Smaller players will struggle with lack of scale, yet have products on sale. Larger established manufacturers are late to the game, but have massive resources. Who is going to win the EV race?


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We've all heard the predictions that large auto makers are going to crush the new electric vehicle (EV) entrants when they bring their massive wave of battery electrics to market. But after the first round of the EV battle, new entrants like Tesla, Fisker, and Think seem to be more nimble and doing better than many people thought. Why? There's a lot to learn in the EV business and the large auto OEMs are finding that it's harder than they believed and are taking longer to develop and launch EV products than they had estimated. Take Mitsubishi, for example, which first planned to launch the i-MiEV in the U.S. market in 2009. That car, now renamed the i, is still not here (it's supposed to arrive in November). Or what about Nissan's Leaf, which has sold 471 units through the end of March but has a waiting list thousands of people long who still don't have their cars. Over in Europe, things are also moving slowly for the large OEMs, with Renault's products being late to market and Volkswagen and Volvo only having production EV models coming to market in a 2013-2014 time line. PSA's technology is borrowed from Mitsubishi and Fiat apparently didn't get the EV memo until quite late. (This post continues after the jump.)

No doubt, we are about to enter an important phase where the large OEMs will bring their enormous resource advantages to bear on the EV space. But the small companies have speed, focus and customer proximity on their side. Remember your first PC? Those early computers, mostly sold to enthusiasts, generally didn't come from the huge mainframe computer manufacturers. They were developed by a bunch of technology geeks and had weird names like Commodore, Wang, Sphere, Atari and Apple.

commodore pc
Image: Marcin Wichary – C.C. License 2.0

The makers of these PCs focused intensely on what this innovative new technology could do in a home computing environment, and didn't really care what mainframe makers were doing, let alone trying to compete with them. With advantages in speed to market, innovative product development and through developing a growing customer base of brand advocates, the small PC makers left the mainstream competitors behind in their dust. As the subsequent rounds of the PC battle played out, many of the large players, like IBM, did eventually learn to compete. Many of the small PC brands disappeared in the transformation, but so too did some of the large mainframe companies.

As former CEO of EV maker Think and with a 25 year career at Ford behind me, I know all too well that PCs are not EVs and that the industries are fundamentally different. Yes, size really does matter in the global auto industry, and being small and well focused is great, but sometimes it's just not going to help you when you're buying 5,000 shock absorbers per year and General Motors is buying 5 million. In today's highly regulated auto industry, the tooling and development cost of bringing a new product to market quickly climbs into the $100m+ range, regardless of who is doing the work and how smart they are.

Let's take a further look at that scale difference. About 50 percent of the cost of a typical EV is likely to be the battery. And another 15 percent or so is going to be the high voltage power electronics that are unique to the EV segment. So in total, about 65 percent of the variable cost is in items where the newcomers don't suffer a scale disadvantage, and probably even have a small cost advantage over the big guys. Not everyone agrees with Tesla's battery strategy of using well-proven cylindrical cell li-ion batteries, but it seems to be working well in practice and likely gives Tesla a cost advantage over some other approaches. And in the area of power electronics, I have no doubt that the smaller players are leading. Trouble is, on that remaining 35 percent of the cost, the new entrants get clobbered. There's just no way they are able to purchase those important components at anywhere near a globally competitive cost, and it probably represents a cost disadvantage of $500-$1,000 per car on a typical EV. Maybe not too much for a Fisker or Tesla, but pretty important for anyone trying to compete with Nissan's Leaf.

One of the advocates of the newer entrants is Ray Lane, Managing Partner at Kleiner Perkins Caufield & Byers who is one of the main shareholders at Fisker. He told me:

It's all about focus. Typically start-ups have to have one person that is "the best" at something and that drives the whole culture. OEM's have lost that. They are monoliths playing out what they think the industry wants rather than trying to change the game. When you take Henrik out of the bureaucracy or have an entrepreneur like Elon, who isn't encumbered by "what the industry thinks", then magic happens. When the OEM's catch up, these companies need to retain what made them special.

So I asked Henrik Fisker what it was that made Fisker so special that he was going to be able to compete and win against the world's leading luxury car makers, and he said:

Fisker Automotive's brand sends a clear message of "caring" about our environment and our dependence of oil, combining this with extreme style and power, to evoke the emotional side, that made us fall in love with the automobile in the first place. This is a clear message that the driver will project by owning one of our cars: Responsible luxury.

Celebrity CEOs or a small and dedicated team can provide the spark, but to really light up in the auto industry you need to be in the right place at the right time with the right product – and with enough resources available to quickly capitalize on that. We're seeing some EV companies capitalize on this and others struggle. Time, money and people are always very scarce for these new entrants, and we're already seeing signs of some of these companies that are not going to make it.

Will the prospect of $5 gas help these new EV entrants keep their early lead? Or are Nissan, Ford, Mitsubishi and GM's products – and the possibility that they can price them at less than their fully accounted cost – going to quickly give them the upper hand? Too early to tell, and it is certainly possible that the market will grow quickly enough for everyone to have a slice of a rapidly increasing pie. Another way to get ahead is to focus on sub-segments that the large OEMs find more difficult is going to help the small players. Through employing micro-marketing techniques like focusing on states or cities with incremental EV incentives and selling their zero emission vehicle (ZEV credits), the makers with EVs actually already on sale have a good early advantage.

With a federal credit of $7,500, incremental state incentives of up to $5,000 and ZEV credits that might be worth $10,000+ per car, the potential certainly exists for the smaller players to stay in the game. The technology isn't yet ready for EVs to be part of a national market across the entire U.S., so this early phase will see both large and small makers slicing and dicing the national market into small micro-market sub-segments where today's EV technology can best match what customers need with their transportation, while maximizing the available benefits and incentives.

tesla daimler partnership

Partnerships are going to be important. Is it possible to match the speed and innovation of the small players with the purchasing might of the world's largest automotive players? Perhaps. In Tesla's case, the partnerships with Daimler and Toyota have been fundamental in creating credibility for Tesla's technology and helping overcome some of the scale differences. Bright Automotive is heading down the same path with GM. No doubt, others are working hard behind the scenes to try and create more of these potentially important alliances. But will the large auto makers want this or will they instead utilize a "fast follower" strategy – and then eventually blow right by the small players? Most of the large OEMs have their own EV plans that don't necessarily gel with the products and culture of the smaller companies.

I do think we are going to see more partnership announcements between the small EV companies and the large OEMs if they are going to prosper. For the small players, it's a pathway to overcoming the enormous barriers that they face, while at the same time providing a quick to market test bed for the large OEMs that partner with them. As the EV industry evolves, there'll be some winners, some losers and some who partner along the way to improve their position. The little guys are in front after the first round, but that's mostly because the big players were late arriving to the game. Now that everyone (mostly) is on the field, we're ready for some interesting times ahead in the next, decisive rounds of the EV battle.

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Richard Canny is the former CEO of Norwegian electric vehicle developer Think. He joined Think in August 2008 and was CEO of Think Global and Think North America from October 2008 to October 2010, and was Vice Chairman of Think North America until January 2011. Prior to joining THINK, he accumulated a wealth of automotive experience to from a 25-year career at Ford Motor Company where he held key leadership roles in all the world's major automotive manufacturing regions.

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