Published on July 4th, 2020 |
by Paul Fosse
July 4th, 2020 by Paul Fosse
I wrote this article before Maarten came out with an article on the same subject last week, but I came to the opposite conclusion. He sees progress faster than his expectations, I see progress slower than my expectations. I think that is because I live in the US and he lives in Europe.
I’m as big a fan of Tesla as anyone and it has certainly done more to advance the adoption of electric cars than any other manufacturer, but I’m going to talk about how the actions of some of the other companies will be key and how I think they will be able to survive even though they can’t innovate as fast as Tesla. [Editor’s note: We just discussed this a little bit in the latest Tesla Inside Out podcast as well, going down a bit of a different (but complementary) road on the topic.]
You see, some markets are really winner take all. Economists call them natural monopolies. If you have strong network effects like Google, Facebook, and Twitter, it is difficult for anyone to unseat you in your market once you have sufficient size. Now some will argue that means they need to be regulated and broken up. Others will notice that whenever a big tech company looks like they are invincible (IBM, HP, Microsoft, Google, Apple, etc.), they become rather fat, dumb, and happy and their growth dramatically slows, and although they frequently hold a profitable space, they fail to innovate into new market spaces and dominate new emerging markets. They try to make up for the lack of internal innovation by buying small companies, and that works for a while, but eventually it all falls apart. I think you can see this pattern happen in every company (not just tech companies), and I would expect it will eventually happen to Tesla in 10 to 15 years also. Keep your eyes peeled for that.
So, what does this have to do with electric cars? I think Tesla can have a big lead in electric cars and still not take 90% of the market. I don’t think the auto industry is a natural monopoly and I think many people will prefer non-Tesla vehicles even if they are objectively inferior. There are many cars sold in today’s market that aren’t the “best” and they sell because they are good enough and have a certain image, style, warranty, price, style, flashy advertising, or appeal to a certain tribe of people. I really don’t see Tesla changing all that (although, I wish it could).
A couple of weeks ago, I looked at my supply and demand predictions for 2025 from a high level, whereas this article dives into supply at the time periods leading up to 2025 and how some notifiable companies will reshape their lineups.
The Supply Of Electric Vehicles
I’m going to look at the auto market in 3 phases.
- Stage 1 — now to 2021
- Stage 2 — 2022 to 2023
- Stage 3 — 2024 to 2025
A month ago, when I started writing this series of articles, I thought all cars sold would be electric by 2025. I was wrong. Let’s look at why. In a word: supply. It is popular in many circles to think markets are all about demand, but classical economists had it right. There can be no economic activity without supply. As Elon Musk worded it (referring to the Covid-19 shutdowns), “For the fools out there, if you don’t make stuff, there is no stuff.”
It also applies to building electric cars during a time when there is no pandemic. It doesn’t matter if we think electric cars are better, if we don’t have any electric cars to buy, we still have to get to work, so many people will buy a gas car. People dreamt of electric cars for many years, but until Tesla and Nissan built cars that people could buy about 10 years ago, it was just a fantasy. So, for this thought exercise, I’m assuming the global auto market has slow growth over the next 5 years. We could have a big collapse for many reasons, including COVID-19, debt crisis, or autonomous vehicles encouraging people to ditch their cars and just take a robotaxi around. If any of those happen, the transition to EVs will accelerate from the following analysis considerably. The base case is 100 million cars a year sold in 2025. Tesla’s plans are pretty well known. As Elon laid out in an interview and I documented in this article. Let’s look beyond those.
Electrification Stage 1 (2020 to 2021)
I know how EV enthusiasts (like myself) hate the word “electrification” because it is used by manufactures to greenwash their vehicle lineups without making them truly sustainable. In this stage, you will see the EV market share triple from about 1% in the US in 2019 to about 3% in 2021. As Zach covered in November 2019, there are 7 EVs that could hit 10,000 cars a month if the stars line up. I’ll cover the ones I think will be popular in the US.
Nissan Leaf. Nissan recently refreshed the “original EV.” I drove an earlier Leaf until I got my Tesla Model 3 two years ago. It is a fine car that could make a nice niche for itself, but its lack of active thermal management of its battery has somewhat tarnished its reputation, especially in warmer climates.
Nissan Ariya. Nothing better than a crossover in today’s market. Why not update the proven Leaf drivetrain and put it in a crossover?
VW ID.Buzz. Just on looks alone, this will sell.
Ford Mustang Mach-E. Zach didn’t include this, but I think it could be one of the top selling EVs of the next couple years. [Note from Zach: I agree! And this is specifically the model David Havasi and I focused the most on in our latest Tesla Inside Out podcast.]
Chevy Bolt. This is another car that might not get to 10,000 cars a month, but it could sell better with an update and good pricing. Chevrolet isn’t giving up on the small EV. It is aggressively discounting the model to help keep it selling.
Of course the Tesla Model Y will have a big impact.
The second thing I see happening is the “normalization” of the hybrid. The first round of hybrids that came out were distinct cars that cost a lot more than a small economy car but got a lot better mileage. The Toyota Prius, the Honda Impact, the Ford C-Max. These small cars frequently went for $25,000 instead of $20,000 for a Corolla, but they signaled to your friends you cared about the environment, they were nicely equipped, and if you drove a lot of miles, the fuel savings made the extra cost pay off. What Toyota and some other automakers are doing now is rolling out hybrids in all of their “regular” vehicles. The Camry, Avalon, and Highlander have had a hybrid for many years, but the RAV4 hybrid came out in 2016, the Corolla hybrid in 2020, and the Venza and Sienna come out in 2021 as hybrid-only models.
This allows people to get a hybrid in the car they want for about $3,000 more (which they will make back over time), but they don’t have to switch to the Prius model with its Eco image, poorer acceleration, and poorer handling (typical in a hybrid even though it doesn’t need to be).
The new Sienna minivan takes this to the next level by making every 2021 Sienna a hybrid, so you don’t have to even make the decision to upgrade to the hybrid engine. (Typically, an automaker can put an option in a car for half the price or so if they make it standard, because of economies of scale and simplification of the manufacturing line.) Honda has a similar strategy — selling hybrid Accords, Insights (which now look like Civics), and CR-Vs that offer 50% better fuel economy for as little as $1,500 over a similar gas model.
Another strategy is to take advantage of the large US tax credits (up to $7,500) to offer a plug-in hybrid electric vehicle (PHEV) that allows people to use almost no gas as long as their daily commute is less than the electric range. The best example of that is the new Toyota RAV4 Prime. Unfortunately, Toyota’s poor planning and not ordering enough batteries mean that it won’t be an option for many buyers for a long time.
I’m just highlighting two automakers, but they are almost all making plans to “electrify” their lineups. Putting an electric motor into many more vehicles does a lot of things for the company:
- Gain greater experience in electric motors and batteries.
- Start to build supply chains in these components.
- Hybrid cars all shut off the gas engine, saving fuel, wear on the engine, and pollution in city stop-and-go driving.
- Automakers can start to migrate air conditioning, power steering, power brakes, water pumps, etc. to run off electric motors instead of a belt.
- Since engines only run part of the time, maintenance schedules can be less frequent.
- Engine longevity should be increased since the engine doesn’t run all the time.
- Automakers can reduce R&D in gasoline engines, since a simple 4 cylinder Atkinson cycle engine can power all your hybrids. To make a sportier or more powerful model, you add a better electric motor with a higher output battery. You don’t need to have several gas engines for different performance levels.
I dove into the technical and financial details in this article I wrote last year.
Phase 2 (2022 to 2023)
In this time period, I expect electric vehicle market share to double in the US to about 6%, or close to a million vehicles, as the pricing of electric vehicles gets more competitive and more vehicles produced in high volumes become available from Tesla, Volkswagen, General Motors, Ford, and BMW. It will become obvious to most in this time that electric vehicles are the way to go, but a severe shortage of batteries will make it impossible to increase EV share any faster.
During this time, automakers will make all of their vehicles except their cheapest base model hybrids as they stop all development of gas and diesel engines. In order to meet the demand for quiet and high-performance electric vehicles without the battery supply to produce true 100% battery electric vehicles, they can either make plug-in hybrid electric vehicles, or I expect more to copy Nissan’s strategy with the serial hybrid.
Former Nissan CEO Carlos Ghosn was not a fan of hybrids (since he expected true electric vehicles to quickly surpass them), but since he is out of the picture, Nissan is expanding the use of the e-Power system to give customers many of the advantages of an electric vehicle at a lower cost and without needing the batteries that Nissan doesn’t have access to.
Phase 3 (2024 to 2025)
This is when I expect the real tipping point to happen. I expect the volume of electric vehicles to double again to about 2 million vehicles in the US, but if overall auto sales tank to about an 8 million run rate due to people keeping their existing car until they can get the electric vehicle they want, those increased sales could make up 25% of overall vehicle sales. A run rate that low will cripple the US auto industry, but they need to rightsize, as people will buy many fewer cars every year as vehicles last longer and are able to be updated with new features without trading them in.
I started off writing this article thinking that by 2025, all the cars sold would be electric, but I was wrong. What I failed to realize is that auto manufactures aren’t yet convinced that electric cars are the future. They are still wasting resources on making engines that are 3% better. Those are going to end up being stranded assets. If you start development of a new engine now, it won’t be ready till 2025 or later. There will still be gas and diesel cars sold then, but you just want to produce them for the people who can’t get electric vehicles. There is no reason to spend billions of dollars making engines better unless you doubt whether the transition will happen. The problem is the companies don’t have the resources to both build competitive vehicles and enhance their traditional vehicles. They only do it in places the laws force them to. They need to do it for their own financial future.
We didn’t have to pass a law to get people to buy smartphones, and we shouldn’t have to pass laws to get people to buy electric vehicles. They aren’t something you have to force people to buy, because they are better. That doesn’t mean that you can’t pass incentives that recognize the positive health effects of zero-emission cars, or in densely populated areas ban them to improve air quality. Both will help auto manufacturers make the transition that they shouldn’t need help making, but still do.
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