Five Reasons Electric Cars Will Disappoint

Includes: F, HMC, NSANY, TM, TSLA
by: Rick Newman

They're cool. That's for sure.

The Nissan Leaf (OTCPK:NSANY) and Chevrolet Volt could turn out to be the most innovative mass-produced cars in a century. By taking some, or all of their power from a household electrical outlet, they offer the first real glimpse of transportation that doesn't rely on petroleum—and could even crest the magical 100-miles-per-gallon threshold, once the official electricity-to-gasoline conversions are complete. Even better, the two electrics offer something new without the ugly packaging that has doomed futuremobiles in the past. They're cute, actually.

The Leaf is a perky five-passenger hatchback with sporty handling that can go about 100 miles on an eight-hour charge. The Volt, a bit edgier, is a four-passenger hatch that can go about 40 miles on a charge, with a gas engine that kicks in after that. Both offer a comfortable interior, futuristic controls, and do-gooder credibility. Together, these first-generation electrics set worthy standards for competing models from Toyota (NYSE:TM), Ford (NYSE:F), Smart, and even Chinese manufacturers to meet or beat as they arrive over the next few years.

Now for the bad news: Hardly anybody will buy one, and for a good long while most car buyers will consider electric vehicles to be a great purchase—for somebody else to make.

The hype over EVs will reach a crescendo over the next couple of months, as the Leaf and Volt start to arrive in showrooms, commercials air, enthusiasts cheer, and the press fawns. But before long, you might start to wonder why they're so scarce on the roads. Despite all the attention, EV sales in 2011 will probably number 30,000 or less in the United States, an infinitesimal fraction of total sales. They're obviously unproven, but EVs are also quite expensive compared with comparable gas-powered models, even with generous tax breaks. And while costs will come down over time, J.D. Power & Associates predicts that even a decade from now, EVs will account for less than 1 percent of all U.S. sales. "It is unlikely that global demand will reach the levels that have been widely predicted for the industry," the research firm said in a recent report.

That prediction could be wrong. Nissan CEO Carlos Ghosn, for one, believes that EVs will account for 10 percent of global market share by 2020. And technology breakthroughs, stronger government backing, or an unforeseen spike in gasoline prices could propel electrics into the mainstream faster than skeptics predict. But for the next few years at least, electric vehicles will fail to live up to the hype. Here are five reasons why:

They're way too expensive. To store the electricity drawn from a power outlet, EVs require huge batteries that cost $10,000 to $15,000 apiece. This can drive the overall vehicle cost to nearly twice the levels of a comparable gas-powered car. For exotics like the $109,000 Tesla Roadster (NASDAQ:TSLA) (which debuted in 2008) sticker shock isn't really a problem. But for mass-market family cars, it is.

The Leaf, for instance, starts at about $33,000, compared with prices of less than $20,000 for a gas-powered hatch like the Mazda 3 or Volkswagen Golf. The Volt starts at about $41,000, compared with a mere $17,000 for the Chevy Cruze, which runs on gas but is functionally similar to the Volt. A federal tax break lowers the cost of EVs by $7,500, and some states add further subsidies. But even the discounted price represents a steep premium.

Owners will recoup some of the difference through fueling costs that are about 75 percent lower, at current prices for gasoline and electricity. But earning back a $10,000 premium, say, would still take more than 10 years for somebody driving 15,000 miles a year. And a high sticker price or monthly payment quickly discourages buyers. In a recent study, J.D. Power found that 17 percent of consumers said they were generally interested in buying an electric vehicle. But when told it would cost $15,000 more than a similar gas-powered car, only 5 percent were interested. Plus, those generous subsidies may not last; similar federal tax breaks for hybrids expired earlier this year, and some local governments that once promoted hybrids by offering perks like carpool-lane access have transferred those benefits over to EVs, which are trendier. Something even newer could claim those perks in a few years.

Limited range. General Motors is going to make sure everybody in America knows the difference between the Volt, which has a backup gas-powered engine, and the Leaf, which doesn't. One Volt commercial, for example, points out that the GM car allows for "spontaneous acts of freedom" and doesn't leash the driver to a power outlet. Still, the Volt's battery will only power the car for 25 to 50 miles, depending on conditions, and for drivers who frequently exceed that distance, there's no point in paying extra for an EV.

The Leaf can go about 100 miles on a charge, which accommodates people with longer commutes. And a variety of warnings will chime and ding as drivers deplete the battery and get close to running out of juice. Nonetheless, the Leaf has a glaring shortcoming: You can't use it for long trips. And running the battery down without being sure you'll make it to an outlet can produce "range anxiety," a condition GM got familiar with in the 1990s when its costly all-electric car, the EV-1, became a colossal flop.

EV advocates hope that eventually, a network of quick-charge stations will dot America's highways the way filling stations do today, allowing drivers to recharge the battery in 30 minutes or less. By the end of 2011, there will be about 12,000 charging stations in 19 states. But those will be clustered in a few places where pilot projects are underway, like southern California, Dallas, Nashville ,and Seattle. In most American towns and cities, there's no plan for a charging network and there probably won't be until enough EVs are on the road to justify the cost. This is the usual chicken-and-egg problem with new powertrain technologies: They depend on new infrastructure that's prohibitively expensive unless there are millions of cars to support it. For the next several years, that will limit pure electrics like the Leaf to commuter status, and require their owners to have a second car if they ever want to visit grandma or drive to the beach.

The environmental benefits aren't persuasive. Electric vehicles have no tailpipe emissions when they're running on battery power. Environmentalists love that. But the average car buyer doesn't care that much. Just 10 percent of car buyers say environmental impact is one of the main things they consider when choosing a car, according to J.D. Power. Much more important: Reliability, comfort, styling, gas mileage, and of course, price. EVs aren't entirely pure, either. The huge batteries have to be disposed of at some point down the road. And while they don't emit their own pollutants, cars charged through an outlet require power plants to crank out more electricity, which usually means burning more coal or natural gas. So the overall reduction in pollution depends on how cleanly the local power plant produces electricity, which an individual driver obviously can't control.

Competing technologies are getting better, fast. Electric cars might take off quickly if gas were $10 a gallon and EVs were the only alternative. But automakers are rolling out all kinds of high-mileage technologies, mostly because of new government rules that require average fuel economy of 35.5 mpg by 2015. New "clean diesels," mostly from European automakers like Volkswagen, Audi, BMW, and Mercedes, get mileage that can reach into the 40s. Analysis by car-shopping site shows that the break-even point for clean diesels (at which the better mileage compensates for the higher cost) ranges from one to eight years, with at least one model being cheaper right off the lot. The new Toyota Prius plug-in hybrid, coming in 2012, will offer about 15 miles of battery-powered travel before it begins to operate like a traditional hybrid, with its gas engine and electric motor working in tandem. The Prius plug-in will have less battery power than the Volt and be less revolutionary, but will also cost thousands less and offer a better bargain to buyers. That evolutionary approach may be more appealing. The Fisker Karma, a $90,000 luxury plug-in coming in 2011, is also a quasi-electric, with a gas engine that kicks in after 50 miles or so to help run the electric motors that power the car.

Gas engines are getting better too, thanks to advanced transmissions, direct-injection technology, and dozens of smaller refinements. Nearly a dozen 2011 models get average mileage above 30 mpg, including popular rides like the Ford Fiesta, Mazda 2, and Mini Cooper. Ford and other automakers are finding ways to get V-8 power out of V-6 engines that produce better mileage, or V-6 power out of a four-cylinder. That lets buyers cut fueling costs while enjoying the performance of internal-combustion engines that are far more proven than electrics or even hybrids.

America is not the right place for electrics. Sure, we have plenty of big cities with bad traffic and millions of commuters who could cut down on fueling costs with an EV. But we also have a huge country, a vast highway network , and a unique motoring culture in which mobility, freedom, and even speed are highly valued. EVs aren't optimized for that. There's a good chance they'll catch on faster in Europe and Japan, where cities are closer together, gas is more expensive, and drivers are more willing to accept tradeoffs. And China, with its centrally planned economy, could install a nationwide charging system practically overnight, compared to the plodding pace of 50 state governments strapped for cash in a weak economy. So if you really want to see EVs in action, you may have to head overseas. Or build your own charging station and see who shows up.

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