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Charged for Battle

The first serious contenders for a mass-scale electric car are on the road. They’ve already changed GM and Nissan; will they change the world?

A charging station for the Nissan Leaf

By Eric Pooley
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Most of the drivers on the 101 Freeway in Marin County, Calif., on this foggy December morning are oblivious to the black snub-nosed car gliding along beside them. Every so often, however, someone does a double take, gives a thumbs-up, or snaps a cell phone picture, because the car in the next lane is one they’ve never seen before: a Nissan Leaf, the world’s first affordable, mass-produced electric vehicle, or EV.

This particular Leaf happens to be No. 1: The very first sold anywhere. At the wheel is Olivier Chalouhi, who took delivery an hour before amid some impressive hoopla at a Nissan dealership in Petaluma. Now, driving south to San Francisco with Nissan (NSNAY) Americas Chairman Carlos Tavares riding shotgun, Chalouhi, a 31-year-old Web entrepreneur, is explaining how he came to be the first person to buy this car. His voice is soft but easy to hear from the backseat because, with no internal combustion engine, the Leaf (nationally about $25,000 after a $7,500 federal tax credit) is eerily quiet, almost as cocoon-like as Nissan’s $50,000-plus Infiniti M.

“It all started,” Chalouhi says, “when I saw an ad for the Chevy Volt.” The Volt, which started shipping to dealers in mid-December, is the Leaf’s chief competitor in the green-car sweepstakes. It runs for about 40 miles on an electric charge before a small gasoline engine kicks in to recharge the battery. That gives the Volt more than 350 miles of range—unlike the Leaf, which runs for 60 to 100 miles, varying with weather and terrain and driving style, before needing a recharge that can take 30 minutes to 7 hours, depending on the strength of the charger. The Volt’s gasoline engine makes it less attractive to some eco-minded consumers like Chalouhi. “In all the articles I read about the Volt, the Leaf was discussed as well,” he says. “As soon as I found out about the Leaf, I forgot about the Volt. The Volt wasn’t going to project the image I wanted. It has a tailpipe.”

“The Volt is a hybrid,” Tavares, 52, says happily from the passenger seat. “A very nice hybrid. But we see it as a transitional vehicle, and we were always of the opinion that we were providing the ultimate destination: 100 percent clean. No emissions. No gasoline. No tailpipe.”

The energy chain is more complicated than that—the electricity powering a Leaf may or may not come from low-emission sources—but right now it’s time to enjoy the ride. Chalouhi turns off the highway and guns the car up a steep, winding road in the Marin Headlands overlooking San Francisco Bay. The Leaf is surprisingly agile and sure-footed; its electric motor has plenty of pep, and 600 pounds of laminated lithium-ion batteries below the floorboards help it hug the road. Chalouhi is having fun with the tight turns heading into the hills, where Nissan has stationed a media team to capture the moment with some suitably dramatic images. Alas, the Golden Gate Bridge is hiding behind the fog, making the glamour shot impossible, so Chalouhi guides the car back down toward the 101 while a product manager, Paul Hawson, briefs him on the next photo op, at City Hall in San Francisco. “At the end of the ceremony,” Hawson says, “you and Mr. Tavares will go to the car and plug in the charger together.”

Chalouhi looks worried. “So I’m not going to be charging for long?”

“A short amount of time, yes.”

Chalouhi lives 35 miles to the south in Redwood City; the Leaf’s sophisticated NAV screen is telling him he has 37 miles left before his battery runs out of juice. The owner of the first mass-produced EV, in other words, is experiencing his very first twinge of what GM (GM) marketers have helpfully named “range anxiety.”

“So I won’t get much charge at City Hall,” Chalouhi says.

“You’ll get some,” Hawson assures him. “You’ll get home. We’ll make sure you get home.”

The psychology of the American car buyer is the biggest roadblock Nissan must get past for the Leaf to become the hit that the company promises it will be. Nissan’s chief executive officer, Carlos Ghosn, likes to point out that 95 percent of drivers travel less than 100 miles per day, making the Leaf practical for most. Yet practicality doesn’t always translate into peace of mind. A recent study by Synovate Motoresearch showed that 60 percent of 1,600 U.S. consumers surveyed think their gasoline-powered cars are reliable. Only 30 percent of those surveyed think hybrid-electric cars are reliable (even after a decade of virtually trouble-free performance), and only 10 percent think electric cars will be trouble-free. “The main thing holding back electric vehicles is the customer,” says John German, a former strategic planner for Honda (HMC) who is now a program director for the International Council on Clean Transportation, a green think tank in Washington. “It’s risk aversion.”

Nissan and GM missed the decade-long trend toward gasoline-electric hybrid vehicles—Toyota’s (TM) Prius dominates that segment, which still accounts for less than 3 percent of all cars sold in the U.S. When Ghosn joined Nissan as chief operating officer in 1999, the company was flirting with bankruptcy; as CEO starting in 2001 he slashed 60 percent of its research and development projects but kept the costly battery program that led to the Leaf. In 2005 he also became chief executive of Renault, which owns 44.3 percent of Nissan, while Nissan holds 15 percent of Renault. The Renault-Nissan alliance has now spent more than 4 billion euros ($5.2 billion) developing EVs and batteries, according to the company.

Both Nissan and GM began work on their new electric vehicles in 2006, when the rest of the auto industry had more or less given up on EVs after a brief foray in the late 1990s and early 2000s. When Nissan announced its project that year, “Nobody took us seriously,” Ghosn, 56, says in a telephone interview. “We had many very ironic comments coming from our competitors about the illusion of the electric car.”

The sniping never stopped. Former GM Vice-Chairman Robert A. Lutz, who helped develop the Volt, told Bloomberg News last year that all-electric vehicles were still years away from widespread adoption. “He’s rolling the dice,” Lutz said of Ghosn’s battery-only approach. “I don’t see it happening.”

Until a next-generation battery emerged with better range at less cost, the industry decided, all-electric vehicles were too limited for the mainstream. (Some investors seem to agree these days. Last week electric car manufacturer Tesla’s (TSLA) stock dropped 15 percent on the day the insiders’ lock-up period expired.) Everyone remembered the fiasco of the first abortive EV era, from 1996 to 2003, when California required GM and other carmakers to offer the vehicles. The cars were too expensive to be profitable, so the carmakers succeeded in overturning the state mandate, then scrapped the program. In GM’s case, the company crushed many of the cars, called EV-1s—a PR nightmare captured in the 2006 documentary Who Killed the Electric Car?

Now, says Ghosn, “Everybody is competing for the electric car market. People who don’t really have an electric car are saying, ‘We have one, too.’ Even the hybrids want to look electric, which was not obvious four or five years ago. My call was the right one. It doesn’t always work out that way, so you’re happy when you’re vindicated.”

His declaration of victory is a little premature. For one thing, major automakers no longer have a choice about going electric. They have to, largely because of government mandate. California law requires the largest automakers to have low- or no-emissions cars in their fleets by 2012, and the Obama Administration’s new fuel economy standards, which raise fleet averages to 35.5 mpg by 2016, a 40 percent improvement over current levels, make having a zero-emissions vehicle a smart way to balance out the gas-guzzlers.

While it’s true that more than a dozen electric and plug-in hybrids are slated to go on sale in the next two years—entries from Ford (F), Honda, Toyota, Mazda, and many more will be on display at the Detroit auto show, which begins on Jan. 10—Nissan is the only major automaker betting so heavily on all-electric technology. GM is hedging, with cars that run on electricity but use a gasoline engine to recharge. Honda has put its R&D muscle into hydrogen fuel-cell technology, which remains prohibitively expensive. (The Honda FCX Clarity hydrogen vehicle is a machine of great beauty, and each one costs Honda more than $100,000 to produce, according to K.G. Duleep, a fuel-cell expert at Virginia-based Energy & Environmental Analysis.) BMW, Volkswagen (VLKAY), and Mercedes-Benz (DAI) have focused on ultra-efficient diesel engines. Toyota’s main EV offering is an incremental play: a plug-in Prius that adds about 15 miles of all-electric range before the hybrid motor takes over.

It remains to be seen whether this flood of supply will meet with sustainable demand. In a report called “Drive Green 2020: More Hope Than Reality,” marketing firm J.D. Power and Associates projects that in nine years, battery-electric vehicles like the Leaf will enjoy annual sales of only about 100,000 units in the U.S. and 1.3 million units globally, or about 1.8 percent of the 71 million cars expected to be sold. Another 3.9 million hybrids and plug-in hybrids will be sold worldwide in 2020, the firm estimates, bringing the total electric and hybrid market to about 7 percent. “While most consumers say they want to create a smaller personal carbon footprint,” the study says, “research shows this consideration carries relatively low weight in the vehicle purchase decision.” Other studies are more bullish; Bloomberg New Energy Finance projects that plug-in cars such as the Leaf and the Volt could make up 9 percent of U.S. sales by 2020 and 22 percent by 2030. Yet after 10 years as the world leader in hybrids, Toyota has never sold more than 187,000 Priuses in the U.S. in a year, about the same amount as the Hyundai Sonata. Prius sales reached that peak in 2007, just before the financial meltdown, and have dropped since then as lower fuel prices have lured Americans back to SUVs.

Now consider Ghosn’s projections for the Leaf. Nissan will produce only about 50,000 this year and next, but by the end of 2012 three new Leaf plants will be operating—in Oppama, Japan; Sunderland, England; and Smyrna, Tenn.—with a total capacity of 500,000 cars per year and the ability to scale up to a million, just as all those competing EVs and hybrids from Toyota and Audi and Ford will be coming to market. Ghosn is the first to admit that he’s making a huge bet.

It may not be an altogether crazy one. Tom Turrentine is director of the Plug-in Hybrid Electric Vehicle Research Center at the University of California, Davis. An anthropologist by training, Turrentine has partnered with major automakers to conduct a series of detailed studies of actual Americans driving actual electric cars—not just EV enthusiasts, but regular people driving an array of electrics. As his team observed the driving habits of more than 300 EV households over the past several years, families driving and living with their electrified Minis, plug-in Priuses, and Nissan hyperminis, the data told him that EVs “were never going to be ‘just like’ internal combustion cars.” They were different, and in some ways superior.

“There’s something about electric drive, with its quiet glide and immediately available torque, that drivers really enjoy. Even when they aren’t going fast, people think they are having fun,” says Turrentine. “Engineers at BMW tell me it’s the way the cars accelerate. You don’t have clutches and transmissions, so your accelerator pedal is feeding electricity directly to the motor, and you feel it accelerate the car. There’s nothing in between you and the tires. Some people fall in love with that feeling.”

For all his confidence, Ghosn understands the immense challenges to expanding Leaf sales. That’s why, for the past three years, his company has had a team of traveling executives—the Zero Emission Mobility Team—meeting with city, state, and utility officials around the country to solve crucial infrastructure problems such as the cumbersome permitting process for home chargers and the need to create a network of high-speed public chargers in cities and along interstate highways. “We are not the provider of just a car this time,” he says. “We are the provider of a whole new system.”

Utilities may welcome the opportunity to sell more electricity, but they also worry about the load. Several new EVs suddenly plugged into the same suburban block could fry a local transformer. More difficult is installing the needed network of charging stations, both in the home and in public, to allay range anxiety; 13,000 public chargers are expected to be in the ground by the end of 2011. (The U.S., by Nissan’s count, has 106,000 gas stations coast to coast.)

The most important issue of all has to do with customer education and acceptance. To appeal to the “pragmatic majority” of buyers, Nissan needs to sell the cost advantage of ownership: year in and year out, EVs cost far less to own and operate than internal-combustion vehicles—about 2 cents per mile to drive, compared with about 13 cents per mile for an average gasoline-powered car, according to Nissan—and less to maintain as well. To buy Leafs in serious numbers, these pragmatic men and women need to be able to imagine themselves behind the wheel of an electric vehicle.

For the product to be competitive, however, Nissan must also keep the price down. Nissan manufactures its own batteries in a joint venture with NEC, and they account for roughly half the cost of the car, making the initial price of an EV more than that of comparable gas-powered vehicles. For now, federal and state tax credits and rebates are required to make the cars cost competitive. The Leaf’s sticker price of about $33,000 makes it $10,000 costlier than a well-equipped Honda Civic, for example. Factor in the $7,500 federal tax credit (along with rebates and tax credits available in 16 states, such as a $5,000 price break in California and a $4,500 rebate in Hawaii), and the EV becomes competitive. Assuming the new Congress doesn’t roll it back, that federal tax credit is available to the first 200,000 EV customers of each carmaker; when it runs out, Nissan expects to be selling so many Leafs that economies of scale will bring costs down. Ghosn says the company needs to sell between 500,000 and 1 million Leafs a year in order to enjoy those economies. “Then we’ll be able to compete without any government subsidies. Our battery costs are already coming way, way down. Everybody in the business has estimates, but nobody really knows everything we’re up to. The Leaf is going to be one of the most profitable products Nissan has ever made.”

While Ghosn was planning the Leaf in 2006, Bob Lutz and Jon Lauckner, GM’s vice-chairman and director of product planning at the time, were also trying to dream up an electric car that would leapfrog the Prius. Like Nissan, GM was after some much needed public acclaim and green credibility. The company had been derided for shutting down its EV-1 and crushing the cars, and Lutz thought a pure EV that used no gasoline would be a public relations coup.

Lauckner, now president of General Motors Ventures, the automaker’s technology venture capital group, studied American driving habits just as Ghosn and Tavares were doing at Nissan. Where the Nissan team focused on the fewer than 100 miles a day traveled by 95 percent of drivers, Lauckner lingered over another set of numbers: 78 percent drive fewer than 40 miles a day. He figured a car equipped with enough battery power to go that far, plus a gasoline engine to recharge it on the fly, “would be a game-changing concept that would address the shortfalls of electric vehicles on one side and go beyond the top hybrids on the other. We wanted this to be someone’s first car, not their second or third commuter car,” he says.

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