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TheStreet Open House

BMW Cuts Off Toyota, GM and Ford in California

Stocks in this article: GM TM F TSLA

Let's say the BMW i3 can go an average of 100 miles on pure electricity. If the gasoline engine operates at 40 MPG after that, the gasoline tank can only be 2.5 gallon (2.5 x 40 = 100).

So this car will not be the one you will likely drive from LA to San Francisco. It will, however, be an ideal commuter car (for the carpool lane) where you would know you would never get stuck if you ran out of juice.

This market is a California goldmine. BMW should just name the car "1849" and be done with it.

Unprecedented Grip

How will people object to this almost alarmist-sounding article? I'm sure the California government bureaucrats would say that there is no special exemption for BMW, because anyone who meets the same rules would qualify just as well. That would be true, technically speaking.

However, consider this: Why is BMW the only car on track to meet this special rule in time for late 2013? The answer is most likely BMW got a head start by first engineering this car, and then (January 2012) the government bureaucrats created the loophole.

So it's true, anyone who qualifies could just copy BMW. However, the automobile industry isn't the smartphone industry -- a new model can't be coughed up in 18 months.

It typically takes at least four years to develop a brand new model. The head start means everything in terms of capitalizing on a de-facto custom-made regulatory loophole.

As such, BMW may have an unprecedented grip on the California car market for, say, all of 2014. The 40,000 carpool permits will be gone for all other car makers, but BMW can continue selling carpool lane access for gasoline cars.

Great for BMW. Not so great for competitors including Ford, GM, Toyota and many others.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Editor's note: Multiple readers asked why it would be necessary for other carmakers to come up with brand-new vehicles to compete with BMW. These readers asked why these carmakers couldn't just replace the gas tanks in their existing vehicles with smaller ones. Following is Wahlman's response:

The answer to the question is twofold:

1. First of all, the article does not say that the smaller gasoline tank is the only criterion to fit this new/custom category of plug-in hybrid car.

The article states that the criteria are "murky." The smaller gas tank is one criterion out of perhaps multiple ones, and I don't know what these other criteria might be.

On the surface, it would otherwise appear that it would be relatively easy for a car maker such as Ford, GM or Toyota to relatively quickly (within, say, a year or two with all the new safety and durability testing that would be required) redesign the vehicle in order to simply downsize the gas tank from, say, around 9 gallons to perhaps 2 or 2.5.

2. But "simply" downsizing the gasoline tank from any of the existing plug-in hybrids would be a nonstarter. The point of a plug-in hybrid is that you can keep the battery relatively small, because you are augmenting it with gasoline power for your "overage."

As a result, the Toyota Prius Plug-In yields 6 miles in electric mode, the Ford C-Max Energi 21 miles and the Chevy Volt 38 miles -- the longest of any such car in the market today. You are then able to capture an average of 65% or so of your driving in electric mode in the case of the Volt, and obviously a smaller percentage in the competitors.

But let's apply the "BMW rule" to any of these three cars: You would get a total range of 12, 42 or 76 miles, respectively. Only in the case of the Volt would you equal the least capable all-electrics made by Nissan and Ford. And at that point, there would, of course, be no point. That kind of performance would be unacceptable, especially when you consider the extra manufacturing and engineering cost.

Rather, what you would have to do -- and what BMW has evidently done -- is to work the issue from the other end. BMW started out with a pure electric car and in the initial engineering process designed the ability to add a small gasoline engine and gasoline tank.

This means the company started with a car that's got at least 80 or so miles of range -- and could of course have more -- not 38 miles or less, let alone 6 miles. There is a world of difference between a car that has 76 miles of range and another one that's got 160-200 miles of range and is cheaper to engineer/manufacture.

If you think of re-engineering an all-electric car to add a generator with a small gasoline tank, this has tremendous implications for:

1. Safety testing.

2. Durability testing.

3. Space.

4. Balance.

5. Overall packaging and attractiveness.

I contend that such a re-engineering effort is so unattractive that essentially all car makers will shun it. They really need to start from scratch in order for a good shoe to fit this foot. And that's a four year or so process. Perhaps five-year. BMW started a few years ago, and it has promised the car will hit U.S. roads by December 2013.

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