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Electric cars and the European car industry

After laughing at Tesla and the electric vehicle concept since 2010, European car makers may already be fighting to save themselves from eventual extinction and the only thing that might be enough to save them is their size.

It’s a bold statement and a lot of things may change in two years but there is no doubt at all now that German car makers have realised they completely misunderstood the future only 5 years ago.  European car makers failed to take the threat of electric vehicles seriously and now they are paying for it with having to work overtime to catch up. So what has changed and why, if at all, have European car makers made a mistake?

When Tesla launched its first electric car in 2008, the whole idea of electric cars seemed like a dream. Batteries cost a small fortune and would probably need to be changed every three years, it took roughly 24 hours to recharge, driving range was limited and there was no charging network. “Why”, the vested interests said, “would anyone want to buy electric?”

The brains behind Tesla, Elon Musk, determined that while this was true then, battery technology and the application of IT to cars was expanding exponentially. He calculated the fundamentals of solar energy, battery technology improvements already in the pipeline and foresaw a day when half or more of domestically consumed energy would be home produced solar power – just what is needed to swing the car market to favour electric.

Today, European car makers are investing as heavily as they can in the electric car future. Some have committed to a range of future cars which will include some full electric and some hybrid and others, most notably VW, are betting their entire future on all electric cars as soon as they can manage it. Almost 70 new electric VW models will be launched by 2028. VW has gone all in on electric but why should they do that?

In the end, it all comes down to price and running costs. Within 2 years, an all electric car will cost the same as a petrol equivalent and the driving range will be 250-300 miles. 300 kilo watt fast chargers are now being produced which will take the recharge time down to 20 minutes or less. Long journeys will be possible without anxiety over range and you will simply combine a re-charge stop with a tea break. Servicing costs are practically zero with EVs. In 5 years time, EVs will cost 10-20% less than the petrol equivalent to purchase, will cost dramatically less each time you fuel up and will have near zero servicing costs.

If none of this makes sense to you, consider this single point. In 2009, the cost of a battery pack for a car was $35,000 when the cost of a petrol or diesel engine was $5,000. Today, a similar battery pack costs $12,000 and the petrol engine equivalent costs $6,000. In two years time, the same battery pack will cost $6,000. At that point the cost dynamics shift completely. VW estimates that the cost of owning and running an electric vehicle with considerably better performance than an equivalent sized petrol powered car will within 5 years be approximately half.

These numbers, when they become obvious to consumers, will power a driving revolution with equal force to the switch made from horse drawn vehicles to petrochemical powered vehicles shortly after the turn of last century.

So there we have it, EVs are coming and no one can stop them. Given all this, can Tesla survive to reap its prize or will it be crushed under foot by the established brands?

Yes, Tesla will almost certainly survive and thrive because of one other factor I have not yet mentioned. It has a clear 5 year lead in battery technology at the moment but that lead may not be maintained.  It has a clear lead in electric motor design but it looks like this will be eroded over the next 5 years.  In terms of manufacturing system technology, Tesla is at a clear disadvantage. These factors suggest European car makers need not be too concerned. All except for one thing – autonomous driving systems.

Tesla has a large, possibly insurmountable lead in autonomous driving hardware and software technology.  How so?  Because, ten years ago, Tesla decided to invest heavily in developing software and hardware designs which would give it a world lead in driverless driving technology. This is where it may turn out to be impossible for the competition to catch up and, if they can’t, Tesla will become the dominant car maker in 20 years’ time or sooner.

Tesla’s computing tech lead is all to do with the machine learning circuits built into every Tesla on the road today and since the first model S was produced 10 years ago. Every Tesla on the road today is collecting and transmitting camera, radar and other data to Tesla’s HQ where it is processed and processed again to improve the decisions of the autonomous driving computers in Tesla cars.  Those same driving computers are continuously running on all Tesla cars in the background checking, millisecond by millisecond, the computer decisions against what the real world driver did. It’s a numbers game that depends on brilliance in software engineering and collecting vast quantities of real world driving data.  At the moment, Tesla is the only maker with such a vast pool of data with which to train its driving computers. 

Worse still, Tesla cars are already capable of driving autonomously on motorways, main roads and even alley ways.  All they need is regulatory approval and Tesla expects to obtain approval for its cars to drive autonomously somewhere in the world by 2020. Assuming that goes well – and it probably will – there will soon be a rush for the rest of the world to follow suit.

Even worse, Tesla worked out many years ago that the EV revolution will cause the very concept of car ownership to be questioned. Already, all Tesla cars on the road can be converted to driverless mode with almost no physical modification. Tesla’s lease contracts do not include an option to purchase the car at the end of the contract because Tesla has plans to launch a Tesla owned taxi business as soon as possible. At that point in time Tesla driverless taxis will become available.

And, if you are a Tesla owner, Tesla will allow you to rent your car to Tesla at times when you are not using it. At current taxi fare rates, Tesla forecasts that a car owner could expect to recoup the entire cost of a new Tesla in as little as one year by renting the car back to Tesla when not in personal use.

Yes, Google is snapping at Tesla’s heels with its own development of self-driving technology and great claims are being made about how good it will be.  But, I am persuaded by Elon Musk’s argument that Google’s use of LIDAR technology produces good early results but will, in the end, prove to be a blind alley in development terms.

This is potentially paradigm shifting stuff and the big prize in the future driverless car market will go to the car maker with the lowest accident rate.

Posted in Investments, Technology