Electric Cars & Economics: Profitability Versus Social Benefits

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The laws of economics are fairly well known. Making something once is expensive. Making something a million times costs far less per unit. Take the story of the man who came to Henry Ford one day with a new door lock he had invented. Ford looked it over, liked it, and offered to pay the inventor a penny apiece. The inventor was indignant. It cost more than that to make just one of his locks! What he didn’t realize was Ford would buy hundreds of thousands of them over the years. Thanks to economies of scale, he could have made a nice little business out of supplying Ford Motor Company with his door locks.

Image credit: Carolyn Fortuna. Used with permission.

The auto industry has been successful over the years because it adopted Henry Ford’s assembly line ideas. Today, tens of millions of new cars, trucks, motorcycles, and bicycles roll out of factories all around the world every year, each one virtually identical to the next and each one costing the manufacturer far less per unit than building just a few dozen or a few thousand.

Stefano Aversa is the head of European operations for Alix Partners, an international consulting firm. He tells Forbes that most of the companies planning to bring electric cars to market in the near future will struggle to make money because they plan to sell too few of them, negating the economies of scale needed to reach profitability.

“There are way, way too many electric car models being planned and the average volume per model, at 26,000, is much lower than the 180,000 average volume per ICE car, and that means it will be very hard to make money. If you take out Tesla, models like the Nissan LEAF and Volkswagen’s ID.3, the rest are way below at perhaps 10,000 per model and some more like 5,000. It’s very hard to make money in electric cars,” Aversa says.

Volkswagen says it expects 25% of its sales by 2025 will be electric cars. Aversa disagrees. “We expect investments in electric cars will be a very disappointing return on investment. (global sales of) 25% (of the marketplace) is completely unrealistic. We expect by 2025 sales of electric vehicles plus plug in hybrids (PHEVs) to reach 12% of the market, up from a combined about 3% now,” he says.

Other financial institutions see things much the same way. Morgan Stanley says it expects electric car sales to increase from around 2% globally in 2019 to 11% by 2025. IHS Markit predicts EVs will be 14% of the European market by 2025. UBS sees them being only 15.6% of the market by then.

Battery Constraints

Germany has just announced an EV incentive package that amounts to €9,000 for electric cars priced less than €40,000. The UK is also talking a good game about providing incentives for electric car purchasers, but has yet to provide any details. France and other European countries have similar post-corona stimulus packages in mind.

But those incentives won’t be enough to boost EV sales significantly, says Angus Tweedie of Citi Research. “This is a relatively niche portion of the market so we won’t have broad-based stimulus coming through. There are constraints on battery supply, which means that the absolute volumes that can be driven through this are going to be relatively limited.”

He points out that there are €17 billion worth of conventional cars stranded on dealer lots thanks to the sales slowdown created by the pandemic. The German stimulus package provides nothing to help get those cars sold, which means production of new cars will be delayed, which means a lot of factory workers are going to be idle. Tweedie thinks the pressure of all those unemployed workers will force Germany to rethink its EV incentive program.

Social Benefits

Economic theory is very precise, as far as it goes. But there are lots of factors which impact society that cannot be quantified with precision, and so they get left out completely from all those sophisticated calculations economists like to make. One such factor is social benefit, which includes things like longer life expectancy and better health outcomes for society in general.

A new study by Clearing The Air — a joint project by Environmental Defence and the Ontario Public Health Association — looks closely at atmospheric pollution in the greater Toronto area and finds that each electric vehicle added to the transportation mix provides $10,000 worth of intangible economic benefit to the community. The report is thorough and detailed with lots of cool interactive maps. Feel free to check it out. Here’s the graphic that presents its conclusions best.

Clearing The Air chart
Image credit: Clearing The Air

“Local air pollution within urban environments is highly detrimental to human health,” says lead researcher Marianne Hatzopoulou, a professor at the University of Toronto. “When you have an electric vehicle with no tailpipe emissions, you’re removing a wide range of contaminants — from nitrogen oxides to fine particulate matter — from the near-road environment and shifting them to power plants. The net effect remains a large improvement in air quality.”

Health Canada estimates that 3,000 premature deaths per year can be attributed to air pollution in the Greater Toronto-Hamilton Area. “If you bring it down to an individual level, each electric vehicle replacing a gas-powered one brings nearly $10,000 in social benefits,” Hatzopoulou says. “Those benefits are shared by everyone, not just the people buying the cars.”

Reporting on the Clear The Air study, EVAnnex says, “Several sources have calculated that jobs in the renewable energy and electric vehicle industries already outnumber jobs in all the fossil fuel industries combined. What on Earth are we waiting for?”

An excellent question. Among all the hand-wringing about profitability, economies of scale, and whether a penny apiece for door locks is too much, we lose track of the main objective, which is maintaining an environment where humans can continue to exist on our little spaceship at the far edge of the Milky Way. Perhaps economics will save us — cheaper electric vehicles will make them the norm and replace all those pollution spewing monsters — but slavish adherence to economic principles may also spell our doom if we decide survival is just too expensive.

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Steve Hanley

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be "woke" and doesn't really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: "The secret to change is to focus all of your energy not on fighting the old but on building the new." You can follow him on Substack and LinkedIn but not on Fakebook or any social media platforms controlled by narcissistic yahoos.

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