The Four Biggest Automakers Say They'll Spend $100 Billion on Electric Cars — 9 Charts on What That Means for the Car Industry

It looks like electric cars are about to kill off gasoline cars. We are still a long way from that day.

The numbers now coming out of the electric-car business are astronomical.

This week Tesla confirmed it is in talks with the Shanghai city government about building a factory there. Barring surprises, it will put up a wholly owned plant in a bonded zone — Tesla's first factory outside the United States.

Bloomberg had reported earlier that Tesla would invest $9 billion in Shanghai.

That is a lot of money for Tesla, roughly equal to its revenue over the past 12 months. At the same time Tesla has to pay for the Model 3 production line and for more battery capacity, and both need cash. To that end it has raised at least $3 billion in debt financing this year.

Set against mainstream carmakers such as Volkswagen, Toyota and GM, though, the figure is not that big.

The world's four largest carmakers by output have all announced aggressive electric-car investment plans in the past six months

As of October 2017, almost every major carmaker in the world had announced a plan to shift to electric vehicles.

In May, Volkswagen said it had started a $12 billion electric-car program and would roll out 30 electric models by 2030. In September it raised the projected spending to a startling $84 billion, about $60 billion of it earmarked for battery production, with the model-development budget lifted to $24 billion.

That $84 billion is ten times Volkswagen's full-year profit in 2016 — a measure of how seriously it takes the plan.

The same month, Toyota said it would start developing pure electric cars, aiming to launch around 2020. In September it announced a joint venture with Mazda and Denso to develop electric cars, due on the road by 2020, with $1.9 billion committed so far.

The Nissan-Mitsubishi-Renault joint venture said in September this year that it would spend 10 billion euros by 2022 on 8 pure electric models and 12 hybrids. Last month it raised the figure to 18 billion euros (about $21 billion).

GM put $1 billion into electric-car research as far back as 2005, and in 2009 announced a further $17.8 billion for electric-car production. In China it plans to launch 10 new-energy models by 2020.

Volkswagen, Toyota, GM and Nissan were the four highest-volume carmakers in the world last year, building 39 million vehicles between them, more than half of the world's car-production capacity.

Other manufacturers announced their plans mostly in 2016 and 2017.

BMW spent $2 billion developing the i3 electric car. It now intends to bring out 12 new all-electric models before 2025. BMW has not disclosed a detailed investment figure; its old rival Daimler-Benz plans to spend $4.8 billion on electric cars.

Ford's net profit has fallen by nearly 50% year on year for three straight quarters, and it has responded with a $14.5 billion cost-cutting plan. Even so, faced with the rise of electric cars, it has decided to spend $4.5 billion on research and bring out 13 electric models before 2022, and to go further in China: by 2025, 70% of the models it sells there will be electric or hybrid.

Some other traditional carmakers are spending less on electric cars, but they too have fixed timetables and model counts.

Hyundai, for instance, has announced $1.2 billion of investment in all in its electric-car program, and plans 31 environmentally friendly models by 2021, among them 3 plug-in hybrids, 8 battery-powered cars and 2 fuel-cell vehicles.

Honda set up an electric-car division in 2016, and in 2017 formed a $56 million joint venture with the Japanese electronics company Hitachi, aiming to make electric cars two-thirds of all its models before 2030.

A few luxury brands have plans of their own, among them Jaguar and Porsche. Jaguar has an experimental plan for 2 electric models; Porsche has put in $750 million to develop electric cars together with Audi, its fellow Volkswagen Group brand.

Besides these traditional carmakers, the past two years have brought many electric-car startups built from nothing. Because these new companies have worked only on pure electric cars from the beginning, their production timetables come earlier than the traditional carmakers'.

Big carmakers moved from developing single models to developing platforms. Now they are doing the same with electric cars

Building a car usually starts with the exterior shape, then a scale model based on the drawings, and after adjustments a full-size concept model of the finished car.

Next the engineering team, together with the styling and interaction designers, work out the car's mechanical structure and interior on top of that shape. The last job is turning the car in the computer into a real car through trial production. The whole process usually takes four to five years.

In the early days of the industry, the 1930s say, cars were designed one model at a time. Take the Volkswagen Beetle: its designers did not have to think about whether it could spawn other models, and its blueprints could build only that one car.

But once a carmaker has to sell several models around the world, each suited to local demand — and especially when many of those cars do not really differ that much — designing each model on its own means repeated work, longer development and higher cost.

The carmakers' answer was to design a common "vehicle platform" and build new cars on top of it.

A modular vehicle platform works like a formula: engineers feed in different parameters and get different models out.

Take the best-known platform, Volkswagen's MQB. For any front-wheel-drive sedan with a transverse engine, the platform lets designers set at will the distance from the nose and the passenger cabin to the front wheels, the distance between front and rear wheels, the distance from the rear wheels to the tail and to the cabin, and the height of the chassis off the ground.

Designers can also use MQB to build almost any body style — four-door sedans, station wagons, convertibles, SUVs, MPVs and more. Cars owners know well, such as the Volkswagen Jetta, Passat, Tiguan, Touran and Golf, the Audi A3, the Audi TT and the Skoda Octavia, are all built on MQB.

One study puts the Volkswagen Group's total spending on developing MQB at 50 billion euros. That enormous figure is about seven times the group's 2016 profit. But spread across the 24 models confirmed to use MQB, the development cost per model falls to 2.1 billion euros.

Toyota, Nissan, BMW and other big carmakers all have modular platforms of their own. Now they are applying the platform strategy of the gasoline era to electric cars, and more thoroughly.

Look at the electric-car plans they have announced in recent years: Volkswagen intends to develop 10 models in two years and 30 in seven.

Past experience says that would be impossible without platform-based development. The Nissan Leaf was designed on its own from the start, and Nissan has not spun any other model off it — in fact it could not.

Electric cars are also simpler in structure, so in theory one powertrain can serve every model with similar requirements. That fits platform development even better. It is easy to imagine that in future, different electric models from the same brand, sedans and commercial vehicles alike, will differ only in their outer shells, with nearly all of the core parts shared.

New carmakers are arriving too, but Tesla's history shows that starting from scratch is not easy either

Building a car is a very complicated piece of engineering, and the market is fiercely competitive. Today's mainstream carmakers — Toyota, Mercedes-Benz, Volkswagen, Ford and the rest — are old brands built up over decades, even a century.

Next to an internal-combustion car, an electric car is simple: a whole set of powertrain and electrical parts, and the engineering behind them, disappears. Google and Apple, neither short of money, both once had grand plans to build cars on their own, and in a complicated market both failed or changed course.

In the past two decades the only genuinely new brand is Tesla, which caught the electric-car opening.

Martin Eberhard and Marc Tarpenning founded Tesla in 2003; Elon Musk joined in 2004.

It then took Tesla nine years to get the Model S into mass production. Along the way, in 2008, the company came close to bankruptcy; Musk took over as CEO that year and saved it through layoffs and a new round of debt financing.

Before the 2010 listing, Musk found Tesla several rounds of venture capital and a US Department of Energy subsidy to ease its thin cash reserves. After the IPO, Tesla mainly sold bonds to raise money from the capital markets.

To date Tesla has taken in $12 billion from outside the company, through 24 rounds of financing plus one subsidy. That money, on top of nearly $10 billion a year in car sales, has paid for building and buying factories and for putting 3 models into mass production.

Prodded by government policy, many auto startups have joined the electric-car army.

Pony Ma, Lei Jun, Li Xiang and others put up the money to found NIO in 2014. In 2016 it built 10 EP9 electric supercars. That does not mean NIO can mass-produce electric cars: the EP9 cost $1.2 million, only 10 were built, and the first six buyers were the company's six founding investors. The car was only NIO's "technology validation vehicle."

NIO has so far raised about $1.3 billion. Going by Tesla's experience, that is not enough to build its own factory and make cars there, which leaves contract manufacturing as the practical option. So the electric SUV it plans to unveil at the end of this year will be assembled at JAC's Hefei plant.

Then there are electric-car startups such as WM Motor, XPeng and Singulato. All three have raised around $1 billion each so far, and each has only one or two models in development. According to what has been made public, WM Motor is building its own factory in Wenzhou, including a line that can build cars to customer order, with volume production expected in the second half of next year. Singulato and XPeng use contract manufacturers. This month, XPeng's first mass-production car rolled off the line.

Even Dyson, the home-appliance company known for its bladeless fans, has joined the electric-car war. In August 2016 and September 2017, Dyson said it would invest $2.6 billion before 2020, half to build its own electric car and half to develop a new kind of solid-state lithium battery.

Tesla's success today makes it easy to forget that it nearly went under on the way, and easy to assume electric cars are already a big market. Government subsidies plus Musk's own pull with engineers got the company through, and let him persuade more good people to join him.

Building electric cars really is hard.

But electric cars are already a settled trend in the industry, and battery makers are all expanding capacity

The core parts of an electric car are the battery and the motor. Of the more than $10 billion Tesla has burned, half went to battery capacity for now and for the future.

As the carmakers publish their electric-car plans, the battery makers are planning more capacity too.

Panasonic built the "Gigafactory" with Tesla, making batteries for Tesla cars alone. Its total planned capacity is 35 gigawatt-hours (GWh); about 30% is running now, with the rest due around 2019.

Samsung SDI, part of the Samsung Group, sells mainly to Volkswagen and BMW. It has 5 GWh running and plans to reach 9 GWh by 2020.

LG Chem, part of the LG Group, sells mainly to GM, whose star product is the Chevrolet Bolt. LG Chem has 11 GWh running and plans 34 GWh by 2020.

Batteries from the Chinese company CATL, meanwhile, go mainly to domestic manufacturers such as BAIC, Changan, Geely, Great Wall Motor, SAIC and Yutong. CATL is working with SAIC and plans 36 GWh of power-battery capacity by 2020.

China's Ministry of Industry and Information Technology is pushing domestic battery makers to raise capacity across the industry. Under the Action Plan for Promoting the Development of the Automotive Power Battery Industry (《促进汽车动力电池产业发展行动方案》), the combined capacity of China's 140-plus electric-car battery makers is to top 100 GWh by 2020.

In May, Bloomberg reported that the Chinese investment firm GSR Capital was negotiating with Nissan to buy its battery subsidiary, AESC. Once the deal closes, the two sides will announce the specifics of a local partnership, possibly including a new battery plant in mainland China.

AESC was founded in 2007 and makes mainly lithium batteries for electric cars; Nissan holds 51% of it. After several rounds of further investment and capacity expansion, its lithium batteries are what the Nissan Leaf runs on.

In this market, huge research budgets are only the beginning. Money cannot solve everything

One big barrier separates electric cars from gasoline cars: range anxiety. Charging is slow, and running flat can cost hours of a trip. That is the biggest difference.

Even a small change to a car's powertrain runs up against very stubborn user habits.

The Prius is generally taken to be the best-selling new-energy car. At its heart is a planetary gear set with a motor and a generator inside it, connected to an internal-combustion engine that mostly runs on the Atkinson cycle, plus a fairly small battery pack. In essence the system asks nothing new of a gasoline-car driver, and it is very frugal with fuel.

From 1998 until now the Prius has sold nearly 4 million cars, with average annual sales growth of 26.4% — a handsome number for a single model. But sales only took off in its eighth year on the market. The market took a long time to accept it.

Look at the sales history of 2016's best-selling electric cars — the Tesla Model S, the Nissan Leaf and the BMW i3 — and each is still at the starting stage of 30,000 to 60,000 cars a year, very close to the Prius's early sales.

Musk's engineering team can design good cars. The problem is that factory output is far too low. Tesla has already put several billion dollars into building the Model 3, and in the three months just past it made 260 of them — one-fifth of the original plan.

Big companies joining in can speed up the spread of electric cars, but not in the short term.

Their advantage lies in controlling capacity and the supply chain. But switching to electric cars also means dropping decades of accumulated knowledge of the internal-combustion engine. No sooner had Volkswagen set its target of selling a million electric cars a year by 2025 than it ran into a battery-capacity bottleneck.

Once past the bottlenecks, the big carmakers still have to rebuild their sales channels. The car-sales system today works like this: the carmaker parcels out sales quotas to 4S dealerships (sales, spare parts, service and surveys), and the dealerships sell the cars to consumers.

In this arrangement the carmaker takes most of the profit on the car itself, and the 4S dealership controls the profit on everything that follows the purchase — registration, insurance, maintenance and repairs.

We once did a simple calculation: buy a Volkswagen Passat for 200,000 yuan and use it for ten years and you spend about 325,000 yuan in all, of which 125,000 yuan comes after the purchase — 40% of the total.

What makes a 4S dealership borrow money to take on a sales quota is the profit in after-sales service. But electric cars need no engine oil and hardly any maintenance. A dealership that cannot make money will very likely switch brands and go on selling gasoline cars.

Carmakers could hold on to the 4S channel by subsidizing it heavily, or by selling only electric cars. The price is likely to be a steep fall in profit, which is the last thing executives want to see.

In theory they could also sell directly. But only in theory: the rules bar GM and other carmakers from selling directly in the United States, and decades in, they are wholly built around the 4S model. It is not that no big company has ever overhauled something this basic to how it operates, but there are not many.

According to a Bloomberg report, at the present growth rate annual electric-car sales should reach about 58 million by 2038, an even split with gasoline cars.

But because gasoline cars have dominated buying for so long, electric cars will still be only a third of all the cars on the road in 2038.

It is easy to foresee that whether the push comes from the product or from policy, hundreds of billions of dollars poured by carmakers into this new field will not make people throw away their old cars and embrace electric ones overnight.

The process will take a long time.

Graphics by Feng Xiuxia

Cover image / Bloomberg, Wallpaper HD