Coming To America In 2019 — Compliance Cars Only

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Note: A version of this article was published in the second half of an article last week. We rearranged several things and wanted to highlight it separately this weekend, but don’t presume you’ve contracted deja vu if you read the first article.

The European market is about the same size as the US market, ~17 million vehicles. On average, US electric car incentives are better ($7,500 federal tax credit + local incentives in USA beats most European incentives, such as a €4,000 rebate in Germany).

In Europe, however, 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. I explore this in more depth on the bottom of this article.

In 2019, a dozen new fully electric cars and SUVs are coming to the USA market. Well, they are not coming to all states — many will be what are called “compliance cars.” Let’s take a look at these electric cars and SUVs briefly first.

List of Electric Cars 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. Otherwise, the main markets for Jaguar to sell this car are Europe and China. Most of the 2019 production is already sold, so 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 and the USA is not, so we’ll have to see how thing go, but the car-buying habits of Audi customers are not likely to change overnight.

What Porsche is going to do to sell its Taycan is not known yet, but I expect special order mostly, as is often the case for models of this brand. The vehicle may sell fine in this market compared to Porsche’s normal volumes because of its unique position in the market and way of selling cars.

Mercedes is coming to market with the EQC, in small numbers initially because the company is unsure of the market and marketing of the new vehicle. It also would like to see how this new technology is handling in real life. Daimler did build a battery factory for this and for future electric models, and some dealers in the USA will have some display models, but the bulk of the production is for Europe and no one would be surprised by low-volume EQC sales in the USA.

All three German companies are clearly executing a strategy towards competing in the electric car market globally in the long term. 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. Getting the picture? Well, let’s move in before exploring in more depth.

Hyundai and Kia already have orders logged for practically all of their 2019 electric vehicle production. In some markets, they’ve started talking about 2020 deliveries. It’s nearly impossible that Hyundai and Kia will have high sales in the US for their extremely compelling Kona EV and e-Niro, since they will prioritize other markets.

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. That should not change much, especially with the Tesla Model 3 in high-volume production and now available in both markets.

What will happen with the MINI brand is an open question at the moment.

Volkswagen 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 — the Leaf has never been one.

The Smyrna plant was expected to make more Leafs than the European and Japanese plants combined. Now, however, US sales are just ~15% of the total and barely double the Canadian sales. So, what will happen with the E-Plus? We’ll see.

Why Are Electric Cars Compliance Cars in the USA?

What makes carmakers only offer compliance cars in the States? Let’s explore.

In a discussion in the comments of another website, John Ford used the following 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.

All of these new vehicles will be competing in Europe and elsewhere for market share and profit. Not so in the good old US of A, though. If not for corporate reputation and visibility, it could even be more economical to buy ZEV credits than send some cars to collect dust on dealers’ lots.

What about if they are sold for marketing purposes, though? Would that remove the label compliance car? I think not really.

We know that compliance is definitely a motivation to sell some cars in the States, but we should also recognize it is not the only reason. These carmakers want to showcase that they can also make competitive fully electric cars. Many of these are cars now designed from the ground up to be electric, and to lead the carmaker’s entrance into this new market. A pure compliance car would be a converted gasmobile with a trunk full of batteries, like 2012 Ford and Fiat plug-in vehicles. But, then, why aren’t they going to be sold in the US in higher volumes?

We have to update the description from John Ford a bit. The defining characteristic is not why the car is produced, but why the car is sold in a specific market. Several of the electric cars coming to the USA in 2019 were produced to sell in high volumes, but they will be compliance cars in the distant land of red, white, and blue.

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.

As part of the above, what makes these ground-up electric cars compliance cars in the USA and not serious contenders in the market is that — the legacy carmakers can’t compete well with Tesla or even gasmobile models there. And they know it.

Tesla does not sell its cars through independent dealers, but instead has a direct sales organization with stores, galleries, and an online sales portal. There aren’t really Tesla cars in stock. All cars are made to customer specification as a special order car — though, Tesla has shifted away from this a little bit with quarter-end sales events. Tesla does not give discounts, not even to Elon Musk himself. This is a very efficient system for the vehicle industry.

For contrast, let’s compare a car from the imaginary legacy 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 and for the same price.

AM has an American dealer network with dealers in every state. It sells its cars in the traditional manner: saturate the dealer’s lot with cars so that the dealer is forced to sell them to make room for more.

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

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).

So, while automakers across the world are now producing and developing real electric vehicles meant to be competitive in their classes, the US will not see high sales volumes of these models yet because it is the hardest market to recoup costs and make a profit on this new powertrain. Since they won’t be sold efficiently or in high quantity in the US, the door will be left open longer for Tesla to swoop in and increase its market share.

A compliance car just can’t compete with a Tesla — by definition.