July 20, 2017
“Tomorrow’s Vehicles” shows the vehicle market will not change overnight, but the seeds for more rapid evolution have been sown.
If you read the headlines, you might start to think that the world is changing at an amazingly rapid clip and that within a few years we will be riding around in electric, driverless pods. Every day, I scan news articles and am continually surprised at how many people believe that a market the size of the transportation sector can transform in a matter of years. In reality, the North American vehicle market will not look much different from the one we experience today- dominated by internal combustion engines. But beware – the trends we are seeing in the composition of vehicle sales over the next several years will compound to have a very significant impact on the market of tomorrow.
The Case for a Slow Start to Change
The market changes slowly for one very important reason – size. You must not dismiss the impact of size on the pace of change. Here are some stats to think about:
- 250 million – registered light duty vehicles
- 12 million – registered medium and heavy duty vehicles
- 150,000 – gas stations
- 42 million – vehicle fill-ups daily
- 17.5 million – new light duty vehicles sold in 2016
- 38.5 million – used cars sold in 2016
- 3.2 trillion – vehicle miles traveled in 2016
Rational Evaluation Yields Relative Stability Followed by Faster Change
In light of these headlines and in recognition of the enormity of the market that is being evaluated, it is critical to take a realistic look at what might be happening. In the Transportation Energy Institute’s latest report, “Tomorrow’s Vehicles,” we take a look at three major elements – fuel consumption, light duty vehicles and medium/heavy duty vehicles – to understand how the market might evolve between 2016 and 2025, the current target date of federal fuel efficiency standards. (The report analyzes forecasts provided by Navigant Research.)
The results might surprise reporters throughout the nation, but they seemed to make perfect sense to me. The market will not change noticeably by 2025, but as the seeds of change begin to plant their roots, the compounded growth rates could impact the market in the years that follow.
Electric Vehicle Sales Grow Fast, But Capture Limited Market Share
Battery electric vehicles are projected to increase their market share of new vehicle sales by more than 600% in the aggressive scenario, which is most optimistic for electric powertrains. In the raw numbers, Navigant is projecting a 28% compounded annual growth rate – unheard of in the vehicles market.
Yet, despite this frenetic pace to capture market share, BEVs will at most represent 4.8% of new vehicles sold in 2025. This is not to diminish the accomplishment of this technology to consistently increase market size, but it is not the revolution some reporters are suggesting. Further, the impact on the market will be minimized due to the sheer size of the market. Even with this projected rate of growth, BEVs will accumulate less than 2% share of the vehicles on the road in 2025.
Recent announcements in the press claiming the complete move to electrification by some OEMs and governments do not apply just to pure battery electric vehicles (BEVs) – they also include plug-in hybrids (PHEV) and traditional hybrids (HEV), which use both liquid fuel and electricity for propulsion. If we include all three electrified-vehicle types in the projection, they could combine to capture 11.9% of sales in 2025 and nearly 6% of vehicles on the road. While this continues to be an impressive rate of growth, considering in 2016 they combined for less than 3% of new vehicles sold, it is far from what most would consider a revolutionary pace.
The impact of this expansion in the electric vehicle market will not be felt by 2025, but beyond that the significance of sustained growth could very well have a major influence on the dynamics of the transportation market. No sector can ignore compounded growth rates of these levels without acknowledging the long-term implications. That said, reporters who think the revolution has begun are misled – the seeds are planted and the roots are taking hold, but the rapid transformation of the market remains more than 10 years away.
Liquid Fuels Dominate all Class of Vehicles
Revolutions have to start with a big bang somewhere, and quite frankly that has not happened yet. In 2016, when the U.S. set a record for light duty vehicle sales, more than 99% of those units sold were powered by liquid fuels. Clearly, the gun has not fired to signal the start of a revolution. Over the next 10 years, alternative power trains will gain some market share, but not at a pace one would equate with a revolution – or even a real race.
In the light duty sector, vehicles powered by liquid fuels could lose market share and drop to 91% of new vehicles sold. The difference will be picked up by BEVs and PHEVs. But for the vehicles traveling the roads in 2025, the change will be hardly noticeable – a drop from 99.6% of cars on the road powered by a liquid fuel to maybe 96.6%.
In the medium and heavy duty sectors, liquid fueled vehicles could lose up to 2% share of new vehicles sold. Most of the growth in this sector will be generated by vehicles equipped with diesel hybrids and natural gas. Even so, in terms of vehicles running down the road, the change will be less than 2% – the impact will easily pass unnoticed.
Again, change will not be felt in the next ten years, but if growth rates of alternative powertrains can be sustained over the years, ultimately the shape of the market will change. This is not a revolution, it is more of an evolution with an expected acceleration in the later years.
E85 Could be the Big Loser
Perhaps the greatest change in the market will be experienced in the flexible fuel vehicle (FFV) market. These are the only vehicles that are equipped to operate on the alternative biofuel, E85. For many years, automakers received a credit towards satisfying their fuel efficiency requirements with every FFV they produced. This credit is set to expire in model year 2019, and the forecast for continued production is not optimistic.
According to the Navigant Research projections, FFV sales are expected to almost disappear – dropping from more than 12% of the light duty vehicles sold in 2016 to just slightly more than 1% in 2025. Those marketing E85, however, will benefit from the slow turnover of the market that is limiting the near-term impact of electrified vehicles – in 2025, FFVs are projected to represent close to 8% of vehicles on the road, which is consistent with their position today. The impact on the market associated with the loss of the credit and the reduction in production of FFVs will most be felt towards the end of the next decade.
Market Change is Slow at First, but Will Speed Up
It seems to be a continuing drum beat of this column – the market changes slowly. “Tomorrow’s Vehicles” is the latest demonstration of the enormity of this market and the relatively slow pace of change. But, although the overall impact on the market of evolution is difficult to see from a broad vantage point, change is happening. The growth in electrified vehicle sales may not have a tremendous impact on the market in 2025, but the cumulative effect of such growth rates positions the technology to have a much greater impact in the years immediately following this forecast period.
Those who are servicing the vehicles market need to understand what vehicles are on the road in order to provide appropriate services to those customers. But those thinking long term need to look at sales trends, for these are the ones that will influence the customers tomorrow. For the next ten years, there is unlikely to be significant change in the market of vehicles on the road – but the elements are coming into place to influence a more rapid conversion in the following years. Kind of like when considering the benefits of a 401K plan, don’t ignore the impact of compounding rates of growth. If you do, you will be unprepared and surprised when the market takes a sharper turn in a different direction.