Disconnect grows over electric cars

Henry Payne
The Detroit News

From the battery-powered Chevrolet Bolt crossover to the hydrogen fuel cell-powered Honda Clarity to a hybrid Chrysler minivan, automakers are expected to show a parade of electric vehicles at the 2016 Detroit auto show.

A rare sight a decade ago, they will join dozens of battery-powered entries in dealer showrooms as automakers try to dazzle consumers and meet government gas efficiency mandates.

But with national gas prices hovering at $2 a gallon and SUV sales booming, battery-powered vehicles’ share of the market last year dropped to just 2.4 percent, a 20 percent decline from 2014. The trend has sent ripples of concern through an industry that must meet escalating emissions goals to combat global warming by 2020 — that is, within the current product cycle.

“The regulators are what are driving electric car production,” said Karl Brauer, an industry analyst with Kelley Blue Book. “It’s not because consumers are demanding them.”

By 2020, California, the country’s largest auto market, will require roughly 10 percent of sales be zero-emission vehicles (either EVs or fuel cells). If they don’t meet that threshold, automakers will be fined $5,000 for each vehicle under their sales target. As part of its mission to combat global warming, the Environmental Protection Agency is not mandating such stringent targets nationwide, but it is requiring that carmakers’ fleets average 54.5 mpg by 2025.

As an interim step, 2016-model cars are supposed to meet a goal of 35.5 mpg this year, but according to the EPA’s “Fuel Economy Trends” report issued last month, automakers won’t be close. In reality, the fleet average is an estimated 24.7 mpg.

Detroit automakers, however, avoided government fines by making enough hybrids and EVs to gain credits under EPA’s complicated rules. Those credits will be key to meeting the looming California and EPA goals, but they will get much costlier. Only EVs and fuel-cell vehicles will get full credits, while gas-hybrids like the popular Toyota Prius will get less.

At the Los Angeles Auto Show, General Motors Vice President for Global Product Development Mark Reuss expressed confidence that his company is well-positioned to meet California’s mandates with the all-electric Bolt, plug-in Volt sedan and other offerings such as the hybrid Malibu.

Industry insiders refer to EVs like the Bolt as “compliance vehicles,” made not in response to market demand, but to comply with government regulations. But for smaller automakers like Fiat Chrysler, Mazda and Subaru — which haven’t been able to afford the massive R&D costs of EVs — the regulatory challenges are steep.

“The entire industry is going more toward electrification,” said Reid Bigland, FCA’s North American vice president of sales. “It’s really the primary way to be compliant with the 2025 (federal) standards. That is consuming a significant amount of capital in this industry.”

The result is a two-tier market.

To satisfy consumer hunger for SUVs, automakers are churning out crossovers and trucks at a record pace. Trucks and SUVs account for 55.7 percent of market share — an 11 percent increase in the last five years.

To meet demand, manufacturers have introduced 31 all-new SUVs since 2009, according to IHS Automotive. Yet battery-powered car production has soared even as their market share has shrunk. Automakers have flooded the market with 50 new hybrid and electric models, IHS says.

“The automakers are beholden to two masters,” said Auto Trends Consulting’s Joe Phillippi, an investment expert. “The companies are responsible to their customers and shareholders, yet the government wants its own way.”

Fiat Chrysler Automobiles CEO Sergio Marchionne has decried this two-tier market as unsustainable. The high cost of electrification has, in part, driven Marchionne on a quixotic venture to merge with GM. GM has been dismissive of the suggestion.

“Chrysler did not have the funds” to invest in EVs before its 2009 bankruptcy, said Bob Lutz, a former product executive for both Chrysler and GM. “And even now they can’t divert scarce capital and engineering money for these money-losing compliance vehicles.”

Lacking electric cars, Chrysler has taken the more affordable road of buying credits to meet federal rules. In 2015, reports Forbes, Chrysler paid the federal government some $600 million in credits, effectively a half-billion-dollar tax in order to stay on the right side of the law.

But buying credits will be less of an option as rules tighten to force automakers to sell electric and fuel-cell vehicles. This is by design.

In her new book, “Driving the Future: Combating Climate Change with Cleaner, Smarter Cars,” Margo Oge, the former director of the EPA’s Office of Transportation and Air Quality, gives an insider account of how the Obama administration used “the weakened bargaining position of the ... crippled automakers” in 2009 to force a doubling of mpg standards to 54.5 by 2025.

The rule, she writes, effectively forces a fundamental shift in engine technology toward “game-changing full-electric vehicles or fuel cells” to fight global warming.

If the EPA numbers are a road map to reduced tailpipe emissions, California — where EVs and hybrids already make up 11 percent of market share — will specify what vehicles will get us there.

The California Air Resources Board expects combined sales of fuel-cell, EV and gas-hybrid vehicles to reach 137,000 by 2020, and 270,000 by 2025, explained spokesman David Clegern.

Fuel-cell vehicle sales are mandated to hit 10,600 annually by 2020 — a tall order for even big manufacturers given their expense and the fact that only two fuel-cell vehicles, the Hyundai Tucson and Toyota Mirai, were available in 2015, with combined sales of barely 100. Honda’s Clarity ($62,000 estimated price) is expected later this year, while a joint venture between Honda and GM aims to produce another FCV by 2020.

The landscape is more difficult for small manufacturers with no battery programs. Mazda, for example, has been on the cutting edge of gasoline fuel efficiency with its SkyActiv engines, yet will get no credit for that work in California.

“The only options they have are to buy credits or invest billions in batteries,” said KBB’s Brauer. “It’s pay up or else.”

IHS Automotive Senior Auto Analyst Stephanie Brinley speculated that “the capital investment is so high that there will likely be opportunity for joint investment. Partnering with other automakers on technology is probably how Mazda gets there.”

But experts agree the industry is fully committed to making electric cars, whether consumer demand materializes or not, in order to be compliant with rules.

“The regulators are not going to back down,” said Brinley. And EVs “are not a switch automakers can just flip in five years.”

CARB’s Clegern said California’s standards have been adopted by nine other states, which will mean a total industry commitment to 3.3 million zero-emission vehicles in showrooms by 2025. “We’ll hit a critical mass at some point,” he says, which may drive costs down.

A key test will be Chrysler’s expected introduction in Detroit of a hybrid model into the high-volume minivan segment despite “zero market demand for a hybrid minivan,” said KBB’s Brauer.

Henry Payne is auto critic for The Detroit News. Email him at hpayne@detroitnews.com. Follow him on Twitter @HenryEPayne.