Interview with Robert Hill, Principal of Deloitte Consulting LLP and Leader of Asian Automotive Practice in North America

The success of current efforts to introduce electric vehicles into the market will largely be determined by the ability of vehicle manufacturers to convince consumers that these vehicles represent a viable and competitive alternative to the traditional automobile. To investigate concerns and the factors that must be addressed by vehicle manufacturers as they seek to bring these products to market, KWR International speaks with Robert Hill, Principal of Deloitte Consulting who recently completed a study on this topic. This interview was originally prepared by KWR International for the Japan External Trade Organization's Green Innovations Program and is published with its permission. Interview by Keith W. Rabin

Thank you Robert for speaking with us today. Before we begin can you tell us about your background and Deloitte's work in the automotive sector?

I am a management consulting principal focused on the automotive sector. Specifically I work with Asian companies in the U.S. and conduct research on primary trends in the auto industry including electric vehicles with an eye toward helping Asian companies operating here to improve their businesses. Deloitte's global automotive practice, with offices in Tokyo, Detroit, Frankfurt and Los Angeles, performs comparative research both to help clients address emerging trends in local as well as global markets and to address issues they need to face to expand their business operations.

You recently directed a study titled "Gaining traction: A customer view of electric vehicle mass adoption in the U.S. automotive market". Can you tell us how this report came about, why you took the approach you did and the nature of your findings?

Our view is that electric vehicles and power trains present a great opportunity to reengage customers with automobiles as a product. Electric vehicles offer better performance and an ability to support new body styles, shapes and materials. From a customer point of view it is very exciting. From the standpoint of industry it will reshape the value chain. As we looked at the space we thought the industry needed an outside-in customer perspective to identify the barriers of adoption for critical segments. We believe adoption will occur on an exponential curve and the critical question was not so much the requirements of the early adopters but rather the "early majority" which is a far larger segment and can start the curve upwards.

What was the nature of the findings?

What we found out was that people are enthusiastic but that there were some distinct barriers. First, there is "range anxiety". We confirmed the average consumer travels less than 100 miles a day but when they get into a vehicle they expect the range to be 400 miles a day. This is about the range of a full tank of gas and not for going to the office or short trips but longer journeys. We also found there was a lack of familiarity and awareness about the battery or range-extending or hybrid technologies. OEMs, government and others that seek to build the industry need to work on this to inform dealers and comfort customers.

Additionally, in the U.S., buying an automobile is still a branded experience. It is more similar to buying perfume than bottled water. Brands that are most associated with electric vehicles are those with fleets with high fuel efficiency such as Toyota or Honda however neither of these brands will be first to market. Nissan, Chevrolet and Mitsubishi will be first.

That presents a challenge to these brands as they need to invest in building their green image. However it also presents an opportunity. For example, Nissan is repositioning its brand in the U.S. around quality, safety and green and the launch of the the Leaf EV is a critical strategy.

In terms of price what we found is that customers in the U.S. are focused on the "deal" and not on total cost of ownership. An important part of the variable is fuel cost over the life of the vehicle. However, in the U.S. that variable tends to be slightly less important as customers are focused on the initial price they pay upon purchase, which represents another area brands need to focus on.

How large of a market are we likely to see for electric vehicles? How long will it take to develop and how are "customer demographics" likely to develop over time?

We believe that by 2020 the U.S. market for electric vehicles with electric power trains - not hybrids - could be as high as a million vehicles and as low as half a million. The key drivers of that will be government subsidies and gasoline prices and the ability of OEM's to deal with issues such as range anxiety. If all those factors align it will be at the high end if not the low end.

The key segment, as I mentioned, is not the early adopters. The car companies know them well and they are a relatively small segment. The early majority is more critical as they will drive mass adoption (drive the curve upward). They have incomes of about $100,000 and live in suburbs, so the challenge of the OEM is to convert them and then go on to the rest of Middle America.

The winners will likely be the large OEMs such as Nissan and Chevy, and the small upstarts will likely be acquired. That is why you see Toyota aligned with Tesla. The new brands face a couple of challenges. First, they make niche cars (e.g., sports cars and roadsters). Next, building the processes, systems and infrastructure required to market, sell and distribute vehicles in the U.S. market is very costly and resource intensive. So it makes a lot of sense to join with someone who already has it in place.

Emerging markets such as China and India represent large sources of incremental growth in the automotive industry. How do these markets differ from those in the US, Japan and Europe in terms of their ability to drive development of electric vehicles?

We are currently working on this survey in those countries and will have more data soon, but I think adoption will be faster in those countries as customers will be quicker to get over the barriers we identified, such as range anxiety. That is because these markets are newer and their customers are more flexible. From a value chain point of view this also represents an opportunity for these countries to leapfrog over internal combustion engines so their governments will embrace and support this change.

Are market forces sufficient by themselves to drive development of an electric vehicle industry or are government subsidies, which are often seen as essential to alternative energy development essential to guide its growth and development?

I think the government needs to support key elements of the infrastructure and the overall birth of this industry. There is consumer demand, as these products do outperform traditional vehicles along several dimensions, though I think subsidies are important on an initial level until battery prices come down.

In terms of infrastructure starting with the big picture there are concerns about overtaxing the grid, so continuing efforts to develop this are important. If we had 1M vehicles on the road today the grid would have troubles. Local communities also need to develop recharging stations. Then there is the pricing of the vehicle themselves.

Part of the problem in developing capital intensive industries such as electric vehicle is that massive investment is required over long time frames which can then quickly become obsolete due both to conditions of overcapacity as well as new innovations which build off earlier generations before they are fully amortized. Is there any way around this and if not how can these investments be justified except within a "public goods" scenario?

Well I revert back to our research showing that there is demand and there is pull on the other end of the pipe and I do think the industry is much more pragmatic about investments now than ten years ago. So a good example of this is Nissan's investment into battery plants in the U.S. -- I think that was wise and prudent.

Most of our readers are Japanese companies active in or seeking to expand into the alternative energy and energy efficiency sectors. Some are in the automotive industry. Do you have any special words of wisdom for these individuals?

From our point of view we see electric vehicles as representing a key source of innovation in the U.S. auto market so companies looking to expand should think broadly about how they can participate across the value chain. Electric vehicles will be connected to customers and they need to be much more a part of people's daily life than traditional vehicles. From smart phones that tell the driver where the next charging station is, to range-extending batteries, there are opportunities across the value chain that will transform the way the auto industry works in the U.S.

What other infrastructure is needed to develop a viable electric vehicle industry other than the vehicles themselves? How much of the existing infrastructure, for example filling stations, repair shops, dealers, etc. can be adapted for use with these new vehicles?

I think it is going to require a transformation of this space for example dealers providing charging places, repairs, OEM will set up their own facilities to fill gaps.

Thank you Robert for your time and attention. Before we conclude do you have any parting words you want to leave with our readers.

Deloitte's research shows that by 2020, electric vehicles will account for 3.1 percent of total automotive sales in the U.S. For mass adoption to really take off however, barriers such as: familiarity, brand, range, charging, infrastructure and price/cost of ownership must be addressed. It's also expected that with volumes increasing, many OEMs will enter the market and that consequently, the market share per OEM will shrink, making achieving profitability and manufacturing efficiencies a challenge. That all said, electric vehicles are here to stay. They are an exciting innovation and over the long term they will be widely accepted, though there will be some ups and downs as we go through this transition.

Robert Hill is a principal with Deloitte Consulting LLP and leads the Asian Automotive practice in North America. Currently, Robert assists major automotive companies in solving a variety of strategic, operational and technology issues. His expertise includes product development, sales, marketing, distribution, manufacturing and supply chain management. Robert has been with Deloitte for 24 years including 4 years as an expatriate in Asia.