Electric Vehicles Have a Fuel-Efficiency Problem

Source: By Stephen Wilmot, Wall Street Journal • Posted: Monday, March 14, 2022

Tesla’s imitators may not be paying enough attention to squeezing all the juice they can out of EV batteries

An employee works on the production line making electric vehicles for Hyundai Motor Co., in Ulsan, South Korea. Photo: SeongJoon Cho/Bloomberg News

How fuel-efficient is the electric vehicle you’re thinking of buying?

The question isn’t as silly as it sounds. The electricity stored in the big lithium-ion batteries that drive EVs is fuel too. The amount needed to propel all that metal a given distance forward matters for the electricity bills you will end up paying, the miles you can travel between charges and the size of the battery you need to buy in the first place.

But the question might be important above all for investors. EVs that make efficient use of battery supplies should be more profitable to manufacture, all else being equal. And as cash flows from conventional cars come under pressure, the margins car companies make on EVs will start to determine who has the cash flows to keep up in an emerging technology race.

Fewer than one in 20 new vehicles sold in the U.S. last year was electric, including plug-in hybrids, but that will change. In a survey by consulting firm AlixPartners last October, 19% of U.S. consumers said they were “very likely” to buy an EV as their next vehicle, excluding hybrids—up from just 5% two years before. The numbers are higher globally: One-quarter of consumers intend to buy an EV next. There is no shortage of enthusiasm from manufacturers: Seven of the nine car ads in the recent Super Bowl were for plug-ins, compared with none as recently as 2018.

The options currently on offer typically run for roughly 2 to 4 miles for every kilowatt-hour of power their batteries hold—a measure that has something of the familiarity of miles a gallon. Some, including data provider Edmunds, prefer to say they need between roughly 25 and 50 kWh to go 100 miles, which is the same equation flipped. As tested by Edmunds, EVs by Hyundai and BMW’s Mini brand rank best by this measure of efficiency, while EV darling Rivian’s debut pickup truck is at the bottom.

Rivian’s position shouldn’t be a surprise. The weight and poor aerodynamics of pickups have always made them fuel-inefficient, which hasn’t stopped an increasing share of Americans buying them. With the electric versions now hitting the market, there is an extra factor: To achieve a decent range between charges despite that inefficiency, you need a lot of batteries, which are themselves heavy.

That leaves some doubting that electric pickup trucks make sense at all with today’s EV technology. Rivian recently increased its prices, drawing the ire of fans and a partial reversal last week by the company. “The correct solution for an affordable pickup today is the internal combustion engine,” says Peter Rawlinson, chief executive of rival EV startup Lucid Group, which works on luxury sedans and is unusually focused on questions of powertrain efficiency.

The weight dynamic applies in reverse to the most efficient cars, which tend to have small batteries. “It is a feedback loop: If you have an efficient vehicle you need fewer batteries, which in turn makes it more efficient,” said Arne Brethouwer, founder of European data provider EV Database.

Such comparisons highlight the limitations of efficiency metrics as a guide to consumer EV demand, particularly in the U.S. Rivian’s truck has had rave reviews and substantial preorders, while smaller, lighter EVs haven’t sold well.

General Motors has shifted its focus away from the relatively efficient but otherwise problem-ridden Bolt EV toward muscular vehicles with huge battery packs like the GMC Hummer and the coming electric Silverado. Its bet seems to be that electric powertrains won’t change the American preference for big, inefficient vehicles. This seems reasonable given that the cost of charging even electricity-guzzling EVs will almost always be lower than filling conventional counterparts with gas.

So why is Tesla TSLA -2.02% so focused on efficiency? The EV pioneer uses smaller battery packs than you might expect given the range of its vehicles, thanks to energy-saving innovations in functions such as climate control as well as the powertrain itself. Given the high cost of batteries, this may be one reason Tesla was able to make double-digit margins for most of last year, alongside other factors such as the vast scale of its factories and high U.S. vehicle prices.

Many EVs that go after Tesla’s market, such as Ford’s Mustang Mach-E, pile on extra batteries—and pounds—to keep up. The question around this approach is how the economics stack up. The difference between a gas-guzzler and its electric counterpart is that the manufacturer bears part of the cost of EV inefficiency upfront through battery purchases rather than leaving the consumer to shoulder it all at the pump.

Traditional car makers can subsidize their EV businesses for a while to get a foot in the door, but as sales take off they will need to bring down battery costs. The much-discussed playbook for doing this at GM, Ford and Volkswagen involves dedicated EV designs, scalable battery technologies and in-house cell production.

The question of stretching batteries as far as they will go is only starting to get attention. At this year’s CES tech show, Mercedes-Benz unveiled a concept car optimized for efficiency: The “Vision EQXX” can run for more than 6 miles for every kWh of battery capacity.

The cost problem might be muted in time by battery innovation. “Today’s batteries are going to be in the museum by the end of the decade,” said Morgan Stanley analyst Adam Jonas. Still, companies that know how to squeeze all the juice they can from the latest battery technology seem likely to stand at an advantage.

In the EV age, fuel efficiency is cost efficiency too. Investors would be wise to pay attention to it, even if consumers don’t.

Write to Stephen Wilmot at stephen.wilmot@wsj.com