Electric Car Demand Could Dwarf Supply

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About 11 million cars are sold in the U.S. each year, and the first two practical and moderately priced plug-in electric cars -- the Chevrolet Volt and Nissan Leaf -- are about to be delivered to the first customers in December. Over the next 12 months (calendar year 2011), Nissan (Stock Quote: NSANY) will deliver 20,000 Leafs and Chevrolet about 15,000 units in the U.S. market.

The total of 35,000 cars is less than one-third of one percent of the U.S. car market.

Leaving aside the important distinction that the Chevrolet Volt, made by General Motors (Stock Quote: GM), is close to a "no compromise" solution with a back-up gasoline engine that picks up after the first 25 to 50 miles, who will be buying plug-in electric cars out of these 11 million annual U.S. buyers? The debate seems focused, almost subconsciously, on single-car households, and the argument goes that almost all U.S. households won't tolerate the familiar "range anxiety" phenomenon.

Let's for a moment assume the debate is right about single-car households: If you are a one-car household, you will simply not buy an all-electric car. This is where the analysis these days typically stops.

But what about multi-car households? In most multi-car households, the second car is driven shorter distances -- to school, shopping, soccer practice and local errands. It is often asserted that a majority of cars are driven less than 60 miles a day. Rarely is the question asked: How many second or third household cars are driven less than 60 miles a day? I would venture to guess close to 99%.

In other words, most households only need one car that can go 60 or 100 or more miles a day, while the second car almost never does. This means that as long as all-electric cars can be price-competitive, the demand in the U.S. alone could be 5 million electric cars a year if one assumes that almost half all cars sold in the U.S. are for multi-car households. You only need one car that can handle a longer road trip; the second car is almost always used only locally.

Are all-electric cars price-competitive? Thanks to the generosity of your tax-paying neighbors, the Nissan Leaf sees its $33,500 sticker price reduced by $12,500 ($7,500 federal tax credit, plus $5,000 in some states) to $21,000. At that price, it appeals to a majority of second-car buyers.

Therefore, as a baseline scenario, we should be able to say with some confidence that as soon as electric car awareness spreads, even without a meaningful public charging infrastructure, U.S. demand for all-electric cars should be about 3 million units a year (a majority of 5 million multi-car households). Even if we too-generously include the Chevrolet Volt into the equation, this means that in 2011 we will have a 100:1 demand/supply imbalance based on these two cars.

Clearly, the supply of all-electric cars will increase rapidly as we move into 2012 and beyond. Nissan has announced that by the end of 2013 it will be making 500,000 Leafs per year, about 200,000 of which will be made in the U.S. Indeed, 2013, will be the year when almost every other significant car manufacturer will enter volume production (more than 10,000 units a year), although there is very little precision to the 2013 numbers outside Nissan.

By 2013, the U.S. will also have a very well-developed charging infrastructure for plug-in electric cars. Already today, most any establishment in control of a few parking spaces is looking to install chargers: hotels, malls, fast-food joints, parking garages, office buildings, apartment buildings, you name it. It is not inconceivable that the U.S. alone may have more than 100 million electric car chargers installed or in planning by 2013. The low cost of these installations (well below $10,000 apiece), and the simplicity of the environmental requirements, should mean that already in 2012 we will have many more electric car chargers installed than traditional gasoline/diesel fueling establishments.

Therefore, by the end of 2013, the U.S. should be seeing the demand for all-electric cars by single-car households go from near-zero to at least 10% to 15% of that part of the market, with plenty of upside potential as people realize they can plug in their cars almost anywhere they stop. All in all, by 2013-2014, therefore, the U.S. alone should drive demand for about 4 million all-electric cars a year.

There are all sorts of legitimate arguments against electric cars, applying to different people in different situations, causing 100% adoption to be unrealistic for the next 10 or so years. For example, people with very large/heavy van needs, trailer-pullers, or classic supercar enthusiasts, are less likely candidates for all-electric cars. Likewise, however, the strongest case for electric car demand comes from multi-car households, where the majority of demand will reside for at least the first two to three years following the current pioneering Nissan Leaf introduction. And as I have said, that part of the market alone should be about one-third of the total U.S. car market.

For the next two to three years, the supply/demand imbalance is so dramatic, with production being well under 10% of demand, that investment opportunities should abound. As to what those companies are, that will be the subject of a separate analysis, and in the meantime I welcome suggestions and arguments.

At the time of writing this article, Wahlman had no position in the companies mentioned.

Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008.

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