popular but are more of a city solution since their highway mpg is close to the non-hybrid models. We are waiting for the next generation of batteries to really answer our needs.

    • Don’t worry, Trump is privatizing the national parks and the states will follow under the spell of ALEC. Developers will make them millionaire-only refuges.

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