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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Trillion Dollar Market That Stopped Chasing Profits

Tesla

Every carmaker worth their salt is developing electric cars. It’s like a virus that’s going around infecting car manufacturing companies. The virus’ name, of course, is Tesla—with observers seeing Elon Musk’s “marketing mastery” as the driving force behind the EV craze.

Tesla’s popularity seems to defy logic, or at least the logic that says profit is the ultimate goal of any business, and it should come in big and fast. But Tesla lounges comfortably in the red. Other carmakers are losing money on their electric vehicles as well. Yet both Tesla and the others continue to make them. Why, the profit-focused minds wonder?

Environmental regulation is the most obvious answer. Several European countries, some U.S. states, and more importantly, India and China, have all passed regulations that would support the growth of electric car demand in the years to come. India plans to go all-electric-car by 2030. China has given itself until 2040 to phase out internal combustion engines in passenger cars.

With China already the biggest car market in the world and India close behind, it’s not surprising that carmakers are in a rush to offer these markets a choice of electric vehicles, even if it’s not profitable today.

Even Big Oil is joining the EV rush: Shell is developing smart EV charging stations, wary of forecasts such as Goldman Sachs’ recent one that oil demand could peak by 2024. It may be too oil-pessimistic but it’s not out of the question.

Related: The Next Big Offshore Boom Is About To Happen Here

But, those skeptic observers say, EVs are still rather expensive. Plus, people like their gas guzzlers. Indeed, lithium-ion batteries are still on the costly side, with 1 kWh costing GM $145 to produce. Chances are 1 kWh of battery time isn’t much cheaper for other EV makers, either. Yet a lot of work is going into lowering battery costs, so they’re bound to come down in a significant way sooner or later.

Bloomberg New Energy Finance says battery costs will decline to $109 by 2025 and to $73 by 2030. The Department of Energy forecasts the $100 mark will be reached in 2022; GM and Tesla forecast the same. That’s just five years from now, which is probably making oil majors devise contingency plans. Or not, because bar Tesla, carmakers are still making money on regular cars and bleeding cash on EVs.

The numbers are quite impressive: Fiat Chrysler is losing $20,000 on its electric Fiat 500 version—per car. GM loses $9,000 on every Chevrolet Bolt. And yet the latter has announced one of the most ambitious EV plans for the medium term.

Tesla doesn’t have ICE cars to offset losses on its flagship but it’s making cars and selling them: 450,000 people have pre-ordered the Model 3. And the company’s stock has been remarkably resilient. Not only has it risen despite negative bottom-line figures, but this week the shares dropped on reports of lower than expected Model 3 production numbers, and recovered within a day.

Related: What Really Killed The Oil Price Rally

The logic of enduring years of loss-making in efforts to secure a substantial share of a nascent market might be alien for traditional business, but that doesn’t make it unreasonable. Regardless of how much drivers love their SUVs and pickup trucks and regardless how much they get annoyed with longer charging times for EV as compared with ICE vehicle fueling, there’s a mental shift happening on a global level, and it will only spread.

It could take five years or it could take 10, but when it comes to EV sales forecasts, there is consensus: these will only grow from here on out. With costs falling consistently and with the help of government incentives, EVs will start making profits in the not too distant future.

In case anyone has an ironic comment about EV tax incentives, remember that it’s not the only industry benefiting from pointed government support. Oil and gas in the U.S. and UK, to mention merely two, also enjoys subsidies in various forms. In other words, governments are supporting two opposing camps. Talk about ironic.

By Irina Slav for Oilprice.com

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  • Guy minton on October 04 2017 said:
    What subsidies is the US giving oil companies????
  • Cowpoke on October 04 2017 said:
    I am still driving a 98 Camry with 275,000 miles on it and it will continue to run for a number of years.
    ICE cars are being sold today by the millions each year and have a 20+year life span. So it would take MANY years or an outright ban to no longer see ICE vehicles on the road.
  • Chris on October 05 2017 said:
    Tesla...... fool and his money. Well not quite, its other people money. As long as the pipeline of money, not oil is still flowing, the music keeps playing, and everyone keeps dancing. How much longer without profit?
    Is it again too big too fail??? I think, lot of people holds its finger on the sell button for TSLA
  • Josh Gregner on October 05 2017 said:
    You are wrong. If you think that Tesla's success is about environmental regulations, you have not understand anything about Tesla at all. Tesla owners lover their vehicles, they love the speed, the technology, the coolness. I do think some of them like low environmental foot print but since 2012 Tesla has continuously made their cars more expensive and they are selling more of them every quarter.

    You are likewise wrong about China: Of course environmental concerns are a factor. But for decades Chinese companies have tried to be internationally successful with their cars. This has never worked. With e-mobility the clock is rest to zero. And China wants that and sees that and banks on that. That's why China is pushing EVs.

    All of the above is bad for oil: environmental regulation you can lobby out of this world. The factors that make Tesla a success and the factors that drive China won't be impacted on by any oil burning car. And this is bad for the future of oil.
  • Jeff Bowa on October 05 2017 said:
    I hate reading articles about sports on a tech site. The same is in this article. In fact the opposite is true. The car companies are chasing profit and thats why they are developing the EV. The EV will be far cheaper to produce when its mass produced.....something its not currently. With half the parts of a ICE car and assembly times that are way less the profits will be enormous on these vehicles. Not to mention the EV beat the ICE in every metric. Its only a matter of time. This is a similar story to the cell phone and the land line. The land line was the king but we all know what has happened.
  • May on October 05 2017 said:
    I am sure that everybody will be thrilled to look for charging stations. Why run for a week on liquid fuel when can charge your battery every day?
  • snoopyloopy on October 09 2017 said:
    "The numbers are quite impressive: Fiat Chrysler is losing $20,000 on its electric Fiat 500 version—per car. GM loses $9,000 on every Chevrolet Bolt. And yet the latter has announced one of the most ambitious EV plans for the medium term."

    There's little basis in reality for either of those claims. Marchionne likes to claim that FCA loses money on the 500e (first it was $14k, then it advanced to $20k after several years), but that's almost certainly because they don't sell it anywhere except California and Oregon. If they were to increase sales, any development costs (which should be minimal since it's a conversion, not ground-up EV anyway) would get amortized over a bigger fleet. Meanwhile, no one from GM has ever confirmed that they're losing $9k on the Bolt and a recent teardown report estimates the cost to build them at around $29k. Development costs might add more, but would again provide a huge incentive to sell more to amortize that cost over a large fleet.

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