China May Have the Lead in Developing the Next Generation of Cars

| About: General Motors (GM)

I’m very enthusiastic about the potential for Plug-in Hybrid Electric Vehicles (PHEVs) to provide a big piece of the ultimate solution to America’s “oil addiction” problem. The PHEV will have an extended-range all-electric capability and a small gasoline engine that will re-charge the battery when it begins to run low, thus providing ample total range on a tank of gas.

A PHEV with a 20 mile electric-only range will allow many drivers to do all their normal daily chores while using only minimal gasoline, if any - thus getting virtually infinite mpg. Meanwhile the car’s range per tank of gas for long distance travel will be as good as any conventional car and extended-range efficiency will probably be in the 50 mpg area. All-in average mileage for such a car might well be over 100 mpg.

Some PHEV critics think a fleet of PHEVs would require substantial new electrical generating and grid capacity, but that is not true. PHEV’s would not need to be recharged during day-time use because their gasoline engines can keep them going. For plug-in recharging they could - and no doubt would - be plugged in for recharging at night. If the batteries are re-charged at night when there is ample spare electrical capacity the current grid could service 80% of all U.S. cars with no additions required.

Electric grid efficiency is one reason why PHEVs make more sense than all-electric vehicles, which would require much re-charging during day time when most vehicles are being used. Thus, an EV fleet might require a great deal more electrical generating capacity and grid enhancement. Moreover it definitely would require a whole new national infrastructure of re-charging and/or battery-exchange locations. In my view EVs might be practical in some highly concentrated population areas, but not generally in the U.S.

Good-bye Volt

Since PHEVs can have so much impact on both the energy investment outlook and national security, I follow with some interest the news about their likely availability. Recently a picture is starting to emerge. It is not positive for American car companies, of which GM’s Volt is the poster child. This is not totally surprising given GM’s proven history of incompetence.

We know that the Volt’s battery is so expensive that GM proposes to sell the car for $40,000 - a price that would eliminate most buyers. And even with such a high price GM promises they would lose money on every vehicle. So, as I’ve previously written, the Volt may well be more of a political strategy for GM than a likely transportation solution. Now a new study by Carnegie Mellon University says the design of the Volt’s propulsion system is inherently sub-optimal and uneconomical - “not cost effective in any scenario” in the words of the study.

The reason is quite obvious once you think about it. GM designed the Volt battery to go 40 miles on a charge because, they “reasoned”, some 90% of all drivers go no more than 40 miles in a day. What Carnegie Mellon points out is that the average driver goes less than 20 miles in a day. Therefore the Volt’s battery is twice as large as necessary for some 50% of drivers . Since battery weight and cost are the prime determinants of a PHEV’s cost-effectiveness, the Volt battery is about twice as large as is economically practical for most drivers.

Here’s how the report put it:

The Carnegie Mellon study, conducted by engineers from three different departments, constructed computer simulation models to determine the impact of additional batteries on fuel consumption and cost and greenhouse gas emissions over a range of charging frequencies. It found that small-capacity plug-ins that get less than 20 miles per charge are more efficient than conventional hybrids. And it said that large capacity hybrids like the Volt that go 40 miles or further on a charge are never cost-effective, because the batteries cost and weigh too much. A car with the Volt’s range, according to the study, would also be extremely uneconomical traveling fewer miles as it hauls around battery capacity it doesn’t need.

So much for the Volt. Ciao - and lets hope the U.S. govt. is smart enough not to fall for the Volt’s fools-gold as an excuse to keep G.M., a chronically mismanaged company, from enjoying the cleansing benefits of bankruptcy. Among which benefits might be new management.

Hello China…and Warren Buffett

Another recent report points out that China is producing at least two next-generation efficient vehicles and that the Chinese government is doing all it can, including providing purchasing subsidies, to make the vehicles succeed. Gee, that sounds like an awfully good idea, doesn’t it? For so many reasons: to reduce oil consumption, to get a jump on other countries as producers of next-generation cars, to gin up economic activity during this global slowdown.

China is the logical country to lead the world out of oil-dependency because it is:

- technologically innovative,

- facing massive energy constraints to its growth objectives, and

- enjoys a rational, development-oriented government that is powerful enough to shape its industrial policy much the way Japan did in the 1960’s with excellent results and the way Brazil has shaped its energy policy to achieve oil independence.

China’s automotive fuel efficiency standards are already more stringent than America’s. And China has already developed a huge market for electric two-wheeled vehicles. It is growing its electric car business out of that experience.

The U.S. with its huge venture capital and engineering resources should also be a world energy technology leader. But so far that simply hasn’t happened. It’s not yet known whether Team Obama will take advantage of the impending GM and Chrysler bankruptcies to push the U.S. into car technology leadership - or whether they will simply continue to pour money down a rathole. Let’s hope they will be half as clever and wise as the Chinese are proving to be.

One of the two Chinese electric vehicles is the Chery, an all-electric with a 93 mile range and 73 mph maximum speed. It’s not available to consumers yet and it doesn’t sound like a horse that I would prefer for the U.S. market for reasons discussed above. But maybe the Chinese market, with its huge population density centers is sufficiently different from the U.S. that the Chery EV will succeed.

Of much more interest to me is the BYD car which began to hit Chinese showrooms last December and which is planned for introduction in Europe in 2010. BYD, which stands for “Build Your Dream,” is a battery-centered company that is 10% owned by Warren Buffett’s Mid-America Energy. Mid-America is looking to set up a U.S. dealership network for their car.

The BYD vehicle is a PHEV that uses a ferrous battery, an improved version of the lithium-ion batteries planned for use in U.S. makers’ PHEVs and which “could be much cheaper than lithium-ion or nickel-metal hydride batteries.” The BYD ferrous battery is said to be rechargeable to 70% of capacity in ten minutes. According to Wikipedia, “BYD claims that a test model can travel 100 kilometers (62 mi) on electric power before the gasoline engine will be needed, and that the battery can be fully recharged from an outlet in nine hours.”

Global Competition

The electric car race will be won by companies that can offer the most cost-effective batteries; this is a battle of technologies, as I’ve recently discussed. If the BYD ferrous battery is, as claimed, more cost effective than either the NiMH or Li-on batteries it will be in a very strong competitive position. Depending on the strength of BYD’s intellectual property rights, it could be a huge winner.

But the PHEV game is only in the first inning. While the BYD looks like a very strong competitor, so far little or nothing is known about its cost, quality, or driving characteristics. Many other car companies are planning to introduce EVs and PHEVs over the next few years. For example, Volkswagen, which has a good track record for technological innovation, has yet to announce their EV entry.

Unfortunately from what we know today the U.S. car makers don’t look like they have the winning battery technologies or cost advantages. As I have previously discussed, they seem to have settled on an inferior lithium-ion battery solution only because the Japanese have bottled up the better NiMH technology for themselves. As yet the Americans have not been able to access any better battery technologies.

A Solution for America?

So here’s a free idea for Team Obama. Since the facts are that:

- American car companies don’t yet have a good battery technology,

- GM and Chrysler don’t have managements anyone would want to invest in,

- And Warren Buffett owns a big piece of BYD, which is looking like a strong technology leader in highly efficient vehicles,

- And Buffett is rumored to be trying to establish an automotive retailing network to sell the BYD products in the U.S.

- And electric utilities have an interest in pushing PHEV technologies and so may well be potential capital suppliers for a PHEV enterprise….

Why not let GM and Chrysler go into bankruptcy, let the U.S. government take control by extending debtor-in-possession financing, then let the U.S. government turn them over to Buffett to supervise and help provide the growth capital and the management structure? Buffett might provide capital through Berkshire Hathaway directly or through its Mid-America Energy subsidiary that already owns 10% of BYD and as an electric utility has good reasons to support the development of PHEVs in the U.S.

If any reader out there has the ear of Team Obama, please feel free to pass this along.