Essec Business School

What does the future hold for Europe’s car industry? Facts and figures emerging in recent weeks might not look promising – Peugeot Citroen PSA needed a 7 billion Euro bailout at the end of 2012, Renault announced only this month the suppression of some 7 000 jobs and statistics show that European car registrations has fallen by over 8% over the past year. That said, for Carole Donada these talks of “crisis” are nothing new and should be kept in perspective.

“Every five years more or less we’re talking about crisis. But rather than a crisis in the traditional sense of the term, I would describe the current situation as a meeting of conditions: In addition to the economic downturn and its impact on public buying power, sliding sales have also been brought about by the fact that markets in developed nations are at a point of saturation, the price of fuel is increasing steadily and public opinion and attitudes towards the environment and ideas of ownership are changing.”

By allowing users to respond to concerns over fuel costs and environmental impact, is the electric car a potential answer to these woes? As governments in Europe and abroad ratchet up investment in new electric mobility technologies, it’s clear that it’s seen to a certain extent as a possible answer to the downturn.

That said, radical change has been predicted for the automobile industry every decade of the 20th century and Electric Vehicles have been presented as a solution before. Specifically, the 1970s oil crisis and nuclear power development re-stimulated interest in electric vehicles, but nothing succeeded in firmly establishing the mass market in the 20th century.

So the real question today is: have factors finally aligned and announced the dawn of a new era in which an electric mobility paradigm will take shape?  

Electric Vehicles: the Eternal Victims of the Car Industry

The electric engine is nothing new. Electric vehicles even enjoyed a brief period of success in the early 1900s during which time they represented almost 40% of cars on the road. However, the rise of the internal combustion engine, boosted by the popularity of Ford’s model T and its derivatives, gave rise to an industrial paradigm that has kept electric vehicles out of the mass-market circuits for nearly 100 years.

“Over a century ago, automakers defined an industrial paradigm  based on two success factors -  a volume-based strategy and the in-house control of their product’s core component – the internal combustion engine (ICE). Obviously, this paradigm is not conducive to the development of electric vehicles, not only because they wouldn’t be produced in sufficient volume but also because they would put constructors, who lack the skill for producing and dealing with electric devices, at a disadvantage.”

“That said, carmakers are conscious of the limitations of the historical paradigm in which they exist, which is better adapted to a growing market than a declining one. They want to anticipate the demands of tomorrow’s consumer. This explains why today’s car makers are becoming involved in think tanks, university research programmes, studies and forecasting operations: to develop a plan of action before the radical transformation of the automobile industry as they constructed it. So while advances are being made, they remain timid.”

In other words, if customers progressively replace their internal combustion vehicles, carmakers loose their knowledge-monopoly as they lack the skill for producing and dealing with electric devices. They are forced therefore to rely on partnerships with battery producers. So while advances are being made in the domain and most carmakers today are working on electric or hybrid vehicles, their market share remains small: in France last year only 4000 electric cars were sold of which 80% were bought by businesses.

The first dissuasive factor for individual consumers is the rather large price-tag attached to buying an electric car. Existing within the automotive industry’s economy of scale, the volume just isn’t there today to keep costs low enough for everyday consumers, compared to the cost of buying a standard ICE-run car. Cost indeed is determined by volume.

“The thing is, electric vehicle owners save over the long term, not only on fuel costs, but also on repairs – there are no pistons, filters or carburettors to require the traditional ‘tune-up’. The battery is only real issue. So while owning an electric car may represent a much larger initial expense, you have to look at the costs over 10 years, for example, to actually see savings.”

“The real problem might better be described as a communication breakdown. If they really wanted this technology to succeed, carmakers could make the long-term savings more clear. However, they are reluctant to communicate on this fact because it would hurt their relationship with dealerships that make huge profits on maintenance. Furthermore, when you encourage users to look at long-term costs, it might also encourage them to re-evaluate the idea of ownership. Would it not be cheaper to rent a car when needed for example?”

In this context we see that the automotive industry – at least unconsciously – is putting off the decline of the internal combustion engine as long as possible, to preserve the complex industrial paradigm in which carmakers exist. How can we break out of this trend?  

The Argument for More Policy

100 years ago, the industrial paradigm grew with the full support of public authorities that assisted in financing and creating the infrastructures needed to use internal combustion vehicles. Will electric vehicles benefit from the same aide? Should governments intervene or should the markets do the work?

To look more closely at the subjects of policy and infrastructure, the Armand Peugeot Chair hosted speaker Willett Kempton, Professor at the University of Delaware and electric mobility expert. He argues that electricity is the most viable replacement for fossil fuel but that the long-term success of the electric vehicle will require more government support.

“Both France and the US have strong automotive industries, both understand that air pollution can weigh on their health systems, and both have CO2 emission goals,” he explains, “it is in their best economic interest to develop policy that will grow this new market. The thing with electric cars is that the energy is cheap but the place to store it – the battery – is very expensive.  Government subsidies at the time of purchase make sense…. This is one area in which our countries are doing a good job already.”

“That said, a smaller battery would also help reduce the cost of buying an electric car but would require more frequent charging and therefore a bigger, better-adapted network of charging stations. This is the area where our government need to do more.”

Indeed, owning an electric car means first that you need to the means to charge at home. A domestic device installed like any other electric appliance would give owners the capacity for a slow change, over 12 hours. But what about charging in public spaces where drivers have a lot less time on their hands?

In the US there is about 5-10 million in subsidies set aside for private companies to develop changing facilities. However, Professor Kempton would also argue that national standards need to be set regarding the locations of charging centres, the type of current they use and their wattage.

“Where are the right places? For me it’s certainly not at a petrol station…My argument is that charging stations be located for where it is convenient to stop for an hour for lunch or for shopping. This would require a careful analysis of routes.”

And not only would good electrical grid infrastructure make electric vehicles more practical and affordable, it can also help users cash in on their unused, stored electricity. “

The idea of Vehicle to Grid is an attractive one because it lets users deposit unspent energy back onto the gird. It helps users make additional savings while also further reducing their carbon footprint. Plus, it helps stabilize energy spikes on the network... Already today electric car owners can sell their unused electricity on the grid, but this is another area where policy needs to step in and regulate prices and help encourage drivers to stay plugged-in.”

Both the constraints and technological advancements of the 21^st century have given electric mobility great potential. And while carmakers might still be moving forward timidly, many governments and global leaders are hopeful, maintaining a target of 20 million electric vehicles on the road by 2020. However, to reach these goals a lot of work remains to be done, not only in terms of technology and infrastructure but also in terms of consumer mindset.  Only the implementation of disruptive offers, industrial structure and governance will accelerate the establishment of a new paradigm.