Friday, 7 July 2017

Automotive Evolution

I was intrigued to learn Swedish based, Chinese owned car maker Volvo had announced their intention to exclusively manufacture electric and hybrid electric passenger vehicles from 2019. No petrol, diesel or gas.

Given the very low number of electric cars sold throughout the world, this appears a high-risk strategy.

Other automotive manufacturers have launched an all-electric model (Jaguar, Mercedes, Nissan, Mitsubishi) while others have flagged their intention to do so (Ford). However, they plan few variants of these cars meaning they will represent a small percentage of their total model range.

Norway boasts the highest number of all electric cars per head of population with some 100,000 registered vehicles for a population of 5.4 million.

Australian all electric vehicle sales in 2016 slumped to just 219. There was however an increase in sales of Hybrid vehicles much of which was driven by Taxi fleet purchases.

Perhaps the most notable electric car manufacturer is Tesla. They may well be the most controversial too. Tesla set out with the very simple objective of mass manufacturing good looking, high performing, functional vehicles at an affordable price, able to travel a reasonable distance per charge.

Given the background of founder Elon Musk, they also set out to apply a Silicon Valley start-up approach to the business, rather than a traditional automotive design and manufacturing process.

They have borne the brunt of much criticism, some of it more than justified and much more appearing to be based on perhaps a form of jealousy. Musk has a tendency to over promise and under deliver when it comes to announcing and then meeting deadlines.

The New York Times has been a constant critic and on the back of negative expectations, many pundits took short positions on Tesla Stock. Recently, Elon Musk was unable to hide his delight  when Tesla’s market capitalisation overtook that of Ford.

Significantly, it was confirmed this week that the first Tesla Model 3 will roll off the production line this month and be delivered to a patient customer a week or so later. The Tesla Model 3 is their model for the masses and pre-publicity suggests a retail price in the vicinity of US$35,000. There is a long worldwide waiting list for the Model 3*.

But back to Volvo and their recent announcement.

My instinct is their decision will be proven correct, as long as they can see out the initial years.

There has been commentary that electric cars will need some sort of tangible Government subsidy if they are to be successful. This could be as simple as reduced registration costs.

For two reasons, I cannot see this happening in the short term.

If electric vehicles are to gain consumer popularity, they need to be viewed as a genuine alternative in their own right. They need to be functional, reliable, attractive, practical and affordable.

They must compete in the broader automotive market as “a car” and not as something new, special or unique.

The second factor is perhaps more interesting and certainly more complicated.

There are a large number of entities with a vested interest in continuing the dominance of the Internal Combustion Engine and they are huge multi national organisations with huge capital invested in their existing infrastructure and distribution networks.

Tesla have built, and are further expanding their Supercharger outlets. Oil Companies have a huge interest in maintaining their service station networks, as do the transport companies that deliver the fuels.

More electric cars + more charging outlets = less demand for fuel sales.

Electric vehicles require far less servicing. There are none of the moving rods of steel and cranks enclosed in a steel or alloy housing being exposed to the repeat explosive pressures of compressed fuel and air. Service intervals for the Tesla Model S are 60,000 kilometres.

Given service and resulting parts sales are a key component of new car dealership profits, the number and size of such businesses would certainly decrease if electric cars became a meaningful sector of the market.

And then there is the Government and their charges and taxes that represent a significant percentage of the price we pay per litre for our fuels (or per gallon in USA).

All electric cars have a place in the market and would represent an emission friendly means of transport. However, if they become mainstream as Volvo predicts, there will be a resultant impact on our fundamental economic model effecting employment and revenue. There would also be a flow on negative social impact, particularly in rural communities.

Watch this space.

*I am on the waiting list for a Tesla Model 3 and expect delivery in 2019. The Tesla Model S is by some way the most outstanding vehicle I have driven, including Ferrari.

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