MAINSTREAMING ELECTRIC CARS

Amping along the byways… 

Hark, electric vehicles (EVs) are hopefully travelling towards the broader car-buying public. Under very strong prodding by the California Air Resources Board (CARB) and the Obama administration, 32 different models of EVs are currently being sold in the US, principally in CA. To date, the 6-year old US market for EVs remains a very thin one; optimism about future growth far outweighs actual sales. As of last December, EV sales represent a slender 1.43% sliver of US new car sales, when you count both plug-in hybrid sales together with battery-only vehicles’ sales. If you consider only battery electric vehicle sales, the EV market share shrinks to 0.76% of new car sales. This negligible market share maps the rocky road EVs need to travel towards genuine public interest and acceptability. This road contains both opportunities and potholes that need filling.

The automotive press observantly genuflected last week as Tesla finally displayed a production version of its smaller, more affordable Model 3 EV. Much hope (and hype) accompanies Tesla’s Model 3 that it produces in Freemont, California, because its base price is said to be about $35,000, less than one-half as much as the two other EVs it makes. Last year Tesla raised much-needed cash by requiring Model 3 customers to provide a $1,000 down-payment/deposit for their car. At this point roughly 400,000 customers have provided a deposit. Very impressive. Some of these folks will be waiting for quite a while to get their car; and some of them might not receive the entire currently-available federal tax credit.

Tesla’s chief executive, Elon Musk, said he expects 100 Model 3s will be produced in August and 1,500 or more in September. He also said that he expects the company to be able to produce 20,000 a month starting in December. In the first quarter of 2017, Tesla lost $397 million, 40% more than a year earlier, but its revenue more than doubled, to $2.7 billion.

Flying far under the hood of the Model 3's media coverage is Chevrolet’s comparable Bolt EV, which with little fanfare has already been selling in CA for seven months. The Bolt has captured strong reviews and has an impressive 238 mile battery range. The Bolt’s MSRP is $36,600 before rebates. Sales of the Bolt have inched forward; in June 1,745 were sold, ranked second behind Tesla’s Model S, whose MSRP ranges from $68k to $138k. All EVs sales are measured in proverbial inches. Of the 32 EV models being sold in CA, only 6 had more than 1,000 sales in June. For perspective, the nation’s best-selling car, the Toyota RAV4 SUV, sold 34,120 vehicles in June. The top-selling vehicle in the US remains the Ford F-Series pickups that sold 77,895 trucks in June. The top-selling EV in June, Tesla's Model X (its crossover vehicle), is ranked 151st, with national sales of 1800 vehicles, down 10% from June 2015. The Chevy Volt has 1642 sales, ranked 162nd.   

Effective environmental policy necessitates mainstreaming electric vehicles that will appeal to and convince “regular people” like Jane and Joe Van (who have 2.4 mini-Vans) to buy an EV. The transportation sector now produces the most CO2 emissions of any industry in the US. The sooner they’re convinced, the better for the environment. People like the Vans represent far more typical car purchasers than rich folks who can afford to and choose to buy expensive Model S’s and X’s. 

Changing people’s automobile purchase habits so they actually consider buying an EV requires numerous changes and is a marathon rather than a sprint. To date federal and state EV oriented policies are sadly unidimensional, offering financial incentives. What’s needed? First, attractive, capable EVs must be available in the marketplace; and second, these vehicles must be comparable with non-EV vehicles, especially regarding cost, range performance and supporting infrastructure. Only a select few EVs are now available for mainstreamers like the Vans.

Electric vehicles have been available since the beginnings of automobiles. Gustave Trouvé, a French electrical engineer, invented perhaps the first EV in 1881. But they have never succeeded against internal-combustion engine technology. Al Jardine, who is a musician and co-founded the Beach Boys as the band's rhythm guitarist, has mentioned that his grandfather worked with Thomas Edison on the electric car and he sold electric cars at the 1900 World's Fair in Paris. Those were the days.

When I was growing up in Philadelphia during the 1950s, I remember being impressed by the big, lumbering trucks of the Saturday Evening Post Co. on downtown streets filled with giant, heavy rolls of paper used to publish the magazine. These trucks were all electrically powered by lead-acid batteries. The magazine was published weekly from 1897 to 1963. Its heavy-duty electric trucks disappeared some time before its fall from weekly readers’ grace.

As mentioned before, the federal government and the State of California have actively promoted electric vehicles with several mechanisms. The Obama administration boldly increased the required corporate average fuel economy (CAFE) standards. In 2011, President Obama announced an agreement with 13 large automakers to increase CAFE to 54.5 miles per gallon (mpg) by model year 2025. The administration was able to secure agreement with the manufacturers in no small part because of its increased leverage. The federal government had bailed out both General Motors and Chrysler, two of the three largest US automakers, from bankruptcy in 2009. This big increase the CAFE standard has provided strong incentive for auto makers to improve their cars’ fuel efficiency and to introduce more hybrids and EVs towards that end.

Adding to the EV charge, Volvo Cars (owned by the Chinese firm Geely Holding Group) announced will stop investing in internal combustion technologies for its cars starting in 2020 and will focus exclusively on plug-in hybrid and all-electric vehicles. In addition, France declared last week it would end sales of internal-combustion engine vehicles by 2040.

However, when gasoline prices started tumbling five years ago, the sales growth of hybrid and EV cars unsurprisingly plummeted. In January, sales of two different, popular Prius models fell over 30% on average from a year earlier. With gas prices down, consumers have bought more low-mpg SUVs and pickups rather than cars, which have made achieving the 54.5 mpg goal increasingly unrealistic. In fact, the major car producers have begun laying off workers in their car factories due to lower sales. Recently, car manufacturers have complained to the Trump administration that the 2025 CAFE standard needs to be relaxed, given the purchasing behavior of consumers. Who knows if they can gain the president’s ear let alone his brain?  

The California Air Resources Board (CARB), the state’s environmental agency, has formally adopted the 2025 CAFE standard for vehicles sold in the state and upped their mandate for zero-emission vehicles (ZEVs): battery, fuel-cell and hydrogen powered vehicles. California has optimistically estimated its regulations would result in ZEVs making up about 15% of all California auto sales by 2025, but the current share has been stuck in first gear, around 3% since 2014 with regulations in force. [EVs actually don’t have first gears, they use gearless, continuously variable transmissions, but you get the idea.]

The CARB’s ZEV mandate is a complex set of regulations that prioritizes the offering of ZEVs via a California cap-and-trade mechanism using the issuance of ZEV credits when a manufacturer sells a ZEV. This ZEV credit system has greatly benefited Tesla in particular, as well as other ZEV manufacturers like Nissan and Toyota. Because it’s a low-volume manufacturer that sells only EVs, Tesla has built up an impressive surplus of credits and has gladly sold them to other manufacturers who don’t sell enough ZEVs in California. These credit sales have significantly helped Tesla’s cash-flow challenges as it rapidly expands.

A Fortune article states that Tesla has received a total of $600 million from sales of these credits over time. Due to its surplus, Tesla has had no trouble meeting the CARB's ZEV mandate — because it can satisfy those obligations with state-awarded ZEV credits instead of actually producing zero-emission vehicles. Tesla has thus significantly benefited from some automakers' decisions to buy more credits instead of building more cars. Critics of the ZEV cap-and-trade program understandably argue that the CARB has issued far more credits than needed. Manufacturers have decried the ZEV credit program, saying the mandate covers only the supply-side production of such vehicles; there’s no mandate for (so far reluctant) customers to buy them. They have a point, but. With a substantial stretch, mandating customer purchases of ZEVs might work in China, given its new-found interest in the environment, but not California or the rest of the US where it’s a first-order political non-starter. That only works for health care insurance, another subsidy-loaded, heavily regulated industry. And that mandate won’t be around for much longer if the Republicans ever get their act together; perish the thought.

Nevertheless, the federal government and individual states like California have provided fiscal incentives-subsidies to customers for EV purchases. Rebates and tax credits are offered directly to buyers, to entice consumers – the demand-side of the vehicle market – like the Vans to purchase ZEVs and counter “the forces of carbonization,” as Governor Jerry Brown just categorized climate-change deniers.

The federal EV purchase subsidy is an income tax credit of up to $7,500. This credit has been in effect since 2010 and will begin to phase out once a manufacturer has reached 200,000 EVs sold. Given Tesla’s sales success, its customers may not enjoy the full federal credit within the next year or so. The California ZEV subsidy offers up to an additional $2,500 for the purchase or lease of battery EVs. In addition, several of the state’s electric utilities provide residential EV owners a lower off-peak hours’ rate when they can charge their vehicle.

These consumer subsidies seem to be effectively promoting EV sales to an extent. When the State of Georgia and Hong Kong eliminated their EV subsidies, sales crashed. After 2015 when the Georgia state legislature removed the state’s EV credit, the sales of the Nissan Leaf dropped from 15 times the national average to a small fraction of what they were. In Hong Kong, Tesla sales dropped to zero in April from nearly 3,000 the month before when the province’s EV tax break was eliminated. Thus a big question is raised about future EV sales as the president’s 6-shooter Dept. of Energy Secretary Rick Perry considers eliminating the federal EV tax credit. If all federal EV incentives and involvement are removed, Navigant, a consulting firm, expects overall demand for plug-in hybrids and EVs could be reduced as much as 20% by 2025. When it comes to energy, whatever the form, nary a BTU is produced, sold or used without some sort of subsidy.

Aside from public policy, what other potholes are in the EVs’ road to mainstreaming? There are three. First, is EV batteries. Producing lithium-ion EV battery packs that are cost-effective and enduring has been an ongoing challenge. Costs are coming down and battery efficiencies are incrementally increasing, but when compared to tried-and-true internal-combustion engines battery drive-trains are more expensive.

Experts believe if the price for one kilowatt-hour’s (kWh) worth of lithium-ion battery capacity can be reduced to $150, electric vehicles can become cost competitive with internal-combustion vehicles, without subsidies. Knowledgeable specialists guestimate that the Chevrolet Bolt’s 60-kWh pack costs about $215 per kWh. Tesla’s head of investor relations claims the Model S battery packs cost $190 per kWh, although that figure might be derived with Tesla (nontraditional) math—accounting that often ignores R&D and capital investment costs.

The final $50 or so per kWh are likely to be the most difficult to attain. No one now predicts significant leaps for today’s lithium-ion battery technology. Instead, cost reductions are more likely to be found over the near-term from economies of scale and manufacturing improvements. Tesla’s Gigafactory is a $5 billion battery-making building in Nevada may pare up to 30% of a pack’s cost, if it comes together as planned by 2020. Here’s hoping.

The second pothole is charging infrastructure (aka, EV “fuel” stations). Electric vehicle charging stations are necessary for anyone who owns an EV, especially those whose range is diminutive. Here's a nice visualization showing more than two dozen EVs' and plug-in hybrids' charging range along with their base prices. With several 200+ mile electric vehicles now available (the Chevy Bolt and Tesla Models S, X and 3) and longer-range EVs hopefully arriving in the next several years, today’s parallel to a pre-Interstate America is the utter lack of a consistent, standardized fast-charging infrastructure for EVs. If EVs are to replace gasoline-fueled vehicles, a national, automaker-independent network of direct-current fast charging stations will be required, that can restore up to 100 miles of range in just 30 minutes.

Unfortunately, standardized charging isn’t yet on the EV horizon. EV drivers from every automaker face a very different experience than gas-fueled vehicles. Electric charging is usually a-frustrating amalgam of chargers run by separate charging networks, using varied hardware. There’s little consistency among interfaces, with some of the chargers only accepting membership cards and fobs for proprietary networks. Is this any way to build popular demand for your EV product? No. But that’s what EV owners now confront and will be for the foreseeable future unless someone (say the IEEE, the Society of Automotive Engineers or much less likely given the present administration’s carbonization focus, the federal government) sets a uniform, national standard for “fueling” EVs.  

Third, the environmental benefits of switching from gasoline to electricity as the source of vehicle power are augmented only if electric utilities generate their power from low-carbon sources. Nationally, electric utilities now use fossil-fuels for 65.1% of electricity generation (including 30.4% from coal), according to the DOE/EIA. That’s not low-carbon.

I know, I know, we humans (especially we Americans) have to change the way we behave and live if we’re going to avoid more bad things from happening to our environment. And while I question the validity of really long-term environmental systems models’ predictions 50 or 100 years out, we still need to do something significant today. Forget the future, post-Industrial Revolution data to date show we’ve already caused key, detrimental changes in the world’s weather and environment.

But really, having the CARB exercise supernumerary control over what technologies California motor vehicles can use is concerning for me, an admitted car guy since I could barely walk. My concern centers on the CARB because it seems to not care one milliliter about what the price of gasoline is or at all about how customers actually make vehicle choice decisions. The CARB mandate only focuses on vehicle supply, not demand. No wonder their mandate keeps slipping.

But why should the CARB change; its goal is environmental greenness, not customer satisfaction. The ZEV mandate which specifies the number of vehicles that must be sold has been revised several times due to unexpected market conditions (e.g., the changing market price of gasoline that influences consumer vehicle-purchasing habits). The CARB first set its mandate for low-emission vehicles 27 years ago, when the nominal price of a gallon of gas was $1.12 ($2.03 in real terms).

 With all the challenges that remain, I don’t yet want to buy an EV by trading in my sports car. Do you? There is, however, the plug-in hybrid Porsche 918 Spyder. I’m not the only person who remains reluctant to hop on the EV bandwagon. I hope the potholes get fixed speedily. More than 98% of car buyers haven’t bought an EV. A smoother byway will help greatly. But hop on it we should; the sooner the better if we and the Vans are to go amping along the byways under bluer skies. 

BEES’ KNEES AND WAGES

To bee or not to bee, is that the question? 

Mea culpa. I’ve been in a rut (though not of the elk-ian sort); I spend too much time reading about and reacting to tweets from the child-like creature professing to be our national leader. So I’m taking a vacation by giving up reading news about our president’s tantrums for the summer starting today on our 241st birthday. 4 No Trump is now for me more than a bridge bid. I’m following Gideon Litchfield’s apt suggestion to ignore this man-child’s paroxysms. According to Litchfield, a normal US president is like a creature in the middle of a lake, his every move creating far-reaching ripples that people pay attention to. Our current leader is like a rock in a stream; he creates turbulence and is to be avoided, but everything flows on around him.

Instead, I’ll focus on something apart from the hugely disturbing, corrosive and sad politics of our president.

Say for example, how long have workers’ wages been the bee’s knees?

It’s not a question that’s occupied my or likely your forebrain that much. But it does have implications beyond the biological superfamily Apoidea, where bees reside. To be clear, bees indeed have segmented legs that include knee joints. Praise bee. The idiomatic phrase “the bee’s knees” became popular in the 1920s and refers to something being of high quality or excellence.

Not just the bee’s knees are excellent. There are close to 20,000 known species of bees that are found on every continent except Antarctica, in every habitat on our planet that contains insect-pollinated flowering plants. Many bee species are eusocial, living in cooperative, communal groups (e.g., hives) headed by a female queen bee. Bees pollinate more plant species than any other pollinating animal, including ants, butterflies, bats and hummingbirds.

It is estimated that about one-third of the human food supply depends on pollination, most of which is accomplished by bees. And unlike any other pollinator, bees (specifically the most well-known type, the European Honeybee) produce wondrous honey as well as beeswax and royal jelly. Royal jelly isn’t served on Prince Charles’ UK muffins in the morning; it’s a honeybee secretion used in the nutrition of larvae, as well as adult queens.

In 2013 more than 2.6 million bee hives produced about 149 million pounds of honey in the US according to the National Honey Board. What state produces the most honey? Although it’s unlikely, if you picked North Dakota you’d earn a B++. Bee statisticians estimate that in order to produce 1 pound of honey, 2 million flowers must be visited, which takes a hive 55,000 miles of flying. That’s a lot of flying without any frequent-flyer miles. An average worker bee makes only about 1/12 teaspoon of honey in its lifetime. Thanks guys.

Bees have been making honey for well over 100 million years. Humans have enjoyed a long, positive relationship with honeybees; except when we misbehave and get stung. Depictions of humans collecting honey from wild bees date to 15,000 years ago; efforts to domesticate them are shown in Egyptian art more than 4 millennia ago. Jars of honey were found in the tomb of Tutankhamun. The Greeks treasured honey; Virgil and Pliny wrote about beekeeping 2,000 years ago.  

Onward to wages. Economists generally define wages as the regular payment provided at a fixed rate to labor for services undertaken. For employers it is the cost of using labor, as opposed to using the other two factors of production, land and capital. Wages are determined by several factors, principally the demand and supply of labor as well as labor productivity - the output produced per person-hour worked. Sounds fairly simple, but it usually it isn’t.

One continuing issue regarding wages is how has the premium paid for higher-skilled, more-productive laborers compared with lower-skilled workers over time. This concern has risen in importance as uneasiness about technological displacement of middle-skilled workers has grown and the wages provided to lower-skilled workers and others have stagnated. I wrote about the controversy surrounding how the rise of artificial intelligence (AI) may affect workers’ jobs when I examined robots, blacksmiths and the future.

The seminal efforts of Professor Gregory Clark at UC/Davis offer an intriguing perspective on the premium paid to higher vs lower-skilled workers. I have found Prof. Clark’s deep excursions into quantitative economic history fascinating. His captivating book, A Farewell to Alms, offers insights based on the extensive empirical data he’s collected about the world’s economic history including why the great “divergence” of the Industrial Revolution happened first in England and not, for example, China.

Prof. Clark has recently assembled an impressive dataset of wages in England from the end of the 12th century through current time. With almost 800 years of English data (!), he compared skilled-worker craftsmen’s wages with that of common laborers from the middle ages through the Industrial Revolution and beyond. What his data show is that except for two periods of significant change, the recent rise in the wage premium for skilled and college-educated workers is historically unusual, as shown in the chart below from The Economist.

Sources: The Economist and Prof. Gregory Clark

The chart shows two large changes in the skilled-worker wage premium. The first dramatic decline happened in the 14th century, when average life expectancy at birth was about 31 years. [Interestingly, this short expected lifespan basically was unchanged since Classical Greece – the 4th and 5th centuries BC, when it was ~28 years – and that of 17th century England at 35 years.] With such a short lifespan and when interest rates were high a worker’s taking on an apprenticeship (often 7 years long) to become a skilled craftsman had a high opportunity cost. Fewer men became craftsmen and the craftsman-to-common-laborer wage premium grew until the early 1300s. Thus, from the mid-1200s through the beginning of the 14th century craftsmen’s wages were indeed the bees’ knees. It wasn’t to last.

The bubonic plague (Black Death) cast its very dark penumbra on England and the rest of Europe, starting in the mid-14th century and continuing sporadically through the mid-17th. After 1348-49 when the plague first struck England, its population dropped by one-third precipitating reductions in interest rates and significantly adding to the already outsized challenges of living. Apprenticeships became more alluring both financially and because there were far fewer skilled workers. From the chart, the increased supply of skilled labor relative to common laborers soon reduced the wage premium ratio and kept it around 1.50 until the late 1600s.

The second big change happened during the 18th and 19th centuries. The craftsman/laborer wage premium rose at the beginning of the 18th century and stayed high until the beginnings of the Industrial Revolution in the mid-1700s. Skilled workers’ wages were the bees’ knees then. However, the Industrial Revolution was a game-changer for virtually everyone in England, and soon thereafter the rest of Europe, America and the world. For the first time in history structural technological change created widespread job displacement and opportunities.

In a real sense the Industrial Revolution was realized by the coincident mechanization of agriculture. The Agricultural Revolution allowed land-owners to reduce their field labor and still increase output via improved labor productivity. The enormous increases in agricultural labor productivity were realized by adopting a series of new technologies that coincided with the Industrial Revolution including the cotton gin, iron/steel plows and mechanical reapers. By the 1990s, farm labor and land productivity had increased 100-fold in 150 years.

The decline in the craftsmen/laborer wage premium started in England as the newly-mechanized textile industry hired unskilled laborers – most often from farms – to replace artisan craftsmen in new factories. Industrial machines could be operated by workers with far less training than craftsmen. Average daily income in 1861 England was 14 pence for 10 hours of work or about $336 in today’s dollars. The modernization and automation of British industry steadily became more widespread in the 1800s. The skilled-worker wage premium dropped, as shown in the chart, and didn’t start to recover until the mid-20th century.

Most recently, wage premiums during the past 40-50 years have been directed to college graduates, as I’ve discussed before. As the number of college degree-holders continues to climb, it’s unclear how long this premium will last. The multi-century historical wage data discussed above show that wage premiums awarded to more skilled labor eventually subside. Even the bees’ knees ultimately crumple.