Electric cars like Chevy's new Volt are too expensive today, but they won't be for long.

Commentary about business and finance.
July 28 2010 6:17 PM

The Volt Jolt

Electric cars like Chevy's new Volt are too expensive today, but they won't be for long.

Chevy Volt. Click image to expand.
Chevy Volt

General Motors has announced that the bottom-end version of the Chevy Volt, its new electric car, will cost $41,000. Even after a generous federal rebate, it's still pricey. In 2008, median household income in the United States was $50,303. And so it's bound to generate loads of skepticism. How can this electric vehicle, which has "a gas powered range-extending engine/generator," compete with gas-powered sedans that cost half as much? The Chevrolet Malibu starts at about $21,000. Why would anyone switch? How can we save the planet if U.S. companies are pitching these products only to the rich?

The skepticism is warranted. So long as gas prices stay comparatively low and cars that burn only gas are much cheaper, hybrids and electric cars will have a tough time catching on. But the skeptics ignore history. For the moment, the Malibu enjoys several advantages over the Volt: It's produced in massive quantities while the Volt is made in small batches. The Volt requires new, expensive technology. The Malibu is the beneficiary of a century's worth of experience in building gas-powered cars cheaply. The Volt is competing with a few other electric and hybrid models in a tiny sliver of the market. The Malibu has to compete in a crowded marketplace filled by aggressive companies willing to sacrifice margins for market share. But the Volt—and its purchasers—may ultimately benefit from these same processes. Business history is rich with examples of products that start as luxuries, but quickly become cheaper and more accessible than imagined. The first computer I bought, a Macintosh, cost almost $2,000 in 1990, and it came with a floppy disk drive, no modem, and a pathetically tiny screen. Now consider how much computing power and performance you can get for $500. And price reductions are seen in the price of services as well as goods. Twenty-five years ago, only a very rich person would think about purchasing a cellular phone—both the device and the per-minute cost were quite high. Today, phones and minutes are so cheap that pretty much everybody has one.

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The best example of a luxury product getting cheaper very quickly has nothing to do with microchips and everything to do with engineering genius and the power of scale and competition. It is the product the Volt is trying to replace: the gas-powered vehicle.

When the automobile age dawned at the turn of the 20th century, cars were toys, luxury products and status symbols for the rich to race and tool around in. They weren't affordable for the overwhelming majority of Americans. In 1903, most car companies were "turning out products with steep prices of $3,000 or even $4,000," writes Douglas Brinkley in Wheels for the World: Henry Ford, His Company, and a Century of Progress. In 1903, about 12,000 cars were sold in the United States The following year, Henry Ford introduced his Model B "at a startling $2,000." Now, the Bureau of Labor Statistics' inflation calculator only goes back to 1913. But $3,000 in 1913 is worth about $66,114 today. This BLS report suggests that average family income in 1901 was about $750. Any way you slice it, cars were very expensive. A luxury car cost about four times what a family earned in a year. What kind of future was there for the car as a democratic object?

A pretty good one, it turned out. The Model T debuted in 1908 at a price of $850—still expensive, but less exorbitant given rising incomes. But as Henry Ford increased volumes and continually figured out ways to produce cars more effectively, as Model T's were produced in the millions, the price plummeted. "The two-seat Model T Runabout, which had gone for $395 in 1919, cost only $260 in 1925, the least that would ever be charged for a new American car," writes Brinkley. "The car's 1925 sticker price amounted to only about one eighth of the average annual income in the United States."

Now, of course, Ford's achievement with the Model T was one for the ages. His manufacturing advances were quantum leaps. But auto manufacturers have continued to innovate, develop efficiencies, and offer drivers more for less. The story of our modern age is better performance, better equipment, and better materials for less money. A few years ago, I went to buy a bicycle for the first time in a decade and was shocked to see how far my money could go. Compare the bicycle you can buy today for $300 with one you would have paid $300 for five or 10 years ago. By the same token, a $25,000 car today comes loaded with features that would have been unimaginable five or 10 years ago.

This is not to say that electric cars will cost $10,000 in a few years. But if the industry spends a decade or two developing the infrastructure, technology, and human knowledge to produce 10 million electric cars per year rather than 10,000, and if lots of companies are willing to fail in an effort to crack the market, the price of the Volt and its successors will fall significantly in real terms, if not in nominal terms. And imagine that gas prices continue to rise and throw in the wild card of higher gas taxes. You don't have to be a fantasist to believe that the purchase and operating costs of electric-powered cars could be competitive with gas-powered ones sooner rather than later.

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