New Details on GM's Coming War With Tesla

NEW YORK (TheStreet) -- Bloomberg Businessweek published an article with General Motors's (GM)
outgoing and incoming CEOs -- Daniel Akerson and Mary Barra on Dec. 12 in which the automaker's executives appear to provide the magazine with revealing details about the next-generation Tesla (TSLA)-slaying Chevrolet Volt 2.0, the current generation which entered production more than three years ago."

Or did they?

I'm given to attempting to straighten out what was written in the Businessweek article as opposed to the interpretation that was made by the reporters, Tim Higgins and Bryant Urstadt.

Let's start out by examining the most salient paragraph in the story:

"Although GM has hinted that it's working on a next generation of electric vehicle, Akerson says it's aiming for a compact car that can go 200 miles on a charge, and carry a generator, too. While it will be similar to the Volt, engineers are working on generators that could run on gas, diesel, or natural gas. The increased electric range is coming, in part, from advances in battery chemistry. GM is planning to bring the model out in 2016, for about $30,000, according to a person familiar with the idea -- who asked not to be named because the plans aren't public. It's a project that the company doesn't want to say much about but signifies how it's been trying to move past inventing things to putting inventions into showrooms. "We want it to be a moon shot so we can surprise the competition," Akerson says.

Okay, so GM CEO Akerson says this car will be a surprise. That obviously explains why he is making the otherwise inexplicable foot-fault of volunteering to spill the beans on the surprise car.

I hope you are detecting my irony here. CEO Akerson basically says it's vital that this future "moon shot" car remains a secret, right after having disclosed the range and architecture of what ostensibly sounds like the Chevy Volt 2.0.

The car as described by Bloomberg doesn't add up at all. Let's consider the implications if we take the Bloomberg article description of this new car at face value. Here are the six ingredients:

1. 200 miles electric range.

2. On-board generator, like the Chevy Volt 1.0 or BMW i3.

3. Alternative types of generators, including gasoline, diesel and natural gas.

4. Price $30,000.

5. Timing 2016.

6. Some form of radically new battery chemistry.

The only way you can square this circle is if the last point is true -- a radical new battery chemistry. It is currently believed that the Chevy Volt 1.0 battery costs at least $500 per kWh, including packaging and thermal management.

Considering that the Volt 1.0 battery is 16.5 kWh, this would mean a battery cost of at least $8,000. The whole car sells for a base price of $35,000 ($40,000 nicely equipped), and we really don't know if GM turns a profit on the transaction -- even counting only variable costs. Let's call it breakeven.

This Volt 1.0 battery yields 38 miles of range. The battery's gross capacity of 16.5 kWh yields a net capacity of 10.8 kWh. Dividing 200 miles by 38 suggests the need to increase capacity five-fold in order to reach 200 miles. In other words, multiply the Volt 1.0's battery cost of $8,000 by five and you'll get $40,000.

Therefore, in order to yield 200 miles of range, the battery alone would cost $40,000. This doesn't square with GM's suggested price of $30,000 for the entire car. Considering the $5,000 price cut on the car -- from $35,000 to $30,000 -- we would have to assume a 90% reduction in battery cost -- from $40,000 to $4,000.

Some day, such a 90% reduction will happen. Perhaps in 10 years, perhaps 15 years. But not in a car that will be in showrooms by 2016.

The caveat here is that we don't know what we don't know. There is always the theoretical possibility that a decimal point's worth of revolutionary technology was discovered by GM or one of its suppliers in the last couple of years, and became ready for prime time so that the car can be made in volume by 2016. Sort of like nuclear power in the 1940s.

The other thing that's suspicious about GM's claims as reported by Bloomberg is the combination of a 200-mile range electric car and an on-board generator. Why? If you're going through the trouble of adding the heavy and space-consuming overhead of a generator, you get vastly diminished returns once the battery is capable of going longer than X-number of miles.

Of course, what the appropriate "X" number of miles is, is a source of contention between GM, Ford (F), Toyota (TM), Honda (HMC), VW, Mercedes, BMW and others. GM and BMW are toward the higher end of the curve with 38 miles for the Chevrolet Volt 1.0, for example. Toyota is at the low end with 6 miles, although their next-gen plug-in Prius will probably hit at least 10-12 miles. Ford, Honda and VW are mostly in the 10-22 mile range.

Why is this? Most people drive disproportionately short distances between their ability to charge. The average commute for a US worker is close to 12 miles. Charge at home, charge at work and a 12-mile car can enable you to drive on 100% electric on a majority of days.

Once you go beyond such a "sweet spot" -- whether 12 miles or 38 miles or some other number -- you get severely diminishing returns for a large portion of the potential buyers. The size of the generator -- such as a regular gasoline engine -- still has to be strong enough to enable highway speeds, uphill treks and at least four people in the car with luggage. So that cost doesn't come down.

To wit, Tesla is planning its own 2016-2017 200 mile range car that would cost $40,000 or less -- sometimes a $30,000 number is thrown out there -- and it will be a pure electric car; no generator.

Let's leave aside the speculation as to whether Tesla can deliver this car in time, say some time in 2017 after the delays already under the belt. The Bloomberg GM article says that GM will deliver a car of the same capability as Tesla, at the low end of the Tesla price range -- $30,000 -- but notably with a generator -- by 2016.

Seriously?

If this is true, then Tesla's market value would likely collapse. The Bloomberg article basically says that by 2016, GM will be ahead of Tesla with a car in showrooms.

I had always assumed that Tesla's cost/performance advantage in batteries and electric motors would diminish in the next few years. However, for this advantage to be eliminated and indeed turned around, would be a huge blow to Tesla.

I find this scenario to be extremely unlikely. If GM does indeed have a 200 mile electric car for 2016, it wouldn't come with a generator. And for the price to be $30,000, even without a generator, the cost of batteries would have to decline by 90% in one generation.

In other words, short of a "nuclear power" type of moon-shot that is actually field-proven by now, none of this stuff will happen by 2016. Not 2017, either. There is an extreme outside chance it could happen by 2018, though. Unlikely, but not impossible.

Given that at least one of the ingredients in the Bloomberg article on GM must be wrong -- price, timeline or range, for starters -- what might the real story be here?

First of all, we are most likely talking about multiple cars, different cars. GM does not have only one electrified car in the works; it has several. Some are all-electric; others include a generator, such as the Volt. Price ranges could indeed be from $30,000 up to $75,000 and above.

I have written before about the Volt 2.0, which could ship in 2015 as a 2016 model. One could easily see how this car could be cost-reduced so as to fetch a price close to $30,000, while improving the car all-around. The battery would remain at near 16 kWh, which is where tax benefits maximize. Electric range would improve above the current 38 miles, but probably not drastically.

In other words, the Volt formula is working quite well. What's missing in the Volt is a back seat that fits five people. All you need is a lower price, and the ability to make it profitably. These are easy things to accomplish in the Volt 2.0.

After the Volt 2.0, we could see all sorts of more daring all-EV designs from GM. They could have 200 miles range, perhaps 300 miles, be combined with a new charging infrastructure, and/or much more.

So this is likely the better explanation: The Bloomberg article likely confused several different cars GM has in the pipeline for the next five years. Perhaps this confusion originated at GM. You just can't get to 200 miles EV range for $30,000 by 2016 -- and a Volt-style generator in that car wouldn't make sense.

Even if GM doesn't deliver this magic 200 mile range car as described by Bloomberg -- for $30,000 in 2016 -- the question will still remain: What will be Tesla's remaining advantages? That will be the subject of a separate article, but it's clear that Tesla has a huge and growing advantage in its charging network, as well as in its direct sales model and the software/infotainment upgrades and services.

Tesla will have remaining advantages, even if the battery advantage goes away in the 2016-2019 timeframe. In the meantime, if the Bloomberg article magically has it right regarding that 2016 GM car, everyone in the industry -- Tesla as well as all the others -- would be toast.

Folks, it's not going to happen this way.

At the time of publication the author had no position in any of the stocks mentioned.

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

 

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