A big bet on EVs

NASHVILLE -- More than three years after embarking on a plan to mass produce electric cars in America, Nissan North America is putting the final touches on its $1.6 billion factory in Smyrna, Tenn.

But it's all happening as the electric-vehicle market is falling far short of the rosy projections made back in 2009. Nissan and other manufacturers are facing a daunting scenario, and some are rethinking their EV strategies.

In late September, Toyota Motor Corp. shelved its plan to sell an all-electric Scion eQ. At the same time, Smith Electric Co., the Kansas City, Mo., manufacturer of electric delivery trucks, abruptly cancelled its plan for an initial public stock offering the night before it was to take place, saying the offering would not have delivered the valuation the company needed.

Battery supplier A123 Systems, which supports several electric vehicle programs, including General Motors' Volt, says it will diversify into other automotive uses for its lithium ion batteries -- such as start-stop technology, which shuts off and restarts engines at traffic lights -- because of the changing outlook for EVs.

The disappointing market was symbolized by a crowd that Nissan convened recently under sunny skies on the front lawn of its U.S. headquarters near Nashville. They were participating in Plug-In Day, a national celebration of electric cars and plug-in hybrids sponsored by environmental organizations. But only a small group showed up for the event, counting the company's own employees, local politicians and a few environmentalists.

A cross-town parade of about 50 electric cars included numerous vehicles owned by Nissan itself. A solitary, unsold Mitsubishi i-MiEV electric car came for the parade, supplied by a local Mitsubishi dealership.

The cheering was loud. Participating Leaf owners spoke enthusiastically about their vehicles. But the bottom line was clear: There simply are not very many of them.

That fact is painfully obvious around the industry.

Through September, U.S. consumers purchased fewer than 25,000 Nissan Leafs, Chevrolet Volts, Mitsubishi i-MiEVs, Ford Focus Electrics, and Toyota Prius Plug-Ins. Pike Research forecasts that by 2015, total cumulative EV and plug-in sales for all manufacturers since 2011 will reach just 410,000 vehicles.

That would fall far below the national target, set by President Barack Obama, of 1 million EVs and plug-ins on the road by 2015.

According to Pike, the 1 million mark will be achieved, but not until 2018.

Meanwhile, Nissan is just weeks away from starting EV operations in Smyrna. Using a $1.4 billion low-interest loan from the U.S. Department of Energy, Nissan has invested $1.6 billion to build capacity for 150,000 Leafs and 200,000 lithium ion battery modules annually at Smyrna.

The new battery plant, adjacent to its Smyrna vehicle assembly plant, is a state-of-the-art, clean-room manufacturing operation. In the next few days Nissan workers will begin cautiously making the first trickle of tabletop-sized battery modules before the start of Leaf production in December.

But how many takers will there be for EVs?

"The demand for electric vehicles won't be anywhere near 200,000 before the end of this decade," says Michael Holman, research director for Lux Research Inc. in Boston. "And the entire global market for electric vehicles won't be a third of what Nissan is planning. This is all the result of industry market projections that just weren't realistic."

Speaking to reporters at the Paris auto show at the end of September, Nissan CEO Carlos Ghosn defended his bullish vision for the EV production capacity in Smyrna.

"I think the capacity that we built is adequate for the potential we see for the mid term for the United States," Ghosn said. "When we decided to make our investment in electric cars, we didn't take a very short-term perspective. We took a longer-term perspective."

But Leaf sales have remained puny. Last year Ghosn and other executives predicted 2012 sales of 20,000, doubling the 9,674 Leafs Nissan sold in 2011. That doesn't seem likely now. Through September, Nissan dealerships had sold just 5,212 Leafs -- fewer than the 7,199 sold in the first nine months of 2011, even after the Japanese earthquake interrupted Leaf shipments from Japan.

Things also have been touch-and-go with Chevrolet's Volt plug-in hybrid. GM once envisioned building 45,000 Volts in 2012, but it sold just 16,348 through September. GM has backed off that forecast and temporarily suspended production in September.

GM and Nissan are cutting prices. According to Truecar.com, the industry pricing analysis firm, the Chevy Volt now is selling at a $10,000 discount from sticker, and the Leaf is selling at a $3,250 discount, including incentives such as dealer cash and low finance rates. In September, Nissan also reduced the standard monthly lease rate on the Leaf to $219 a month for 39 months, down from $249.

Multiple issues are at play as demand for electric vehicles stalls.

• Gasoline prices are now lower than the doomsday expectations of 2008 and 2009. The $4-plus price spike of 2008 raised consumer anxiety and calls for alternatives to gas-powered vehicles. But now that gasoline prices are closer to $3.80 a gallon, the industry is seeing sales of big pickups increase.
• The high costs of battery systems resulted in vehicle sticker prices that are out of line with U.S. buyer habits. Though smaller than a $16,000 Honda Fit, the subcompact Mitsubishi i-MiEV retails for nearly $30,000, before counting a $7,500 federal purchase credit. Even with that credit, the Volt retails for around $33,500.
• The high value of the Japanese yen has made it difficult for Nissan to fan sales for its imported Leaf this year. The car retails for $36,050, including shipping, before the government incentives are applied.
• High-visibility quality problems for two of the new cars, the Volt and Fisker Karma, have tainted battery-powered vehicles in general. Nissan spent the summer fielding complaints from a small number of Leaf owners in Phoenix who alleged that their batteries were aging too quickly.

Nissan engineers have said the Phoenix phenomenon resulted from greater than normal driving by those owners -- more than 19,000 miles a year, rather than the predicted 12,500 miles. But Nissan has called for an international panel of green-car enthusiasts to help it address customer concerns.

• Meanwhile, an array of emerging fuel-economy technologies on internal-combustion vehicles, such as start-stop systems, are challenging the underlying mpg advantage of electrics. Pike Research forecasts that start-stop technology is catching on so fast around the world that by 2020 it will appear on 41 million new vehicles a year.

In Paris, Ghosn acknowledged that Leaf sales are slower than expected, and blamed it on the lack of public vehicle charging stations.

"If the level of sales is not at the level we expected, why?" he asked. "Is it related to the product, to the batteries, to attractiveness, or to the infrastructure? The slow level of sales is mainly due to the fact that people are worried about the absence of infrastructure. And we are mainly lobbying in order to make sure that in some cities and in some states a better job is done, a quicker job is done in terms of infrastructure.

Ghosn counseled patience.

"We are going to have to be resilient," he said, "we are going to have to do our job, we are going to have to make sure that we are systematically not only innovating in terms of marketing and selling the car, but also doing our job with local government, states, cities, municipalities in order to push forward what is the main concern of the consumer -- which is, 'I buy the electric car, where am I going to charge it?' I'm talking about quick charge."

He added: "This is not a normal car. This is something which is going to require a profound change in the attitude of the consumer."

Few doubt that there will be growth in EV and plug-in hybrid segments.

"While it is true that plug-in electric vehicles have seen delays in arriving on the market and have sold in fewer numbers than originally anticipated, we expect strong growth as global PEV [plug-in electric] sales volumes will nearly triple between 2012 and 2014," Pike Research Director John Gartner says.

"Automotive companies have made a strong commitment to electric vehicles, and their viability as a transportation platform is no longer in doubt."

But the question is how much and how soon?

Mike Omotoso, a senior partner with industry forecasting firm LMC Automotive US Inc., says EV sales growth will be slower than the automakers hope. LMC predicts combined 2012 sales of electrics and plug-in hybrids will come in at around 41,000, and increase to only about 115,000 in 2013, with plug-in hybrids outselling electrics.

"The challenge will be converting early intenders to mainstream buyers," he says. "The people who already bought Leafs and Volts were never really concerned about the price. They wanted the technology. That won't be the case for the next wave."

As for Nissan's plan to lower the price of the Leaf by building the car in the United States, Omotoso remains doubtful.

"Can you get mainstream buyers to spend $30,000 or $40,000 on an EV when for $15,000 they can buy a subcompact that gets 40 miles per gallon?" he asks. "We see that, even moving the Leaf to Tennessee, sales still won't take off."