O.R./Analytics at Work Blog

Electric Car

In 2011, President Obama set an ambitious goal of making the United States the first country to have 1 million electric vehicles on the road by 2015. With this goal, both the Federal and state governments have invested heavily in the industry through various sources of incentives and subsidies directed at its various stakeholders, notably including the $2.4 billion Federal grant approved in 2011.

So, what went wrong?

Fast forward – it is Year 2015 now. It turns out that EV adoption is growing at a rather underwhelming rate; although U.S. has the largest fleet of EVs in the world, we are only at around the 280K mark as of December 2014.

Currently, the EV industry is still at the stage of trying to go beyond the early adopters, i.e., environmentally-conscious consumers, to reach the mass market. Unfortunately, the consumer inertia for adopting the EV seems much greater than expected. For the industry to take off, it must appeal to the regular mass market consumers who are not necessarily environmentally-minded. As it turns out, the fuel cost per mile of EVs (electricity) is only around 1/3 of the gasoline price, even taking into account the recent plummet of the latter. So, why aren't enough regular Joes adopting EVs?

Toward Mass Adoption of Electric Vehicles

electric car

Whereas a few studies have primarily focused on this issue based on the technological and engineering aspects of EVs, the recently published M&SOM paper coauthored by Lim, Mak, Rong (2014) focuses on understanding the behavioral and business aspects of the industry. In particular, it studies the EV mass adoption challenge based on two novel perspectives; consumer anxieties and business models.

Impact of consumer anxieties

Consumer anxieties, in particular range and resale anxieties, act as major psychological barriers to EV adoption. Range anxiety, the concern that the driving range of EVs (approximately 100 miles due to battery capacity) may not be sufficient to meet the needs of drivers, tends to make drivers underestimate the battery capacity (or, overestimate their driving needs) and hinders adoption. In addition, resale anxiety, the concern over future resale price of the EVs, also discourages consumers from adopting EVs.

Despite the qualitative similarity between the two types of anxieties, the study shows that their impacts can be quite different. Whereas range anxiety typically hurts adoption, resale anxiety can actually help adoption (depending on the EV production cost level). Further, interestingly, the study finds that anxieties do not necessarily harm the consumers; in fact, they benefit consumers since the presence of anxieties forces the firm to cut prices and invest more in public charging infrastructure.

Impact of EV business models

Business models also play a crucial role in EV adoption. While there are various business models and practices being proposed (and deployed) in different countries, their attractiveness and effectiveness are not well understood. The study further explores the implications of battery leasing (whether to sell the battery or lease?) and battery range enhancement options (whether to invest on public charging stations or to offer bigger battery capacity?).

The study finds that the battery leasing service neutralizes the impact of resale anxiety (since the consumer does not own the whole vehicle) and typically improves the firm's profit (due to greater level of surplus extraction through pricing). Further, the battery leasing practice typically harms adoption and consumer surplus when not offered with the public charging option. However, leasing typically helps induce heavier adoption in the initial stage and thus the economic value of (time-discounted) GHG emission savings may possibly be greater than under the owning model, even when the overall adoption size is smaller.

As for the battery range enhancement strategies, interestingly, it was shown that the two strategies may lead to very different adoption outcomes. In particular, range enhancement via enhanced charging infrastructure typically yields more socially-desirable adoption outcomes (greater adoption and emission savings) than the other; in essence, this supports the business model deployed by mainstream manufacturers such as Nissan Leaf (which offers about 80 miles per charge and requires a high density of public quick charging stations) over those deployed by high-end manufacturers such as Tesla. Indeed, this was a major criticism against Tesla's early strategy of selling high-end, long-range EVs before its recent announcement of its plan to produce mass market, shorter-range EVs along with a massive expansion of the Supercharger network.

Where do we go from here?

So, how can these findings help policy-makers better support the industry? Clearly, the stakes involved in the industry (the firm, consumers, and the government) are not perfectly aligned; more specifically, there is a need to coordinate the profitability (of the firm), consumer surplus (for EV consumers) and other public or environmental benefits (for the government) such as adoption rate or emission savings.

The study reveals that, overall, the combination of EV selling (rather than leasing) coupled with offering a network of enhanced charging stations (rather than increasing the battery capacity) provides the highest social surplus (aggregate of EV adoption, emission savings, profitability, and consumer surplus) unless resale anxiety is high. If the resale anxiety level remains relatively high, then battery leasing may also help induce better adoption outcomes. Therefore, policy makers must take into account these factors in implementing policies to properly incentivize the involved parties (especially the private sector) for the desirable business models to be properly deployed.

Today, we stand at a crossroads. Addressing our heavy reliance on uncertain oil supplies and the associated environmental concerns, sustainable growth and successful establishment of the alternative fuel vehicle market are critical steps toward greener transportation. EVs in particular are one of the most promising alternatives with substantial economic and environmental potential, although not without challenges.  Aside from the technological side of the business, understanding the behavioral and economic aspects of EV adoption as this study seeks to do is critical to ensure its long-term viability.

Read more journal write-ups like this on the new M&SOM Review Blog

Read the Full Article:

Michael K. Lim, Ho-Yin Mak and Ying Rong, Toward Mass Adoption of Electric Vehicles: Impacts of the Range and Resale Anxieties, 2015, M&SOM.

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