Thursday, October 08, 2009

Speed Bump: Don’t Bank on the Electric-Car Revolution, Lux Says

Are electric cars the next big thing or the next big flop?

There’s a growing chorus out there arguing that electric vehicles will take off in the near future, not just revolutionizing transportation but bringing an end to the oil age. That rosy forecast for plug-in hybrids and electric cars drove battery maker A123 Systems to a massive stock-market debut last month.

Curb your enthusiasm, says Lux Research in a new report. The next generation of battery-powered vehicles—and that includes hybrids, plug-ins, and all-electric cars—will likely grow over the next decade, but nowhere near as fast as boosters claim.

Even if oil prices hit $200 a barrel by 2020, Lux figures electric cars will make up less than 8% of global new-car sales. If oil stays where it is today, electric cars could make up a mere 3% of the market. With oil at $70 or $140 a barrel, hybrids will likely carry the day. Only with $200 oil will all-electric cars take off.

Lux says its forecasts are “much more modest than the very ambitious expectations being bruited about to justify battery company business plans.” A123 Systems, for example, better place its hopes in the market for storing electricity in the power grid, Lux says.

The automotive battery market will probably be worth between $1 billion and $2 billion a year over the next decade, Lux says. Contrast that with A123’s forecast, via Kearney, of a $21 billion market by 2015. (A123 stopped using Lux for its market forecasts shortly before its initial public offer.)

One other potential worry for battery makers: Global demand for batteries by 2015 could be around 2.8 gigawatt hours. But global supply might reach 6 gigawatt hours by then, making a battery supply glut a “distinct possiblity,” Lux says.

The analysts’ starting point is economics: Hybrids, plug-ins, and electric cars will sell more the more sense they make for consumers. Oil prices are one huge variable, of course; the other is the cost of the batteries, which is the biggest part of the cost of the new cars.

While Lux expects lithium-ion batteries to get cheaper over the next decade, it forecasts only a 30% to 40% decline in battery prices—not quite the steep cost reductions batteries made in consumer electronics.

Though if Lux’s forecasts of a battery glut come true, it seems likely that battery prices would plummet—just as has happened with prices for solar panels over the last year.

Most importantly, Lux argues that consumer appetite for the new cars could be unwound, if oil prices fall in the future or if government support (tax breaks and subsidies) disappears.

That’s a stark contrast to other analysts, such as those at Deutsche Bank, who figure the superior performance of all-electric vehicles will make them hugely popular whatever happens to oil prices.

The Wall Street Journal

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