Executive Summary
2020 sets forth a new decade in the automotive industry where the pace of change will continue to accelerate, and consumers will have an ever-expanding set of vehicle features to choose from. To help our clients and readers understand this dynamic, ultra-competitive and fascinating business, Liberty Advisor Group’s Ed McCarter examined significant trends within the industry and their implications for original equipment manufacturers (OEMs) and suppliers alike.
The first in a two-part series which analyzes the changing preferences of Americans for vehicles and explores how carmakers should respond. From there, the paper examines why vehicles with traditional gas powertrains are increasingly falling out of favor with governments and how OEMs are reacting to this shifting regulatory landscape. The growing popularity of new energy vehicles concludes part one by looking at significant barriers affecting the adoption of electric vehicles and what can be done to overcome these obstacles.
Death of the American Sedan – Should it be Resuscitated?
In April of 2018, Ford proclaimed that it would be shifting away from traditional sedans in the North American market and that future offerings would be limited to the Mustang.1,2 At the time, many considered Ford’s announcement to be a brash decision that would leave a large section of the market open to competitors. That opinion, however, quickly changed and other manufacturers have followed suit; e.g., GM, which includes Buick, Cadillac and Chevrolet, and FCA have all made adjustments to their sedan portfolios.3,4
Evolving consumer demand is credited for the push away from the traditional sedan and stems back to the aughts. Figure 1 depicts this evolution over the last 5 years and brings into focus the following vehicle segment trends:5
Figure 1: Market Share By Vehicle Segment
- The cars segment lost nearly 14% market share over the 5-year period.
- Crossovers and pickups essentially captured the cars’ market share and have grown by 11% and 4%, respectively.
This begs a critical question – what drove this market change where crossovers and pickups now comprise almost 60% of all new purchases?
To begin with, traditional advantages for sedans, such as higher gas mileage, no longer carry as much weight with American consumers when deciding what category of vehicle to purchase. This can be attributed to efficiency improvements in larger vehicles, which have been historically viewed as ‘gas guzzlers’. One clear example is the Ford F-150, North America’s best-selling vehicle, which achieved a 50% increase in mileage through use of a lighter high-strength aluminum body and the incorporation of EcoBoost® engine technology.6,7 These engineering advances coupled with lower fuel prices have made crossovers and pickups more attractive to customers.
Consumer preferences towards functionality have changed as well. In addition to greater demand for in-car technology, a vehicle’s space and versatility are highly sought after as consumers no longer use their vehicles simply as commuter products. Liftgates illustrate this point with their ease of accessibility – loading and unloading groceries, hockey bags and other large items is easier when compared to a sedan’s trunk. The age of drivers is also a factor, especially for those in their 50s and 60s who value the ease of entry and exit from the driver seat.8 Crossovers and pickups offer this convenience, which is another distinguishing factor that sedans cannot compete against. Finally, consumers continue to perceive large vehicles as being safer. Though crash-related fatality rates have improved for all vehicle segments, the Insurance Institute for Highway Safety (IIHS) demonstrated through an extensive analysis that passengers in sedans are more likely to die in front-end collisions with crossovers, SUVs and pickups.9 For consumers, and especially those with children, this will continue to influence their buying decision.
Not all manufacturers have deemphasized sedans in their portfolios, however. Toyota and Honda, as a case in point, had the best-selling sedans for 2019 – the Camry, Civic and Corolla ranked 8th, 9th and 10th, respectively, against all vehicle classes.10 Given that consumers continue to buy cars, should other automakers pursue new sedan programs? The short answer, in the authors’ opinions, is no. From a business standpoint, crossovers and trucks are more profitable which is critical to any business. In terms of emissions, powertrain technology continues to improve and electrification options – which will be discussed in greater detail later in this paper – will further reduce overall emissions. Finally, OEMs have streamlined their platforms and successfully deployed modularity strategies, which has reduced complexity and standardized sub-system and system architectures. As a result, less time is needed to design, develop and tool a new vehicle program and OEMs are able to accelerate their responses to changes in demand and/or regulations.
ICE Vehicles Are (Gradually) Getting the Cold Shoulder
The evidence is clear, nations, states and provinces are moving to reduce or eliminate the use of internal combustion engines (ICE). Consider the following 2019 headlines:
- Is California ready to ban gas-powered cars? Not yet. But they’re thinking about it.11
- British Columbia passes emissions law banning sale of gas-powered cars by 2040.12
- Amsterdam to ban petrol and diesel cars and motorbikes by 2030.13
- The end of the fossil fuel car is on the EU agenda.14
- China considers testing no-go zones for gasoline vehicles: ministry.15
- Hainan to ban gasoline vehicle sales by 2030.16
The drive to decrease the number of ICE vehicles is similar across regions – governments have expressed concern about pollution and climate change while wanting to modernize, if not accelerate, vehicle technologies. OEMs and suppliers have responded in turn with development programs to bring more new energy vehicles (NEVs)17 to market. A key example of this, and the most dramatic amongst OEMs, is VW’s objective to launch 70 new electric models and achieve sales of 22 million vehicles by 2030, which is predicted to represent 40% of all purchases across the company’s product portfolio.18 Other programs of note include GM’s $2.2B investment in its Detroit-Hamtramck plant to manufacture electrics trucks and SUVs exclusively, while Ford is expected to launch an electric vehicle (EV) version of the F150 in 2021.19,20
It is important to monitor consumer preferences as well. According to a study in the northeastern region of the US, Gen-Xers purchase the highest number of EVs, while 63% of millennials would consider buying an electric car.21 Expanding the analysis to the entire country, a report from July 2019 indicated that 63% of Americans are interested in electric cars and 31% would consider buying an EV as their next vehicle.22 This purchasing trend and favorable disposition to electrification is an additional long-term factor that will have a gradual impact on the sales of ICE vehicles.
Resistive and Conductive Factors for EV Adoption
Based on five years of National Automobile Dealership Association (NADA) data – 2015 to 2019 – NEVs are gaining momentum. As shown in Figure 2, NEV powertrains continue to gain traction among purchased and leased vehicles:23
Figure 2: Composition of Powertrain Categories Based On US Sales Data
Figure 2 demonstrates that (1) NEVs sales are increasing in the US, (2) hybrids make-up the largest portion of NEV purchases but EVs have the greatest rate of growth, and (3) even though their take rate is decreasing, gasoline drivetrains remain the dominant category. Expanding to a global perspective, the International Energy Agency noted in its 2019 report that global NEV fleets increased by 2 million units from 2017 to 2018, for a total of 5.1 million vehicles.24
In light of the abovementioned trajectory, the following factors help to explain the upswing in NEV sales:
- Governments are increasingly placing future restrictions on ICE products. One clear example of this is the Chinese government’s restriction of future automotive companies that only make ICE based products.25 This is also an attempt to control capacity proliferation and will be discussed later in this paper.
- Beyond Tesla, new entrants are joining the EV space, such as BYD, NIO and Lynk & CO, and established OEMs are releasing new electrified products.
- Outsiders are investing heavily in NEVs. Rivian, a Michigan based startup, has raised a total of $2.85B from investors such as Amazon and T. Rowe Price.26
- Consumers are willing to pay upfront or make a down payment to secure future products, with examples including:
- Ford’s Mustang Mach-E pre-orders, which cost $500 per vehicle, sold out in 9 days.27
- VW’s ID.3 achieved its maximum 30,000 pre-orders, which cost 1,000€ per reservation, and 10,000 of the orders occurred within the first 24 hours.28
- Amazon ordered 100,000 Rivian electric delivery vehicles, which have a 2021 launch date.29
Irrespective of this positive momentum, there are commercial and technical impediments that need to be addressed in order for NEVs, and especially EVs, to fully take hold:
- To promote the burgeoning NEV market and offset the higher price points, Governments established subsidy programs. Advances in lithium-ion battery technology, however, have lowered the price of EVs; e.g., the cost of electric car batteries decreased by 70% between 2010 and 2016.30 In view of this development and that federal incentives tend to be temporary programs, governments are curtailing funding initiatives. This is evident in the two largest auto markets and the impact to NEV sales was felt almost immediately.
- Tesla vehicle registrations in California decreased by almost 50% in Q4 2019 compared to the same time last year. This is partially explained through reduced government incentives, which were $7,500 until the end of 2018 then halved to $3,750 and again in July to $1,875. This is a result of the federal program phasing out over 15 months once an OEM attains sales of 200,000 EVs, which Tesla achieved in July of 2018.31
- China wants NEVs to comprise 20% of auto sales by 2025.32 To support this objective, federal and local governments established subsidies that, on average, totaled ¥66,000 (nearly $10,000).33 This noteworthy subsidy, however, led to unintended consequences: excess capacity and market saturation – there were 486 registered NEV OEMs in March 2019.34 To course correct, the government began reducing incentives in 2019; for example, subsidies for EVs with ranges over 400 KMs were decreased from ¥55,000 to ¥25,000, a delta of $4,400.35 This move had a swift and rapid effect on the market: the 2018 NEV market increased by 62% YOY but declined 4% in 2019 after incentives were reduced.36 This trend is expected to continue in 2020.
- Beyond price point and diminishing incentives, range and electric charging infrastructure remain perceived technical constraints that hinder EV adoption. A recent Volvo study indicated that 58% of all drivers were concerned that EVs would run out of power and 48% were worried about the lack of charging stations.37 (By comparison, EV owners’ responses were 38% and 30%, respectively.)
To maintain the NEV gains seen in Figure 2, the following actions are recommended to mitigate waning subsidies and perceived technical obstacles:
- OEMs should continue pursuing product cost engineering programs to further reduce the price of electric powertrains. Engineering successes are already being seen, as the average EV price dropped from $64,300 in 2018 to $55,600 last year.38
- OEMs should offer more mid-market options with ranges that surpass 200 miles. Tesla was the first to realize this with the Model 3, which has a base price of $35,000 and a range of 260 miles. The Nissan Leaf, Hyundai Ioniq and VW e-Golf start in the low $30,000s but have ranges between 125 and 150 miles, which does little to allay consumers’ concerns about the total driving distance on a single charge.39
- NGOs, OEMs and dealerships should inform consumers about the total cost of EV ownership and the availability of charging infrastructure. Starting with cost of ownership, maintaining and charging an EV is less expensive than ICE equivalents.40,41 OEMs and dealerships should do a better job of communicating this information to help win over new customers. Moving to infrastructure, Tesla tweeted in 2018 that 99% of the US is within 150 miles of a Tesla Supercharger.42 This is an impressive engineering feat that supports Tesla owners across the country. Other OEMs will need to take similar actions if they are to assuage consumer apprehensions regarding EV range and the lack of charging infrastructure.
Read Part 2 of this paper.
About the Author
Ed McCarter is a Principal Consultant at Liberty Advisor Group. He graduated from Washington University in St. Louis with a BS in Systems Engineering and Economics & Strategy. Ed’s focus at Liberty has been on complex enterprise technology systems and highly engineered products, specifically in the automotive space.
About Liberty Advisor Group
Liberty Advisor Group is a goal-oriented, client-focused and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. Our team, with an average of 15+ years of experience, has delivered over $1 billion in operating income improvement and over 300 M&A deals for our clients. We collaborate, integrate and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named to the 2019 Best Places to Work in Chicago and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.
Liberty’s hands-on automotive experience is why we are able to understand and appreciate the challenges that our clients face. The advisors in our Automotive & Mobility Practice do not have generalist backgrounds – they are Engineers and Computer Scientists who are passionate about the auto industry and how it continually evolves. Further, they have worked across the entire vehicle development lifecycle along with the critical organizations that are responsible for bringing sedans, trucks, crossovers and SUVs to market.
Footnotes
1 Ford originally announced on 25 April 2018 that it would only continue future sedan offerings for the Mustang and Focus Active. Since then, Ford has decided to discontinue production of the Focus Active in the North American market
2 Peter Holley, The Washington Post, www.washingtonpost.com/news/innovations/wp/2018/04/26/ford-has-been-synonymous-with-cars-for-more-than-a-century-thats-about-to-change/, accessed 17 Jan. 2020
3 Notable discontinued sedan offerings: Buick Lacrosse, Buick Cascada, Cadillac CTS, Cadillac XTS, Cadillac ATS, Chevrolet Cruze, Chevrolet Impala, Chevrolet Volt, Chrysler 200, Ford Fiesta, Ford Focus, and Ford Taurus
4 Jim Gorzelany, Forbes, www.forbes.com/sites/jimgorzelany/2019/08/19/the-last-mile-cars-that-will-be-discontinued-for-2020/, accessed 17 Jan. 2020
5 US sales data captured from NADA’s year end Market Beat reports from 2015 to 2019; please refer to www.nada.org to access their reports
6 Vehicle specific sales figures are from Kelley Blue Book’s “25 Best Selling Cars of 2019” report; please refer to www.kbb.com for additional information
7 Brad Plumer, The New York Times, www.nytimes.com/interactive/2018/05/10/climate/fuel-economy-f150-camry.html, accessed 22 Jan. 2020
8 Mark Phelan, Detroit Free Press, www.freep.com/story/money/cars/mark-phelan/2018/10/06/suv-sales-safety-buyers/1531565002/, accessed 28 Jan. 2020
9 Samuel S. Monfort, Joseph M. Nolan, “Trends in aggressivity and driver risk for cars, SUVs, and pickups: vehicle incompatibility from 1989 to 2016”, Insurance Institute for Highway Safety, August 2019, https://www.iihs.org/topics/bibliography/ref/2176, accessed 29 Jan. 2020
10 Reuters, www.reuters.com/article/autosalesusa-top20/table-top-20-vehicles-sold-in-the-united-states-in-2019-idUSL4N29B376, accessed 29 Jan. 2020
11 Chris Woodyard, USA Today, www.usatoday.com/story/news/nation/2019/05/16/california-gas-powered-car-sales-ban/3699738002/, accessed 16 Jan. 2020
12 Nick Statt, The Verge, www.theverge.com/2019/5/30/18646486/british-columbia-zero-emissions-vehicles-act-ban-gas-powered-cars-climate-change, accessed 16 Jan. 2020
13 Daniel Boffey, The Guardian, www.theguardian.com/world/2019/may/03/amsterdam-ban-petrol-diesel-cars-bikes-2030, accessed 16 Jan. 2020
14 Zsigmond Kovács, Transport & Environment, www.transportenvironment.org/news/end-fossil-fuel-car-eu-agenda, accessed 16 Jan. 2020
15 Yilei Sun et al., Reuters, www.reuters.com/article/us-china-autos-gasoline/china-considers-testing-no-go-zones-for-gasoline-vehicles-ministry-idUSKCN1VC07R, accessed 16 Jan. 2020
16 Ma Zhiping, China Daily, www.chinadaily.com.cn/a/201903/07/WS5c80555ca3106c65c34ed316.html, accessed 16 Jan. 2020
17 NEVs are defined as EVs, hybrids, plug-in hybrids and fuel cell electric vehicles
18 VW Newsroom, https://www.volkswagen-newsroom.com/en/press-releases/volkswagen-plans-22-million-electric-vehicles-in-ten-years-4750, accessed 16 Jan. 2020
19 GM Corporate Newsroom, https://media.gm.com/media/us/en/gm/home.detail.html/content/Pages/news/us/en/2020/jan/0127-dham.html, accessed 28 Jan. 2020
20 Sebastian Blanco, Car and Driver, www.caranddriver.com/news/a28947992/electric-ford-f-150-2021-planned/, accessed 28 Jan. 2020
21 Alexandra Kenway, Business Wire, www.businesswire.com/news/home/20190418005157/en/, accessed 16 Jan. 2020
22 Union of Concern Scientists, www.ucsusa.org/resources/surveying-consumers-electric-vehicles, accessed 28 Jan. 2020
23 US sales data based on powertrain composition was captured from NADA’s year end Market Beat reports from 2015 to 2019; refer to www.nada.org to access their reports
24 International Energy Agency, www.iea.org/reports/global-ev-outlook-2019, accessed 18 Jan. 2020
25 Yilei Sun et al, Reuters, www.reuters.com/article/us-china-auto/china-green-lights-tougher-auto-investment-rules-amid-capacity-crackdown-idUSKBN1OH0GY, accessed 18 Jan. 2020
26 Peter Eavis, New York Times, www.nytimes.com/2019/12/23/business/rivian-truck-investment.html, accessed 18 Jan. 2020
27 Adrian Padeanu, Motor 1, www.motor1.com/news/384702/mustang-mach-e-sold-out/, accessed 18 Jan. 2020
28 Chloe Taylor, CNBC, www.cnbc.com/2019/09/05/volkswagens-fully-electric-idpoint3-sells-out-in-pre-sale.html, accessed 18 Jan. 2020
29 Elijah Shama, CNBC, www.cnbc.com/2019/09/19/amazon-is-purchasing-100000-rivian-electric-vans.html, accessed 18 Jan. 2020
30 Christopher Butler, CNBC, www.cnbc.com/2019/10/20/electric-car-prices-finally-in-reach-of-millennial-gen-z-buyers.html, accessed 20 Jan. 2020
31 Akanksha Rana, Reuters, www.reuters.com/article/us-tesla-registrations/new-tesla-registrations-in-california-nearly-halves-in-fourth-quarter-data-idUSKBN1ZF03N, accessed 19 Jan. 2020
32 Xinhua Net, http://www.xinhuanet.com/english/2018-07/11/c_137317363.htm, accessed 20 Jan. 2020
33 Jack Perkowski, Forbes, www.forbes.com/sites/jackperkowski/2018/07/13/china-shifts-subsidies-for-electric-vehicles/, accessed 20 Jan. 2020
34 Michelle Toh, CNN Business, www.cnn.com/2019/11/12/business/china-electric-car-sales-subsidies/index.html, accessed 20 Jan. 2020
35 Volkswagen AG, www.volkswagenag.com/en/news/stories/2019/05/how-electric-car-incentives-around-the-world-work.html, accessed 20 Jan. 2020
36 Y.Sun et al, Reuters, www.reuters.com/article/us-china-autos/auto-industry-cautious-as-china-starts-2020-with-forecast-of-a-2-sales-decline-idUSKBN1ZC09T, accessed 20 Jan. 2020
37 Volvo Car USA Newsroom, www.media.volvocars.com/us/en-us/media/pressreleases/248305/poll-finds-americans-feel-electric-vehicles-are-the-future-of-driving, accessed 20 Jan. 2020
38 Quarts, Michael J. Coren, https://qz.com/1695602/the-average-electric-vehicle-is-getting-cheaper-in-the-us/, accessed 20 Jan. 2020
39 Dan Frio, Edmunds, www.edmunds.com/electric-car/articles/cheapest-electric-cars/, accessed 20 Jan. 2020
40 U.S. Department of Energy, www.energy.gov/eere/electricvehicles/saving-fuel-and-vehicle-costs, accessed 20 Jan. 2020
41 Capital One, www.capitalone.com/bank/money-management/car/do-electric-cars-save-money/, accessed 20 Jan. 2020
42 Tesla’s Twitter Account, https://twitter.com/Tesla/status/1027954607446609920, accessed 20 Jan. 2020
