Compliance Cars In USA vs Europe & China — A Deep Dive

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In this new year, a lot of new fully electric vehicles are coming to market. Well, they are not coming to all markets and many will be compliance cars.

I had a discussion about this with Disqus user John Ford in the comments of another website. I will start by using his description of a compliance car:

“It’s pretty straightforward: A vehicle produced for compliance with regulations in the states/countries it is sold. They are intended to sell in small numbers as they are unprofitable.”

“You can see this by watching the behavior of the OEM. For example, the Hyundai Kona will only be sold in the US in the ZEV states. The Audi E-Tron SUV will not even be inventoried at US dealers and will be special order only.”

“The Taycan as I said is a little different because Porsche is a low volume manufacturer anyhow for all of its vehicles. And Porsche will make money on the Taycan and as such will sell as many as they can make and will match production to demand up to the limits of their battery supply.”

The Chinese Market

By far, the most vehicles are entering the Chinese market — mainly local production by local companies. Foreign companies like VW, GM, Toyota, and Nissan that dominate the car market are also starting to produce fully electric cars (BEVs) to comply with the regulations. Because of the size of the Chinese market and the severity of the regulations, these compliance cars are better produced in high volume — otherwise, there will be problems with Chinese authorities. When you make 3 million vehicles, like VW does, and in order to comply you need to make 3% zero-emission vehicles, next year 4%, and in a few years 10%, you need an awful lot of well selling compliance cars.

Western carmakers, meanwhile, have their compliance cars competing with dozens of native Chinese companies that only make BEVs or are rapidly shifting in that direction. These native automakers know they can’t really compete in the current car market, and see an opportunity in the new technology to retake their market from foreign companies. For them, BEVs are not compliance cars — they are a chance to excel and to grow.

Worth remembering is that the Chinese EV market is a closed market, with hardly any imports or exports. What happens in China, stays in China.

The European Market

On the European market, nearly two dozen BEVs will compete for the attention of customers. European fuel economy standards are easier to meet with some ZEVs in the mix, but there are no strict zero-emission mandates like China and California have. The new models we expect this year are the first of the transition to more diversified offerings by the carmakers. All larger carmakers active on the European market realize that without at least an electrified (preferably with a plug) version of each model, they will be considered technologically backward. Most models of most carmakers will have a zero-emission version by 2025. I think it is not compliance but competition and market demand that is driving this change.

The 800 pound gorilla in this market is expected to be the Tesla Model 3. Contrary to the situation in the US, it will face a lot more competition in Europe. The Audi e-Tron, Nissan Leaf E-Plus, and next-gen Renault Zoe will each be able to sell over 50,000 vehicles a year. The Koreans, PSA Group, and Volkswagen Group each will have 4 models that will try to find interested drivers. And they are all in the affordable €25,000–40,000 bracket. This will be a very interesting market and there will be many surprising reports from Jose Pontes about who is ahead in which market. Let the games begin!

The USA Market

The USA can expect around a dozen compliance cars. All these cars will be competing in Europe and elsewhere for profit and market share. Not so in the good old US of A. If it was not for reputation and visibility, it could be more economical to buy the ZEV credits than send some cars to collect dust on a dealer’s lot.

If they are sold for marketing purposes, would that remove the label compliance car? I think not really. Compliance is definitely a motivation to sell some cars in the States, even if it is not the only reason. A pure compliance car would be a converted gasmobile with a trunk full of batteries, like 2012 Ford and Fiat plug-ins, but coming cars are designed to be electric and even serious contenders in some markets. But legacy carmakers can’t compete with Tesla, and they know it, which basically makes their electric offerings compliance cars.

As an example, let us compare a car from the imaginary German luxury manufacturer AutoMacher, or AM for short. AutoMacher has a fully electric car with an attractive design and specs, comparable to the Tesla Model 3 Standard Range, which will have a list price of $35,000.

But AM has an American dealer network with dealers in every state. It sells its cars in the traditional manner — it saturates dealers’ lots with cars so that the dealer is forced to sell them to make room for more.

AM is an efficient carmaker with its own USA factory. It is able to build its Model 3 SR competitor for the same “Cost Of Goods Sold” (COGS) as Tesla. It should be able to meet Tesla’s offer on price, but it isn’t.

Selling through the dealer network incurs some extra costs. Some are real and others are only optical.

• The first is that dealers will have some models that are not in demand by the public in their region, even if they are big hits on the other site of the country. Besides that, their customers are used to negotiating the best price. They need room to give a discount. For this, they add $2,000 to the MSRP on top of what is expected to be the average transaction price.
• AM does not have tweeting superstar CEO making the brand super cool, so has to pay for advertising. Another ~$2,000 per car is needed for that.
• The dealer has to make a profit on top of the profit AM is making, whereas at Tesla, that is the same profit. That adds another ~$1,000 to the intended transaction price.
• It is normal for stock to stay on the dealer’s lot for three months, occupying space and using capital. We’ll add on just a few hundred dollars extra for that.
• It takes more person-hours to sell a car, with all the walking around the lot, the test driving, the haggling and paperwork. We keep adding costs. …

Perhaps I am wrong about some costs, or I forgot some, but the MSRP of the AM competitor for the $35,000 Tesla will be above $40,000 for a barebones model. That is not the end of AM’s problems. While Tesla talks about a $35,000 model (plus $5,000–10,000 in options) on its online sales portal, at the dealer, there are many nicely optioned cars with sticker prices between $45,000 and $50,000 on the lot.

This would not be such a great problem if the dealer and his salespeople actually wanted to sell the car. They are the best salespeople, knowing all the tricks to get the mark to sign the contract. But electric cars are destroying their business since most of their profit comes from services. They have little interest in explaining why a more expensive electric car is better than its gas-guzzling sibling. They have to learn many new details and technology that they may have no interest in learning. In other words, many hate to sell electric cars.

Warren Buffet calls such a big advantage in the sales channel a moat. This is a big moat the legacy carmakers have to overcome in the USA. In Europe, most cars are sold the same way that Tesla sells its cars. Fall in love with a shining model in the showroom, take a test drive in a top-of-the-line luxury model, and then make a special order with all the bells and whistles the customer, their partner, and their kids prefer — nothing they don’t like and no haggling (or just a bit of play acting).

A List of What is Coming to the USA

Brand	Model	Battery (kWh)	Price
Audi	e-Tron	95	$ 75,000
BMW	i3	42	$ 45,000*
Hyundai	Kona EV	64	$ 38,000*
Hyundai	Ioniq EV	39	$ 34,000*
Jaguar	I-Pace	90	$ 69,500
Kia	e-Niro	39-64	$ 40,000*
Kia	Soul EV	39-64	$ 38,000*
Mercedes	EQC	80	$ 70,000*
Mini	Electric	42	$ 30,000*
Nissan	Leaf E-Plus	60	$ 35,000*
Porsche	Taycan	90	$ 90,000
VW	ID Neo	48	$ 30,000*

*Prices are determined after extensive studies using tea leaves, different crystal balls, laying the tarot, and drawing each car’s horoscope. If at some future date a dealer (or, heaven forbid, a carmaker) decides to use a different price, the stars are at fault. You can not hold me responsible (I don’t know what that is).

Jaguar is a very small carmaker, smaller than Tesla and even smaller than Porsche. A few years back, Jaguar explained that it is too small to do both electric and internal combustion — that would be too expensive. Because it sees electric as the future, it will stop development of gas/diesel vehicles and go fully electric in the near future. The I-Pace is the first product of that policy and will likely be Jaguar’s best sold model in 2019. Production was originally forecasted at 20,000/year, but I would not be surprised at 30,000 in 2019. Waymo has ordered 20,000 Jaguar I-Pace for its self-driving taxi fleet, starting in 2020. The main markets for Jaguar to sell this car are Europe and China. Most of the 2019 production is already sold. Don’t expect many to wait for you on dealers’ lots.

Audi is part of the Volkswagen Group, just like Porsche. Money is no problem. For the e-Tron, Audi renovated its Brussels plant, tearing it down to its foundation and rebuilding it as an electric vehicle plant. Initial volume of the e-Tron is expected to be 60,000 in 2019 and growing in coming years. Audi did build a factory for electric motors — it intends to launch more models than just the e-Tron. Audi will sell online and via pre-ordering and will sell every car it can make at significantly lower overhead costs than when it stuffed the American dealers’ lots with unsold cars. But the rest of the world is used to this way of car buying; the USA is not.

What Porsche is going to do is not known yet, but I expect special order mostly, as is often the case for models of this brand.

Mercedes is coming to market with the EQC, in small numbers initially because the company is unsure of the market and marketing. It also would like to see how this new technology is handling in real life. Daimler did build a battery factory for this and future models. Some dealers in the USA will have some models, but the bulk of the production is for Europe.

All three companies are clearly executing a strategy towards competing in the electric car market. That makes these models something more than compliance models for the carmakers. However, availability on the US market, focused on ZEV states in particular, makes them compliance cars in the USA.

We have to update the description from John Ford in the intro of this article for this situation. The defining characteristic is not why the car is produced, but why the car is sold in a specific market.

With this new description, we can examine the question of why these cars are sold in the USA.

The reason to sell a small number in a few states is twofold: compliance and visibility as a maker of future products.

The reason not to sell in the USA is simple: As long as battery production is smaller than world demand, all carmakers are production constrained. To get to profitability in this new electric vehicle market, the markets where it is easy to sell with low costs are prioritized over markets where selling is hard and expensive.

The same conditions apply to every imported car on that list. The sales are for compliance and visibility, the lack of an offering in volume is because the US market lost the competition with foreign markets and is too financially inefficient.

Hyundai and Kia have orders for practically all of their 2019 production. In some markets, they’ve started talking about 2020 deliveries.

BMW’s next model, the iX3, will be produced in high volume in China in 2020, and later exported to Europe and the USA. The i3 is a placeholder, sold in low volume in the USA and higher volume in Europe. What will happen with the Mini brand is an open question at the moment.

VW is going all-in with its ID sub-brand for electric cars. But the USA is only 3% of VW’s market. The IDs will come to the US when other markets are served, not in 2019 in any meaningful numbers.

The Nissan Leaf E-Plus is the odd one on the list. It is made in Smyrna, Tennessee, not imported. It is not a compliance car at all, and the Leaf has never been one. The Smyrna plant was expected to make more Leafs than the European and Japanese plants combined. Now, the USA sales are just ~15% of the total and barely double the Canadian sales. So what will happen with the E-Plus?

A Final Observation

The European market is about the same size as the US market ~17 million vehicles. On average, the US incentives are better ($7,500 + local incentives in USA versus €4,000 in Germany, as an example). In Europe, the number of new fully electric cars in 2019 is nearly twice as high as in the USA, and the models in this article will sell 2 to 10 times better in Europe. The difference is a sales channel that is better able and willing to sell electric cars.