Tesla Corporation, the maker of electric cars, has been in the news recently due to bad reviews from the New York Times and others. Tesla responds by basically saying the reviewer doesn’t understand electric cars. But that’s irrelevant. Electric cars have some significant issues even with modern battery technology. The first is range — it’s difficult to get even 200 miles of range out of an electric car, especially if you have to run the heater or air conditoner. The second is recharge time. It takes me five minutes to pump a tank of gas. It takes about an hour to recharge an electric car even with a so-called “fast charging” station. This relegates electric cars to urban commuter duty — where they’re certainly adequate, but most Americans want cars that will take them everywhere, not just within 50 miles of their home.
But the biggest reason Tesla is doomed is not the limitations of the technology. I’d buy an electric car for commuting if it were cheap enough — say, around the price of a motorcycle, rather than the price of a Rolls Royce. Which points out the real reason that Tesla is doomed: They do not have the economies of scale needed to drive price down, and until they drive price down, they cannot achieve economies of scale.
This chicken-and-egg problem is why there has been no new automobile company in America since the 1950′s, where American Motors Corporation emerged from the wreckage of the post-Korean-war recession and lasted until the late 80′s. And AMC had the advantage of starting out with the intellectual property and factories of its two predecessors, Nash Motors and Hudson Motors, while Tesla is starting out at nearly zero, the only fortuitous thing being that Toyota decided to shut down their Fremont factory for making Toyota Corollas at exactly the same time that Tesla was looking to build an auto factory. It turns out that to achieve economies of scale in a mature industry one of two things have to happen: a) you have a technology so compelling and unique that people will pay outrageous sums of money for it until you manage to sell enough of them to achieve economies of scale, or b) you have massive amounts of government backing to subsidize your product until you can achieve those economies of scale. Even AMC, in the end, failed because they could not achieve the economies of scale needed to make a profit at the prices the market dictated for their cars.
So let’s look at Tesla. They do have one advantage over traditional auto makers: their drive train is much simpler. An electric motor has a few dozen parts while an internal combustion engine has thousands of parts. Furthermore an electric motor starts making torque at zero RPM, so you don’t need a clutch (whether automatic or manual) to disengage the motor from the drive train at idle, you simply stop the motor. This simplifies the drive train significantly. Furthermore, the cost of certifying a new engine and transmission to meet all emissions standards can be as much as a billion dollars. Tesla has no emissions, thus no certification cost. The problem is the batteries. The batteries are horrifically expensive. Tesla had to build their own factory for making batteries but now they have to absorb the full price of that factory themselves, while most auto components makers can share the costs of developing and manufacturing a new part amongst dozens of conventional auto makers and models that use that part.
But still, is their technology compelling and unique? In two words: Nissan Leaf. I.e., clearly there is nothing unique about their technology, and due to the limits of electric cars, it’s hard to say that a Tesla is so compelling that people will pay $50K+ to buy the hundreds of thousands of Tesla cars needed to achieve the economies of scale necessary to drive prices down.
In short, the only thing that could make Tesla a success would be massive government intervention similar to what Hyundai received in Korea to turn into a successful auto company. And Hyundai was part of a massive conglomeration capable of cross-subsidizing their auto division in the first place, while Tesla is a startup with relatively feeble funding. It cost Chisler Corporation over $5B to install a modern automated roboticized assembly plant to build the new model Jeep Wranglers in 2007, the last time it had a complete redesign to make it easily assembled by robots. Tesla hasn’t even raised half a billion dollars. Good luck on convincing the U.S. government to fork over the remaining $4.5B needed to install that kind of assembly line for Tesla.
Not compelling and unique, and not enough subsidies from the government or cross-subsidies from a larger corporate parent. In other words, no — zero — way to get to the economies of scale needed to survive, much less thrive. The numbers say it’s fore-ordained: Tesla is doomed. About the only saving grace is that the technologies they developed will live on after bankruptcy, even if only as drive train components in a Nissan or Chevrolet.
- Badtux the Numbers Penguin.
Agreed.
I enjoy seeing the many different small cars and trucks here in Costa Rica along with the diesel motors that are used as well. Small and diesel can work for us too in many applications but of course that will not be allowed to be considered.
The conventional wisdom is that Americans won’t buy small cars unless they’re really cheap, cheap to the point of being torture boxes, because if they have money they’ll buy at least a mid-size car, if not an SUV, because they can afford the gasoline for such a large car. Volkswagen is attempting to defy that conventional wisdom with their small U.S. diesels and they’ve managed to be successful enough that Fiat/Chiseler is considering bringing some of their small diesels over, but the reality is that small cars don’t sell well here in America unless they’re cheap, and even there they sell only to people who can’t afford a bigger/”better” car. Given emissions and safety standards, selling cheap small cars is somewhat an oxymoron… a platinum catalyst costs the same whether it’s on a $12K crapbox or an $80k land yacht SUV.
In Costa Rica gasoline is very expensive for a number of reasons, so fuel economy matters. But even at $4/gallon, feeding my Jeep Wrangler is “only” $200/month, which is annoying but less than it’d cost me to buy a second car with four times the fuel economy to turn that into $50/month. Hint: I can’t buy and insure a second car for $150/month. And I have my Wrangler for a reason (hint — I use it as a real off-road vehicle), so …
I also heard that electric cars are great for driving in the city, but the endurance of the charge in their battery runs out very quickly for highway driving. This is a major problem for those of us who live in rural areas where most of our driving is done on the highway at speeds over 65 miles per hour.
Even AMC, in the end, failed because they could not achieve the economies of scale
I prefer to believe they failed because of the Pacer – the JaJar Binks of the automotive world.
Another thing about electric vehicles is you just kick the resource depletion/pollution issue can back down the road to a nuclear or coal fired power plant.
On balance, this might be better than burning gas in a car, but it has to be only an incremental gain.
JzB
The AMC Pacer was one of those cars that was both behind its time and ahead of its time. Its “jellybean” shape became the most common shape for cars in the 1990′s, yet it was stuck with an antique inline-6 engine that weighed over 500 pounds when Japanese car inline-4 engines weighed around 300 pounds, and equally obsolete and heavy solid rear axle with buggy spring suspension. The result was an overweight turd. AMC would have been better off investing the money in a modern inline-4 engine and refreshing the aging Gremlin — which they did when they turned the Gremlin into the far more attractive Spirit, but of course they didn’t have the money to update the drivetrain by that time, they’d spent it all on the stamping machines for the Pacer bodywork. They finally did design a modern (if somewhat heavy) inline-4 engine for the Jeep Cherokee which did fine duty until the Cherokee was retired in 2001 after 17 years of production, but by that time, in 1984, it was rather too late — they were owned by Renault by then, who later sold them to Chiseler Corporation.
But anyhow, my economies of scale thing has to do with AMC’s production facilities too. They were a joke. Jeeps were made in a WW2-era factory in Toledo that had a dirt floor, and were pretty much pre-rusted due to its leaky roof. AMC’s main factory in Kenosha had been built prior to the Great Depression and consisted of a number of small buildings connected by gantries. To be assembled, cars had to be pushed out into the snow or rain that typify Wisconsin from one building to the next, which hardly did good things for the partly-assembled cars. Furthermore the bodies were built in a pre-WW2 factory in Milwaukee that had a leaky roof, and arrived pre-rusted at Kenosha, and when they arrived at customers the rust often bubbled through the paint job within a matter of months.
The problem is that the most cars AMC ever sold was in 1963, when they sold 464,126 Ramblers. Thing is, these were mostly cheap Rambler American compacts, i.e., not much money. AMC could have invested in better production facilities to increase their profit margin on the Ramblers, and could have further invested in improving the Ramblers with better suspensions and drivetrains and interiors, but instead ignored the Ramblers and spent the money designing luxury and sports cars that didn’t sell, cars that had to be abandoned by the early 70′s when the Hornet and Gremlin became the mainstays of the AMC line despite being basically an early 60′s Rambler American with a styling/chop job (they were even using the early 60′s Rambler straight-6 engines and Dick Teague even figured out a way to re-use some of the early 60′s Rambler stamps for much of the sheetmetal). By 1975 production had collapsed to under 250,000 cars — a rate at which it was difficult to make money, given that virtually all of these were Hornets and Gremlins, a.k.a. cheap cars, with a slender profit margin given their ramshackle factories and high labor costs (caused by the fact they had no modern automation). The only thing keeping the company alive at that point was the fact that the Hornet and Gremlin had the exact same sheetmetal from the front door forward and the exact same drivetrain with the exception of the rear driveshaft, meaning they could get enough parts commonality to get enough scale to eke out a meager profit. Well, that and the Jeeps, but the Jeeps were still being hand-built in that dirt-floored pre-WW2 factory in Toledo and they were hard-pressed to build 35,000 Jeeps per year in that antiquated facility. The only thing that would have saved AMC at that point would have been investing massive amounts of money in modern designs and a modern production facility. Instead, they spent the money that could have been used to do that on the Matador Coupe and the Pacer, both of which were expensive rehashes of existing technology.
From there it was all downhill. When the French took over they built new factories in Canada, but by then it was too late, the AMC dealership network had collapsed and there was nowhere to sell the cars that the new modern factories could produce. So it goes.