General Motors announced changes to the Chevrolet Volt’s design after a NHTSA investigation into why a Volt caught fire following crash testing.

The changes will go into effect once production restarts at the Hamtramck, Michigan facility, but customer cars already sold will follow a different protocol.

Starting in February, GM will initiate a “voluntary customer satisfaction program” to make the necessary changes to the Volt. According to GM’s Rob Peterson said that  formal recalsl must be initiated by NHTSA, and their lack of movement prompted GM to enact a voluntary one instead.

The fix involves changes to the Volt’s battery pack housing, as well as a coolant temperature sensor and a special bracket to prevent overfilling. The previous system allowed the battery housing to be punctured, which then resulted in coolant overflowing onto a circuit board causing an electrical short. The short was determined to be the cause of the fire.

With NHTSA opening a formal defect investigation into the Chevy Volt, GM is moving to defend its rolling lightning rod (no pun intended) and allay consumer fears about its safety. Yesterday I briefly appeared on Fox Business’s Your World With Neil Cavuto show to talk about what the intro to my segment referred to as “the hybrid from hell” and the “killer in your garage.” I tried to explain that the danger to consumers was basically nil, and that the real concern is for rescue, towing and salvage workers. And I would have explained why NHTSA’s tests still leave some serious questions open, but my “fair and balanced” approach meant that my segment ended up being extremely short. So let’s take the opportunity now to look past the hysteria and pinpoint the real issues with NHTSA’s investigation into the Volt.

A recent GM press release on the issue was accompanied by a conference call to reporters [transcript in .doc format here], in which GM’s top product executives, North American President Mark Reuss and Product Development Boss Mary Barra, gave GM’s perspective on the flap. But in a key passage, Barra confirmed that the most reasonable criticism of GM is essentially legitimate, as she confirmed that GM had not fully developed post-crash safety procedures before putting the Volt on the market.

Three weeks after the [initial NHTSA side-pole] test, the Volt caught fire.  This vehicle crash test was conducted before GM had finalized its battery depowering procedure.  We have learned that significant electrical charge, or energy, was left in the battery after the test.  When electrical energy is left in a battery after a severe crash it can be similar to leaving gasoline in a leaking fuel tank after severe damage.  It’s important to drain the energy from the battery after a crash that compromises the battery’s integrity – or you risk potential fire.

That’s why we have developed a process to depower the Volt’s battery after a severe crash.  We have been using the protocol since July of this year and we have now shared this process with the NHTSA and are working to extend this process and the needed equipment to those who handle or store vehicles after a severe crash.

Unable to deny that it should have had post-crash protocols in place before launching its first lithium-ion battery-powered car, GM seems to be trying to broaden the issue to extend beyond the Volt. Said Barra

But I also have to put this into the proper perspective:  Battery safety isn’t just a Volt issue. This is an issue we’re already working within the industry.  In fact, we are currently leading a joint electric vehicle activity with the Society of Automotive Engineers and other automotive companies to address new issues such as a process and protocol for depowering batteries.

The problem is, this does appear to be a Volt issue. Between the Nissan Leafs already on the road and the Prius Plugins that Toyota has been testing for years now, there are no documented thermal events that I’m aware of. Furthermore, the loss of battery integrity that the Volt experiences in side impacts seems to be caused by the lack of a steel battery case, which Nissan fits to its Leafs. Though it’s not clear what post-crash procedures Nissan has proliferated, it seems that its decision to protect its batteries with steel casings maintains battery integrity in government crash testing, eliminating the risks seen in the Volt.

Meanwhile, there is one question that nags at me. In the wake of the June fire at a NHTSA facility, GM shared its post-crash safety protocols. But the latest Volt fire, which happened a week after NHTSA, DOE, DOD and GM engineers test-ruptured a Volt battery, ”sparked a fire of a wooden structure” at the DOD’s Hampton Roads facility. Here’s what’s not clear: whether that battery pack was subjected to GM’s post-crash protocols. If it was, this fire proves that GM doesn’t have a handle on this problem, and that its safety procedures are insufficient. If the post-crash protocols were not followed, NHTSA, DOE and DOD were incredibly stupid to store a battery pack they knew might catch fire in a wooden building. Furthermore, GM’s communications team has yet to clarify whether this latest fire was caused because safety procedures were not followed intentionally. One way or another, this needs to be clarified, even if it makes the government testers look foolish.

Based on GM’s reaction, deploying top executives, offering loaner cars, and vigorously defending the Volt in the press, it’s clear that The General takes this situation incredibly seriously… which is why I’m a little shocked that it hasn’t cleared up the circumstances of the most recent fire. After all, the Volt is easily the most controversial car in America, and based on my experience on Cavuto yesterday, it’s clear that many hope to use this investigation as the final nail in its coffin. But there is still much we don’t know about these thermal events, and what we do know indicates that they are not an immediate danger to owners and drivers.

So where is the danger? Clearly to the afore-mentioned rescue, salvage and towing workers… but also to the Volt’s sales. The Volt already has marketing challenges based on its price and association with the bailout. Even the hint of a fire risk is going to add the Volt’s sales headwind, making it even tougher to meet its goal of selling 45,000 units in the US next year. Meanwhile, the White House’s goal of putting 120k Volts on the road next year is pushed even further out of reach.

In short, this does not appear to be the death blow that Volt-bashers were hoping for, and GM appears to be handling the situation as well as can be expected. But this incident does highlight the downsides to pioneering new technologies, and shows how just one overlooked detail can create huge PR issues.

As Bertel pointed out earlier today, peak oil is here: the graph above is not from some fly-by-night EV firm, but Toyota, an auto industry giant. What years of environmental and security arguments failed to communicate, economics is now explaining with little difficulty. Namely, that demand for oil is growing faster than supply, forcing developed economies to look beyond oil for future growth. And, as you might expect from a conservative player in a conservative industry, Toyota argues that the solution to this growing disconnect is a portfolio of drivetrain technologies. But what if, instead of trying to adapt an existing business model to the new oil reality, you built a new business model from the ground up? That’s exactly what Project Better Place is trying to do, and the contrast between its approach and that of Toyota is fascinating to anyone interested in the future of the automobile.

Toyota’s approach to a world of constrained oil supply in the incremental manner that one would expect from a giant company selling millions of cars each year. In the words of Satoshi Ogiso

To control this gap, we must go multi track. We must improve gasoline and diesel engines. We must increase the number of hybrid models. We must produce the plug-in hybrid. We must develop city commuter electric vehicles. We already started small production of fuel cell vehicles.  We must do all these improvements at the same time.

That approach seeks to serve the entire global marketplace for cars, and places a huge demand on R&D efforts, requiring a company of Toyota’s size to execute the strategy. Better Place’s approach on the other hand couldn’t be more different. Rather than taking a multi-technology approach, BP is focused on one technology: EVs. And rather than building cars itself, BP is focused on providing the services, infrastructure and grid management tools to make EVs viable for more than “city commuter vehicles.” In short, whereas Toyota seeks to evolve, BP is attempting to create the circumstances under which EVs are the natural choice of technology for all automakers.

These vastly different approaches to the same problem have, at their cores, a conflict over philosophy. Toyota, along with the rest of the car industry, is trying to maintain the market for cars as best it can, while slowly introducing new technologies at higher prices which will then trickle down throughout the lineup. As conditions evolve, the market will demand different technologies from Toyota’s toolbox in different amounts. On the other hand, markets are notoriously bad at foreseeing and managing energy price spikes, as witnessed by the crazy segment fluctuations during and after the Summer of 2008. In contrast, rather than promising a steady evolution towards oil independence, BP offers the opportunity for a quantum leap. Its basic mechanism is the government, rather than markets, which can better prepare a nation for the future rather than relying on often-painful,inefficient market mechanisms. And with demand unlikely to drop below supply any time soon, Better Place is the only option for governments with enough political consensus to preemptively force themselves through petroleum-based transport withdrawals.

But just because Better Place is more fundamentally dependent on government assistance than its alternatives in the auto business does not mean it’s another Solyndra. In fact, Better Place has raised some $750m in equity financing, including a $200m round that was announced at the end of last week. Its backers now include, HSBC, Vantage Point, Lazard, Morgan Stanley, UBS, GE, and Israel Corp… none of which are blue-eyed dreamers. And their fiduciary reasons for backing BP appear to be well-grounded: although the company is “pre-revenue,” its valuation (post money valuation on a fully diluted basis) is now $2.25b. That’s an 8x increase for the first round of investors, who would have been hard-pressed to find a stronger return over the 2007-2011 period. So, where does all this value come from if there are no revenues yet? According to the firm’s communications director, Joe Paluska points to

the uniqueness of our model (i.e., investor confidence that we can unlock a hyper growth category for affordable electric cars) and the major trend lines of oil forecast to go up and battery prices continuing to decline with the delta being our operating margin.

Better Place also has another secret weapon that’s sure to attract investors: its CEO, Shai Agassi. The former software maven who created Better Place after being passed over for CEO of SAP, Agassi is one of those rare people who can communicate an idea as complex as Better Place’s network of battery swap stations, its decoupling of the EV and its battery, its under-covered grid management capabilities, and the macroeconomic backdrop that he insists will make it all work. Having met a number of brilliant and intimidating luminaries of the auto industry, it’s safe to say that none of them made quite the impact on me that Agassi did when I met with him earlier this fall. Between the sheer scope of his ideas, and his flinty, intellectual-street-fighter demeanor, it’s safe to say that Agassi is the closest to a truly historical figure that I’ve met in my years covering the auto business. And with the auto industry stuck in the model of slow technological evolution exemplified by Toyota, Agassi embraces the revolutionary approach that a clean break from the past is not only possible, but necessary.

When I ask Agassi if he wanted to “destroy the auto industry,” a charge often leveled against him by industry executives, he smiles and answers with another question:

Did Jeff Bezos want to destroy the publishing industry? Because that’s what he did. But he did it because he saw the potential for an entirely new business model with the Kindle. In effect, the world’s biggest bookseller killed off its existing business, selling paper books, in order to create an entirely new business in digital media.

No wonder then, that Better Place faces such resistance from the established forces in the auto industry, despite the market’s clear optimism for his approach. Thus far, only Renault has signed on to partner with BP; elsewhere, Agassi says the industry is deeply resistant to the idea that infrastructure can make electric cars viable for the majority of the auto market. He sketches a quick graph showing total cost of ownership over 300,000 miles: the cost of a car, gas and maintenance on one side, and the cost of a car, several batteries and electricity on the other. With battery prices near $500/kWh and headed downwards while gas heads upwards, he points to the difference and says

I don’t want to destroy the car industry, I want to destroy the oil industry. I want to share this money with the car companies. When was the last time they got a check from the oil companies?

It’s a question that’s as provocative as Better Place’s business plan, and the fact that it doesn’t convince the automakers shows how deeply conservative the industry is. But then, why get in bed with a plan that aims to kill off your entire gas-powered business when Better Place can’t even prove that there’s a market for their model?

That’s the challenge Better Place faces right now. Its first networks, in Israel and Denmark, are being built up as we speak, ahead of a slow rollout next year of the Project’s services and vehicles. And says Agassi, the first year will be slow and there will be problems. Like what kind of problems? Agassi smirks slightly and says

We’re going to find out. Imagine the first guys to install gas stations… you think they didn’t run into a few unexpected problems?

But it seems that Better Place’s problems thus far have little to do with implementation and everything to do with the fact that big ideas are scary and draw knee-jerk reactions. For example, take a recent Wall Street Journal [sub] piece which cites the concerns of one Moni Bar, chief executive of Budget Rental Cars Israel-Domicar Ltd. For example:

Mr. Bar said that he fears vehicles with switchable batteries might lose as much as 70% of their original value in four years

An interesting complaint, but one one that seems borne of paranoia rather than reality. After all, one of Better Place’s key advantages is that you don’t buy an EV battery, but just the car. The battery is owned by BP, which you then buy a mileage plan from, allowing you to swap batteries at will and insulate yourself  from the 70%-range depreciation that will afflict EVs where you do have to buy the battery. Though BP does not have a buy-back scheme to maintain resale values, it insists that the 70% depreciation number is way off. And with its new Fluence EVs selling for less than the Mazda3 (Israel’s most popular car) and offering a 20% improvement in Total Cost of Ownership (including gas and maintenance), it’s not too surprising that 400 of Israel’s largest corporate fleet owners have signed up to switch their fleets over to Better Place (the majority of new car sales in Israel are made through fleets). As Agassi puts it

We don’t have a demand issue, we have a rollout issue. The first year we are going to take care to have a carefully controlled rollout.

Getting that rollout right is the major challenge for better place, a it is not evolving an existing product to changing times, but is rather attempting to change entire parts of the world all at once. Today it’s Israel and Denmark, next it will be Australia (which Agassi describes as “two and a half Israels, linked by a freeway). Perhaps someday it will be the San Francisco Bay Area, a market Agassi also compares to Israel. Like everyone else, Better Place needs to build scale in order to bring prices down to the point where unlimited-range, limited-depreciation EVs can compete on pure economics; unlike everyone else, BP can be patient while it rolls out its first networks. After all, it doesn’t need to spend huge amounts researching multiple solutions… it just needs for gas prices to march ever upward and battery prices to keep dropping. And when the next big gas price spike arrives, you can bet that a number of governments with overnight mandates to solve, not “work towards solving” oil dependence, will be calling up Agassi. After all, if you want to “shoot the moon” in the race free private mobility from oil dependence, Better Place seems to be the only option out there.

The Detroit News reports that the White House has ordered a review of the Department of Energy’s various loan programs in the wake of the Solyndra scandal, noting

White House Chief of Staff William Daley ordered an independent analysis on the state of the Department of Energy’s loan portfolio — including loans to solar, nuclear and auto companies.

“The president is committed to investing in clean energy because he understands that the jobs developing and manufacturing these technologies will either be created here or in other countries,” Daley said.

One of those programs is the so-called “Advanced Technology Vehicle Manufacturing” loan program, which was nearly used to fund the Detroit bailout and has since come under fire from various quarters. Twice already the Government Accountability Office has questioned the ATVM loan program for its lax oversight, weak goals, lack of technical support, inconsistency in awarding loans and the undetermined impact of funded vehicles. And those internal issues could help explain why the Center For Public Integrity has accused the ATVM program of operating a patronage scheme, alleging that major Obama donor and Tesla board member Steve Westly personally benefitted from loans made to the company. And on the Fisker side of things, backer John Doerr of the VC firm KleinerPerkins is another major Obama donor, suggesting a pattern of politically-motivated loan awards to well-connected EV firms that carry high risks. With government intervention in the auto industry still a hot-button issue in the wake of the bailout, this scandal has huge implications for the legitimacy of America’s emerging “industrial policy.”

Meanwhile the real victim here could be Chrysler, which desperately needs to develop vehicles with higher fuel efficiency and yet has not received any loans that it applied for in the pre-bailout period. Not only could this put Chrysler’s finances under pressure, but it also shows a distinct lack of focus or strategy in the White House’s industrial policy. The bailout era was rife with justifications of the rescue of GM and Chrysler on the basis that the firms would build a new generation of green vehicles. And yet GM has withdrawn from the loan program, and Chrysler is being strung along… while both (but Chrysler in particular) struggle to bring up their average fuel economy which are two of the lowest in the industry. Having rescued these two firms, why would the government choose to send available loans to firms like Tesla and Fisker, which are aiming for the luxury segments and thus have less chance of creating significant impacts on both jobs and the US’s status as a green economy leader? The answer may prove to be found in the relationships between Fisker and Tesla’s well-connected backers.

The fact that Fisker is building its first car in Finland has dominated the political outrage over the ATVM loan program, but the real issue is the opportunity cost. If there is proof that Fisker and Tesla received loans because of political donations made by their backers, it will have diverted money from more effective opportunities, proving that government intervention in the economy is fundamentally fraught with inefficiency. Though Republicans and others have purely political motivations for trying to give the Obama Administration grief ahead of an election, there is a real principle at stake here. If the government is going to play a role in guiding industry towards more sustainable strategies, it needs to take the utmost care to optimize that aid in terms of both market and jobs impacts. The nature of the auto industry is such that start-ups face incredible challenges, and as luxury manufacturers, Tesla and Fisker will neither sell many cars nor employ many Americans. The resources, experience and infrastructure already in place at major manufacturers make them the logical place to invest “green” loans… especially because the bailout did not, in fact, prepare them especially well to compete in the green car space.

Ultimately, governments need to face a fundamental choice:  either allow the market to drive innovation at the risk of losing jobs to other countries, or intervene with programs like this one on a purely utilitarian basis. There is some evidence that government incentives for future technology development can help lumbering auto firms prepare for unexpected energy shocks in ways that the market might not always be able to do, with its relatively short-term incentives. But if there’s not a utilitarian strategy underpinning these government interventions, the effort will inevitably fall victim to political patronage, and all of the inefficiency (not to mention blowback against all forms of government intervention in the economy) that comes with it. By giving hefty loans to two unproven but well-connected startups, the Obama Administration has run the risk of fostering a backlash against all forms of green  incentives… and the result could be merciless market pressure on lagging firms like Chrysler should another oil price spike come. In that scenario, Chrysler could find itself in serious trouble again, and be forced back to Washington for its third bailout… further driving the inefficiencies of the apparently politically-motivated loans to Fisker and Tesla.

The reality is that when consumers actual expectations for range, charge time, and purchase price (in every country around the world included in this study) are compared to the actual market offerings available today, no more than 2 to 4 percent of the population in any country would have their expectations met today based on a data analysis of all 13,000 individual responses to the survey.

That assessment is well in line with other studies we’ve seen, most of which estimate global EV demand at somewhere between one and five percent of the market. But because potential EV demand has a lot of moving parts, from government regulations to the state of EV technology, there’s more to the study than that conclusion alone…

One of the most unexpected lessons from the Deloitte study: you can’t rely on self-identified “early adopters” to drive the market by acting differently than “typical” consumers.

Regardless of whether they thought of themselves as potential first movers, might be willing to consider an electric vehicle, or even those that are not likely to consider an electric vehicle, their expectations for range, charge time and purchase price are extremely similar – and consistently and significantly different from what automobile manufacturers can offer today

Though the appeal of the EV’s environmental benefits vary globally, that appeal never outweighs three factors: range, price and charge time. In the conclusion, the study authors note that their work

suggests that while common consumer expectations have helped the automotive industry globalize, it also means that when it comes to alternative power train technology such as EVs, the globalized consumer will be less willing to deviate from their wellestablished expectations. What’s more, with the rapid development of new markets for automobiles in Asia and the rest of the developing world, millions of new consumers are entering the market with the same set of well-established expectations. This helps explain why the survey found that consumer expectations regarding electric vehicles were so out of line with what can be offered by manufacturers today.

The counterpoint to this argument was laid out by Shai Agassi of Project Better Place, in a recent speech given at the APEC 2011 conference, in which he argued that this influx of new drivers would place enough strain on global oil production that it makes an EV boom not only necessary but inevitable. But then, the Deloitte study doesn’t look into the kinds of services offered by Better Place, which include both battery-swapping (thus eliminating “range anxiety,” as well as an cost benefit that stems from its “end-to-end” business model, which decouples battery costs from the upfront expense of an EV. The Deloitte study implicitly leaves room for Agassi’s alternate scenario when it notes

The current collection of hybrids is better equipped to meld consumer expectations with environmental consciousness and government calls for cleaner forms of personal transportation. While manufactured costs of these dual powertrain hybrids will continue to be a significant challenge, it is expected hybrids will be much more readily adopted by consumers than pure EVs. Ultimately which technology enjoys the most success will depend on ever changing consumer expectations and preferences coupled with effective government policies… Government policy is more so than any other aspect that will likely determine the adoption rate of EVs over the next decade and beyond.

But there’s even more evidence that a Better Place-style infrastructure solution is what the EV market needs, as the study notes

It is clear from the survey that consumers’ expectations for EVs are much higher than anything manufacturers can deliver today. But consumers are also notorious for being fickle and changing their mind; and doing so fairly quickly. Electric utility infrastructure can play a significant role in electric vehicle adoption. Plentiful electric power generated through stable, dependable, clean and cost-efficient sources (and delivered over smart grids with acceptable economics for consumers), coupled with easily accessible and economical charge stations can make consumer concerns about range and charge time dramatically less – even if EV technology does not demonstrate any significant improvements over the next decade. Higher oil prices (anywhere from a 40 to 70 percent increase) would also likely lessen the concerns consumers have today about electric vehicle range, charge time, and price.

This is Agassi’s scenario: higher oil prices coupled with a smart infrastructure supported by government policies. After all, it seems unlikely that the “wait for a technological fix” scenario will deliver the desired improvements in range, cost, and charge time, as the Deloitte study notes that expecting huge declines in battery prices (which affect all of these factors) is not realistic.

But to break out of their small test markets in Israel and Denmark, Better Place needs partners to emerge from the global automakers (currently only Renault is partnered with BP). And, argues Deloitte, the automakers hold the keys to the EV’s success.

Though the tipping points may vary slightly from country to country, the study found that across the globe consumers will be less likely to consider purchasing an electric vehicle as the fuel efficiency of ICEs improves. As a result automotive manufacturers will need to carefully plan their investments to maximize sales of fuel efficient technologies consumers are willing to purchase.

Another way of putting this: with plenty of efficiency improvements to be found in the Internal Combustion Engine, automakers will continue to emphasize those technologies, in effect relegating the EV to the niche role that this study sees for it. An “end-to-end” EV servicing/infrastructure firm like Better Place might be able to significantly broaden the global appeal of EVs, but why take on a partner when you can keep trickling out ICE technology that keeps EVs from being a necessity? Agassi acknowledges this challenge by arguing that he’s asking automakers to take a gamble not unlike that made by Jeff Bezos and Amazon.com with its Kindle e-reader. Amazon had to kill off its traditional book selling business in order to take its book (and content more generally) business to a new level. And, as this study shows, the car business has plenty of incentive to not take that leap… yet. And until automakers actually try to make EVs capable of overcoming the range, cost and charge-time concerns that consumers globally share, we can expect assessments of global EV demand to continue to be as pessimistic as this one.

TTAC’s Twitter followers already know that I’m at the 2011 APEC Transport/Energy Ministerial Meeting in San Francisco, rubbing elbows with key decision-makers from the world of energy and transportation across the Asia-Pacific region. Earlier today I had the opportunity to sit down with Better Place CEO Shai Agassi, the intense, formidable CEO of Project Better Place. I’ll be writing about that conversation shortly, but many of the major points are covered in the speech Agassi gave shortly afterwards to assembled ministers, media and businesspeople. The speech boils down Better Place’s hugely ambitious plan to tackle one of the most complex challenges the world faces: transportation’s dependence on oil. If you’re looking for an Al Gore-style “green” speech, keep looking. Agassi tackles the problem from an economic and technological approach, and he makes a case that is well worth about 17 minutes of your time.

If you’re not familiar with Better Place, you can read some of TTAC’s coverage of the battery-swapping, network-managing, mileage-leasing project at our Project Better Place tag here (much of it on-the-ground reporting from Tal Bronfer, who has been following its rollout in the Israeli market). A comparison of battery swap to other EV business models can be found here, and a study of EV grid management issues can be found here.

The famous Japanese monozukuri  (craftsmanship, sometimes “the process of continually making something better”) is going down the drain. It took the combined efforts of “a consortium of 57 small businesses in Kashiwazaki, Niigata Prefecture,” reports The Nikkei [sub] before they could  “unveil a prototype one-seater electric car that can travel 100km between charges.”

According the The Nikkei, the vehicle has a go-kart-like chassis with strap-on lithium ion batteries and control circuits. “The system as a whole and the control circuits were designed by the consortium under guidance from experts.”

Even The Nikkei can’t help it and captions their depiction of the electric go-cart with a snide “Just hope it doesn’t rain.” Come on, what do you expect from a committee of 57? A Heinz-Mobile, probably.

The first time Top Gear “tested” an electric car, it depicted Tesla’s Roadster running out of electricity and being pushed from the track. Tesla immediately pointed out that the batteries “never fell below 20%” during the test, a charge the British motoring show addressed by claiming that its review

offers a fair representation of the Tesla’s performance on the day it was tested.

Tesla responded again, and then three years later (as the Roadster was headed out of production) the EV maker sued the BBC and Top Gear producers. An online war of words erupted, with Tesla coming away looking rather foolish. And guess what? Now it’s all happening all over again… and this time, the most EV-committed global automaker, Nissan, has taken the Top Gear bait.

In the video above (if it hasn’t yet been pulled), Jeremy Clarkson and James May drive a Nissan Leaf and a Peugeot Ion (a rebadged Mitsubishi iMiEV) and run out of electricity. Comic antics ensue. Nissan though, wasn’t amused (and apparently hadn’t heard of the Tesla debacle), and so Executive VP Andy Palmer rang the Times of London [sub], which dutifully ran a piece with the headline “Clarkson didn’t give our electric cars a sporting chance.”

Having had some practice with this very scenario, Top Gear producer Andy Willman fired back at the Top Gear blog, laying out a four-point defense:

1) We never, at any point in the film, said that we were testing the range claims of the vehicles, nor did we say that the vehicles wouldn’t achieve their claimed range. We also never said at any time that we were hoping to get to our destination on one charge.

2) We never said what the length of the journey was, where we had started from, nor how long we had been driving at the start of the film. So again, no inference about the range can be gleaned from our film.

3) We were fully aware that Nissan could monitor the state of the battery charge and distance travelled via onboard software. The reporter from The Times seems to suggest this device caught us out, but we knew about it all the time, as Nissan will confirm. We weren’t bothered about it, because we had nothing to hide.

4) The content of our film was driven by the points we were trying to explore. As James stated in the introduction, you can now go to a dealer and buy a ‘proper’ electric car, as in one that claims to be more practical and useful than a tiny, short-range city runabout. That’s what the car company marketing says, and that’s what we focused on in our test: the pros and cons of living with one as an alternative to a petrol car.

Ask any fan of Top Gear whether its tests (with the possible exception of test track laps) are any more “real” than, say, professional wrestling, and the answer will be “no.” Top Gear is a scripted show, more allegory than documentary… and as long as they don’t explicitly present EV segments as scientific range tests, where’s the lie? If Top Gear were really “journalism,” they would have tested the Tesla with less than a 20% state-of charge (for starters). Nissan complaining about its treatment in this segment is akin to the the American Kennel Club complaining that Top Gear treated sled dogs unfairly in the Polar Special because the presenters were allowed to modify the Toyota HiLux the dogs were racing against. In the very electric car segment that Nissan’s Executive VP got so steamed about, the lads were also scolded for parking in handicapped spaces, for crying out loud. That says everything you need to know about how seriously Top Gear should be taken as journalists.

But I would argue that there’s a calling that’s even higher than the exalted “journalist”: the comedian. Whereas the journalist has only a noisy commitment to objectivity, a tenuous concept if ever there was one, the comic lives by a far stricter code. With no platitudes to hide behind, the comic has no choice but to point out all that is strange, awkward, unspoken and unrecognized in the world. And Top Gear’s producers realize that audiences aren’t hungry for literal, documentary-style automotive tests verite. What they want is an allegory that helps them understand the truth that’s being left out in the tsunami of EV enthusiasm. And, as Willman points out, a lot is being left out:

In the story in The Times Andy Palmer, Nissan’s Executive Vice President, was quoted as saying that our film was misleading. Well with respect to Mr Palmer, Nissan’s own website for the Leaf devotes a fair amount of space to extolling the virtues of fast charging, but nowhere does it warn potential customers that constant fast charging can severely shorten the life of the battery.

It also says that each Leaf battery should still have 80 percent of its capacity after five years’ use, and that, to a layman, sounds great. But nowhere is it mentioned that quite a few experts in the battery industry believe when a battery is down to 80 percent capacity, it has reached End Of Life (EOL) status. Peugeot, for example, accepts 80 percent capacity as End Of Life.

Now I also know, to be fair to Nissan, that when you go to buy a Leaf they do warn you about the pitfalls of constant fast charging. But the website is the portal to the Leaf world, it’s their electronic shop window. Is it misleading not to have all the facts on display? I’m only asking.

In the world of PR, journalists are expected to objectively repeat what a company’s representative tells them (specifically about the kinds of issues Willman raises) and test their cars under OEM supervision. Comedy, on the other hand, asks Clarkson and company to portray the reality of carbon-age men fumbling to come to grips with strange new technology. Which approach produces the more truthful “review”? More importantly, having the advantage over real journalists, why can’t EV companies just laugh at the comedians?

NHTSA currently intends to propose standards that would be projected to require, on an average industry fleet wide basis, 40.9 mpg in model year 2021, and 49.6 mpg in model year 2025.  For passenger cars, the annual increase in stringency between model years 2017 to 2021 is expected to average 4.1 percent, and to average 4.3 percent between model years 2017 and 2025. Like EPA, in recognition of the utility requirements of full-size pick-up trucks and the unique challenges to improving fuel economy compared to other light-duty trucks and passenger cars, NHTSA intends to propose a lower annual rate of improvement for light-duty trucks in the early years of the program. For light-duty trucks, the proposed overall annual rate of fuel economy improvement in model years 2017 through 2021 would be 2.9 percent per year.  NHTSA expects to change the slopes of the fuel economy footprint curves for light-duty trucks from those in the 2012-2016 rule, which would effectively make the annual rate of improvement for smaller light-duty trucks in model years 2017 through 2021 higher than 2.9 percent, and the annual rate of improvement for larger light-duty trucks over the same time period lower than 2.9 percent.  For model years 2022 through 2025, NHTSA expects to propose conditional standards with an overall annual rate of fuel economy improvement for light-duty trucks of 4.7 percent per year

We had heard that trucks would improve their efficiency at a rate of 3.5% rather than 2.9% for the 2017-2021, and a 2022-2025 growth rate of 5% rather than 4.7%. But then, cars were supposed to improve by 5% in the 2017-2025 period, so both truck and car standards seem likely to end up lower than what the president’s report seemed to promise. But that’s not the only bad news for anyone hoping for tough fuel efficiency standards (or, good news for truck-dependent automakers)… with the release of this notice, we have an initial sense of the loopholes that will be included, and they appear to be of the hefty variety.

The first of the “key program elements” is the off-cycle credit program, which aims to

promote the early market penetration of tailpipe CO2/fuel consumption reducing technologies that are not appropriately accounted for in the current test procedure

This is typically thought to include improvements in C02 output from systems whose energy consumption or C02 output is not measured on the EPA test. According to the document

EPA and NHTSA intend to develop a minimum credit value on a subset of technologies for which we have sufficient data.  We expect this list to include at least six defined technologies, if not more.9 The total number of technologies will be dependent on the available data. In order to make use of the pre-defined credit list of off-cycle technologies, a manufacturer must utilize the technology on a minimum percentage of the company’s vehicles.  EPA and NHTSA will continue to assess the appropriate level and will propose a level in the NPRM.  The specific percentage values may vary by off-cycle technology, and will consider the applicability of the technology across vehicle type.  Under the planned proposal, the total gram/mile credit from the predefined list for any given model year would not exceed a 10 gram/mile10 impact on the company’s combined fleet average. This limit would only apply to the total for technologies where the company chooses to use the agency provided credit values. Automakers can apply for additional credits beyond the minimum credit value of listed technologies if they have sufficient supporting data.

We will, of course, have to see what technologies make it onto the EPA list, and what technologies the OEMs apply for credits with, but in general this provision makes sense. Certainly when compared to the other credit programs, it seems to be the most consistent with the stated goal of reducing fleetwide emissions by all possible means.

The second “key feature” is one of the biggest, and most objectionable of the bunch: the EV/plug-in “super credit.”

To facilitate market penetration of the most advanced vehicle technologies as rapidly as possible, EPA intends to propose an incentive multiplier for all electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and fuel cell vehicles (FCVs) sold in MYs 2017 through 2021.  This multiplier approach means that each EV/PHEV/FCV would count as more than one vehicle in the manufacturer’s compliance calculation.  EPA intends to propose that EVs and FCVs start with a multiplier value of 2.0 in MY 2017, phasing down to a value of 1.5 in MY 2021.  PHEVs would start at a multiplier value of 1.6 in MY 2017 and phase down to a value of 1.3 in MY 2021. 11 These multipliers would be proposed for incorporation in EPA’s GHG program.

As an additional incentive for EVs, PHEVs and FCVs, EPA intends to propose allowing a value of 0 g/mile for the tailpipe compliance value for EVs, PHEVs (electricity usage) and FCVs for MY 2017-2021, with no limit on the quantity of vehicles eligible for 0 g/mi tailpipe emissions accounting.  For MY 2022-2025, 0 g/mi will only be allowed up to a per-company cumulative sales cap based on significant penetration of these advanced vehicles in the marketplace.  EPA intends to propose an appropriate cap in the NPRM.

Regulators argue that the credit system is designed to incentivize “game changing” technology, its major result will likely be less admirable. As I argued in an earlier piece which anticipated the resurrection of the “super credit,” this loophole will encourage automakers to build the overly expensive, advanced technology “green cars” that they themselves argue consumers aren’t interested in buying, because the credits will allow them to build more profitable non-compliant pickups by offsetting their C02 output. The net result: more expensive passenger cars (which the OEMs can blame on the government regulation) and business-as-usual on the incredibly profitable  truck side of the equation. The combination of an artificial zero-C02-per-mile emission rating for EVs (in what universe is grid power carbon-neutral?) and a “multiplier” super credit was left out of the 2012-2016 standard because

EPA has concluded that the combination of the zero grams/mile and multiplier credits would be excessive.

Why? As the National Resources Defense Council argued, the credits would

undermine the emissions benefits of the program and will have the unintended consequence of slowing the development of conventional cleaner vehicle emission reduction technologies into the fleet

And because these credits are likely to be bankable, giving automakers the ability to “carry forward” or “carry back” their benefits to future or past model-years, the wiggle room is even greater. But loophole madness is just getting started…

Next up: “Incentives for “Game Changing” Technologies Performance for Full-Size Pickup Truck including Hybridization.” As if generous over-compliance credits for cars being used to offset under-compliance for pickups weren’t enough, there’s this:

The agencies intend to solicit information on technologies that offer significant increases in fuel efficiency and reduction in greenhouse gas emissions.  We intend to propose a credit for manufacturers that employ significant quantities of hybridization on full size pickup trucks, by including a per-vehicle credit available for mild and strong hybrid electric vehicles (HEVs).  This provides the opportunity to begin to transform the most challenging category of vehicles in terms of the penetration of advanced technologies, allowing additional opportunities to successfully achieve the higher levels of truck stringencies in MY 2022-2025.

The agencies intend that access to this credit is conditioned on a minimum penetration of the technology in a manufacturer’s full size pickup truck fleet, with defined criteria for a full size pickup truck (e.g., minimum bed size and minimum towing capability).  The agencies intend to propose that mild HEV pickup trucks are eligible for a 10 g/mi12 credit during 2017-2021 if the technology is used on a minimum percentage of a company’s full size pickups, beginning with at least 30% of a company’s full size pickup production in 2017 and ramping up to at least 80% in 2021.  Strong HEV pickup trucks would be eligible for a 20g/mi credit during 2017-2025 if the technology is used on at least 10% of the company’s full size pickups.

The agencies will propose specific definitions of mild and strong HEV pickup trucks, but expect to include stop/start, regenerative braking, minimum motor power, minimum battery voltage value and minimum energy storage capacity, or similar types of objective metrics.  The agencies expect that a “mild” HEV will include moderate hybridization and not just start/stop, and that a “strong” HEV will include launch assist. The agencies also intend to propose a performance based incentive credit for full size pickup trucks which achieve a significant reduction below the applicable target.  This credit could also be on the order of 10-20 gm/mile vehicle.  The same vehicle would not receive credit under both the HEV and the performance based approaches.

Now, even with the reduced improvement rate and “super credits,” there might have been some incentive for automakers to invest in smaller, more efficient pickups of the kind that have been woefully underinvested-in in recent decades. But with this provision, the message is clear: rather than incentivizing downsizing, or even offering this credit to all trucks and letting the chips fall where they may, the government explicitly wants to keep full-sized trucks on the forefront by encouraging their hybridization (despite likely market trends in the opposite direction). And apparently it never occurred to regulators that creating a higher truck standard might have led to the hybridization of more pickups anyway… but sometimes loopholes create the need for more loopholes.

Then we get to the treatment of CNG, PHEV and Flex-fuel vehicles.

EPA intends that CO2 credits for plug-in hybrid electric vehicles (PHEVs) and bi-fuel compressed natural gas (CNG) vehicles will be based on the recognition that, once a consumer has paid several thousand dollars to be able to use a fuel that is considerably cheaper than gasoline, it is very likely that the consumer will seek to use the cheaper fuel as much as possible.  Accordingly, for CO2 emissions compliance, EPA expects to use the Society of Automotive Engineers “utility factor” methodology (based on vehicle range on the alternative fuel and typical daily travel mileage) to determine the assumed percentage of operation on alternative fuel and percentage of operation on CNG for both PHEVs and bi-fuel CNG vehicles, along with the CO2 emissions test values on the alternative fuel and gasoline. EPA does not expect to extend this method to flexible fueled vehicles (FFVs) using E-85 and gasoline, since there is not a significant cost differential between an FFV and conventional gasoline vehicle and historically consumers have only fueled these vehicles with E85 a very small percentage of the time.  Therefore, treatment of E85 FFVs will continue as the MY2016 program, based on actual usage of E85 which represents a real-world reduction attributed to alternative fuels.

In the NHTSA program for MYs 2017-2019, NHTSA expects that the fuel economy of dual fuel vehicles will be determined in the same manner as specified in the MY 2012-2016 rule, and as defined by EISA. Beginning in MY 2020, EISA does not specify how to measure the fuel economy of dual fuel vehicles, and it is expected NHTSA will propose to use the EPA “utility factor” methodology for PHEV and CNG vehicles to determine how to proportion the fuel economy when operating on gasoline or diesel fuel and the fuel economy when operating on the alternative fuel. For FFVs, NHTSA expects to propose to use the same methodology as EPA to determine how to proportion the fuel economy, which would be based on actual usage of E85.  NHTSA expects to continue to use Petroleum Equivalency Factors and the incentive multipliers that are used in the MY 2012-2016 rule, however with no cap on the amount of fuel economy increase allowed.

The first half of this sounds reasonable, but when we turn to the flex-fuel credits, my anti-ethanol anger becomes to much to contain. Because ethanol offers no real environmental benefits, has numerous social and environmental costs and sucks billions of dollars in subsidies each year, all credits for flex-fuel vehicles should be cut. But even if that’s not possible, the methodology used to estimate FFV C02 output is not great. According to 2012-2016 rules

EPA will base MY 2012–2015 credits on the assumption that the vehicles would operate 50% of the time on the alternative fuel and 50% of the time on conventional fuel, resulting in CO2 emissions that are based on an arithmetic average of alternative fuel and conventional fuel CO2 emissions… the CO2 emissions value for the vehicle is calculated to be significantly lower than it actually would be otherwise, even if the vehicle were assumed to operate on the alternative fuel at all times. This represents a ‘‘credit’’ being provided to FFVs.

EPA is requiring for MY 2016 and later that manufacturers will need to reliably estimate the extent to which the alternative fuel is actually being used by vehicles in order to count the alternative fuel use in the vehicle’s CO2 emissions level determination… the default is to assume FFVs operate on 100% gasoline, and the emissions value for the FFV vehicle will be based on the vehicle’s tested value on gasoline. However, if a manufacturer can demonstrate that a portion of its FFVs are using an alternative fuel in use, then the FFV emissions compliance value can be calculated based on the vehicle’s tested value using the alternative fuel, prorated based on the percentage of the fleet using the alternative fuel in the field.

The most complex part of this approach is to establish what data are needed for a manufacturer to accurately demonstrate use of the alternative fuel, where the manufacturer intends for its performance to be calculated based on some use of alternative fuels.

In essence, the EPA will either do its own calculations on vehicle miles traveled per year for FFVs, and calculate E85 usage per VMT based on overall E85 sales. This process would have to take place every year. Alternatively, manufacturers could present their own data from demonstration studies to make an argument about what the C02 reduction actually is. In any case, the FFV system is a serious crapshoot, and though the 2016-2025 methodology may be a bit more accurate (if far more complicated), it still amounts to a credit because it doesn’t include “upstream” GHG emissions on a lifecycle basis. If the aim of CAFE is to reduce C02 output, this qualifies as yet another counter-productive loophole.

The final loophole is the most obvious: police and emergency response vehicles are exempt from CAFE. While this is very understandable in many respects, it certainly adds to the impression that government refuses to hold itself to the same standard as it holds its citizens. No surprises there, really.

Meanwhile, the mid-term review might seem like a loophole, and it’s certainly raised fears among environmental groups, but I see it simply as a safeguard. Nobody knows what the market will be like come 2025, so a review to make sure assumptions are on track makes sense for 2017. After all,

Where EPA decides that the standards are not appropriate, EPA will initiate a rulemaking to adopt  standards that are appropriate under section 202(a), which could result in standards that are either less or more stringent [emphasis added]

So, what does this all mean? Again, these details will all be hammered out before a final rule is made official in September, but it’s obvious that the 2017-2025 standard will not only be easier on trucks than cars, but it also offers huge loopholes with which automakers can offset emissions for non-compliant but high-profit trucks. Though it’s a tough standard compared to what the industry has been used to, it’s also got loopholes (like the combination of 0g/mile EV rating and “multiplier credits”) that were considered before and rejected as too lenient. The proof of the pudding though, will be in the eating. If these credits allow automakers to plan for truck sales levels that disappear under the force of rising gas prices, it could be a disaster on par with the very first round of CAFE legislation. On the other hand, if truck-heavy manufacturers continue to make huge profits due to the loopholes in this proposal, the mid-term review could be a far more feisty battle. And, if nothing else, the layers of loopholes on top of already-complex calculations prove how much more efficient it would be to simply tax gas and let the market sort the details out. Sadly though, that’s simply not an option.

Like Batman in The Dark Knight, CAFE isn’t the policy we need, but it’s the policy we deserve.

Electric vehicles present all kinds of challenges to the traditional ways of understanding cars. From design to differentiation, from range to refueling, EVs simply act different than the internal combustion-powered cars we’ve been refining for centuries now. And yet, through consumer incentives and subsidized charging stations, governments seem to be barreling headlong towards the goal of simply replacing our gas cars with electric ones, as if the two were fundamentally interchangeable. Sadly this is not the case, and a study by Project Better Place and PJM Interconnection [PDF] illustrates in stark terms just how costly an unplanned, uncoordinated rush to electric cars can be.

PJM and Better Place open their study with a question that some might find slightly absurd: what would happen if a major metropolitan area suddenly had a million EVs? The question is only absurd from a pure market perspective, as global EV sales volume projections are generally low enough to keep the possibility of a single million-EV metropolis squarely in the realm of science fiction. From a policy perspective, however, the study offers profound insights into issues that the governments who are currently promoting EVs absolutely must consider. Without an understanding of the unintended consequences of a rush to EVs, governments risk spiraling costs, misplaced investments, and market failures.

To understand the potential effects of a million-EV metropolis, PJM and Better place have created a complex computer model which

considered a distribution of 1 million EVs in the Washington-Baltimore Metropolitan Area and modeled the impact of charging the EV batteries in three scenarios: unmanaged charging, consumer-price-incentivized charging, and managed charging via a Central Network Operator (CNO).

With a million EVs in one metropolitan area, a huge percentage of grid energy would be diverted towards transportation that was once powered by gasoline, and these three scenarios represent different approaches to managing the grid impact. The first, or “unmanaged” scenario is essentially the status quo, a market-driven pricing system in which cars are simply powered off of a standard electrical grid using home chargers and the public fast chargers that some cities are already installing (called Battery Quick Chargers or BQCs). The “Time Of Use” (TOU) scenario used a two-tier pricing scenario, modeled on the pilot EV tariff developed by Southern California Edison, which uses advanced home meters to distribute energy for (theoretically) lower grid impacts and electricity prices (as well as public BQCs). The “Central Network Operator” (CNO) scenario models a single EV services provider responsible for all charging and infrastructure, using Better Place’s in-house network models and experiences. In this scenario, the BQCs are replaced by BSSs, or Battery Swap Stations, another unique Better Place offering.

Without going into too much complexity in describing the simulation (check out the PDF for more), it starts with a transportation model which maps EV distribution, trips and charging behavior. That model is then run through each of the three different scenarios, and the results of each is then sent through PJM’s grid market model and assessed for impacts on grid load and energy prices (assuming no fundamental changes in generation and transmission techniques). The results are dramatic, and graphically illustrate the problem with a vehicle-centric approach to EV stimulus.

As the very first chart in this post shows (also shown here in grey), the unmanaged scenario causes huge peaks and valleys in grid load, as commuters follow regular schedules and charge their vehicles at roughly the same times, charging them until full as soon as they are plugged in. The red line in that chart tracks “Locational Marginal Prices” (LMPs), which are at their highest when the grid faces its highest draws. This results in $786.3m in wholesale energy increases per year, a number that the TOU scenario (shown above) actually makes worse by 4%. Where TOU does help is in the annual energy costs aggregated to EV owners (thanks to fixed prices), but it is only shown to help by a mere 3.7%.

If you replace the haphazard system of home-charging and public BQCs with Better Place’s battery swap stations (BSSs) and network management system, the peaks and valleys in the grid draw are dramatically leveled out compared to the unmanaged and TOU scenarios. And though localized marginal prices are higher at times than in the TOU scenario, on aggregate they offer 22% savings compared to the unmanaged scenario. That’s over $35m annually (in one city) that’s not coming out of consumer’s pockets. More importantly, wholesale energy prices enjoy a whopping 45% savings compared to the unmanaged scenario for a staggering $350m in annual savings. Now imagine those results multiplied across every American metropolis with a million vehicles, and the impacts of not committing to a central network operator are impossible to ignore on a national policymaking level.

In essence, only a single central network operator can manage the chaos of individual transportation without restricting mobility or causing regular stress on the grid. I personally tend to favor bottom-up, market driven solutions, and at first glance putting a single operator in charge of managing the distribution of energy for private transportation does not seem to be that. But when you go through the model it becomes clear that this single central switchboard and distribution system is actually necessary for efficient market function, allowing for constant response to localized marginal prices and constant mitigation of naturally clustered usage patterns. In light of this reality, the study’s policy implications are less shocking:

This joint study firmly concludes that the increases in wholesale energy cost due to the additional load of 1 million EVs in the Washington-Baltimore Metropolitan Area can be reduced by hundreds of millions of dollars per year if the charging is managed by a CNO responding to real-time LMPs.  These savings are without considering the value from various ancillary services and of large-scale dispatchable load for increasing the penetration of renewables, economic dispatch efficiency, and heat-rates for environmental considerations.  Existing mechanisms do not necessarily allow CNOs to capture any of this value, which could be used for infrastructure deployment.  Based on these conclusions, we emphasize how critically important both the presence of real-time LMPs and of CNOs are to reducing the impacts to the electric power system.  Therefore, we recommend that incentives be developed for advancing the power system such that PRD incorporates LMPs and for EV incentives to reach beyond the consumer to CNOs so that intelligent charging networks can be quickly constructed.

By simply giving consumers credits to buy EVs, the government is setting up the same consumers to overpay massively for their electricity, grids for overstress and utilities for waste and inefficiency. Rather than encouraging these negative outcomes, perhaps governments should consider investing in Better Place’s holistic network management approach. The upfront costs of a Better Place-style CNO are indeed large, but the alternative is well-over $350m in annual increased wholesale energy costs (in one city alone)… waste without end. Throughout history economists have found so-called “natural monopolies,” in which markets are unable to provide a service as efficiently as a single actor. With the problem of EV grid management, we seem to have found another. And because the battery-swap model also fixes the major micro-level problems with EVs, namely lack of range and battery depreciation costs, Better Place is looking more and more like a no-brainer to me all the time.

Mark Modica, a former Saturn dealer GM bondholder, has leveraged his financial loss at the hands of the government bailout into a blogging position at the National Legal and Policy Center, a conservative nonprofit that “promotes ethics in public life through research, investigation, education and legal action.” At the NLPC, Modica focuses on what he believes to be corruption surrounding the auto bailout, and has written a series of anti-GM posts that make TTAC look like a Detroit hometown newspaper (TTAC “bias police,” take note). Most recently, Modica has caught the attention of the auto media, including Automobile Magazine and Jalopnik, with a series of posts accusing Chevy dealers of “scamming” taxpayers by claiming the Volt’s $7,500 tax credit and then selling Volts as used cars. TTAC welcomes anyone seeking to cast more light on the bailout, but unfortunately, Modica’s attacks are too focused on making GM look bad and not focused enough on providing relevant information to the American people. Let’s take a look and see why…

In the piece that set off the current flap, Modica wrote

I recently set out to determine how honest General Motors is being when it claims that demand for the Chevy Volt is exceeding supply. It was not hard to discover that this is not the case as retail sales remain dismal. A web search on vehicle locator sites such as Autotrader and Cars.com exhibit sufficient supply of the Volt, one dealership within 70 miles of my location had six new Volts available for sale.

Even Ebay lists vehicles, many had no bids and one listing in Texas hadn’t even met reserve with only one day of bidding time remaining. But I discovered something far more disturbing during my search. Many Volts with practically no miles on them are being sold as “used” vehicles, enabling the dealerships to benefit from the $7,500 credit supplied by the American taxpayers on each car. The process of titling the Volts technically makes the dealerships the first owners of the vehicles, which gives them the ability to claim the subsidies.  The cars are then offered to retail customers as “used” vehicles.

The practice of dealerships purchasing from one another is not uncommon. “Dealer trades” are done all the time in the industry. What is very unusual is for the receiving dealership to be able to maximize profits at the expense of taxpayers by claiming tax credits of $7,500. It is also very rare for dealerships to part with any model that has higher demand than supply, as GM claims is the case with the Volt. In addition to qualifying dealerships for a $7,500 tax subsidy, the titling process also allows GM to record Volt sales even if the cars are sitting on dealership lots.

Modica’s attack is hamstrung from the start because his goal is to demonstrate that supply of the Volt exceeds demand. The simple truth is that the government’s tax credit, in combination with strong early-adopter demand and low production volumes, basically guarantees that Volt demand will outstrip demand in the short term. If Modica wants to prove that the market won’t support the Volt’s high price and complexity, he’s going to have to wait until production ramps up and the early adopters have satiated their “gotta have it” instincts.

Because he doesn’t appear to have the patience to watch the Volt fail on its own terms (which, it must be added, is not a foregone conclusion, depending on how GM handles production), Modica has to look twice as hard for potentially damning evidence. Since the availability of used Volts alone doesn’t say much about the supply-demand balance, Modica manufactures another “scandal”: that Chevy dealers are taking the $7,500 tax credit that the government intends for consumers, and then selling Volts as used cars with no tax credit.

This “scandal” quickly falls apart under the weight of its over-ambitious pretensions: after all, if demand for Volts is as weak as Modica wants to believe, surely absorbing the tax credit at the dealer level is a recipe for Volts languishing on dealer lots. Since Modica offers no evidence for high dealer inventory, his major thrust (proving that demand for the Volt is weak) falls apart. Furthermore, without a single case of a dealership claiming the tax credit and then selling a Volt to a customer under the pretense that it still qualifies for the tax credit, his research ends up well short of proving a “scandal.” As a result, Modica is left having to argue against dealers taking the credit on principle.

And here’s the tragedy: Modica is so focused on landing a political-economic “scandal,” he ignores the legitimate criticisms of both GM’s Volt-dealer policies and the government’s tax credit. Had he been less interested in the political side of things, Modica would have noted that GM’s hands-off approach to Volt dealers has led to dealers gouging early adopters. Sure, that storyline would have proven that short-term demand for the Volt was strong, but then Modica could have pointed to the contrasting situation at Nissan, where Leaf sales are pre-arranged online, cutting dealer markups out of the loop. This strategy also keeps Nissan dealers from taking the tax credit (at least in theory), and will prevent any “gouging fatigue” that could hurt Volt demand down the road.

From the other side of this issue, if Modica had been more interested in the politics of plug-in tax credits, he would have realized that manufacturing a poorly-proven “scam” was wholly unnecessary. As TTAC reported back in February, taxpayers have already lost some $7m worth of plug-in tax credits to fraud. In short, the Treasury Inspector General for Tax Administration has already proven that $33m of tax credits were claimed erroneously by everyone from prisoners to IRS employees ($7m of which is unrecoverable), offering Modica a well-documented scandal that has been undercovered in the mainstream media.

When industry and politics collide, the public deserves strong, independent information gathering and analysis to protect against inevitable abuses. But those who wish to take up that mantle have a responsibility to own up to their motivations: are they looking for legitimate issues regardless of their political or economic consequences, or do they set out with predetermined conclusions and gather up just enough information to support them? Unfortunately, Modica’s history and recent work seem to place him in the former category. Exploring the interaction between the US Government and the auto industry that it now interacts with more than ever, requires the ability to spot scandals without having to manufacture them. And the more you cover the inevitably tortured relationship between private business and public government, the more you realize that there are very few big scandals anyway… after all, free markets and fair governments almost always die the death of a thousand cuts rather than being taken down by a cartoonish scandal.

In the last time we heard from Better Place – a little less than two months ago – we’ve witnessed the unfolding of the company’s first functional battery swap station. And yet we were left with one big question mark hovering over the entire project: the price for the end customer.

This question is particularly crucial for the Israeli market, where the vast majority of people owns a car and uses it for their daily commutes and where gas prices are amongst the highest in the world – about $8.3 per gallon. And while the company has already unveiled its prices for the Danish market, it hasn’t revealed the price of the car and monthly subscription for the Israeli market – until now.

As expected, Better Place is pricing their only automotive offering as of now – the Renault Fluence Z.E. – quite similarly to the similar, gasoline-powered competition: $35,326 at current conversion rates [full English pricing release in .doc format here]. The basic trim level features a satnav (as part of Better Place’s on-board software), dual-zone climate control, auto headlights and wipers and cruise control – add an extra $2,000 in case you want goodies like leather seats and alloy wheels.

Yes, I can hear the muffled gasps coming from our readers across the Atlantic. Why so expensive? Due to the complex Israeli car taxation system, which brings taxation on some cars to over 70% of their value – car prices in Israel are exceptionally high. Electric cars, however, get a (temporary) reduction and are only taxed 10% of their value, which, according to Better Place, made it possible for the company to price the Fluence Z.E. similarly to other competitors in the segment.

The most crucial part of Better Place’s price scheme is, therefore, the monthly subscription rate. As in Denmark, Better Place has chosen to offer several plans based on annual mileage. The basic plan, offering 12,400 annual miles, will set you back about $310 per month. Other plans offer 14,300 miles for $370, 16,100 miles for $420 and 18,600 miles for a monthly payment of $460. The company will also offer a prepaid plan – including the car itself and 15,500 annual miles for 3 full years – for about $45,300.

Better Place commits to maintaining the same subscription prices for a period of 4 years and assures us that the all plans are without obligation (except for the prepaid plan), so you can cancel at any time (but be left with the car itself literally being idle in your garage). The price also includes one Better Place charging spot that can only be installed in a parking spot legally belonging to the owner.

As the average mileage for a privately-owned Israeli vehicle is about 11,300 miles annually, the most relevant plan for the individual customer would be the most basic 14,200 mile plan. Let’s break it down and compare it to the monthly spending in the local gas station each month as would be with a gasoline-powered competitor – for example, the long-running Israeli bestseller – the 1.6 liter Mazda3.

Assuming a realistic combined fuel consumption of about 29 mpg for a Mazda3 which travels 14,200 annual miles, the payment for Israeli gasoline will set you back about $330 each month, while the comparable Better Place plan is only $20 less. With competing hybrid and diesel-powered vehicles – even the Renault Fluence diesel itself – Better Place is even put in a considerable disadvantage.

Now, of course, Better Place’s PR hasn’t arrived unprepared for this battle. They point out that the insurance for the Fluence Z.E. is cheaper by about $350 per year compared to that very same Mazda, and that the less-complex electric motor will reduce maintenance costs by an estimated $215 per year. The handy comparison tables Better Place have prepped on their launch-market websites (Israel and Denmark) point to savings of about a $1,000 annually. They’d also be right to point out that the Fluence Z.E also comes more equipped in base trim than its direct competitors.

While the greater mileage plans offer better value on the cent-per-mile front, the difference is not substantial and they are not applicable to the majority of customers in a country in which the two farthest points are a full 300 miles apart. And let’s face it – when choosing between similar vehicles in the same segment, the average Joe – or in this case, the average David – usually does the rough gasoline-price-per-mile calculation we did here and doesn’t necessarily weigh in long term and less recurring factors such as insurance and maintenance costs. And then he learns that in order for Better Place to install a charging spot for his future car, he has to have a registered parking spot in his name (and in Israel – and especially in larger cities in which the majority of Better Place’s potential customer base lives – it’s not a trivial requirement).

But by far the biggest turnoff for the average consumer is Better Place’s refusal to introduce any sort of a buyback scheme – which means that in four years’ time – when the warranty and contract expire – the car could be worth nearly nothing. Better Place claim that by then EVs will become regularity on Israeli roads – and as a result, their value as used vehicles will be similar to competing, conventional cars – but what if they don’t?

There are two unanswered questions that can potentially make Better Place’s Israeli venture work despite all these drawbacks. The first is future gasoline prices. We all know that they’re headed up – but we don’t know exactly how tall the climb is going to be. A natural disaster or political instability in one of the chief oil producing nations can bring gasoline prices up to an extent that the difference between gasoline and Better Place’s EV will convince customers into biting the bullet of uncertainty and choosing the Fluence Z.E. over its conventional competitors.

The second question – left unanswered by Better Place – is lease pricing. To understand why, you need to know how Israel’s car market works.

More than 60% of all new cars delivered in Israel each year are leased – and most of these are company cars for which the employees pay by a monthly reduction in their salary and by waiving several social benefits. These cars are usually leased not from the dealers themselves but by car rental companies such as Avis or Hertz, and in most cases come with a complete maintenance package and are returned to the leasing company within 3 years in exchange for a new car (or a termination of the contract). The employing company usually pays for the fuel, and in most cases the allowed mileage is greater than the Israeli average or – in some case – even close to unlimited.

In this scenario, the customer may not even care whether the car is powered by fossil fuels, electricity or by the power of love – and the uncertainty is covered by the knowledge that within 3 or 4 years, the car will be someone else’s problem. In order to convince leasing companies into purchasing large quantities of their cars, Better Place is likely to heavily discount the Fluence Z.E. for those companies, while keeping the official sticker price intact to attempt to preserve the car’s value when the cars go on sale once the lease ends. And Better Place wouldn’t be the first to do this. In fact, Hyundai has used this technique to get to the top of the charts. But despite signing memorandums of understanding with Better Place, no Israeli leasing company has announced intentions of offering the Renault Fluence Z.E. to customers as of yet.

At the end of the day, Better Place’s unveiling of its pricing scheme still hasn’t answered the bold question mark hovering over the project’s viability, but rather brought about several new question marks into the game. In the current state of affairs and for most Israelis, the company’s electric car – be it a noble concept as it may – is still not a real alternative to the traditional automobile. The price difference is not enough to lure a wide customer base into electrifying their main method of transportation. And that’s without even taking into account the issue of range anxiety and the fact that while in construction, only a handful of battery swap stations exist as of now.

If Better Place wants to appeal to that wide customer base – and not be a niche choice aimed at the environmentally-conscious and early adaptors – it needs to make its product more attractive and less risky. Rising fuel prices may make the Fluence Z.E. more financially attractive from month to month, but the company also needs to provide peace of mind to its customers by introducing some sort of a buyback program and by leasing the car through third-party vendors like the vast majority of its competition. Until then, the electric car for everybody will remain just what it is now – a vision.

For years now the Chinese automakers have been the bête noir of the global car industry, inspiring equal parts fear and contempt in boardrooms and editorial meetings from Detroit to Stuttgart. In an industry built on scale, China’s huge population and rapid growth can not be ignored as one scans the horizon for dark horse competitors. And yet no Chinese automaker has yet been able to get even a firm toehold in the market China recently passed as the world’s largest: the United States.

Certainly many have tried, as the last decade is littered with companies who have tried to import Chinese vehicles, only to go out of business or radically rethink their strategy (think Zap for the former and Miles/CODA for the latter). Others, like BYD (or India’s Mahindra), have teased America endlessly with big promises of low costs and high efficiency, only to delay launch dates endlessly. In short, a huge gulf has emerged between overblown fears of developing world (particularly Chinese) auto imports and the ability of Chinese automakers to actually deliver anything. No wonder then, that we found what appears to be the first legitimate attempt at importing Chinese cars to the US quite by accident…

The internet is an amazing thing: on any given day you literally never know what you’re going to find. Typically when I find a story that shows promise as a TTAC post, I open a few tabs in a new window and search for words and phrases associated with that story in hopes of finding related reporting and greater context. And sometimes those searches lead to a story that’s infinitely more interesting than the original idea that lead to them.

A few days ago, for example, an Automotive News [sub] story about Wheego Electric Cars Inc caught my eye. The firm, which imports Shuanghuan Noble gliders and converts them to electric power using US suppliers, sold its first retail vehicle last Earth Day (April 22), but AN [sub]‘s piece was hardly the puff piece you might expect from such an opportunity. Instead, the industry paper reported that Wheego was out of money and had retained a VC outfit to raise cash, even quoting CEO Mike McQuary as saying

My constraint is primarily capital. We’ll be living hand-to-mouth as we try to get the first cars built. The next 200 will creep out as we raise money.

It’s the kind of story that appeals to TTAC’s occasionally vulture-like editorial instincts, as I know that more than a few of TTAC’s readers would probably get a schadenfreude-laden chuckle out of the struggles of a firm trying to sell an electrified Chinese Smart Car clone for “$33,995, including shipping” (before $7,500 federal tax credit). But after a little bit of digging through the search results for “Shuanghuan” (looking for mmore background on this Hebei Province-based automaker) I came across a website that I hadn’t expected to find: www.shuanghuanofdesmoines.com. Never having seen anything resembling a Chinese-branded dealership in the US, I clicked over.

There, I found a website titled “Shuanghuan Auto,” advertising two versions of the Noble and the SCEO (neé CEO) SUV… with an Iowa address. A glance at TTAC’s archives showed one incredulous write up from Bertel two years ago, and little else to explain this unexpected find. The Noble G4 was advertised as having gasoline (1.1 liter Suzuki design, made in China) or electric options. The SCEO was shown with a 2.4 liter Mitsubishi engine or a 2.5 liter “Yuchai” turbodiesel. I briefly checked the EPA website and, finding no signs of “Shuanghuan” or “Yuchai,” I dialed the number on the website and a day later I spoke with the owner of Shuanghuan Auto Des Moines.

Gene Gabus lives up to the finest Iowan standards of friendliness, instantly warming my expectation-free cold call with immediate candor. “I don’t know if you realize this,” he says, “but it takes a ton of work to get these cars up to American market standards.” As it so happens I had heard that it was tough to import cars to the US, and soon Gabus is explaining the extensive re-working that was needed to bring the Noble’s fuel system and rear-crashworthiness up to snuff. “We’re just working on the advanced airbag system now,” he says. Having seen a Noble crash test and been impressed by everything but the fact that there didn’t appear to be any airbag, this sounded promising. He describes extensive fuel tank modifications and says that dual-fuel figured heavily into US market plans. “You’ve heard of CNG cars?” he asks. I had. This was becoming even more interesting.

“Why have I barely heard of you guys?” I ask. “We’re used to hearing a lot of hype from importers of brands like Mahindra and BYD.” “Well,” he answers, “the feds don’t like a lot of talk before they approve a vehicle. Besides, we’ve watched the other guys talk a big game and fail to deliver. We want to avoid that.”

“And you are a former Chrysler dealer?” I ask. The address had been listed as Des Moines Chrysler on Google Maps. “Did you lose the franchise during the bailout?” There’s a brief pause. “I was robbed,” he growls. His profitable dealership had lost its franchise, while a pair of smaller local competitors had kept theirs. It’s clear that the wounds are still fresh, but they haven’t stopped Gabus from diving into a full-on attempt to homologate Chinese cars for the US. I press him with more questions. “Look,” he says, “let me give you Bob Smith’s number. He’ll be able to answer all of your questions.”

Sure enough, Mr Smith answers my first phone call, and in short order is answering my questions in a warm, Southern drawl. “I’ve done business in China since 1985,” he explains. “Computers, wheelchairs, that kind of thing.” And why cars? “I’ve seen how China is growing,” he explains. “I’ve seen their demand for gasoline grow and grow. Supply won’t keep up with their growing demand, and we’ve seen what happens when gas prices approach $5/gallon. People begin to seek out alternatives.”

Smith and Gabus plan on selling gasoline and electric-powered versions of the Noble, but the centerpiece of their plan involves dual-fuel version, which run on gasoline or Compressed Natural Gas (CNG). Like many people who have spent a lot of time around the car industry, Smith and Gabus are skeptical about all the hype surrounding electric vehicles, and given that most importers of Chinese vehicles focus on electric conversions, this puts them in a unique position relative to their competition. Smith waxes enthusiastic about the low prices and high supplies of natural gas in the US, and says the key to his business case is the relatively low cost of natural gas conversions.

“Look,” he says, “batteries often cost as much or more than the car itself.” The struggles at Wheego, which has split homologation costs with Smith and Gabus’s Shuanghuan importation outfit (Smith calls Wheego “good guys”), fill in all the necessary details. An electric Smart clone might appeal to hard-core greenies, but at $33k, their chances of mass-market acceptance are slim. Like Wheego, Smith is banking on help from the federal government in order to break into the market, but unlike the EV hawkers, his natural gas focus helps avoid the trap of having to sell a low-cost car at high prices.

“We expect the Pickens Plan to pass this summer,” explains Smith, referencing the natural gas subsidy bill that’s been championed for years by natural gas baron T. Boone Pickens, and was recently re-introduced and endorsed by the Obama Administration. “When that happens, people will be able to build home refueling stations which tap into their home heating natural gas lines and they’ll receive a $2,000 tax credit to install it.” But that’s just the beginning. Under the Pickens Plan bill, light duty vehicles (powered by natural gas or dual-fuel) would be eligible for a $7,500 consumer tax credit, the same amount currently available to plug-in vehicles.

It’s starting to add up. Not long ago, Edmunds CEO Jeremy Anwyl called for parity between EV and natural gas tax credits, and Honda has recently announced 50-state sales of its natural gas Civic GX. These guys are surfing a building trend. “So,” I ask, “what price point are you targeting post-tax credit?” His answer drops my jaw: “$4,000 to $5,000,” he says. I suddenly get it, and I’m floored by the idea. Low-cost, high-efficiency Chinese cars that sell at a price that’s less than half of the cheapest gasoline-powered cars on the marketplace. This is the kind of plan that has had the industry terrified, and yet has yet to be seriously pursued. And here are a couple of guys, flying under the radar, bringing a truly disruptive Chinese import to market… in Des Moine, Iowa. You can’t make this stuff up.

At this point, I stop thinking of Smith and Gabus as underdogs (or possible hucksters), and start thinking of them as a couple of shrewd operators. But, says Smith, the plan is still a huge gamble. They’ve already spent millions crashing some 32 Shuanghuan Nobles, and upgrading their bracing, fuel tanks, evaporative emissions control systems, advanced airbags and seatbelts. Having been working with the EPA and DOT for two years already, Smith confirms that he expects full DOT/EPA approval by the end of the second quarter of this year… within the next two months (Wheego has reportedly already received DOT crash-test approval). The SCEO SUV has not yet started testing, he says, and the process will take two years, so they’re starting with the Noble. Even with a crazily low targeted price point and high natural gas efficiency, there’s no guarantee that the Noble will take off. “But,” says Smith, “you have to take a chance and put some money on the table if you want to change anything.” And rather than trying to make the cover of every green magazine in the country, Smith and Gabus have started with the tough task of homologation… and now they’re almost done. Their huge bet is about to hit the table.

Before getting off the phone with Smith, I ask when he’ll next be in Des Moines. I explain that I want to meet him and Gabus at Shuanghuan Auto Des Moines, drive the Noble, and hear more about the origins of their import scheme, as well as their plans for the future. “Sure,”he says, “I’ll be there in June.” “In that case,” I reply, “so will I.” This story, which has flown below the media’s radar for two years now, is starting to take off… and TTAC will be there to cover it. By June, EPA and DOT approval should be rapidly approaching, and Smith and Gabus will be approaching the next challenge: pricing and selling these tiny Chinese cars. If the Pickens Plan passes and they’re able to hit their price points (both still “ifs,” the men admit), these industry outsiders could put Chinese cars –and Des Moines, Iowa– on the automotive map in this country. In an industry with seemingly infinite barriers to entrants, that’s a huge story… and one we’ll continue to cover.

George Orwell’s warning, that “the first victim of war is the truth,” apparently applies equally to trade wars. On Friday, Senators Carl Levin and Debbie Stabenow (both D-MI) wrote the United States Trade Representative to express their concern over “reported draft regulations” of China’s New Energy Vehicle plan, noting

We are concerned that these draft regulations continue China’s long history of breaking international trade rules.

Given that the ongoing low-level trade war between the US and China, this was a predictable bit of saber-rattling. But if Levin and Stabenow’s political motivations are easy to understand, the logic that leads them to believe China’s New Energy Vehicle plan is a violation of international trade rules is not. Meanwhile, neither the Senators nor the USTR appear not to have heard about another, more serious possible trade issue arising from China’s headlong dash towards electric vehicles. Sounds like a job for The Truth About Cars…

The Stabenow/Levin letter is long on button-pushing and short on facts, telling the USTR that

In its latest National Trade Estimate (NTE), your office highlighted a new Chinese trade barrier that is designed to prevent U.S. automakers from accessing the Chinese market. According to the NTE, China is in the process of drafting new regulations as part of its New Energy Vehicles (NEV) plan, which seeks to advance hybrid and battery electric vehicle production in China.

So, what does the 2011 NTE say about China’s automotive trade barriers? Precisely two paragraphs, as it turns out, only one of which deals directly with this alleged new barrier to EV business. Still, the entire passage is relevant to the dispute, so we have reproduced it below:

In May 2004, China issued a new automobile industrial policy, the Policy on Development of the Automotive Industry, and subsequently it issued implementing regulations that unfairly discriminated against imported automotive parts and discouraged automobile manufacturers in China from using imported automotive parts in the assembly of vehicles. In 2006, the United States, the EU and Canada initiated dispute settlement proceedings against China at the WTO. The WTO ultimately ruled in favor of the United States. In September 2009, China repealed the challenged measures.

Various U.S. industries are concerned about Chinese policies that may discriminate against foreign products. For example, the U.S. automotive industry is concerned that foreign-invested producers of New Energy Vehicles (NEVs) and NEV parts in China may begin to face discrimination. China is developing new regulations as part of its NEV plan, which encompasses hybrid and battery electric vehicles. Current drafts reportedly specify that automakers that intend to manufacture electric vehicles in China must demonstrate a “mastery” level of proficiency in key parts such as electric vehicle batteries, motors or control systems before receiving a license to produce and sell electric vehicles. In addition, according to reports on current drafts, the Chinese entity that manufacturers the vehicle, either a domestic manufacturer or joint venture operation, must demonstrate clear ownership of intellectual property rights to the technologies that enable the “mastery.” U.S. industry is concerned that China may implement these proposed requirements by requiring that production of key NEV parts take place in China. These proposed requirements also give rise to concerns that foreign manufacturers of NEVs and NEV parts will be compelled to contribute their intellectual property to their Chinese joint venture operations in order to fully participate in the NEV market.

This is the complete basis for the Stabenow/Levin letter, which in turn has already led to several highly misleading media reports. And no wonder: not only is the USTR’s analysis shockingly vague, but its sourcing also leaves much to be desired, referencing only “reports” of “current drafts” of China’s NEV plan. Moreover, its conclusions serve far better as a way to ratchet up anti-China rhetoric than as a way to reflect the reality of China’s proposed EV development plan.

Because the paragraphs quoted from the NTE above contain no direct reference to which “reports” of “current drafts” of the NEV it is concerned with, TTAC has had to dig around quite a bit for those “reports.” An initial survey of media reports uncovers stories like this one, from ChinaAutoReview, which cites First Financial Daily (a paper affiliated with several Chinese Communist party organizations) and quotes a multinational auto parts executive as saying

This policy may force a large group of foreign-invested companies in China to adjust their stake

But this is not the whole story, as the FFD has its (pro-party) biases and CAR (owned by China Business Update) has separate pro-Western business biases. The paper’s “About Us” section notes

Our clients include Fortune 500 OEMs and suppliers, investment banks, accounting firms, consulting firms, government agencies and trade associations. With our extensive networks in China and the world, we make sure that our clients get the best possible services available to help them tap into the Chinese automobile and components market.

Still, if all the sources on the matter agreed with CAR/FFD’s findings, we might agree that this draft legislation is troubling. However, a little more research turns up a month-old report from the law firm of Vinson & Elkins [PDF here] which both clarifies the proposed laws and (not coincidentally) provides a less worrying interpretation of it. The report notes

In 2010, the MIIT circulated two drafts of the New Energy Auto Industry Development Plan among the major automobile manufacturers in the PRC for comment. The plan seeks to meet the State Council’s Energy Savings and Emission Reduction requirements, as well as the State Council’s strategy for Strategic Development of New Industry. If promulgated, the plan will govern foreign investments in the electric vehicle industry. While the official version of this new plan has not been issued yet, comparison of the two released drafts yields an interesting change of language regarding equity participation under the New Energy Auto Industry Development Plan.

As provided in the first draft, the Chinese party to a joint venture must hold at least 51 percent of the shares, regardless of whether the joint venture is for the production of automobiles or for only the production of critical auto components. However, such language was deleted in the second draft issued on 9 September 2010, such that the 2007 Investment Catalogue becomes controlling for investments in the electric vehicle industry. Under the 2007 Investment Catalogue, only automobile final assembly requires the Chinese partner to hold a majority ownership interest, as noted above. The production of automotive parts is therefore not subject to a restriction on foreign majority ownership (although certain investments require either an equity joint venture or a cooperative joint venture of which the Chinese partner must own at least a non- controlling interest, as also noted). Moreover, pending the implementation of the New Energy Auto Industry Development Plan, the 2007 Investment Catalogue currently remains controlling over foreign investment in this area.

Here we find that an initial draft of the NEV plan did require that non-final-assembly producers of key NEV components be majority owned by a Chinese partner, but we also learn that this draft has since been superseded by language that maintains the law as it currently exists. In other words, the concerns of the USTR and Senators Stabenow and Levin were recognized and alleviated by the Chinese as early as September of last year. Somehow, the US concerns managed to be both premature (appearing before final approval of the plan) and woefully out-of-date (criticizing a draft that has since been superseded by language which does not change the basic realities of investing in China’s EV industry).

The Vinson &  Elkins report goes on to explain, in some detail, the finer points of China’s NEV investment policy, including the issue of “mastery” which so concerned both the USTR and Senators Stabenow and Levin. There are, it turns out, three categories of EV business qualifications: the “starting,” “developing,” and “mature” phases (one assumes this final category refers to the “mastery” requirement criticized by the American saber-rattlers). It is important to note that none of these phases require any technology transfers beyond requiring that products “not violate any third-party intellectual property rights.” Even if the earlier draft NEV plan were to pass, and manufacturers of key EV components were forced to create joint ventures, they would simply operate as all Chinese (and, it should be noted, Indian) joint ventures do: through the licensing of technology from the foreign partner. In fact, many Western “automotive experts” do not realize that much of the profit earned by foreign automakers with Chinese JVs comes from technology licensing rather than profits on sales, which are notoriously difficult to repatriate.

In short, through just a little research we’ve learned that the draft proposal which so frightened the USTR and Senators Stabenow and Levin has since been superseded by a version which does not appear to make the changes that drew such an angry response. Furthermore, the details provided in the V&E report indicate that, even if the initial draft were passed, it would not fundamentally change the rules of doing business in China, or coerce foreign firms to “sign over” technology or build components in China in an anticompetitive manner.

Of course, if that initial draft were passed, it could require suppliers to take on Chinese partners where they might not have otherwise. And though it seems that draft will not be approved, it’s worth understanding why that might be a natural development from the current JV system. One of the key issues in the shift from ICE vehicles to battery-powered vehicles is a concentration of value into the battery and associated systems. The since-rejected measure makes sense for any joint-venture-based market, as it prevents the final assembly partnership from being relegated to the smallest possible slice of the value chain. But since no new coercive technology transfer is called for in any of the drafts of the NEV plan, foreign partners will be able to replace any profit  they might have accrued by building the batteries as a wholly foreign-owned enterprise (WFOE) and selling them at a profit to the joint venture by licensing their battery technology to the joint venture instead.

Meanwhile, the USTR and its friends in the US Senate could learn a thing or two from the companies who are actually facing these possible (but again, unlikely) changes in Chinese policy. A Reuters piece filed from the Shanghai Auto Show quotes executives from several foreign supplier companies who are active in the NEV “key components” manufacturing business, and their response to the “proposed drafts” was the exact opposite of the American saber-rattlers. An analyst expresses concern at the proposal, but Robin Choi, director of commercial business development for the Asia-Pacific division of Johnson Controls is more pragmatic, telling Reuters

We are kind of surprised that they limited it at 50 percent. It’s a little bit of a concern for us. To be honest, we don’t know what the result will be, but we are continuing the dialogue with the government. It’s not official yet. If it is, we might have to follow the rules.

Hans-Peter Kunze, Valeo’s senior executive vice president of sales and business development adds

It’s still a draft and how many drafts have we seen in our lives?

Perhaps Herr Kunze has already read the V&E report? Finally Wolfgang Dangel, president of Schaeffler’s Asia-Pacific division strikes the note that seems to define the response of the suppliers who would be affected by any change to these laws, saying

We just have to be alert to watch very carefully about what will happen. No matter what the final outcome will be, we can contribute one way or the other. At the end of the day, we are still confident as we have enough technology and expertise on our hands.

Unless the Chinese government were actively eyeing ways to directly coerce that technology out of the hands of these suppliers, a perception that the USTR and Senators Stabenow and Levin are clearly anxious to fuel despite a total lack of evidence for it, these firms will be just fine. Sure they might have to set up JVs (again, this seems unlikely given the revisions noted in the V&E report) but as long as they can license their technology, they still have their major source of Chinese profits.

By now it should be fairly clear that the USTR and its allies in the US Senate are in a tizzy about something that might not happen, and wouldn’t bother the industry it directly affects much even if it did happen. I’m no WTO expert, but the idea that there are US-based producers of batteries and other key EV systems who are desperate to export them to China for CKD assembly rather than licensing technology for low-cost Chinese production isn’t wildly credible. After all, there’s only one “knock-down”-style EV currently in production… and that’s the CODA EV, which is “assembled” in the US by a US company, out of batteries and a sedan which are both built in China. Imagine that business model working in the opposite direction… not easy, is it?

And while US Senators and trade officials fret over a phantom menace, another real issue is emerging from China’s rush to push EV production and consumption that has completely escaped their notice. As Bertel has documented in considerable depth, a combination of municipal and Central Government subsidies will give Chinese consumers over $18,000 for every EV purchased… and according to rumors we’re hearing out of China (which we will, of course, confirm as soon as humanly possible), those credits are available only to buyers of Chinese-made vehicles made by Chinese brands. If true, this subsidy would certainly constitute an anti-competitive policy (imagine how the White House might have structured Cash-for-Clunkers, or how Japan might have structured its own efficiency-oriented subsidies).

Moreover, if Beijing’s decision to exempt EVs from its registration lottery and traffic restrictions similarly applies only to EVs made in China by Chinese brands, these two policies would create a powerful barrier to what is likely to become the first major Chinese EV market (which happens to be about the size of the Australian market). And since subsidies will be spreading to cities across China, the even more powerful registration lottery and traffic restrictions could too, potentially banning even joint ventures from China’s EV market. This, not an unlikely and ineffectual policy shift on the supplier side, is what America’s trade representatives and concerned Senators should be looking at. After all, if it’s enough to make Bertel Schmitt an EV believer…

It’s long form Saturday! Most of you probably thought you would never see the day Bertel writes a fiery manifesto for the Electric Car. Today is your day.

Yesterday, we were first to run with the story that Beijing most likely will become EV capital of the world. Not because Beijing scientists have developed the miracle battery. Not because Chinese EVs suddenly go 400 miles on a single charge. Physics did not change. Beijing changes. Months ago, new car buyers in Beijing stopped dreaming about buying a new car.That dream was shattered. Now suddenly, an EV has become the only car a new car buyer can buy and drive tomorrow. Or on Monday. If one would be on sale. Here is what happened:

In Beijing, the car market has completely collapsed.

That does not grab you? Then  what if the car market had come to a complete halt in Australia? Beijing has about the population of Australia and had car sales approaching those of Australia. Why did the Beijing market collapse? Because the city doesn’t want more cars on its roads. New car registrations are strictly rationed. More here.

On Thursday, we picked up rumors, and on Friday, we received confirmation that Beijingers will be able to buy a car again. If it is an EV. The media didn’t believe it or ignored it.

Foreign reporters hop off their bar-stool at Maggie’s and go into a tizzy when someone drops a white flower in front of a Beijing McDonald’s. Reporters end up taking pictures of each other, because nobody else is there. Now, they are asleep at the wheel when the EV the media supposedly adores so much does become law. (And if you ask me: People from Glen Beck to John Stewart are missing great material.)

On Friday, the news was in the Chinese press only, and not served on an ready-to eat, fork & knife English platter. Today, the English speaking papers have it. From CCTV to People’s Daily to Global Times, they all run the story that EVs in Beijing will not only be “enjoying the same level of preferential subsidies with Shenzhen”, but will also “have the sole privilege of license-plate-lottery-free, no traffic restrictions and tax-free exemptions (paid by the government).”

You need to live amongst the people of Beijing to understand how big that last one is.

Before we do that, let’s go back to Shenzhen and the subsidies. They are huge: 60,000 yuan from the city and 60,000 yuan from the central government to the buyer of a pure plug-in. That’s a total of 120,000 yuan, or $18,362.64 in today’s dollars. That would be a big amount of money stateside, and the purchase power proponents will agree, it is is even bigger in China.

In Shenzhen, however, the money remained in the government coffers. Nobody wanted it.

Why would a customer not buy the BYD E6 over the BYD F3 with such a munificent donation? First, because there is no BYD E6 commercially available. Second, because the conventional F3 costs $9,000 or so, maybe less with generous BYD-in-distress discounts. Whereas the E6, even assuming a low $30,000 MSRP, would still cost $11,638 after subsidies. They are Chinese, it makes a difference. With the F3, they can drive to Guangzhou and back, whereas with the E6 – do we really believe the 249 mile range? Anyway, moot matter, no E6 available.

In Beijing, the first time buyer does not have that choice. Whether F3 or A7, with a mei you (no have) license plate, any ICE powered car is for all intents and purposes out of reach. With an EV, the car can be driven on Monday. It can be driven on any day of the week (conventional cars must stay off the streets for one day, as per Beijing regs). No tax on top, to sweeten the deal until it drips and you need a napkin.

For a Beijinger, it can’t get any better. Even if Ed McMahon himself would knock on my door and hand me the keys to the BMW 7series I just won in the Chinese Family Publishers sweepstakes, I could not drive it – no tags. McMahon can’t hand me the tags, not transferable. No, you can’t even give a regular car away in Beijing.

Suddenly, $11,638 or even $20,000 or more for an EV are mere afterthoughts. Remember: In Shanghai, people pay more than $7,000 for the license plate.

The only problem: Which EV? I would not know which EV I could buy on Monday, as Ash Sutcliffe rightly comments over at Chinacartimes. We shall see miles of cable in a week at the Shanghai Auto Show, snaking into parking lots of electric cars, but none for sale. Mock-ups we have seen for years. What are they waiting for? A market.

This being Beijing, the press is full of mentions of Beijing’s carmakers Foton and of Beijing Auto. Both are owned by BAIC, which is controlled by the City of Beijing. Get the picture? No wonder the plan was waved-through so fast. Foton has an electric taxi out, the Foton Midi. I can’t buy it. It’s used as a trial in Yangqing, which still is in Beijing proper, but way out there. I’m told, if I would tell the driver to take me downtown, or to the airport, he’d say “bu yao” – no good. Too far from the charging station in Yangqing. Those taxis don’t stray farther from that charging station than little chickies from their mother hen.

Beijing Auto has electrified versions of the former Saab in development. BAIC has a number of other vehicles in development. The operative word is “development.” So nothing from there – yet.

Who else?

Well there would be Nissan with a Leaf, or Mitsubishi with an i-Miev. Both market ready.

The Leaf would be just what the doctor ordered for Beijing. Nissan has plans for a few hundred in Wuhan this year, says Reuters. Wuhan is the city Nissan’s joint venture partner Dongfeng calls home. According to the Reuters report, Nissan wants to “make the Leaf in China as soon as possible, but the key issue to the decision is the sales volume.” That according to Tsunehiko Nakagawa, vice president of Nissan China Investment.

Dozo, Beijing is wide open. Let’s bring the Japanese price of $44K down a bit (this is China), say to $40K, deduct 18,362.64, and you have $21,638 – not bad if it’s the only choice you have. Around 140,000 yuan, a nice price point. Tough sell anywhere else, Nakagawa is right when he worries about sales volumes. He won’t find it in Wuhan. But in Beijing? The Leaf could become more ubiquitous than the Made-in-Beijing Hyundai Elantra taxi.

Mitsu’s i-MiEV would be ready also, but we have no China plans on the RADAR.

Shipping them from Japan may not be such a good idea at the moment, it would eat up 25 percent in customs duty anyway, spoiling all the fun.

Being first in this cornered market is absolutely essential. Let’s not forget: If you sell EVs here, you will be selling to first time buyers. They have never driven a car they owned. They will grow up with an EV and will know nothing else than a car must be electric. A car filled with gasoline will be as alien to them as chopsticks to most of us. Here is the chance to sell to first-time affluent, worldly buyers, in the world’s second or third largest city (they are fighting it out with Shanghai), in the capital of the world’s largest auto market, with the world watching in awe. I bet Dongfeng would not mind at all.

If neither Nissan nor Mitsu will occupy every street-level wall socket in Beijing (all conveniently 220V, and rock-solid supply), someone else will:

A few days ago, Volkswagen had sent out a blurb about “becoming the friend of the National Museum in China.” I probably wasn’t the only one who immediately (electronically) spiked it.

Who cares whether VW donates a few cars to take people museum hopping in Beijing? Who cares whether “as part of this sponsorship, Volkswagen will launch its first electric vehicle fleet in Beijing?” We’ve heard that greenwashing before. Who cares whether “China plays an important role for Volkswagen´s goal to become the leader in the global electric vehicle market by 2018?” Hyperbola in green. Recycle bin.

In front of the new regulatory backdrop, (or “unter den geänderten Rahmenbedingungen” as they so much fancy to say in the Fatherland), the electric museum shuttles become a stroke of genius. Whoever had the sheer luck or inside information (being familiar with VW, my money is on sheer luck) just started the best timed promotion there is. Most likely he or she will get promoted. They run a fleet of Golf Blue-e-motion (to be launched in Germany in 2013, in the U.S. in 2014) and Touareg Hybrids (available). They are the only electric cars on Beijing’s streets, while everybody is absolutely dying to have one. They can keep the Touareg Hybrid, and should launch the Golf Blue-e-motion immediately in Beijing. It would sell like hotcakes while the rest of China scrambles to make their prototypes ready for market.

Volkswagen doesn’t honestly believe that the Golf Blue-e-motion will be a volume model anywhere else anyway. What did Volkswagen’s sales chief Christian Klingler say? “The electric car is not a request from the customer, the electric car is a request from the government.” Now he could say: “The electric car is a request from the customer, the electric car is a request from the government. We have a win-win!” They love win-wins in Wolfsburg.

Volkswagen’s joint venture partner FAW, maker of the Golf, would be delighted to produce the electrified version. Mei wen ti! (No problem.)

Volkswagen’s southern JV partner SAIC has more electric know-how, but FAW wouldn’t mind picking some up. And while they are at it, they could also update the English version of their website. It’s from 2009 and in the old CI that never went anywhere. Bu kequi.

No Volt. So sorry. Pure plug-in only. Them’s the rules. Try the lottery.

Do I sound excited? Yes, I am. As most around here know, I do not believe that the EV will be taking over the world anytime soon. I am a pragmatist. Most buyers are pragmatists when they get into the showroom. I have sat in too many focus groups, listened to how they lied about protecting the environment at all cost. In the store, they take the car that makes the most sense for their money. I never really cared what propels a car, as long as it’s fast and peppy. Drive-trains are not a religion.  I believe in cars that make sense.

In Beijing, the only car that makes sense for a first time buyer that did not win the lottery is an EV. It’s a market, ripe for the plugging.

Just over a year has passed since these statements made air, and in typical Israeli fashion – most of the goals were not met. Despite promising to begin delivery of cars in the beginning of 2011, Better Place has not sold a single car over the four months that passed since New Year’s Eve. And the number of battery switch stations built in Israel was – you guessed it – exactly zero. Until now.

I couldn’t blame the residents of Kiryat Ekron – a small town located about 20 minutes south of Tel Aviv – for mistaking Better Place’s latest effort for an automatic car wash. Examined up close, Better Place’s first commercial car battery switch station still looks like a carwash for the yuppie: it’s a white, square structure with an appropriately modern rounded-rectangle tunnel attached to it, standing in the backyard of a gas station.

But before we talk about switching batteries, let’s talk about cars. Namely, let’s talk about the Renault Fluence Z.E, which Better Place sets to be its most important car in Israel. So far, Better Place has only demonstrated their solution to the public using a fleet of converted Renault Lagunas – one of which I briefly drove last year. The launch of the first Israeli battery switch station was the first opportunity for me to meet the nearly-finalized prototype of Better Place’s flagship in person.

Unsurprisingly, it’s based off the Renault Fluence – which in its turn is a bigger, four-door version of the Megané, targeted mainly at developing markets outside of Europe. While the Fluence is formally a compact car – despite being quite large for its segment – its electrified sibling errs ever further towards midsize in the automotive wardrobe, having been extended by a few inches in order to accommodate the battery somewhere underneath the rear seats. Interior dimensions seem to have remained the same, while trunk space was slightly compromised in the conversion process.

While Better Place didn’t let us drive the cars ourselves, performance figures seem to be adequate – just over 10 seconds from 0 to 60 mph and an electrically (no pun intended) governed top speed of about 90 mph – all that from an engine putting out about 90 horsepower and 167 ft-lb of torque. Interestingly, according to Better Place officials, the entire battery pack weighs just under 660 pounds, while Renault itself gives a more optimistic 550 pound weight figure.

The battery switch process itself is thoroughly unexciting, which must mean great praise for Better Place’s work in developing the concept. The driver only needs to flash his Better Place RFID card at the machine, drive into the rather narrow tunnel and find something to occupy himself with during the upcoming 3 minutes. The car slides into position, slightly lifted – then an underground robot grabs the battery, disappears – and returns with a fresh one. All of this is invisible to the technologically impaired driver, while the geekier amongst us can watch the entire process streamed live on a TV planted outside.

Better Place says that the stations are designed to be modular and compatible with several different vehicles and that 15 batteries are stocked in every station at all times. Even though that doesn’t sound like a lot, Better Place claims that the calculations they’ve made found this to be the optimal number. 8 more switch stations are in construction, and the company set 40 stations throughout the country as its initial goal, despite initially promising 70 stations by the end of 2010. According to company officials, they found that 40 stations provide a complete coverage of Israel, and that more stations may be installed in the future according to answer demand in key locations.

Shai Agassi, the company’s charismatic CEO and founder, was as optimistic and ambitious as usual. “You’re seeing the second Apple”, he announced in the press conference that followed the switch demo. This time, however, Agassi and his team were significantly less keen on throwing promises around – only committing to starting distribution to customers on Q4/2011.

Despite already announcing its pricing schemes in Denmark in the beginning of this month, Better Place refuses to reveal Israeli prices at this time. An internal Better Place memo which leaked to the Israeli press, however, sets the price of the Renault Fluence Z.E at 123,000 NIS, or about $34,500. That may sound like a lot of money for a compact car, but consider that in heavily taxed Israel, the bestselling car – the Mazda3 – is only some $800 cheaper, while lacking much of the equipment that the tax-reduced Fluence Z.E is expected to carry standard.

As fleet sales account for more than 60% of the new car market in Israel, Better Place is aiming to sign contracts with the country’s most prominent rental and lease companies in which it guarantees buyback of its vehicles after three years in service in exchange for a commitment by the companies to price the Fluence Z.E closely to internal combustion competitors.

If the Danish pricing schemes are of any indication, Better Place is expected to offer several different plans for various mileages. In Denmark, the most expensive plan – allowing for unlimited mileage –costs the user about 400 euros (or about $550) per month, while the most basic – allowing for up to 12,000 miles per year – costs from 200 ($280) to 250 ($350) euros. Considering Israel’s slightly higher gasoline prices, the appropriate plans in the Holy Land will likely cost more compared to Denmark.

And if those prices sound a bit high to you, it’s probably because they are. A very rough calculation puts one month of Denmark-priced gasoline for an average compact car travelling 12,000 annual miles very close to the price Better Place offers for that mileage, and perhaps even slightly higher. It seems that Better Place’s main lure would be the ‘unlimited’ packages. On its end, Better Place doesn’t try to refute this claim, only going as far as promising running costs “comparable or lower” to those of equivalent gasoline vehicles.

One of the most interesting points brought up in the press conference was the compatibility of Better Place’s charging points with third party cars. The company was keen to emphasize that the charging points, of which a 1,000 have already been installed in public and private parking garages, are designed according to a “standard”, which will allow non-Better Place cars to be charged using their current infrastructure. Agassi went as far as claiming that the company doesn’t view fixed-battery EVs as competition since they only target drivers travelling short distances. Agassi was also reluctant to answer journalists’ questions regarding specific models, but said that the company is in “negotiation” with several local dealers regarding possible cooperation.

As I was standing next to one of the Fluence Z.Es parked by the curb, a curious passerby interrupted my photoshoot. “Nice looking car,” he said. “What’s the engine’s displacement?” “It’s electric,” I dutifully replied. “Oh, cool”, he noted as he continued to circle the car. “So how big is the engine?”

“Our target is for people to say it’s a car”, said Agassi in his opening statement. Did they succeed in that? The answer is a resounding yes. Better Place and Renault have managed to create a car that looks, feels and refuels like your average Camry, and for that they deserve credit. Unfortunately, that’s not the toughest challenge the company has to face. The jury is still out on the viability of Better Place’s model in real life, and in an industry as conservative, the company isn’t going to have an easy time proving the skeptics wrong.

Alberta is a province in Canada. A lot is agricultural, but what is much more important are the treasures beneath the soil. Alberta sits on more than 1.7 trillion barrels of bitumen, better known as oil sand. That’s about equal to the world’s total proven reserves of conventional petroleum. Canadians are troubled that EVs might ruin these riches.

Oil sand competes with electric vehicles in insidious ways: Electric vehicles are expensive. They only make sense when the oil price goes up. It costs money to extract the oil from the sands. The higher the price of oil, the more sense it makes to harvest the sands. At 2006 prices, 170 billion barrels were considered economically recoverable from the sticky sands. That put Canada’s oil reserves in second place behind Saudi Arabia. However, it represents only 10 percent of what’s there. The people of Alberta should be as interested in higher oil prices as the proponents of EVs, one would think: The higher the price, the more sand can be turned into oil. Instead, the people of Alberta are getting very nervous.

“Electric cars could make driving cheaper and cleaner, but also could put some Albertans out of work,” worries the St. Albert Gazette. “Cars are a major source of greenhouse gas emissions. Electric cars could take care of those emissions, but what would that do to the demand for Alberta oil?”

The Albertans are one step ahead of us. Instead of getting anxious about vanishing oil reserves, they get apprehensive about a sinking demand by a wide adoption of EVs. Which would put Alberta out of business. They still remember the 80s when oil became cheap and most of their mines closed. They became rich again by the middle of the last decade. Now, Canada is the largest foreign source of oil for the United States, supplying nearly a million barrels a day from oil sand, says the Gazette. Checking data by the U.S. Department of Energy, the number makes sense. However, it also makes sense to say that Canada only supplied 22 percent of the imported oil in one of the last months of 2010.

Be it as it may, reading the papers about the success of EVs, Albertans are worried about a bust cycle. People did what people do when they don’t know what to do: They assembled a panel of experts.  The panel will first meet next Tuesday in Edmonton.

Talk organizer and St. Albert resident Perry Kinkaide already sees a new boom ahead for Alberta: It could mean a new auto industry in Alberta, he suggests, as oil companies shift from using oil as fuel to oil as a starting product for lightweight electric car parts. “In the old days you needed to be near steel. In the new days, you may need to be where the oil is.” Comforting thoughts – for Albertans.

Axel Meisen, chair of foresight at Albert Innovates Technology Futures, toots in the same vuvuzela: “Alberta should think of other uses for petroleum than for fuel, such as carbon fiber. This light, strong material will be popular in electric cars, and could see use in bridges and other buildings.”

Al Cormier, the talk’s facilitator and executive director of Electric Mobility Canada, a national industry group that promotes electric vehicles, also sees no reason for alarm. EVs surely are the wave of the future and will lower the demand for oil, but “assembling an electric vehicle probably takes just as long as assembling a regular vehicle,” Cormier says, and he does not expect any job losses there. If the cars are assembled in Alberta.

The proceedings of the panel’s meetings will be available at www.abctech.ca.

Now here comes an heretic thought: If EVs  indeed become wildly successful and kill the demand for oil so much that Alberta will have to close oil sand mines and take to assembling electric motors and plastic parts, does that mean that us Luddites can drive down to the gas station and say “Fill ‘er up” for, say, $1.80 a gallon?

GM and its Korean battery partner LG Chem have signed licensing agreements with the Department of Energy’s Argonne National Laboratory, giving the two firms access to Argonne’s proprietary lithium and manganese-rich metal oxide mix for use in lithium battery cell cathodes. The material will need “several years of testing” according to The General, but could extend battery life, increase charging voltages and storage, and make Li-ion cells safer. Energy Secretary Stephen Chu says GM’s agreement with the publicly-funded lab

gives General Motors the ability to use cutting-edge battery technology throughout its supply chain. The licensing of this technology will also spur the renewal of the American battery industry, creating hundreds of new jobs where they are needed most.

But that’s not quite the whole story. According to press releases, GM’s deal with Argonne allows the automaker to

to use Argonne’s patented composite cathode material to make advanced lithium-ion batteries

But LG Chem’s agreement allows the Korean firm

to make and use Argonne’s patented cathode material technology in lithium-ion battery cells

In short, a publicly-funded lab has licensed technology in a way that appears to deepen the (partially) government-owned automaker’s dependence on a foreign firm. Confused? So is the mainstream media. And so, to some extent, are we.

Though the mainstream media reports (not to mention Secretary Chu) seem to treat LG Chem as an afterthought in this deal (if they mention the Korean connection at all), the artist formerly known as Lucky GoldStar Chemical is the glue that holds everything together. The Korean chemical giant currently ships Lithium-ion cells (the actual “batteries”) from Korea to Michigan, where GM then uses them to assemble battery packs (in which multiple cells are linked together and managed) for the Chevy Volt. In 2012, LG Chem’s wholly-owned US subsidiary (known as Compact Power, but referred to in the Argonne pressers as “LG Chem Michigan, Inc”) will open a Li-ion cell manufacturing plant on Holland, Michigan which will eventually manufacture cells using Argonne’s technology for the second-generation Chevy Volt.

Those cells will be assembled into battery packs by GM, which is apparently why The General had to sign a licensing agreement to use Argonne’s technology. Of course GM will be testing and evaluating those cells in cooperation with LG, but otherwise, The General’s main role in this announcement appears to be to give a patriotic sheen to a move that cements its dependence on its Korean partner.

After all, without a GM deal to announce, it would be tough for Secretary Chu to tout “the renewal of the American battery industry” by licensing a publicly-funded technology to a Korean company. After all, if LG Chem’s Michigan plant makes it part of the “American battery industry,” wouldn’t every foreign automaker with a US production facility count as “the American auto industry”? Clearly, the Detroit talking points about how it doesn’t matter that transplants hire Americans because “profits don’t stay here” are going to need some recalibration.

And Chu wasn’t the only person hyping this licensing arrangement to gloss over some inconvenient realities. Jeff Chamberlain, who heads Argonne’s Energy Storage Initiative, had this to say:

It is especially gratifying to know that the commercialization of this Argonne-cathode is helping the development of an emerging U.S. battery manufacturing industry, as well as the creation of new American jobs.

The goal of Argonne’s battery research is to support the U.S. automobile industry… The added benefits of this endeavor are the potential creation of U.S.-based green jobs, lessening U.S. dependence on foreign sources of oil and a reduction in greenhouse gas emissions.

American jobs? Sure. The American battery “assembly” industry? OK. But as far as American “manufacturing” and “independence” goes, this deal appears to fall way short. Instead of fostering a true “American battery industry,” this deal merely ensconces a Korean firm at the base of a supply chain that, according to Chu (as well as GM, the Argonne lab and all EV proponents), will supply the future of the automotive industry. It’s one thing for local governments to incentivize the production of transplant manufacturing plants, but it’s quite another for the federal government to do so under the guise of helping an automaker it partially owns.

But this isn’t the first time LG Chem has received assistance from the US government to make Detroit dependent on its cells. After all, its “transplant” factory in Holland, MI is being built using $151m in recovery act funds. Nor is GM the only US-based automaker to slouch towards dependence on the Korean firm: Ford will be using LG Chem battery packs in its forthcoming Ford Focus EV. Where GM simply relies on LG for the basic components of battery packs, Ford will rely on the Koreans for the whole assembly as well as the cells that make it up (but then, Ford’s Focus EV is heavily foreign-firm-dependent in other ways as well).

In fairness, no American firm offers the kind of Li-ion cells needed for automotive applications… which is a problem we’d hope a publicly-funded institution like Argonne (not to mention Recovery Act dollars) would be focused on addressing. For all the support the Obama Administration has given the EV sector, it’s more than a bit galling that none of it has been focused on addressing America’s shortcomings at the base of the EV supply chain. No amount of red-white-and-blue- or green-washing can cover for the fact that any future American EVs will now be dependent on a foreign firm.

Alternatively, America could make its peace with the fact that it’s trading one malignant foreign addiction (Oil) for a more benign but no less foreign dependence. After all, Foreign  auto firms hired thousands of Americans over the last several decades to build the cars that Detroit wouldn’t or couldn’t. But if that were to happen, all the bailout-era rhetoric drawing a distinction between the “American” auto industry and the “foreign” transplants would be revealed as the thinly-disguised protectionism it really was. And this announcement would not be used as evidence of the strength of “American” battery and auto industries.

Just in time for today’s tour of Michigan’s “battery belt,” the Obama Administration has released a study [full PDF here] of its electric vehicle stimulus efforts which concludes that the money was all well spent. Though the report covers a number of programs, from the ATVM “retooling loan” program which is backing companies like Nissan, Tesla and Fisker, to charging station subsidies, the major accomplishment of these billions of dollars is encapsulated in a single claim:

By 2012, thanks in part to the Recovery Act, 30 factories will be online and the U.S. will have the capacity to produce 20 percent of the world’s advanced vehicle batteries. By 2015, this share will be 40 percent.

As you can see from one of the report’s graphs (above) the US will achieve this 40 percent share of the world’s EV battery production just as two-thirds of the cost is beaten out of the things. And because batteries don’t follow Moore’s Law, it’s all diminishing returns from there. So what happens come 2015?

The obvious answer: oversupply. A study released earlier this year projects that

Planned investments will thus result in significant overcapacity between 2014 and 2017, especially in the US and in Japan. Given the announced investments, capacity in 2015 will already reach 200% of the demand projected for 2016. In addition, not all investments have been announced; as-yet unknown investments by key players will lead to further overcapacity, and national subsidies will stimulate even more investments.

Though that number likely includes the Obama Administration’s spending, it certainly doesn’t include the just-announced $12.5b investment by the Korean government into its Li-ion battery industry. And that investment comes at a time when two Korean firms (LG Chem and Samsung) already control 40 percent of the world’s Li-ion cell production. That investment will not only water down the Obama administration’s claimed benefits of EV stimulus, it will also greatly accelerate fears of oversupply. Given the beating that EV battery maker stocks (like A123 Systems) have taken of late, it’s not a fear to be taken lightly either.

Meanwhile, let’s look at the Obama stimulus’s main claim to fame: a stark reduction in battery costs between now and 2015. That claim is already looking like a red herring, considering the starting point of the Obama study’s graph. Since the hypothetical battery used for the graph is 33.33 kWh (100 mile range at 3 miles per kWh), the Obama administration’s estimate values currently-available batteries at about $1,000 per kWh. That number flies in the face of the Nissan Leaf, which has reportedly cracked the $400/kWh mark with its current battery pack. In short, the Obama Administration’s 2015 battery price of $10k would be a mere $3k reduction in price from currently-available prices… realized over 5 years and at a cost of billions of taxpayer dollars.

These lower-than-anticipated prices are yet another indication that oversupply is on the way, and that multi-billion-dollar governmental investments in the Li-ion sector are simply inflating a bubble that will have to pop at some point. Meanwhile, Obama’s much-touted stimulus program funneled nearly as much money to foreign firms like Nissan and LG Chem as it did to homegrown outfits. These foreign firms, which are able to double-dip into US and (say) Korean government investments will be able to beat prices even lower, squeezing out the more marginal recipients of only US investment. Meanwhile, the limited range, capacity degradation and relatively high cost of EVs compared to gas powered cars will keep demand relatively inelastic even as competition and overinvestment drives competition.

And then there’s one final element to this story that can not be ignored: just as global battery supplies hit 200+ percent of global demand in 2015, a number of firms are planning to release their first generation of hydrogen fuel-cell cars. Toyota, Honda, GM and Hyundai have all targeted 2015 for the release of $40k-$50k production fuel cell cars, which should suck a lot the early-adapter oxygen out of the (by then) oversupplied EV market. At this point, the lessons learned by Toyota with its hybrid program will start to be felt: having binged on high-priced early-adaptor sales, Toyota was able to pay off its hybrid development program, but big profits are proving elusive as EVs are coming into their own. Firms like Nissan are positioned to do for EVs what Toyota did for hybrids, but as a result, Toyota can sit out the five-year cycle, and slowly build on its hybrid technology, before creating a whole new fad for the well-heeled and greener-than-thou segments just as EVs start to pay for themselves and reach a reasonable price point.

With cutting-edge consumers migrating towards hydrogen cars, and battery oversupply reaching dangerous levels, 2015 will not be a happy year for firms that have invested heavily in EVs. Government stimulus between now and then might help, but it won’t be the major factor in driving down prices, nor will it guarantee a sustainable business model. With competitors (namely Nissan) already established to serve much of the market by 2015, and with other competitors already looking past EVs for 2015 and beyond, the government can’t expect stimulus alone to keep EV startups (like Tesla and Fisker) and EV catch-ups (like Ford and Chrysler) on a solid footing.

In May, Audi’s Rupert Stadler declared to the preeminent German car magazine Auto Motor und Sport that “Our goal is the complete victory.” Buoyed by strong sales momentum in China and elsewhere, Audi has been mouthing off about its ambitions for some time now. But Stadler spent as much time talking about electric cars as he did growth in the US and China, talking up VW’s relationship with BYD and Sanyo, and promising electric city cars. Only the Stadler’s bombastic headline hinted that Audi’s gain might come at Tesla’s expense, as well as Mercedes’ and BMW’s.

But in June’s AM und S, Audi once again stole the headlines, proclaiming production plans for an electric version of its mid-engine R4, itself based on VW’s BlueSport Concept. At six seconds to 60 mph, it would be considerably slower than the Tesla, but its 250 km range would be similar. And considering that gas and diesel VW and Audi (and possibly Porsche and Seat) versions could start under $25k, it seems fair to say that Audi will be able to price EV versions south of the Tesla Roadster’s $101k base price. That, along with the $120k-ish R8 E-tron are the two jaws of Audi’s Tesla-munching jaws.

And then there’s one of the biggest challenges for Tesla: sales and service. Audi has plenty of dealerships and service employees… Tesla has boutiques in several jet-set shopping districts. Where would you buy an electric sportscar? Besides, if you don’t want a silly “e-tron” but you like the car, they’ll probably sell you a 335 hp five-cylinder turbo version for less money. And then talk you into an electric A2 for guilt-free commuting. Or talk you up to a crazed R8-based E-tron sportscar, which will start $10k-$20k higher than the Tesla.

The R8 E-tron is supposed to be available in 2012, when Tesla’s Model S is planned for launch. The R4 E-tron is scheduled for launch one year later, alongside the A2 EV city car. Tesla had planned on ending Roadster production in 2012, but has backed away from any end date for the Roadster allowing it to drive on into this EV sportscar pincer attack. And if Audi is going to attack Tesla’s Roadster from above and below, you know more Germans won’t be far behind. Sure enough, Mercedes has already announced a super-expensive EV version of its SLS AMG, likely heralding more EV sportscars to come. Given the behind-the-scenes politics at Volkswagen, Porsche will probably launch a BlueSport-based EV sometime around the same time as the R4 E-tron as well, if only to keep the upper management feuding.

Which leaves Tesla’s Model S to carry the firm until and unless a joint vehicle with Toyota materializes. And the Model S won’t even be the first luxury four-door EV on the market… unless the Fisker Karma misses another production deadline. The less-affluent (though not much less) early-adopters will already be happily buzzing around in their Leafs, Volts and EV Focii by then, unmoved by the inevitable lease offers tempting them to stretch for a Tesla. And after that, there’s not much market for high-end EVs. Every argument that Tesla might make about the unique abilities of its EV “sports sedan” is countered by the fact that the estimated range for a base price $50k Model S is 160 miles. Plus the Fisker looks better.

I’ve long thought that Tesla could have stayed focused and carved out a unique niche as the 21st Century’s first EV sportcar specialist marque, riding AC Propulsion’s good idea to the status of a new Porsche if they were lucky. Not content with such a marvelous goal, Tesla has now officially lost its chance to establish its brand with (say) a GT and supercar, by letting Audi steal the EV sportscar momentum. And for what? In order to sell twice as many cars at half the price every time it comes out with a new product? To leverage one revolutionary but hardly mass-assembled sportscar into a global business to challenge the OEMs?

Audi gets it. Stadler tells AM und S that “the E-tron label will become as important to us as the Quattro label was to us 30 years ago.” This is exactly the kind of lesson of history that tend to escape start-ups. Audi has had its boots dirty building one of the most successful luxury brands over the past 30 years, and that institutional experience is worth every bit as much as the brand itself.

With its stock public, and its hopes attached to a 2012 EV sports sedan and a tenuous relationship with Toyota, Tesla is shooting the moon. If it doesn’t sell 20,000 Model S sedans by 2013 (for roughly $1b in revenue), Tesla will be toast. After two years of likely losses, Tesla’s stock will be battered down from its frothy precipice by the time the Model S arrives. Which will also be about the time Audi’s two electric E-trons start sinking their teeth into the remains of Tesla’s sportscar business. Sure, the Model S could be a stunning success, but even if it is, Audi will already have small premium EVs ready to go by the time it launches, meaning Tesla has nowhere to run downmarket (where the Leaf, Volt and Focus will already be established).

As much as EVs and California seem to go hand-in-hand, the Golden State’s homegrown hero does not have a happy road ahead of it. Along the way the brand will almost certainly prove a point that the auto industry seems to have to prove at least several times in every generation: ambition doesn’t change the world, focus does.

Actually, he’s been broke for since last October.

“About four months ago, I ran out of cash,” Musk wrote in a court filing with the Superior Court of Los Angeles on Feb. 23. “I had to obtain emergency loans from personal friends. These loans are the exclusive source of cash I have. If I did not take these loans, I would have no liquid assets left.” Tough when you make only 8 grand a month and have two high maintenance women.

The documents, released by Venturebeat are part of Musk’s divorce trial. He’s in a messy divorce from budding sci-fi novelist Justine Musk. Justine is not very successful. In all of 2008, she received a total of $7,225 in royalties, and $24 in interest. Tough for Elon: He has to pick up the tab for her lawyer too.

Elon makes a little more. But not much. His monthly income is listed as $8,255. Tesla pays him a salary of $2,773, his SpaceX company remunerates him with $1,690 a month. There is a little income from investments. He definitely won’t be able to buy one of his roadsters with that kind of money.

For someone who makes that little, he lives high on the hog. No bank will give him a mortgage with that kind of income, so he rents. For $50,000 a month. That gets him a Santa Barbara beachside hacienda, barely big enough to house his five sons and a “friend” called Talulah. Talulah Riley is 24, Musk is 38. No complaints from me, my wife is 20 years younger than I.

Five kids and a 24 year old can be a bit of a drain on your finances. Two nannies, $10,000 a month. Monthly laundry bill $2000. Health care costs not paid by insurance: $11,000. It adds up quickly. To $98,023 a month.

Then there is Justine and the lawyers . Another $100,000 a month. With so little income, it has to come out of savings. On February 24, 2010, Musk wrote to the court: “I currently have liquid assets of just under $650,000. This money is needed to support Justine and the children and to pay my own living expenses, which, together, are in the range of $200,000 a month.” That was three months ago. At $200,000 a month, the $650,000 must be gone.

You don’t want to be Musk’s friend. According to court papers, he’s currently scraping by on “emergency loans from personal friends.” To make a long story short: Musk is in deep doo-doo.

If Tesla’s IPO is successful, his finances would look brighter. But there are two problems. The court has slapped a protective order on Musk’s holdings, says Venturebeat. He won’t be able to liquidate significant holdings without first getting permission from his ex-wife. That’ll cost him. Then, there is the matter of how Musk’s precarious finances will affect the IPO.

The filings with the SEC cite the usual laundry list of risk factors, but no word of Musk’s own tight finances. Tesla is “highly dependent on the services of Elon Musk,” says the filing, but in no word does it say that an estranged wife has him by the balls – financially. Venturebeat says that some in the venture capital community think that Musk’s situation should have been disclosed in the filing. Venturebeat asked the SEC, they had no comment.

Should the IPO fail, then no money from Toyota – it’s contingent on the successful IPO. We, the U.S. taxpayer likely won’t see any of the money the Department of Energy loaned Tesla. Should the IPO succeed and the Tesla stock sink afterwards, then you won’t have to wait long for an onslaught of lawyers. The dirty laundry most likely will feature prominently.

If everything goes hunky dory, then Justine Musk possibly gets half of the proceeds. There is a postnuptial agreement, but Justine is contesting it. She lost the first round, but the case goes to appeal. It’s all pretty well explained in her blog. If you are a glutton for divorce drama, then there is a great article in Divorce Saloon. Read it and you’ll never marry.

P.S.: According  to her blog, Justine wants:

- The house (not the rental, she did the usual thing and made him move out)
- alimony and child support (with 5 children, pretty much a given)
- 6 million cash (lump sum often negates alimony for the wife, but that can be bunched into child support..)
- 10 percent of his stock in Tesla
- 5 percent of his stock in SpaceX
- and a Tesla Roadster (she says “I really, really want one…”)

Advice to Musk: Settle for a little less. That protective order can get quite nasty over the long time an appeal takes. You pay her lawyers, and they’ll string it out as long as possible . I bet, $10m lump sum, child support, and the roadster would do it.

Oh, and I’d amend the S-1. The story is out anyway.

Throughout the bailout bonanza, we were told that the car industry means million of jobs. True enough, before the money was doled out, we learned that auto-related industries employ 3.1 million people around the country. Now, the government is paying big bucks for electric car development.  From Tesla all the way to Nissan, the industry is getting $ 25 billions of DOE loans, conditional  on the development of advanced vehicle technologies. Which usually means electric cars.  What’s wrong with that picture? If successful, it could cost a big chunk of those 3.1 million jobs.

According to The Nikkei [sub] electric vehicles require around one-third of the parts used in conventional automobiles. Let’s take bearings. “If electric vehicles become popular, our business would face head winds,” says Naoki Mitsue,  Chief of Japanese bearing maker NSK. An ICE powered car uses between 120 and 150 bearings. An electric car is happy with half of that.

That tricky 7 speed DSG twin clutch transmission could be replaced with something of washer/dryer complexity. Compare an electric motor with a car engine and its myriad of moving high precision parts, driven by thousands of controlled explosions per minute, and you’ll agree that an electric car is a model of simplicity. It’s also a job eater.

Fewer parts, less work. As the car gets simpler, there is less to repair and replace: Mr: Goodwrench could face the fate of the Maytag Man.

If that battery wouldn’t be so obscenely expensive (and with the help of the DOE, they are supposedly working on that), the electric car would cost much less than a conventional one. Once it does, less jobs in banking. Repo men will line up for unemployment benefits. You think it’s a joke?

Japanese parts manufacturers “face the grim prospect that some of their products will become obsolete in the era of electric vehicles,” writes the Nikkei, and reports that “autoparts makers have begun searching for new business models to make up for the inevitable sales declines.” Of course, they plan to make electric parts. But at the end of the day, there is no denying that one third of the parts means one third (or less) of the work.

A couple of weeks ago, TTAC reported how Dieter Zetsche was re-elected as CEO of Daimler for another 3 years. In that article we mentioned the many challenges that face him. Mainly, how to make Daimler sustainably profitable. Size matters in the auto business. An unattached Daimler has a hard time achieving the economies of scale someone like say Audi or Lexus can. So unless Daimler fancies being taken over (and we all know Daimler likes to be on top in any tie-up) it’ll have to form partnerships and joint ventures to get those cost savings Daimler needs. The big arranged wedding between BMW and Daimler isn’t going anywhere. Instead, Daimler announced that it had formed a partnership with Renault to produce the new generation Smart car. Then, Daimler announced it had formed a partnership with BYD to develop an electric car for the Chinese market. Now Daimler is trying to form a new partnership to achieve massive cost savings: A partnership with the tax payer.

Germany’s Handelsblatt reports that Dieter Zetsche is urging the EU Commission and the German government to provide financial assistance for the development of electric cars. “To support the development of alternative engines, we need positive conditions,” said Zetsche, who is also head of the European Automobile Manufacturers’ Association (ACEA). “At the same time it’s necessary to build the appropriate infrastructure.” Zetsche went on to say that establishing new technology is expensive and that only help from the EU, for a limited time, can bring this technology to market. Herr Zetsche wasn’t the only CEO from a German car company calling for this “partnership”.

“We would welcome in the beginning phase government support for the acquisition of electric vehicles, which will be significantly more expensive than other vehicles,” begs BMW boss Norbert Reithofer, another company in dire need of economies of scale. “The EU Commission should also clarify how it plans to support electric autos.” As reported by The Local, Martin Winterkorn, CEO of Volkswagen, also would not turn down government money. “Compared to what neighbouring country France has invested in similar programmes, the amount is relatively low.”

Ah, the ol’ “if the Frenchies get it, so should we” ruse.

Not only is Germany way behind the curve when it comes to the electrification of cars, Handelsblatt says Germany is lagging behind other countries in helping electric cars to market. The United States is giving a tax break of nearly $8000 per vehicle, the UK are offering up to $7500 per vehicle, in China, customers will get $9000 per electrified vehicle. Germany has pledged $680m to get one million electric cars on the roads by 2020. That works out to a pittance of $680 per vehicle. You know what? The German Auto industry should be grateful if they even get that.

The Local also reported that Germany’s budget is a train wreck about to happen. Total government spending is forecast to reach €319.5 billion. Trouble is, tax revenue is only expected to collect €211.9 billion. In fact, after financial wrangling in the centre right coalition, the deficit could be, at best, €80.2 billion (imagine that showing as your overdraft). Which means cuts will have to be made and, I’m guessing, they’ll be savage ones. So, does the German auto industry really think they have a shot at getting these extra subsidies? Especially, when you take an honest look at what electric cars really give you.

According to Wikipedia, the efficiency of a fossil fuel power station is poor. To quote “Typical thermal efficiency for electrical generators in the electricity industry is around 33 percent for coal and oil-fired plants and up to 50 percent for combined-cycle gas-fired plants” (Thermal energy which is converted into mechanical energy which is subsequently turned into electrical energy). Also, don’t forget, the emissions of a fossil fuel plants aren’t fresh air and water; it’s greenhouse gases, and plenty of them. So the efficiency of electric cars is really called into question here. Does the fact that an electric car, which produces no emissions in itself, make up for the increased emissions which fossil fuel power stations will emit? And Germany has a lot of fossil fuel power stations. In fact, our friend Wikipedia says that Germany’s main source of electricity is still coal and that they plan to build 26 new coal plants. 22 percent of Germany’s energy comes from natural gas, which comes from Russia. Russia has shown a tendency towards turning off the gas when someone looks at them askew. So Germany, and the rest of Europe, wants to wean itself from what comes out of Russian pipes. Building nuclear plants is considered an impure thought in Germany, ever since the then red/green regime had decided in 2000 to stop building new nuclear plants, and to phase existing ones out until 2020. Coal Germany has in abandon. Wikipedia figures that peak coal would be reached in 400 years in Germany. Or in 900 years. Nobody knows for sure. But coal stinks.

So to recap, the German Auto Industry has asked for more subsidies, at a time when the German government needs to be more prudent, subsidies for a “green” technology that is dependent on smokestacks. Blimey. How can the German government refuse an offer like that?

There is however one saving grace for the German Auto Industry. The Germans are next door to France. Now France has a different energy policy. Their electricity infrastructure is based heavily on nuclear and hydro-electric. Two sources which are carbon friendly (though in the case of nuclear, it produces waste which is far more harmful, but work with me here). Now given that Daimler is forging closer ties with Renault to build cars in France, could the rest of the German Auto Industry try to ingratiate themselves to the French government (which is quite pro-electric cars) for those subsidies which the German government will almost certainly refuse? The French like to look after their own (not that looking after your own is a bad thing, I’m not casting judgement here), but when those people who knock at your door are outsiders, bringing possibilities of extra jobs and money to your country, maybe you should put the kettle on and be a bit more welcoming?