In Japan, electric vehicles seem to have run out of juice

June 3, 2013: 11:34 AM ET

All-electric cars are being shunned in favor of hybrids.

By Michael Fitzpatrick

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FORTUNE -- Japan -- a leader in the development of electrically powered vehicles -- has largely failed to fall for so-called EVs.

Not that the Japanese don't care about CO2 emissions. Millions of dollars have been spent by the state to promote greener alternatives to the internal combustion engine, while hybrid car purchases remain the highest in the world. Last year a whopping 40% of Toyota's (TM) sales in Japan were hybrids.

But despite generous government subsidies to buy EV and Japanese innovations that power even the U.S.-made Tesla (TSLA), Japanese motorists are starting to see them as costly and even, oddly, politically incorrect.

Why? A report by McKinsey consultancy says up to a third of Japanese customers for EVs say they would not buy again. They were put off by their high price, higher electric bills, and the considerable bother of locating places to charge their cars says the survey. But the new reason to hate the vehicles now is they are tainted by association with the electric power company that suffered and, in many minds, helped cause the Fukushima nuclear meltdowns.

According to one local weekly an all-electric taxi service in Osaka with 50 Nisan Leaf EVs was a hit before the nuclear disaster. Then, as the crisis developed and passengers came to view power suppliers with contempt, demand dried up. "Business stinks," one driver told the weekly. "Their takings are less than half that of regular cars. Demand for EV taxis is over."

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Arguably the biggest bet on EVs is by Carlos Ghosn, CEO of Nissan (NSANY). But with only 60,000 of its Leaf EVs sold -- half of those in Japan -- the vehicle is being quietly shunned in favor of more popular hybrids like Toyota's Prius, say analysts. Nissan says it still hopes to sell 1.5 million of its green-mobiles by 2016. Motorists' "range-anxiety" and battery capacity remain top issues for Nissan, says its chief vehicle engineer Hidetoshi Kadota. "If you talk to Leaf owners, they want more range. So, whatever we can do to change the car, the battery, the system -- especially the battery, we are developing ways to improve it beyond its current capacity."

High prices and limited range haven't deterred a minority of rich Japanese eco-enthusiasts, but ordinary motorists have balked at the $28,000 price tag even after the state eco subsidy, says autos analyst Issai Takahashi of Credit Suisse, Tokyo. "There are basic constraints such as cost, range, and lack of recharging stations. But on top of that, after the quake, electricity is getting very expensive, which will drive the sentiment of consumers," he says.

After Japan closed all of its nuclear power stations but two post-Fukushima, the nation's electric power now comes from dearer-than-nuclear, fossil-burning thermal stations. With few domestic energy resources, a weaker yen has meant higher costs for imported energy, which are now being passed onto consumers. Battery technology, meanwhile, has not met the promises expected a few years ago, making the average reach of a fully charged car -- about 200 kilometeres -- inadequate for most. Poor demand, in turn, meant that R&D centers like those at Toyota cut back on battery development, say analysts.

Nor did a super-charged yen help over the last few years, points out Japanese tech pundit Terri Lloyd. "There are some very promising battery technologies out there, which I think would be more advanced if Sharp, Panasonic, and others didn't have the high yen consuming their attention."

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The development of cheap, practicable batteries for EVs is still years away say some experts. Some are looking for alternatives: A team from the Toyohashi University of Technology has managed to pass electricity through 10 centimeters of concrete, potentially enabling cars to charge while they drive. "In Japan, along highways and other roads where the speed limit is about 80 km per hour, if one were to reduce speed a little, charging could occur while driving through the lanes," says Masashi Ishikawa, Director of the Science and Technology think tank at Kansai University. "I think that kind of technology is necessary."

Japan is far from giving up on EVs completely, however. About 70% of patents for such cars and "electric propulsion vehicles" were filed by Japanese applicants last year, according to a Japan Patent Office survey. Much innovation centers on the development of energy-generating fuel cells as a greener proposition that offer more exciting possibilities compared to plug-in EVs.

Toyota, aiming to have a fuel cell car on the market by 2015, is spending billions on their creation. Meanwhile, the Japanese government is helping build the infrastructure needed to fuel them, giving the plug-in builders something to worry about in their rearview mirrors. Unless regular EVs like the Leaf see a massive increase in price and battery performance soon, they could end up as just a blip in transport history.

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