Trying to forecast EV sales? Good luck with that

commentary People are still trying to figure out if electric vehicles will be the Netbooks or the iPads of the auto industry--a flash in the pan or an enduring hit.

There has been a spate of recent articles predicting a glut of batteries because demand for plug-in vehicles won't be strong enough to match supply. The Washington Post yesterday pointed out that many battery companies that received federal aid could hit the brakes or run off the road entirely in the near future.

There are already signs of trouble. Lithium ion battery maker A123 Systems had to lay off people from its factory in Michigan because Fisker Automotive has delayed introduction of its Fisker Karma luxury plug-in. Aptera Motors, which made a three-wheel battery electric car, shut down Friday and battery maker Ener1, whose electric-vehicle partner Think went bankrupt, was delisted from Nasdaq.

Battery and auto companies need to build out manufacturing capacity even before they start selling product. So what will the demand be? Experts are all over the map.

Morgan Stanley estimates there will be 18,000 plug-in hybrids and pure EVs sold in the U.S. this year, which is slightly below its previous forecast but international sales are 30 percent below its prior estimate.

Those muted numbers were the reason it downgraded Tesla Motors to underweight today. "While we're still in the very early innings of vehicle electrification, the commercial progress of EVs in the marketplace has been mixed at best, and largely been unimpressive to date," Morgan Stanley's note said, according to Business Insider.

At the same time, one can find forecasts that are far more bullish. Research company IDC Energy Insights this week predicted that there will 120,000 plug-in electric vehicles sold in North America next year, which would be a big jump from current sales.

This pattern of wildly divergent plug-in forecasts has happened for years for a simple reason: nobody knows what the price of oil, which has been notoriously volatile in the past, will be in the future. And the projected decline in electric powertrain prices, including batteries, is difficult to pinpoint since so much depends on bringing down cost through high-volume manufacturing.

Hybrids clearer winners
As a consumer, a plug-in electric vehicle is much more appealing financially when gas prices are high and going up. It's far cheaper per mile to drive on electricity even with today's gas prices, but the payback on that initial electric-vehicle purchase will obviously happen sooner in a higher-priced environment. Meanwhile, internal combustion engines are poised to get significantly more efficient because of more stringent EPA standards, making them more competitive with electric technology.

The other point that often goes unmentioned in discussions over plug-ins is that electrification takes many forms. Battery-electric cars are relatively expensive--the Nissan Leaf costs about $35,000 and the Ford Focus Electric is just under $40,000 before a $7,500 tax credit--but a smaller battery means a lower purchase price. Toyota's approach is to have a relatively small battery for its Plug-in Prius, allowing it to have a suggested price of just under $32,000 before rebates.

In the end, it may not be cold economic calculations that sell plug-ins. Tesla Motors' Model S is a stunning, roomy car with all the high-tech features you could imagine and it doesn't use oil. Even electric cars that aren't luxury models accelerate nimbly and are generally enjoyable and smoother behind the wheel compared to combustion engine cars.

To put things in perspective, nearly all forecasts predict that battery-electric vehicles will only represent a few percent of sales in the next three to five years, while hybrids will continue to go mainstream.

So rather than making giant battery packs for pure EVs, factories in the years to come may shift focus to smaller batteries for start-stop and traditional hybrids. Hybrids are less sexy than brand-new battery electrics, but at this point they have broader appeal. The trick for auto companies is to be nimble enough to adjust to changes in demand, while still investing in electrification for the future.