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The Economics Of Electric Cars
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Electric cars have been hailed as a possible solution to the pollution on our roads, particularly deep within the inner cities. Since 2011, when only two types of zero emission vehicles were available in the US, the production of electric cars has expanded almost exponentially.
The demand for electric vehicles has been assisted by the increasing pressure on governments from international treaties to reduce their carbon footprint, in an attempt to curtail the ever-encroaching yet debated global warming.
China wants 30% of its government vehicles to be electricity generated by 2017, while Europe aims to achieve 10% by 2025. China aims for five million electric cars by 2020. Electric cars are seen as an integral part of improving environmental prospects.
China Charges Ahead
The Chinese market is now the biggest globally for electric cars, ahead of the US, and the Asian country is expected to grow 50% before the end of the decade. The Chinese government is providing subsidies to local makers of all the various parts that the electric car requires. The giant electric vehicle manufacturer based in Shenzen, BYD, has benefited from friendly procurement contracts to aid its production of electric buses. It is reported to be worth 1.5 billion yuan.
To aid its local suppliers of electric cars, China has denied battery certifications to foreign competitors, Samsung and LG, both based in South Korea. Social media giant Tencent, which is developing internet connected electric vehicles with Foxconn, has benefited from this protectionism. Further, the e-commerce company Alibaba is providing data cloud services to local electric vehicle maker Kandi Technologies, in order to popularise the sharing of rides.
While the vast quantity of government subsidies that have flooded the market have increased the number of registered electric vehicles, the quality of those vehicles has suffered significantly, and they have yet to match that of America’s startup unicorn Tesla.
As ever with China, mass production does not always result in success. While it is evident that China is dominating the production of electric vehicles, they are not necessarily dominating consumption per capita. Flooding the market with subsidies does not guarantee that consumers will race towards the latest models.
Telsa Hijacks The Fast Lane
Tesla has changed the way people view electric cars. At first, electric cars were simply considered to be one stage up from a golf buggy, but since Elon Musk’s greatest project took to the market, everyone is after the latest Tesla model.
So lucrative has this business been, that other car manufacturers, such as BMW and Audi, have created premium electric vehicles in order to gain a slice of the market share. But Tesla is still in the lead, and the company has a market capitalisation of $29bn.
Tesla’s success derives from the fact that the company inserted larger and more expensive rechargeable batteries. As such, the cars have a range of 250 miles in between charges.
Their falcon-wing doors and lightening acceleration have made the cars exceptionally popular. In combing hundreds of small-mass produced laptop batteries, Tesla asserts that its power-packs cost half of what its competitors do.
But the company, whose aim is to produce 500,000 cars a year starting 2018, has struggled with making electric cars economically. Currently, it still finances its activities via the sale of shares and is continuing to operate at a loss.
It is unclear whether Tesla can actually self-fund through revenues or whether the electric car business is simply too unprofitable. According to the former co-founder, Ian Wright, the original business plan was to raise $25m and get enough cash flow to break even, but that has not happened.
The vehicles are not cheap to purchase and “nobody buys an electric car to save money”. The top of the range Tesla vehicle costs $100,000, and Barclays Bank believes that Tesla will require $11bn over the next five years and may not reach the point of profit generation until then.
Tesla has shown that the barriers to entry for the car industry are relatively low. The company has bought equipment cheaply from other car companies, choosing to finance itself through acquisitions. It bought a car factory in California from Toyota and GM for $42m. In addition, research firm Bernstein suggests that Tesla spends only $4bn on R&D, which is approximately one-seventh of its streetcar rival Volkswagen.
At the moment, Tesla does not have a direct competitor. However, Apple is rumoured to be looking to expand into the electric car market. With the fall in the prices of rechargeable batteries, the barriers to entry for the electric car market are falling rapidly, and it is only a matter of time before the likes of Audi and Jaguar produce their own replicas.
Are Electric Vehicles Economically Efficient?
Many people assume that electric vehicles are less expensive, but this is not necessarily the case from the perspective of social gains and losses. Europe alone exports €525m of cash per day in return for oil, which is approximately 1-1.5% of GDP for the European Union. Whilst this cannot be cut out entirely on the back of electric vehicles, it does mean that it can be reduced, especially if electric vehicles can be charged by electricity generated with EU-based resources. Europe would need to find a way to tax the renewable energy consumed or make up for the loss of revenue from gasoline taxes.
Furthermore, as the world gradually switches to renewable energy sources, Europe will lose out on its global oil market revenue. This is, of course, if Europe does not move more quickly into the consumption of electric vehicles, which it could as a developed economy and therefore maintain its oil export whilst reducing its import. Either way, Europe exports far less than it imports and therefore the electrification of the car industry would be of net benefit to the region.
Oil is only the beginning. The time, money, productivity, quality of life and environmental features sacrificed in the consumption of fossil fuels renders the use of electric vehicles far more economically beneficial. Air pollution from road transportation currently costs the OECD countries $1trn every year due to the adverse health effects such as cancer, asthma and heart attacks.
Furthermore, if one considers the added expense of global warming and the toll its natural disasters will take on the economy, the bill escalates. The geopolitical threat of relying on oil is expensive. The US reportedly spends $75bn a year to secure access to foreign sources of oil or to keep supply routes open, although this may change as their fracking ventures expand.
The major drawbacks for electric vehicles are the limited number of valuable charging stations with only a modest mileage before the proximate charge is required. However, the US Department of Transportation announced in July that they would dedicate $4.5bn in loans to guarantee the upsurge in developments in new and readily available charging stations. The Department of Transport further encouraged the cooperation between state and local governments to aid their efforts and have established coalitions between the automakers and utilities.
Electric cars are more efficient than an older model that guzzles through gallons of petrol. But the newer models of many cars use diesel instead and are therefore replacing the fuel to power the car with the fuel required to recharge the batteries is a seemingly futile swap. If the electric car is charged within a city that is powered by renewable energy, such as solar or wind, then the car will produce less per kilowatt-hour of electricity generated, but if the power is created using coal, which is still the predominant source of power across the globe, the effect is somewhat limiting.
Until the way the power is supplied is addressed, it will continue to be debated whether electric cars are in fact contributing to the reduction in carbon emissions and greenhouse gases.
Conclusion
While oil prices are low consumers are choosing to remain with their diesel powered cars. Electric vehicle sales were reportedly down 11% during the first half of 2016. But younger generations are showing increasing concern about the environment they will inherit from their parents, and just as veganism has become a lifestyle alternative for some, electric cars may see another upsurge.
It may seem like a short-term loss in government revenue, but in subsidising renewable energy and the production of electric cars, national and international institutions will save in damages as a result of global warming further down the line.
Much of this debate is largely hypothetical, because until driverless cars are used to the same degree as diesel vehicles once were, it is difficult to quantify a comparison. But it is likely that the introduction of driverless cars will disrupt the industry further.
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Steve Taggart
February 4, 2018 at 2:06 PM
Has anyone really thought the electric car concept through? First, the time required to recharge batteries is significant, the cost per mile of running. An electrical car cost per mile is higher than many gas powered carry, and the biggest issue is that our electrical grid would have to be completely rebuilt to handle widespread adoption of electrical cars. Bottom line, cost to buy is higher, cost to run them is higher, the I fracture rebuild cost is huge and,,by the way, most electricity comes from burning fossil fuel. This is a stupid idea powered by politics, not common sense.