Friday, November 17, 2017

It Will Take More Than Tesla - Crossing The Chasm - Part 4

In Part 3 (News Roundup) I said that I would next look at some of the big questions provoked by the transition to Electric Vehicles (EVs).  My natural focus will be the UK but I believe that much of what I say is relevant to the rest of the world, and I will draw on examples of what’s being done (or is planned) in other countries for comparison.



There are plenty of questions, issues and risks to think about in this major transportation transition, but the first that I want to deal with is, from a consumer point of view, what it will take to “cross the chasm."

Crossing The Chasm

In the early 1990s Geoffrey Moore pubulished a booked called “Crossing the Chasm”, subtitled “Marketing and Selling High-Tech Products to Mainstream Customers” - in essence a manual for getting your leading edge technology product beyond the early adopters, technical enthusiasts and “buy it because it’s new and shiny” types and into the hands of the mass market.  There’s a great summary by Jonathan Linowes.

Moore’s thinking was that rather than there being a smooth curve of adoption from innovators (the real enthusiasts) through early adopters and on to early majority and late majority (the peak of the curve of adoption) with laggards coming in at the end, there were gaps between each of these groups of customers.  Getting across those gaps - with the largest being between early adopters and the early majority, so large that it was not so much a gap as a chasm - required different thinking.  That is, what made your first few customers buy your product would not be enough to get the early majority to buy it.

The Innovators

So who are these innovators, the very early adopters of EVs, and just how many of them are there?  Well, not very many, perhaps by definition.  But even less than you might think given all the press coverage around EVs, some of which I referred to in Part 3.  One way to count how many there are is to look at applications for grants from the government’s Plug-in Car Grant Scheme.  As of Q3 2017, a total of 122,000 cars had applied for grants since the scheme started in 2011.  That’s a cumulative figure, which, when placed against roughly 2.8m annual car sales in the UK, suggests that these innovators, at roughly 25,000 or so cars in 2017, are pretty much the 1% of fable and lore.  But, that 122,000 total includes both Plug-in hybrid and EV - the former count for roughly 60% of the total, leaving about 45,000 EVs so far in 2017.  The 1% is really the 0.5%



The most popular car that qualifies for the grant is the Mitsubishi Outlander PHEV - around 29,000 cars in Q2 2017.  The Nissan Leaf follows up at around 17,000 cars.  Tesla, including both X and S, counts for about 6,500 - as I’ve said, it will take more than Tesla.  In total, there around 50 cars eligible for the grant, though not all have seen sales so far.  What’s clear from the numbers is that there are far more hybrid options available than purely electric, for now. Mitubishi are roughly the 25th most popular brand in the UK, selling about 8% of the number of cars that Ford, the number 1, sells.  Nissan are 9th, seeling about 45% of Ford’s total.

According to various profiles, these innovators are likely to be relatively younger and richers than buyers of combustion engine cars and, some say, smarter/better educated than them too.  It’s hard to disagree with the “richer” label - EVs (and hybrids) are more expensive than cars with combusion engines, even with a generous government subsidy provided for (not to mention lower ongoing costs in terms of fuel, tax and congestion charges).  It strikes me that the innovators, whilst thinking green, are unlikely to be choosing such a vehicle only to be green - there are too many other factors to consider, particularly range and charging locations.

Our innovators, then, are relatively well off and have evaluated the pros and cons of EVs and decided that they can handle range limitations (perhaps because most of their journeys are short and because they can easily charge their car at home, with off-street parking available), they’re thinking green but they’re also thinking about long term cost saves (in the absence of any guidance on future “fuel” tax levies).  They’re also, probably, chasing technology - these same innovators are likely first buyers of new models of phones, televisions and other electronic gadgets; they may also have their eye on future revenue opportunities by feeding energy from the car back into the grid.

They’re also, I think, risk takers - they don’t know how things will play out in the future in terms of residual value of the car in a few years, future software upgrades, possible software errors that result in problems and so on.   They’re “moon shot” customers, people who are happy to take the risks because they want to be first and, if they’re happy, they will make great ambassadors for the brand that they’ve chosen (possibly to the point of terminal boredom for some of their friends who may be less inclined to be innovators).  

The Early Majority

The second wave of EV purchasers will be quite different from the innovators.  They will be thinking through far more options and considering a far greater number of angles than their early adopter counterparts.  The issues and questions confronting the early majority, who will still be asking why should they buy and EV, rather than why shouldn’t they, include:

Do I even need a car?  There’s a reasonably large section of the population - probably skewed relatively young and living almost entirely in cities - who likely see no need for a car.  They have easy access to public transport and use Uber when they’re out, they may not have easy access to parking and they’ll see the congestion charge (if in London) as a needlessly expensive tax.    Many will be green-thinking and conscious of the pollution in cities and will want to do their bit, but it will mostly be a calculation purely based on cost - why incur the regular expenses of a car when they can have near immediate access to one by the minute or by the hour through Uber, Lyft (soon) and black cabs with Zipcar and equivalents handling the very occasional long journeys they’ll make?

What choices do I have?  The number of pure EV models on the market today is limited.  As I noted in part 3, that’s changing and, over the next 3-5 years, there will be considerable choice.    Choice is important - if it wasn’t, VW wouldn’t have 300 models (across 12 brands) on the market.  Every major manufacturer has made the commitment that certainly over the next 10 years, and in many cases even fewer, they will have electric and/or hybrid versions of every car in their range available. My sense is that VW won’t have 300 EV models though - engine sizes, fuel injection, turbo, diesel, petrol etc are all redundant and will be replaced by external shape and functions, interior design and features and perhaps battery size.  Just as now, a near infinite variety of colours and functions/accessories, but only a few core models - small, big, off-road even.  Not that simple perhaps, and not right away, but you get the picture - number of seats, amount of storage space, safety features, entertainment upgrades and software capability (today and in the future) will become the big decision points (once range becomes a non-question).

Where do I go and see the choices? Dealers are going to have make some interesting decisions soon.  They only have so much space available to them … so do they roll the diesel cars out of the showroom (diesel car sales are already falling and are at their lowest even percentage of the total, notwithstanding industry efforts to convince us that modern diesel is as clean as petrol - imagine why we might be just a little sceptical about such claims)?  Do they reduce the number of petrol and diesel cars on show and make more room for EVs and hybrid?  Do they open an EV / hybrid only showroom on the basis that if the customer wants to buy an EV, there’s no point in showing them a diesel car?  Wrapped inside this are some very interesting disincentives for dealers - I’ve heard various estimates but something like 2/3rd of a dealer’s revenues are tied up in the aftermarket support of a car; with EVs having 1/4 or 1/5 (and falling) of the number of parts of a combustion engine car, will much of that revenue disappear because there’s less to go wrong (and some of what goes wrong could be fixed remotely by software?).  Comparing models across dealers is also going to get interesting - given how much of an EV is software based, how long should a buyer wait before she knows that the software is reliable and so can confidently make a purchase?  How can you compare software capability between manufacturers?  How should a buyer evaluate a manufacturer’s ability to patch and upgrade the software regularly?

How much will my EV cost to buy?  If you’re making the choice to buy an EV today, you can see exactly what the purchase price is.  It will be the sticker price less the government’s incentive plus the cost for installing a charger at home less the subsidy for the same charger.  But what if you’re thinking about making the switch a year from now?  Will those subsidies still be in place?  Two years from now?  I suspect the government sees no need to announce changes to those subsidies now given that take up is low, but as it starts to move higher (and the graph of purchases is very clearly upward now), that susbidy will look like an increasing cash drain, and one that, today, is seemingly rewarding people who are already rich enough to buy an EV.

What are my long term servicing costs?   Routine service costs are relatively easy to forecast - there’s some data available for existing cars, but there are also some unknowns (e.g. if a future software update adds functionality, will that cost money too?) - and, again in theory, the cost for an EV should be lower than for a combustion engine car (though it seems likely that independent/small dealers will struggle, at least for now, to compete with the main brands which means that there will be a little less competition); it’s unclear, today, what “major expenses” might be expected were there to be a significant failure but it seems reasonable to think that (a) costs will be lower than combustion cars because there are fewer parts and (b) there should be fewer major failures.



What about running costs? The cost of fuel is an area of significant uncertainty, not today, but soon.  With £27bn of fuel tax and some £5bn of road tax at stake, it seems unlikely that once EV ownership becomes more widespread, possibly as soon as it reaches mid-single digit percentages, that tax loss will have to be replaced and, given that most charging will likely be at home, a per mile charge seems most likely - with the cars themselves reporting the distance travelled, for government (or a 3rd party agency) tallying it perhaps every month or every quarter.  Charging away from home can be estimated too - and various third parties offer membership fees that let you charge at their own stations.  There is, of course, an ugly scenario - one that we have seen before with bank ATMs (you can only take money out from your own bank branches) and mobile phones (you can only text people on the same network) - where a long range driver will have to join multiple schemes to be sure that they can charge wherever they are; that should, like the examples I gave, work itself out in time though I can see an initial burst of effort to get first mover advantage where multiple suppliers provide charging capability to the same places (there is a role for regulation here perhaps, where government drives common standards and cross-charging) but, if not, the market will take over and smaller companies will be acquired and rolled together to create ever larger companies competing on price, speed of charge and network reach.

How much will my car be worth when I come to sell it?  There is very little data on this so far - the two data points I’ve come across are that a Tesla S is probably worth as much as 60% of purchase price at the 3 year point and a Nissan Leaf is worth only 20%.    This likely reflects Telsa’s constant software upgrade programme and its expectation (supported by testing) that its batteries will last 20+ years (and that they can then go on to be used e.g. for running lifts in appartment blocks for decades more) versus Nissan’s 10 year warranty on batteries (implying a large replacement cost).  As more cars come to market, these figures will get more difficult to assess.  A more important question for a potential EV purchaser might be, how much will my current car be worth in 3 years?  With the press on diesel engines resolutely negative, large numbers of cars (as much as 90% of the retail market) being purchase on PCPs and the shift to EVs, an awful lot of combustion engine cars will enter the second hand market over the coming years.  Someone is propping up that market now, but it seems unlikely it can be continued for much longer.



Where will I charge the car? Some 60% of UK households have access to offstreet parking and so, for most of those (subject to local infrastructure), installing a charging point capable of fully charging your car in a few hours overnight will not be very difficult.  There’s definitely a shift in mentality required though - if your car is “full” every morning when you get into it, just how often will you actually need to charge it somewhere other than home?  Sure, if you are going from Edinburgh to London, you’re going to need to charge it at least once along the route, just as if you want to go from Bath to London and back in a day, you’re probably going to need to charge at the far end (depending on how leaden your foot is).  Nonetheless, there will be a continued need for “en route” charging stations - but just where they will need to be and how big they will be is going to take some work.  Filling a car with petrol, buying some sweets and paying is a few minutes; the equivalent with an EV, even with a super charger, is going to be several times as long.  That means more space devoted to charging than fuelling because cars will be there longer, with the possibiilty of queues if there aren’t enough charging spots.  It also means more thinking about the economics - what’s an acceptable margin on a full charge (it’s possible, I’m sure, that some people will want “half a charge” or less, but it seems more likely that if you’re going to stop for longer anyway, it might be more practical to get a full charge, unless you’re on your way home and just need enough to get there).    The 40% of homes without offstreet parking present a different problem - cables hanging out of windows and running across pavements are clearly not the solution.  Experiments are underway with converting lampposts to provide charging - but there are more cars in the typical town centre street than there are lampposts.   Induction charging is another option, but would involve serious surgery to roads.  Paris is taking a different route and massively increasing the EV equivalent of Zip Cars (building on the success of Ve’libre).  There’s going to be a tricky balance here about predicting need and putting in capacity, perhaps ideally doing the work at the same time as other infrastructure is being deployed - think fibre to the home for instance.

How future proof is my car really?   Perhaps the greatest unknown with EVs is whether there will be major changes in capability a few years from now that dramatically affect residual value.  Major changes to hardware - more cameras, better radar, huge improvements in battery capacity or run time, more autonomous capability that needs new technology - could all happen, or be thought to be about to happen, and so depress residual value.  New combustion engine car models are telegraphed early and come, generally, with only marginal improvements - some design changes, some clever new features at the high end, a trickle down of previously high end features (parking sensors for instance) to lower models.  By the time we get past the early majority and into the late majority, this issue will probably have gone away but it will be on the mind of many purchasers.

Is it really green?  The power to charge the batteries has to come from somewhere - coal? The elements inside the batteries have to come from somewhere - exploitative mines in the Democratic Republic of Congo?  The car has to go somewhere when it reaches end of life - landfill?  These questions are relative of course - combustion engine cars produce toxic emissions that are hyper-local, rare elements are in catalytic convertors, combustion engine cars sit in scrap heaps with seemingly little recycling.  Here’s a view from Wired magazine.  The Guardian recently quoted a study that said whole life emissions of EVs will be around 50% of diesel cars.  What we do know is that there is an increasing push for power to come from renewable sources and that the bulk of charging can be done overnight when power costs are lowest (because demand is lowest) and so can be provided by the base load capability (initially, though that will change).  Dealing with the rare elements in batteries, recycling/re-using batteries and handling scrap (the bulk of which will be diesel and petrol cars are we get closer to the 2040 point, in the UK, when petrol and diesel cars will no longer be sold new) will all need some work.
  
What if I break down? “Running out of fuel” still happens and is easily fixed with a combustion engine car by taking a walk to the nearest fuel station and heading back to your car with a can of fuel.  What happens if you run out of charge on the motorway?  Will the AA have something in the back of the van that can deal with that?  What about a typical breakdown?  Will the RAC have the expertise to diagnose and address the problem?

Is it secure?  Whatever the answer to this is, let's not get the Smart Meter programme people involved.   This is going to be answered on a case by case basis, but I suspect that there will be plenty of scare stories along the way as teenage hackers as well as university researchers, tech companies and nation states discover that there are lots of ways to exploit the software in many cars.  How this turns out is up for grabs perhaps.

A Framework For The Future

Providing clarity and certainty around these questions requires a mix of actions from both public and private sector, with some co-ordination to avoid the otherwise inevitable chicken and egg scenario where buyers fear to buy and suppliers fear to supply.



Customers are already thinking  “I can’t buy an EV because (delete as appropriate) ... I don’t know where to charge it ... I’m worried that I’ll be taxed based on how far I drive ... my car will be worthless when I want to sell it ... it won’t be possible to upgrade it ... it’s not green enough.”

And

Suppliers, whilst making commitments to ship huge numbers of new EVs across their range are worried that “we can’t ship all of these EV models because the subsidies might be about to go away ... there isn’t enough charging infrastructure ... government will replace fuel tax with a road charge ... we haven’t got a recycling plan in place for the batteries”

The Role Of Government

Government has a key role in helping address some of these questions and also in being clear where it doesn’t plan to step in:

- Clarity is needed on future subsidies (for purchase incentive, home charger costs, fuel tax and road tax).  How and when will current subsidies be phased out?  What will replace them and will it be revenue neutral to government (meaning that the tax burden on an EV driver will be the same as now, just calculated on a different basis). Careful thought will be needed, as, for instance,  a per mile charge may actually increase the burden on careful drivers - those who consciously buy efficient engines and drive carefully likely use less fuel than those who do not, but will end up paying the same if it’s purely on a per mile basis.    Norway's recent proposals can show us what happens if this isn't well thought through - they look to be reversing course and increasing the cost of larger EVs (adding $5k to the price of a Tesla S for instance) because the original thinking was that the subsidies would encourage less well off people to buy EVs but it turned out that it encouraged far more rich people to buy bigger and more expensive EVs)

- A wider programme of incentives, encouragement and funding to position the UK at the top of the tree in the development of EVs and autonomous vehicles.  I've frame this in two parts - (1) a series of X Prize-style competitions but also (2) a comprehensive programme of proposals to encourage companies to take risks and develop new EV capabilities.

(1) The creation of X prize competitions, in partnership with VCs and research bodies, to promote the development of alternative battery technologies, development of autonomous capability and street infrastructure upgrades.  There is already some of this going on - for instance, see this £51m award across four projects in the "Connected and Autonomous Vehicle" (ugh) domain.    This funding is provided by the government's new MERIDIAN brand (why it's capitalised I don't know).  Meridian (I can't shout it every time) believes that the CAV market will be worth £907bn by 2035 ... so £51m is hardly putting a dent in it.  I fear another graphene here - the hard innovation thinking is done in the UK and other countries exploit it because we don't invest enough.  In this case, though, companies are investing billions (cf £1bn from Dyson into battery technology) and yet government appears to be fiddling with table stakes.

(2) Companies can already claim R&D tax credits but I have the sense that these are mostly chased by companies who know how the system works and who would likely do the R&D work anyway.  What about companies who don't know how the system works or who really can't afford to take the risk on the R&D, but who might if there was access to a buffer of cash to help them.  Government is terrible at picking winners so both (1) and (2) need some careful work to make sure that the risks are understood, and there should be the option for government to take an equity stake in return for its support of the work.

- Charging capability for the 40% of homes that do not have off street parking needs some thinking about and some regulation.  Streets may need to be dug up - and that should only happen once, packing in as much related work as possible (filling potholes, providing fibre to the home, installing smart meters, preparing for 5G rollout, deploying capability to support future autonomous vehicles and leaving easy access and capacity for future, yet to be thought of, infrastructure etc).  Local authorities may choose to award contracts, or give licences, through a competitive process to ensure that there is capability in their area but not a proliferation (note, I don't, for a minute, believe that local authorities should fund widespread charging infrastructure, but that they should think about regulating it to ensure coverage and minimal overlap). Central government may need to step in to ensure that there is cross-charging between networks, though the market is likely to resolve that first I suspect. 

- A security laboratory, working with major vendors, GCHQ and others to establish standards and technologies to make cars secure, made available to all vendors as open source to encourage fast adoption (and patching) of their technology to reduce the risk of compromise

- A comprehensive plan for recycling EV components, particularly batteries.    This could be left to manufacturers but, actually, having a national plan for dealing with potentially dangerous components, particularly if there is life left in them that, whilst insufficient to power a car, could power other things, could be a real game changer for the UK, creating new businesses and business models. 

- A plan and infrastructure for dealing with the vastly larger number of scrapped cars that we will see over the coming years, not just through a "scrappage scheme" where owners are encouraged to retire their ageing diesel car in return for some money towards a new EV (see the points above about subsidies).  In this case, I mean how are we going to deal with the petrol and diesel cars that are end of life and that are not replaced by new petrol and diesel cars.  It seems to me that we are going to have millions more cars scrapped over the coming 20 years than over the last 20 years - where will they all go, how will we recycle components etc?

- A clear regulatory framework and plan to encourage investment in sufficient local power distribution to support increased EV charging.  TfL, for instance, say that when they increase the number of buses in a bus station, they often have to work with power companies to provide new substations.  What else could that capacity provide?  How can future demand be thought through and made available ahead of when it's needed?  How will it be paid for (when it's deployed ahead of time) and what does that mean for a power company's regulatory asset base (and so its return)?

- Sourcing standards for components.  EVs today, just as many internal combustion engine cars (not to mention phones and many other electrical products, particularly anything with a Lithium-based battery) rely on a few critical components that often come from questionable sources - cobalt from the Democratic Republic of Congo (Half of global supplies come from the DRC and Amnesty International claim that as much as 20% is mined by hand, often by child labour).  We have an opportunity to funnel money, with appropriate controls, through our aid and development funding, to change how this works - to upgrade and automate mining, protect the labour force and avoid exposing them to harmful conditions and enhance the environment.  It would be a great shame if we went "full steam ahead" without addressing these issues before it's too late and the damage is irreparable.  Government's can step in here to drive sourcing standards and monitor adherence.

Bringing together these strands, as well as others that I will run through in future pieces, is some of what I think it will take to move EVs from the world of "why should I buy one?" to "why shouldn't I buy one?".    I don't, though, see it happening without a well thought through, integrated approach that involves public and private sector - all the more as supply chains and custom processes are adjusted in the run up to, and aftermath of, Britain leaving the EU.

Anyone buying a car today should perhaps already be looking at EVs available and asking both of those questions and seeing how the options land - and possibly even consider deferring their purchase decision to see how the EV landscape changes over the next year or so.