Hybrid Theory

The first hybrid vehicle introduced to the United States debuted 22 years ago – the Honda Insight. The following year, the Toyota Prius entered the market and the hybrid market began to accelerate quickly. By 2007, sales eclipsed 350,000 units from just 13 models, and some were predicting that more than 100 hybrid models would soon be available for sale in the U.S. Those forecasts were never realized and year after year sales hovered at or below 3%, setting a record of 3.2% of sales in 2013 before slipping to less than 2% just three years later. The attention hybrids had attracted seemed to have waned as attention shifted to battery electric vehicles (BEV). But recent data indicates that automobile manufacturers may not have given up on this technology, maybe due to Obama-era CAFE standards, and in the first quarter of 2021 hybrids clawed up to 4.5% of sales. What has changed and what can we learn from the experience of hybrid vehicles?

Similar to hybrid vehicles, which blend a combustion engine with an electric battery (no plug-in), the band Linkin Park entered the scene about the same time and represented a blend of musical styles – hard rock blended with rap and a variety of other influences. Their break-out album was titled “Hybrid Theory,” which had absolutely nothing to do with the vehicles but provides a unique soundtrack and hook for this column. A key difference, however, is that Hybrid Theory sold nearly 5 million copies in its first year – it took nearly 20 years for Americans to purchase 5 million hybrid vehicles, cumulatively.

Crawling

One of the first tracks to be released off Hybrid Theory was “Crawling,” which is the same word I would use to describe the hybrid vehicle market in the early years. From their debut in 1999, it took seven years (2006) before the market offered more than 10 hybrid models from which consumers could select.  Their popularity, however, was growing and a rapid expansion was set to occur in the coming years. And early on, the policy cards were being stacked to support their growth. In fact, I purchased a Honda Civic Hybrid in 2002 largely because I was commuting 90 minutes each way to and from work and my hybrid gave me single-driver access in the high occupancy vehicle lanes – a key motivator in my decision.

Around that time, I wrote an article and predicted that consumers would be more apt to purchase a hybrid if the powertrain were offered in traditional vehicle styles. I personally was not attracted to the unique styling of the Prius or the original Insight and believed that consumers would gravitate towards hybrids if they were integrated into everyday vehicles, like the Civic. I think the experience of the past 10-plus years supports my “hybrid theory.”

One Step Closer

By 2010, hybrids were at least one step closer to mainstream. Model availability had dramatically improved with 29 hybrids offered for sale in the U.S. Yet, sales volume did not grow in parallel. In fact, only 274,000 were sold in 2010 compared with 352,000 sold in 2007 when less than half as many models (13) were available. Choice was better, but sales did not follow suit. Granted, the end of the decade experienced the Great Recession, which affected everything – so we need to cut the segment a little break. As the economy recovered, so did the market for hybrids.

In 2013, nearly 500,000 hybrid vehicles were sold and consumers were able to choose from 46 different models. Hybrid vehicles represented 3.2% of light duty vehicles sold and edged out diesel-equipped vehicles to become the second most popular powertrain in America. But following that year’s performance, sales slipped.

Forgotten

Why were hybrids seemingly forgotten as a choice among consumers? For that, I think it is helpful to look at consumer preferences.

In 2018, the Transportation Energy Institute published, “Driving Vehicle Sales – Utility, Affordability and Efficiency,” a review of more than 15 years of vehicle sales data and vehicle attributes. We concluded that people buy vehicles largely based upon what they need (i.e., a large family is not purchasing a compact sedan as their primary vehicle), what they can afford (purchase price is critical) and vehicle efficiency (typically applied within the class of vehicle they have determined they need). These observations clearly apply to the hybrid market and its history can provide insight into how newer vehicles (i.e., BEVs) may be considered by consumers.

Let’s take a look at the market for hybrids in 2013 verse 2020 and first quarter of 2021. Of the 46 hybrids sold in 2013, 33 (72%) were classified as “cars” versus 13 “light trucks.” Yet even back in 2013 light trucks represented more than 50% of all vehicles sold and the trend towards truck classified vehicles was gaining momentum. Hybrids were not following those trends.

Another issue that may have limited hybrid market penetration, even during this strong year, was price. The number one selling hybrid in 2013 was the Toyota Prius, accounting for 36% of all hybrids sold with an MSRP of $24,200. Making a comparison between the Prius and a combustion engine equivalent is difficult because there is no non-hybrid Prius. However, the best-selling hybrids which were also available in gasoline-only versions were the Toyota Camry and the Ford Fusion. When comparing the MSRP for these vehicles, it would seem that price may have been a factor – the hybrid variants carried about a $4,000 premium and were quite a bit more expensive than the class leading Prius.

One would think that the fuel economy advantages of the hybrids would help consumers overcome that price delta. Overall, hybrids on average were 83% more efficient that gasoline vehicles. For the two profiled above, the Camry and Fusion hybrids delivered around 50% better fuel economy than their gasoline equivalents. And it seems this did have an impact in 2013, when gasoline averaged $3.49.  Past Transportation Energy Institute research demonstrates that consumers shop around for more efficient vehicles when fuel prices are higher. But even so, the promise of reduced fuel expenditures over a future period of time is difficult for consumers to embrace and incorporate into their purchase decision, especially when the vehicle purchase price is nearly 20% higher for the more efficient model – uncertainty about future energy prices introduces a very unstable variable in the decision making process relative to valuing efficiency.

In the End

Fast forward eight years and the market for hybrids seems to have recovered.  Following their peak in 2013 at 3.2% of light duty vehicle sales, market share began to drop off and by 2018 they accounted for less than 2% of sales from 36 different models. This could have been the result of several factors, including the enthusiasm for BEVs coupled with a four-year period in which retail fuel prices averaged $2.41 per gallon – not a level that inspires consumers to shop around aggressively. Maybe it also had to do with model availability – of the 36 models available, 26 remained classified as cars. The deck seemed stacked against the technology.

But surprisingly, during the pandemic year of 2020 hybrids staged a comeback. Of the 37 models sold last year, 23 (62%) still were cars. But the best-selling hybrids were crossover vehicles, with the Toyota RAV4 hybrid accounting for 25% of all hybrid sales.  Looking at the first quarter of 2021, only 18 (56%) of the 32 hybrid models sold were cars and the top five models, accounting for 60% of all hybrid sales, were crossovers and one van.

Of those five, three have gasoline-only variants. The price delta between powertrains ranged from $2,000 – $5,000 with efficiency advantages of close to 50%. The other two, which were previously offered with gasoline-only powertrains, were only offered as hybrids which likely helped boost their popularity. It would appear that the availability of hybrid powertrains in popular models that consumers wish to purchase has had an influence on the sales performance of these vehicles.

High Voltage (Bonus Track)

In the end, there are lessons to be learned from the hybrid experience.  Customers have certain decision-making processes and priorities. What they need and what they can afford are paramount in deciding what type of vehicle to consider. For years, hybrids did not necessarily fit these criteria – not available in utility vehicle formats and carried a price point that was difficult to justify. When the vehicles were presented in line with customer preferences, sales recovered.

For new vehicle technologies entering the market, I believe the same will hold true. And for BEVs, the shift to offering electric powertrains in the types of vehicles customers want to buy has already begun. In the first quarter of 2021, 77% of all light duty vehicles sold were light trucks – crossovers, sport utility and pickups. This is what Americans want to buy – to be successful, a new technology needs to be offered in these vehicles.

The transition to positioning hybrid vehicles and BEVs within the context of consumer preferences has begun – let’s see if sales follow suit.