Do Electric Cars Make Economic Sense for the Mass Market?

Big, seemingly risky investments in GMs Volt and the Nissan Leaf led two automotive
economics experts to analyze what makes these vehicles attractive to automakers.
By Edward Tuttle and Brian Gorin of Analysis Group
state of the art appears to be well-repre-

But battery costs have been decreasing

sented by the Nissan Leaf, a sub-compact

at only about five percent per year. Fuel

car with a claimed 100-mile range (far

prices are unpredictable, yet the likeli-

below that of any mainstream internal

hood of achieving a positive standalone

combustion car), and a battery with an

return on investment for either the Leaf

estimated production cost of at least

or GMs similarly timed product, the Volt,

$16,000. In other words, a vehicle in a

seems very low. GM, in fact, has stated

class that typically sells between $16,000

that it does not expect its first generation

and $20,000 in the United States will

Volt to be profitable.

come to market with a battery that alone

Virtually every automaker has announced

costs as much as competing cars while

Both makers may be seeking a first-mov-

providing a very limited driving range.

er advantage such as Toyota has enjoyed

Selling this vehicle with normal margin

with the current generation of hybrids.

expectations would mean pricing it at a

Building intellectual property, know-how,

level likely to attract few buyers.

and consumer brand awareness in a new

plans for small fleets of plug-in hybrid

or electric vehicles in the U.S. market.
Environmental goals, sales and promotion, and new regulation all play a role
in motivating these plans, even though
the market for such products remains

Accounting for the cost of complying with emissions

and fuel economy regulations, a money-losing plug-in
can make sound economic sense for a large automaker.

unproven. Manufacturing costs remain

In fact, Nissan has announced that it will

generation of vehicles could add up to a

stubbornly high and consumer demand

sell the Leaf for $32,780, a price which ap-

persistent advantage. These are expen-

may fail to materialize.

pears, at best, to leave no room for profit

sive bets, however. Honda invested in

and yet which is still double that of some

first-generation hybrids as early as Toyota

But two companies, GM and Nissan,

class-size competitors. A federal tax rebate

but has achieved only a fraction of

have committed to widely publicized

(and in some states, subsidies) will help

Toyotas success. This may explain the

launches of mass market plug-in electric

increase demand; indeed, Nissan has re-

apparently more careful pace of GMs

vehicles, with 2011 sales goals in the tens

ceived refundable deposits from enough

and Nissans main competitors.

of thousands (and ultimately hundreds of

consumers to match the first years

thousands). Nissan is spending billions of

expected production. At these margins,

Another factor may provide economic

dollars on battery plant construction.

though, Nissan is still likely to be losing

justification for early investment, though.

Most automakers have taken far more

money so why bring the Leaf to market?

Upcoming emissions and consumption

tentative steps, prompting us to wonder

regulations in the United States and

if, from an economists point of view,

First Mover Factor?

Europe will effectively demand much

these were rational decisions. Put another

One commonly cited rationale is anticipa-

higher fleet average fuel economy from

way, who is the more sensible: the

tion of future battery cost reductions and

automakers over the next few years. If

aggressively investing minority or the

future gas price increases, which could

GM and Nissan achieve higher sales of

majority with its more measured path?

boost the mainstream consumer appeal of

plug-in electric cars than competitors do,

a high-priced electric car. Other markets,

even at a loss, could the increased fleet

There Goes the Margin

such as Europe and Japan, tax gasoline

fuel economy allow them to avoid

The ability to supply an electric vehicle

aggressively enough that the operating

regulatory penalties or the kind of

has been dictated by advances in battery

cost savings of the electric car are already

expensive technologies needed in other

technology for some decades. Todays

more meaningful.

vehicles to bring them into compliance?

40

5.7MPG
Gap

36
32

37.7

32.0

28
24
20

Current Fleet Fuel

Economy Rating

2016 Requirement
Applied to Current
Fleet

Estimated Costs per Vehicle to Meet CAFE Standard in 2016

Traditional Strategy vs. Leaf Strategy (2016 Leaf Sales = 120,000)
Net Cost per Vehicle to Meet
Fuel Economy Standard

Corporate Average Fuel

Economy (Miles per Gallon)

The Challenge of Meeting Nissan's

2016 Fuel Economy Requirement
$1000
$800

Traditional Strategy

Leaf Strategy

$600
$400
$200
$0

Leaf Margin
$5,000 Below Standard

Traditional
Compliance Strategy

Leaf Margin
$4,000 Below Standard

Leaf Margin
$3,000 Below Standard

Compared to the cost of compliance without the Leaf,

Nissan can afford to give up $4,500 in margin on every Leaf

Versus 2010, Nissan must improve fleet fuel

economy by 5.7MPG by 2016
Source: NHTSA

Source: NHTSA, Analysis Group

Running the Numbers

Using 300MPG as the Leaf rating, one can

And what of GM? It also appears to have

The National Highway Traffic Safety

estimate an alternative cost of compli-

an early mover strategy. GM is using a

Administration maintains a research arm,

ance with 2016 regulations. If Nissan

different technology in the Volt, incorpo-

the Volpe Center, which has developed a

succeeds in selling 120,000 Leafs annually

rating a back-up generator able to give

model to estimate the cost of compliance

by 2016, without changing fuel economy

the car conventional range and refueling

with upcoming fuel economy require-

in the rest of its fleet, its fleet economy

capabilities while providing the plug-in

ments. The so-called Volpe model

would exceed the required level.

electric experience. This may make the car

evaluates a wide range of technologies for

ultimately more broadly appealing but

saving weight or improving engines,

Can Margin Take a Back Seat?

saddles it with higher costs and, ironi-

transmissions, and other powertrain

This alternate strategy well call it the

cally, a lower projected fuel economy

components to increase overall fuel

Leaf Compliance Strategy would allow

rating (GM projects 230MPG). Against

economy. With parameters for the size

Nissan to meet standards without

GMs much larger fleet, the Volt has far

and weight characteristics of any auto-

incremental costs to the rest of its fleet.

less potential to provide the kind of

makers fleet, it allows for an approxima-

Given the level of Nissans U.S. sales, the

dramatic compliance benefit Nissan sees

tion of the cost each automaker faces to

company could afford to give up $4,500 in

with the Leaf making cross-subsidies

comply with fuel economy regulations.

expected margin on each of the 120,000

less affordable for GM and further

hypothetical Leafs and achieve the same

cementing the Leafs cost advantage.

Using the Volpe models estimates,

total profit.

bringing Nissans fleet into compliance

Conclusion

with 2016 standards will cost Nissan $832

Potentially, this strategy affords far more

To conclude, we find that there can be

per vehicle. Using lighter weight materi-

flexibility than the Traditional Compli-

merit to the aggressive electric car

als, more efficient engines, lower rolling

ance Strategy. With the Leaf-driven fuel

investment path, but not for all. As U.S.

resistance tires, and similar techniques

economy cushion, Nissan can compete in

taxpayers owning a stake in GM, we hope

well call this the Traditional Compli-

every other car class with a less constricting

GMs Volt strategy will pay off and

ance Strategy Nissan can bring its fleet

set of parameters than can automakers

reenergize the company. Wearing

from the 32.0MPG it achieves today to the

following a Traditional Compliance

economists hats, however, we have to

37.7MPG regulated for 2016.

Strategy, who will need to achieve higher

favor Nissans big gamble on the plug-in

fuel economy within each car class.

electric market. n

economy rating for the Leaf. This is

However, the strategy is predicated on

edward tuttle is a managing principal in

non-trivial, since the petroleum or carbon

selling enough plug-in cars to make a

equivalent of the electricity used to charge

difference in overall fleet fuel economy. If

boston office .

the Leaf must be estimated. Should it be

the plug-in market, even with subsidies,

research contributed by associate jonathan

the carbon associated with U.S. average

remains modest by 2016, there may not be

borck and vice president adam decter .

power generation capacity or should

a market much larger than Leafs

policy set a more favorable rate? The EPA

projected volumes. Thus the advantage to

has shown interest in setting rates that

moving early and establishing market

provide at least some additional incen-

position first.

But the EPA has yet to provide an

tives for plug-ins. Nissan claims the Leaf

will rate at over 300MPG.

analysis group s menlo park office ; brian

gorin is a managing principal in the firm s