Will the Future Belong to the Big Automakers, or to Upstarts Like Tesla? Electric Cars at a Crossroads | 2017's Biggest Business Stories ⑦

Growth and bubbles driven by enormous amounts of capital, the wealth and the problems that piled up along the way, and political winds no one can predict — after more than 20 years of prosperity, all three tangled together in business this year. There was no shortage of hot topics, but look closely and business logic was not what decided which companies won and which lost. This is the seventh piece in our review of 2017's biggest business news.

At CES, the consumer electronics show that ended last weekend, Toyota gave over almost all of its large booth to a newly announced concept car, the e-Palette. It is about five meters long, runs on eight wheels, has no distinct front or back, no steering wheel and no accelerator, and looks like a computer case lying on its side.

As Toyota imagines it, e-Palettes in different sizes would be sold to different partner companies, to carry passengers, deliver goods, or serve as vending machines.

Electric, self-driving, and sold to companies rather than to individual buyers — that is Toyota's idea of the car of the future. And unlike the concept cars of the past, which disappeared once the show was over, the e-Palette comes with a date: 2020.

Toyota is currently the world's most valuable automaker, worth more than $200 billion, twice as much as Volkswagen. It was also one of the automakers that announced a turn toward electric cars in 2017.

Toyota already sold more new-energy vehicles than anyone else, but before 2017, when it said "new energy" it mostly meant hybrids or hydrogen.

As policy moved, electric became unavoidable. In 2017, several European countries proposed dates for banning the sale of gasoline cars; the most aggressive, the Netherlands and Norway, suggested 2025. China's Ministry of Industry and Information Technology promised that year to set its own date for banning the sale of fuel-burning cars.

Prodded by policy, the big companies caught up. Volkswagen, Toyota, General Motors and the Renault-Nissan alliance together announced more than $100 billion of investment in electric cars, with the first battery electric models due in mass production as early as 2019.

The big automakers had been slow on electric cars because they had a traditional gasoline business to protect. Now that policy has changed, the big automakers — which have no worries about factories or sales channels — all turned to electric cars in 2017, and all set their dates at around 2019 to 2020.

That leaves the new companies very little time.

2017 was also the year Tesla was supposed to start mass-producing the Model 3. Starting at $35,000, it is Tesla's most important mass-market electric car, and it decides directly whether Tesla can ever turn a real profit and whether Tesla can become a major automaker.

So far, though, Tesla is still in what its CEO, Elon Musk, calls "production hell," building less than a tenth of what it planned. What is holding it back lies mostly upstream of the assembly line.

In China, where the hope is that electric cars will let the country vault past the established carmakers, internet money had already reached every business connected to cars. As QDaily laid out last year, from the new- and used-car e-commerce and aftermarket parts trade of a few years ago to online car insurance and on-demand washing and servicing, internet companies were everywhere.

By 2017, those supporting businesses were no longer the point. Startups were taking internet money and copying Tesla: building electric cars and working on self-driving technology.

NIO was the first internet-backed carmaker to put a car on the stage, unveiling the ES8 in December. But it has yet to prove the car can be built in volume. The other companies are further still from production.

The big companies are about to enter the electric car market, and the new companies are not ready.

The CES that just ended shows that for the big automakers, "electric" is no longer a concept but part of the production plan

In this year's CES automotive hall, Toyota had the largest booth. The e-Palette it had just announced was the only thing on the main stage of its display area.

The car drives itself the whole way, with no human intervention. Toyota hopes to use it eventually for carpooling, food delivery, car-sharing, short-distance shuttles, vending and even factory robotics.

Once cars drive themselves, Toyota's thinking about the industry's future starts with a change in ownership. Machines will replace human drivers, and in a society full of self-driving cars, people may no longer need to own one.

A handful of large companies have already signed on with Toyota to push the project along, among them Uber, Didi, Pizza Hut and Amazon, all launch customers. Toyota plans to put the vehicle into service at the 2020 Tokyo Olympics.

Below the main stage sat a Concept-i. That concept car, the one meant to offer its driver emotional support, captures the tone Toyota used a year ago when it talked about "electric": free-flying imagination with no chance of arriving any time soon. Now Toyota has more practical plans.

Several other big automakers brought electric concept cars too. The concept car from EQ, Mercedes-Benz's electric sub-brand, stayed on the main stage for the whole show. It has one motor front and one rear, and its shape and size are close to Mercedes' current sport coupes. Its designed range is on a par with Tesla's, about 500 kilometers.

Nissan's stand held the latest version of its electric car, the Leaf. Last September Nissan replaced the best-selling electric model in the world with a new generation; its 240-kilometer range is about half the Model 3's. Staff at the show said the car had already taken more than 30,000 orders worldwide.

Hyundai showed its work on autonomous driving, electric cars and modular production, including products that could go into mass production in the next one to three years. One of them is a modular platform designed for electric cars.

According to Hyundai, the platform combines a motor, an electronic damper, brake-by-wire and steer-by-wire technology, and fits them all inside each wheel. An electric car built this way needs no central motor and driveshaft to turn the wheels, which frees space in the chassis for more batteries. And with no wheelbase to work around, design and engineering teams can build different models on a single powertrain.

Parts suppliers, which used to stay backstage, are stepping forward too, because of electrification and self-driving.

Bosch again showed the technology it has been building for the past few years at both ends, the parking lot and the car: the driver stops at the entrance to the lot, sends a command from a phone app, and the car goes off to find a space and park itself.

The system can identify and measure the gaps between parked cars on its own, then send that information in real time to an electronic parking map that drivers can use to find the nearest free space.

Elsewhere, ZF, Nvidia and Baidu jointly developed an onboard computer for self-driving cars; Aptiv, the company spun out of Delphi, launched a self-driving service with Lyft; and Continental showed a new in-wheel drive system that brakes using the electric system built into the wheel hub, taking load off the traditional mechanical brakes.

Kay Stepper, vice president of Bosch's automated driving division, told QDaily that the company's in-house self-driving R&D group has spent years developing sensors, throttle, brakes and electronic control systems.

How far these parts makers get in their development decides how far the big automakers can go.

"In today's wave of automated driving and electric vehicles, Bosch, like the other Tier 1 suppliers, is in talks with the major automakers to supply them components, including automated driving solutions and electric-vehicle power management systems," Stepper said.

The world has gone electric, and for Tesla, which got there first, that is not good news at all.

Tesla produced the first affordable long-range electric car, the Model 3, but it could not get the auto supply chain to build it in volume

The biggest problem with an electric car is still how far it goes on a charge. The Tesla Model S was the first electric car that let people drive more than 300 kilometers before plugging in.

This chart from the Financial Times shows Tesla's old advantage plainly. Not until 2016 did a traditional automaker produce an electric car whose range matched Tesla's, four years after the Model S shipped.

The same chart also shows that now the whole world is talking about electric cars, Tesla, the first mover, will run into serious trouble two years from now.

The Jaguar I-Pace, the Audi Q6 e-tron and the Mercedes-Benz EQ are all expected to reach mass production in 2019. In brand and in range, these cars will compete with Tesla head-on.

The big companies used to move slowly toward electric cars because they had mature gasoline businesses to think about. Now that they have thrown themselves into the electric car market, it is clear that Tesla no longer has years of clear road ahead of it.

The Model S is too expensive ever to go mainstream. Against the new competition, Tesla's hopes rest on mass-producing the Model 3.

When Musk announced Model 3 production in July 2017, he set a plan of 100 cars in August and 20,000 in December. Bloomberg said "Musk has a big plan," and noted that at that pace Model 3 output would grow explosively, which does not fit the way cars are built today.

But Musk may have had no choice, because the Model 3, starting at $35,000, is the car Tesla depends on.

Whether Tesla can deliver the output before the big automakers arrive decides whether it can grow from a small company building 50,000 cars a year into a giant like Volkswagen, GM or Toyota, each of which builds more than 10 million.

Since the third quarter of 2017, though, Tesla has missed its Model 3 production plan every time; by the end of the year it was building 500 cars a month, one fortieth of what it had promised.

Actual output was still far behind plan in 2018. Panasonic, Tesla's partner at the Gigafactory, revealed at CES that Tesla had cut its 2018 weekly target for the Model 3 to 2,500 cars, half of the original figure.

Even so, the rush to build the Model 3 has hurt production of the Model X and Model S. A former Tesla employee said last December that these cars need extensive rework before they leave the factory, with faults large and small: doors that do not close tightly, soft trim cut unevenly, missing parts, loose parts that rattle, water leaks and more.

When a big automaker builds a new car, output is never the problem. The Chevrolet Bolt has already piled up respectable sales: more than 23,000 delivered in all of 2017. Its output is climbing steadily, in the way gasoline cars have always been ramped up.

Building a car stopped being the automaker's job alone a long time ago.

Today, apart from the core parts — engine, chassis, body — things like the transmission and the brake discs and pads are mostly not made by the automaker. It works with established parts suppliers instead.

Tesla has not been able to draw on the technical stock of the whole industry. It makes its own motors, its aluminum-alloy body and chassis parts, its plastic molds, dashboards and die-cast metal parts. More generic components — tires, glass, in-car electronics, wiring harnesses — come from outside suppliers.

Musk has called himself "more Ford than Ford is today." The old Ford made everything itself, and Tesla now does much the same.

But this probably has more to do with Tesla not having many production partners to lean on. The industry's suppliers have no ready-made package that lets a carmaker build an electric car with 500 kilometers of range. So Tesla has had to do everything itself.

Once a company has a better product, what matters more is building it. Look at Apple a few years ago: the iPhone opened a new market, and Apple took the fast-growing smartphone business before BlackBerry and Nokia could react. Had Apple failed to mass-produce the iPhone, it would not be the most valuable company in the world today.

Tesla, which also brought a better product, has yet to prove it can build its cars in volume.

Low output means that however good Tesla's designs are, little of that turns into revenue. Musk's company has never made a profit for a full year. With the Model 3's production problems, quarterly losses of $500 million have become routine, and the debt keeps growing.

Demand for electric cars is not in doubt. The Model 3 has a backlog of 400,000 orders.

But at Tesla's current rate of production, Tesla may not be the company that meets it.

Internet money has been poured into every car-related business in China, and the vehicle manufacturing it now favors is still catching up with Tesla

In this wave of internet carmaking, two or three years old now, Chinese internet capital has tried nearly every business connected to building cars.

Alibaba bought Amap, sold cars on Taobao, developed connected-car services and invested in the used-car platform Souche. Tencent has been doing the same things for years.

All of that has quieted down. Even the used-car business, where rivals spent hundreds of millions of yuan on advertising against each other last year, has changed. Guazi Used Cars has started selling new cars under the Maodou brand, pinning its profits on the interest from car loans.

In the end, internet companies' investment in the auto industry came down to the core of it: building whole electric cars.

Tencent invested in NIO in 2015. The company was founded by Li Bin, CEO of the auto website Bitauto, and Li Xiang, founder of Autohome, among others, and it was the first of China's new carmakers to announce mass production.

The ES8 it unveiled last month is a seven-seat SUV aimed at family travel, with an NEDC range of 355 kilometers and a starting price of 448,000 yuan. It already has a production license from the Ministry of Industry and Information Technology, the first among the internet-funded carmakers.

But getting one car out and building it in volume are two different things. Tesla announced the Model S in 2008. It did not build the car until 2012, and even then output was limited. As of 2018, Tesla is still struggling to produce its new affordable model.

That is the price Tesla pays for going beyond the industry's average level of technology.

NIO's production has been handed to JAC. Whether JAC can build an expensive car well is hard to say, but one thing is certain: it has never built a car in the 500,000-yuan class.

At the launch event for NIO's new car, the ideas that went beyond the car itself looked like a highlight reel of automotive tech news. Battery swapping, which Tesla tried and gave up as an alternative to charging, and delivery into the trunk, which Amazon has patented, were both wheeled out. None of it helps with the production problem; it is all still concept.

And this is as far as any of the internet-funded Chinese carmakers has got. Others, such as WM Motor and Byton, have only just shown the models they intend to mass-produce, and have chosen to build their own factories. Still others, such as XPeng and Singulato, have yet to say when they will build a car at all.

As the big automakers move into the electric car market and start working together on self-driving, the new companies have less and less time.

The big events in the auto industry in 2017: electric and self-driving

Major events in the auto industry in 2017

2017.2

Ford invests $1 billion in Argo AI, a self-driving company

2017.2

Mobileye announces a data partnership with Here Maps, preparing the HD maps that future self-driving cars will need.

2017.3

Tencent buys a 5% stake in Tesla for $1.77 billion.

2017.4

Toyota invests $1.33 billion in its Kentucky plant in the U.S. and hires more than 700 new employees.

2017.4

PSA Group (Peugeot Citroën) returns to the U.S. market

2017.4

Apple obtains a permit to test self-driving cars in the U.S.

2017.5

Volkswagen and JAC set up a joint venture to build electric cars in China

2017.6

Aston Martin ends its partnership with LeEco and will build electric cars on its own

2017.6

Google retires the steering-wheel-free self-driving car it built itself; its self-driving program shrinks

2017.7

Jia Yueting's Faraday Future halts construction of its factory for lack of money

2017.7

Toyota announces it is developing solid-state batteries for cars

2017.7

Tesla begins delivering the Model 3

2017.7

France announces a ban on diesel car sales from 2040

2017.8

Ford announces it will commercialize self-driving cars in 2022

2017.9

The U.S. passes self-driving legislation allowing each automaker to put 100,000 test cars on the road over three years

2017.9

China publishes its "dual-credit" rules, which set electric car quotas for automakers

2017.9

The Chinese government confirms it is studying a timeline for banning the sale of fuel-burning cars

2017.9

Volkswagen Group announces it will launch 300 electric models by 2030

2017.9

Nissan launches the second-generation Leaf

2017.10

The Tokyo Motor Show opens; Toyota, Honda and others show several electric cars

2017.10

Renault announces it will launch 22 electric models by 2022

2017.11

Ford and Zotye set up a joint venture to build electric cars in China

2017.12

NIO announces it will mass-produce its first production car, the ES8, next year

2017.12

Tesla delivers 1,550 Model 3s for the quarter, one tenth of plan

2017.12

The North American car market ends seven years of sales growth, shrinking 1% year on year

2018.1

General Motors announces that its steering-wheel-free self-driving car will go on the road in 2019

Cover image/photographed by the author; long cover image/HD Wallpapers 4K