BMW Suffers Big Setback Against Tesla in California

NEW YORK (TheStreet) -- BMW's (Xetra:BMW) Tesla-challenger, the i3, was engineered to get special regulatory status in California to enable it to compete effectively against the Tesla (TSLA) Model S. Just in time for BMW's customers to start placing their orders, this critical BMW selling point has been removed, resulting in a huge victory for Tesla as well as BMW's other competitors.

So what does this mean for investors and consumers?

Let's start with California's incentives for buying a plug-in electric car, and why it's so important for sales.

California is by far the largest market for plug-in electric cars in the world. It is estimated that some 40% of GM's (GM) electric car sales are to California, and 50% of Tesla's. The numbers are probably almost as high for GM's and Tesla's main electric car competitors -- Ford (F), Nissan NSANY and Toyota (TM).

While there are many reasons for this, including technology and culture, a major incentive for buying a plug-in car in California is the right to drive in the carpool lane solo during rush hour. Anecdotally, Chevrolet car dealers have told me that approximately half of Volt buyers come into the store asking for "the carpool lane car."

However, there are two kinds of carpool lane stickers in California. The first one is the "white sticker" for pure electric cars and natural gas cars. The second one is the "green sticker" for plug-in hybrid cars.

The crux of the matter is that the green-sticker category is limited to the first 40,000 cars that apply. The white-sticker category is unlimited in quantity. As of November 8, 2013, 24,452 green stickers had been issued. One can reasonably assume that the 40,000 limit may be reached by the middle of 2014. Here are the current numbers, directly from California government.

As I was the first to report in November 2012, BMW found a way to work with California's regulatory bureaucrats to create a new class of car that would be eligible for the coveted white sticker. This new class would have a gasoline engine, but a very limited one.

Unlike a Chevrolet Volt or equivalent, this new class would have a tiny engine (650cc, 35 HP two-cylinder in BMW's case) with a tiny gasoline tank (2.4 gallon) and the gasoline engine could only be used to keep the battery from going below the 5% level, not to charge it any higher than that. Furthermore, it could not have a range longer than the battery-powered range, and under no circumstances longer than 100 miles.

In BMW's case, it would work like this: You would drive the BMW i3 for the first 90 miles on electric power. Then the tiny motorcycle-style engine would kick in and propel the car for another 90 miles or less. You could of course refuel the gasoline at any time.

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