Luxury Buyers Ready for E-Cars, Bain Says

Posted by: Jack Ewing on January 27, 2009

Auto execs have invested in electric-drive technology with great trepidation, because they weren’t sure there would be enough demand to justify the massive ramp-up cost. But a new study by consultant Bain & Co. suggests that a real market for electric cars is coalescing.

The survey of 4,000 people in eight countries, including the U.S., China, Japan and Germany, finds that high-income buyers are ready to buy all-electric vehicles as a second vehicle for short trips. “Consumers would be buying now if there were products,” says Gregor Matthies, a Munich-based partner at Bain who specializes in the auto industry.

Demand is highest among people who already own luxury cars. They have the money and desire to buy an electric vehicle because they’re concerned about the environment—and want people to know it. “They are willing to pay a premium but also care about the environment and want to make a statement about the environment,” Matthies says. Another significant finding is that urban customers are willing to accept the range limitations of electric vehicles, because they would only use the cars for shorter trips while continuing to take the Mercedes when driving long distances.

The findings are a surprise considering the problems that electric-car ventures have had so far. Norway’s Think filed for insolvency late last year and is trying to reorganize, while California-based Tesla is struggling.

But momentum for electric vehicles may finally be building. Germany is among countries offering financial incentives for electric car development. New initiatives by U.S. President Barack Obama will likely encourage alternatives to the internal combustion engine. At the local level, cities such as Paris and London are anxious to support electric cars because they are cleaner and quieter.

In addition, the cost of batteries is likely to fall steeply amid intense development efforts by companies such as Germany’s Bosch or China’s BYD. Within a few years it should be possible to mass-produce a small electric vehicle that would sell for about $26,000. At that price, the market for electric vehicles in the U.S. would be 150,000 to 175,000 vehicles a year, Bain estimates.

For car manufacturers, electrification could offer a way to sell customers a new vehicle at a time when fuel prices and environmental concerns are prompting people to drive less. The Bain survey finds that customers are eager to buy an electric car from familiar names such as Toyota, Daimler, Volkswagen or BMW. (Respondents weren’t asked about any of the U.S. carmakers.) “The consumers are expecting trusted brands to deliver these products,” says Matthies.

But the advent of mass-market electric cars is also perilous for the established giants. They are rightly nervous that the shift to electric will invite new competitors such as utilities, who might subsidize the purchase price of an electric car the way wireless network operators subsidize the price of a new mobile phone. If so, car manufacturers might lose some control over marketing and design. In addition, new entrants such as BYD, a battery maker that has gotten into the car business, could also challenge the established auto companies.

The other challenge for carmakers will be to differentiate their products from competitors. Electric motors are much less complicated to build than internal combustion engines and require only a simple gearbox. They are inherently quiet and peppy. The qualities that have sold BMWs, Lexus and Mercedes won’t be as unique anymore.

So design may be the key competitive factor. Some automakers may decide to form partnerships with companies known for superb product design. In fact, the Bain survey asked people whether they would buy a car from Apple. Only 21% of Europeans said they would, vs. 48% who would buy an electric car from BMW. Still, Apple’s score was surprisingly high for a company that has never made a motor vehicle. Existing carmakers can’t take it for granted that they’ll own the market.

Carmakers are already testing electric vehicles, such as BMW, which is deploying an electric version of its compact Mini among select California and New York-area customers. Mitsubishi is expected to begin selling an electric car this year while several other manufacturers will follow in 2010. The Bain study suggests that, after many false starts, the era of electric cars may finally be on the horizon.