BMW Cuts Off Toyota, GM and Ford in California

Updated from 6:45 a.m. EST with Wahlman's response to reader questions. The response follows the end of the original article.

NEW YORK ( TheStreet) -- The most coveted prize for the California car buyer is the ability to drive solo in the carpool lane. There are two ways to do this:

1. Buy an all-electric or natural gas car. Let's say that you want to spend less than $35,000. Then your most available all-electric choices are Nissan LEAF and the Ford Focus Electric. The problem with these cars is that most people shun them because they are -- rightfully -- afraid of running out of electricity, and they may be stuck on the freeway. With only approximately 75 miles range, sales of these cars are bleak for a reason.

2. Buy a car that's electric for the first 6 to 38 miles, and then a gasoline engine kicks in to ensure that you can drive and refuel the car just like any conventional petrol car. This gets you some of the electric car benefits, but none of the "range anxiety" worry of the all-electric cars.

The cars in this latter category in the market today are General Motors' ( GM) Chevrolet Volt, the Toyota ( TM) Prius Plug-In, and two models from Ford ( F) just hitting the market now, called C-Max Energi and Fusion Energi. Net after-tax rebates, all of these cars sell for around $30,000. As evidenced by the 2012 sales data, this latter group of cars vastly outsell the all-electrics -- and sales are growing rapidly.

So what's the problem? Just buy the Volt, the Prius Plug-In, or any of the Fords, and drive alone in the California carpool lane! No?

Actually, while this will work just fine right now, this convenient party is coming to an end -- fast. You see, only 40,000 of these permits will be provided. The program only started recently, and by early October 2012 approximately 6,000 had been handed out. Now that Ford is entering the market this month, the pace should accelerate and I would be shocked if these permits don't dry up by the second half of 2013.

So what happens when these coveted 40,000 permits are exhausted? Will you then be forced to buy a potentially more expensive ($50,000 to $100,000) Tesla ( TSLA) Model S? Or will you live with range anxiety in a car that may only go 75 miles on a charge, with no back-up safety valve?

Actually, no. In a story that is all but certain to set the automotive world ablaze in strife, California's regulatory bureaucrats are on track to grant what appears to be a special status that in practice will apply to only one car -- made by BMW, nonetheless.

Yes, you read that right. After some time in the second half of 2013, the only car that will be sold in California with a gasoline back-up engine, and still eligible for the carpool lane sticker, will be a BMW.

Make no mistake: This is the ultimate trump card in the California market, and it would crush GM, Ford and Toyota -- among others.

The BMW model in question is called the i3. It will be sold in two versions -- one all-electric, and the other in a hybrid form where a small gasoline engine ensures you will never get stuck. But you will still be able to get a sticker to drive in the California carpool lane, even if the 40,000 hybrid stickers are gone, just like a pure electric car such as the Tesla.

I inquired with multiple people at the California Air Resources Board about this, and the details remain a little murky. There was a preliminary decision about this BMW exemption taken in January 2012, but the final approval to deliver this market-crushing loophole to BMW is subject to final verification, probably sometime in 2013 -- once BMW delivers the first final, completed car.

The BMW i3 has undergone testing for a long time already, and there are plenty of pictures of the car being "caught" in public available on the Internet for all of us to see. The factory is being built in Leipzig, Germany, and the project leader is Frank Weber. Yes, the same Frank Weber who was in charge of the Chevrolet Volt in Detroit 2006-2011. BMW hired him to Munich in April 2011.

What is so special about the BMW i3 that will allow it to be the only car of its kind to obtain the ultimate in California car sales trump card, the carpool lane sticker? The details here are a bit murky, but here is one thing: The range for the gasoline tank must not be larger than the all-electric range of the battery.

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.