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Everyone Loves Electric Cars, Except Buyers

Investors’ unwavering belief about an all-electric car future should be re-examined

There have been countless stories and reports over the past several years about how electric cars will soon supplant the gas-driven automobile. There seems, however, to be noticeable absence of critical thinking among tech-hungry investors, securities analysts and financial journalists on the subject.

One shouldn’t be too harsh, though, on the ubiquity of thinking that prevails among financial journalists. Auto executives are no less swayed by electric car conventional wisdom and exhibit the same lack of skepticism on the topic as reporters.

Projections for when the transition will actually occur have run the gamut from the year 2020 to 2030 and beyond. In short, no one knows, or can predict with any certainty, when electric cars will outnumber gasoline-powered autos.

Automobile manufacturers worldwide have announced nearly 75,000 layoffs over the past year. But here is the interesting reason for the downsizing: it is all related to the tepid demand on the part of buyers for electric vehicles. Indeed, it could be said with some measure of accuracy that an enormous gap has opened up between auto executives’ belief in the market potential for electric cars and a dearth of consumers lining up to purchase automakers’ shiny new objects.

GM 30-Year Financial Data

The intrinsic value of GM

Peter Lynch Chart of GM

Instead of retaining workers who can build cars consumers want, auto executives are reducing their labor costs on a hunch that electric cars’ lower production costs will support their precipitous reductions in the workforce. What happens if they are wrong?

For electric car aficionados, here are some sobering figures: For every eight pickups sold in America, there is only one purely electric vehicle sold.

Many of the same individuals who are now predicting an all-electric vehicle future within the next decade similarly assured us that autonomous vehicles were destined to displace the internal combustion engine in and around urban hubs within the next decade. For many urban planners, gasoline-powered vehicles were destined to join the horse and buggy in the transportation graveyard. In their opinion, a glorious autonomous car future was only a few minor tech-glitch repairs away.

For those analysts who have embraced the Street’s view in the implacability of a new electric car market should be more circumspect in their predictions should note some of the manufacturing and variable cost hurdles automakers face. One such technical challenge that continues to plague electric car makers is the seemingly insoluble problem of reducing battery costs.

Lithium-ion battery costs actually dropped last year by approximately 24% due to a massive increase in manufacturing capacity that lowered unit costs as well as prices of key metals such as cobalt, nickel and lithium. However, optimism for a continued and stable decline in battery prices is premature. Lithium-ion batteries do not follow the consumer electronics products’ declining cost models.

Batteries are produced with highly volatile commodities. Even though prices for these components fell last year, they could easily rise once again as capital for extra mining facilities and processing capacity slows. Many battery-cell manufactures are close to putting plans for expansion on hold to instead concentrate on achieving higher returns on existing facilities.

Additionally, there is the fire risk. As car manufacturers try to cram more power into less physical space, volatile lithium-ion battery technology may be at its safety limits. In short, if battery costs don’t continue to fall, affordable electric vehicles will remain beyond the reach of most consumers.

Some of the same technology mavens and futurists who are hawking the unequivocal blessings of electric cars are the same folks who tell us that wind and solar will soon replace oil in terms of meeting all our energy needs. Yet the reality is the total amount of electricity generated by wind and solar currently is a tiny fraction of total kilowatt-hours generated from all sources, including petroleum.

How badly have some auto executives overestimated the electric car market? Consider the following: Hype for electric cars persists even as car makers lose money on them. For instance, amid $4 per gallon of gasoline several years ago, General Motors (NYSE:GM) projected that it would have approximately 500,000 electric cars on the road by 2017. This was an epic miscalculation in terms of accurately assessing demand.

In California, a state with the most stringent environmental regulations and auto emission standards, reports that less than 6% of total vehicles sold in the state are powered by batteries. Sometimes, technical refinements to existing conventional automobile technology can address concerns of consumers, as well as regulators, looking for increased gas mileage capabilities without discarding traditional auto design.

For example, automakers have increased fuel economy numbers on conventional sedans, trucks and SUVs by using turbochargers, lighter composite materials and smaller engines.

The U.S. recently became the world’s top oil producer and the globe is awash in a sea of petroleum. Consumers love their cheap gasoline and their pickups, with unlimited range. It is also worth observing that electric cars are heavily subsidized with a $7,500 tax credit. What would happen if this were ever eliminated?

Despite all the hype surrounding electric vehicles and predictions of global doom should everyone not go electric, to date, consumers have preferred the unmatched convenience of gasoline-powered engines with their unlimited ranges and ease of fill-up. So far, consumers have found no sufficiently compelling reasons to trade-out their F-150’s for an untested electric truck or SUV —even a futuristic, all-metal model, whose windows can deflect bullets, but apparently not a small metal ball.

Disclosure: I have no position in any of the securities referenced in this article.

About the author:

John Kinsellagh

John Kinsellagh is a financial writer, former financial advisor and attorney, with over twenty-years experience in civil litigation and securities law. He completed the Boston Security Analysts Society course on Investment Analysis and Portfolio Management.

He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community, and personal finance.


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