By Edward Taylor
FRANKFURT (Reuters) - BMW <BMWG.DE> and Mercedes <DAIGn.DE> are betting they can mass produce new electric cars based on conventional vehicles, defying sceptics who say they will need more radical designs to head off the threat from Tesla and other start-up carmakers.
There are two ways to make battery-driven vehicles: use a clean-sheet design like Tesla <TSLA.O>, or a traditional vehicle platform that can use all types of motor: combustion, electric or a hybrid of the two.
Electric motors are smaller than petrol or diesel engines, so electric vehicles designed from scratch can benefit from better interior packaging which allows a bigger passenger space. The problem: their unique design requires a dedicated production line and expensive new factories.
BMW learned this the hard way after pouring billions into bespoke carbon-fibre based electric cars, the i3 and i8, which failed to sell in large numbers.
"It is easy to build an electric car. It is difficult to earn money with it," said BMW research and development chief Klaus Froehlich.
Since BMW started selling the i3 in 2013, vehicle battery performance has improved by 40 percent, allowing carmakers to make electric cars with the same heavy underpinnings used by petrol cars and still get a range of 500 km from one charge.
This, they believe, gives them an advantage over makers of custom built electric vehicles.
As Tesla enters the mainstream with its cheaper Model 3, BMW has made a strategy u-turn to produce electric cars in large numbers, pledging to offer battery-powered variants of regular models.
Froehlich said vehicle designs dedicated to only one powertrain were no longer required.
BMW is preparing to launch an all-electric version of its popular X3 offroader by 2020, and Mercedes-Benz will launch the electric EQ in 2019, based on its best-selling SUV, the GLC.
A new electric BMW, the i Vision Concept, will use the same underpinnings as future versions of the BMW 3-Series.
Electric and petrol versions will be built on the same production lines, allowing a flexible response to demand for electric vehicles.
To prolong the life of its i3, BMW has given it a fresh design and a new battery. But the company's strategic bet is on overhauling volume production lines to rapidly scale up production if needed.
Demand for electric cars remains weak due to their high purchase price and limited charging infrastructure. But this may change if battery prices keep falling.
"Battery costs are coming down. We believe that we can bring economies of scale to bear beyond just the battery and drivetrain. I think we will be in a good competitive position from that perspective," Daimler Chief Executive Dieter Zetsche, whose company owns Mercedes-Benz, told Reuters.
Mercedes is also working on a platform just for electric and autonomous cars, to be introduced after its initial wave of electric vehicles hit the road.
Germany's three big premium carmakers - Mercedes, BMW and VW Group's Audi <NSUG.DE> - have most to lose if Tesla's volume assault on the premium car market succeeds.
Loss-making Tesla, which made 83,922 cars last year, is already far ahead of the German luxury brands in electric car sales. BMW sold 25,528 electric i3's last year and Mercedes won't disclose sales figures for its electric B-Class. Overall, Mercedes and BMW sold more than 2 million cars apiece last year.
The Germans long resisted mass electrification, saying no competitor could make electric cars at a profit because the batteries were too expensive. Battery prices have slumped but a 500-km battery still costs $14,000, while a combustion engine is less than $5,000, analysts at Bernstein Research calculate.
Carsten Breitfeld, chief executive of start-up Chinese carmaker Byton, says vehicles must be rethought to unlock their potential, both as new electric cars and as platforms for a new consumer experience.
"Trying to adapt a volume architecture to produce electric, diesel and plug-in hybrids is fundamentally flawed, because these products will be compromised," Breitfeld told Reuters.
Breitfeld used to be a top electric vehicle engineer at BMW, where he headed the i8 sportscar programme before he defected, believing that volume carmakers were no longer setting the pace in electric vehicle design.
Breitfeld sees the German carmakers' answer to the expected surge in electric car demand - putting an electric motor in a conventional car - as a mistake. He believes it leaves the industry vulnerable to a 'Nokia moment': when a new player uses a transformational design to seize control of an established market, as Apple's <AAPL.O> iPhone stole a march on Finnish mobile phone giant Nokia a decade ago.
"Tesla was pathbreaking with its electric car, and that's what everybody is seeking to develop now. The next step is the connected car, which gives consumers a completely new digital experience. That's equivalent to a step from the Nokia to a smartphone," Breitfeld said.
Breitfeld is so convinced of this that he left his job at BMW in 2015, where he was part of a small team working on clean sheet electric cars - a project that caught the attention of Apple.
BMW and Apple explored a partnership on cars in 2014, but ultimately went their separate ways.
Since then German carmakers have worked hard to marginalise the influence consumer electronics and technology companies could have over their vehicles, jointly buying digital mapping firm HERE as a way to reduce the industry's dependence on maps provided by Apple and Google <GOOGL.O>.
Breitfeld says this defensive approach means carmakers are failing to take advantage of consumer electronics innovations.
By contrast, Byton vehicles are designed to take advantage of the "passenger economy": watching movies, chatting with friends or surfing the Internet while in your car.
"Apple created a platform and profits from every transaction made with their objects. We will offer content for our consumers," Breitfeld said of his strategy to make money from selling movies and other entertainment or services.
"For this you need a completely different architecture and computing power," Breitfeld said.
BLUE SCREEN OF DEATH
Car industry veterans caution that toppling incumbents may be harder than many consumer tech executives assume.
Harry Kroeger, a former director at Tesla and now president of automotive electronics at parts supplier Bosch <ROBG.UL>, said plenty of tech companies had failed in the car business.
"I think there is a risk of a certain arrogance that you totally underestimate what kind of sophistication is in that good old fashioned hardware. There is 130 years of evolution in those parts and some of those lessons were learned the hard way," Kroeger told Reuters.
"A gadget, we don't care if that malfunctions, but we are talking about something which might run at 100 mph. Here you don't want a blue screen of death appearing," Kroeger said.
Truly disruptive design is further restrained by stringent safety regulations for cars. A chip controlling car brakes would not also be allowed to run an in-car infotainment system.
"It should not be that a malfunction in loading a song creates a braking manoeuvre," Kroeger said, adding that hackers have been able to manipulate a vehicle by breaking into its infotainment system.
Tesla may pose a threat to the Germans, but only if it can raise production to 500,000 cars by next year. And in the end, Silicon Valley may succeed in the car business by copying the Germans, rather than behaving like a start-up, Kroeger said.
"Tesla has thousands of old economy car guys," Kroeger said. "I think that's the secret why they managed to come up with a car."
(Editing by Giles Elgood)