Navigant Research Blog

Did CAFE Save Lincoln from Extinction?

— June 18, 2015

Wetpaint_webOne year after Mark Fields succeeded Alan Mulally as the CEO of Ford, the company’s premium Lincoln division is finally showing some signs of life after years of decline and ironically, fuel economy regulations may be part of the reason why. Not so long ago, it was appearing increasingly likely that Ford was going to allow Lincoln to simply wither away and die.

When Mulally moved to Dearborn in 2006 to take over the automaker that put the masses on wheels, Ford was in dire straits. He quickly formulated a restructuring plan that included divesting all of the premium brands that the company had acquired including Volvo, Jaguar, Land Rover, and Aston Martin—refocusing only on Ford. Even Mercury and Lincoln were put on the chopping block, although only the former was discontinued in 2010.

Ford was the first U.S.-based automaker to introduce hybrid electric vehicles (HEVs) in the 2006 Escape Hybrid and has consistently been second to Toyota in U.S. HEV sales since then. In 2010, Ford added a hybrid option to the Lincoln MKZ sedan, and it has consistently been a popular setup in the midsize luxury sedan. Despite the popularity of the battery-assisted MKZ, Lincoln has yet to offer any plug-in powertrains in any models, but that may soon change.

Changes Coming

2015 looks like it may be a turning point for plug-in hybrid electric vehicles (PHEVs) in premium vehicles. At the 2015 North American International Auto Show, the big three German premium brands—Audi, BMW and Mercedes-Benz—showed new production PHEV models, and all three have committed to adding plug-in options to all of their mainstream models in the coming years. According to Navigant Research’s Electric Vehicle Market Forecasts, luxury brands are expected to account for 50% of global light duty plug-in electric vehicle (PEV) sales by 2018.

Automakers are pursuing this strategy of creating premium PEVs for several reasons.  Fuel economy and CO2 emissions standards are getting increasingly stringent and mainstream cars have already adopted the most affordable technologies for improving fuel efficiency. To add plug-in electrification would significantly increase the cost, pricing these vehicles out of the market. However, the heavier, more powerful luxury vehicles still have a lot of room to improve.

Adding PHEV powertrains with more powerful engines to a Mercedes-Benz S-Class, the new Cadillac CT6, or potentially the upcoming Lincoln Continental enables manufacturers to dramatically improve efficiency while maintaining—or even improving—performance. Most importantly, customers in the luxury segments are more willing to absorb the cost premium for the additional hardware, allowing manufacturers to maintain profitability.

The Upside to Lincoln

For Ford, making an investment to revive Lincoln provides an opportunity make a significant contribution to its corporate average fuel economy while preserving the affordability and profitability of Ford-branded cars, trucks, and SUVs. Since current Lincoln products are closely related to Ford-brand equivalents with similar fuel economy and comparatively low sales volumes, eliminating the premium models wouldn’t have a notable impact on the fleet average.

On the other hand, Lincoln is revamping its entire lineup with all-new products in the next five years, starting with the MKX crossover this year and the new Continental sedan in 2016. No powertrain details of the production Continental have been announced yet, but it would be surprising if Lincoln doesn’t follow the lead of the rival Cadillac CT6 with a PHEV sooner rather than later. Using Ford’s established PHEV technology, Lincoln could quickly become more competitive and provide a boost to its parent with better margins and mileage.

 

Innovation in New Mobility Offerings

— June 2, 2015

Rideshare app company Uber is continuing on its phenomenal growth trajectory. In the 6 years since the company launched in San Francisco, it has expanded into 300 cities in 58 countries. What’s more, Uber has raised $5.9 billion in 10 funding rounds. During the most recent funding round, in early 2015, the company was valued at an astonishing $40 billion, and it anticipates a $50 billion valuation in its next funding round. The much smaller rideshare app company Lyft, which operates in over 60 cities, has raised around $1 billion and was valued at $2.5 billion in its most recent funding round.

It is interesting to compare these companies to another company in the new mobility sector, carshare company Zipcar. Since it was founded in 2000, Zipcar has spread to around 250 locations and boasts more than 700,000 members. Although this is not an apples-to-apples comparison, it is interesting to note that Zipcar’s valuation from its 2011 initial public offering (IPO) was $1.2 billion; yet, in 2013, Avis Budget Group purchased Zipcar for $500 million.

Comparing Rideshare and Carshare

Uber is essentially being valued as a tech company, whereas carshare companies are more like a traditional business. This difference may seem somewhat counterintuitive since rideshare apps and carsharing are both part of the growing mobility sector. Both are services that thrive in the digital age. Rideshare services like Uber and Lyft would not exist without the smartphone. These services take advantage of the perpetual connectedness that a smartphone offers, for both drivers and users. Carsharing, on the other hand, is not dependent on smartphones, but it has embraced the ease of use that smartphones offer. While carshare companies can still operate from website and smart card access, the use of a smartphone app to locate and book cars opens up new business model opportunities like one-way service, where the vehicle can be returned to any location. One-way service encourages more impulse usage, with someone realizing that a car might be an easier way to get where they are going based on traffic or weather conditions.

The possibility of more usage is key to the success of carsharing because, in spite of the enormous success of the carshare sector over the past 15 years, companies can still struggle to consistently report a profit. Carshare companies have significant expenses due to vehicle leasing, maintenance, and fueling, as well as parking, which can be very costly. By contrast, rideshare companies don’t bear the costs of physical infrastructure. Fundamentally, what these companies are is a matchmaker service, and this requires significantly less upfront investment. This is part of what has allowed Uber to expand so swiftly. And these services are used much more frequently, with over 1 million rides occurring daily. Carshare companies are more like a traditional business with ongoing physical infrastructure costs that make it harder to scale as rapidly.

What will be interesting is to see how Uber and Lyft can leverage their strengths to create new revenue streams. It will also be interesting to watch carshare companies evolve in this new environment. Zipcar has been rolling out one-way service, while Swiss carshare company Mobility Cooperative invested in sharoo, a company that offers a private carsharing platform. The new mobility space will increasingly encourage these kinds of innovations and partnerships.

 

No Clear Path to Highway Funding Solution

— May 4, 2015

The gap between the investment needed for U.S. transportation infrastructure and the available taxpayer funding continues to grow. And neither Congress nor the White House has not gotten significantly closer to solving this problem.  A new report from the University of Michigan’s Transportation Research Institute (UMTRI), released just 2 months before the latest temporary Congressional funding patch for transportation is set to expire, provides further evidence that the federal funding transportation pool will continue to shrink unless Congress takes action.

Navigant Research has been writing about the problem of the Shrinking Gas Tax Fund for many years. Created by Congress in the 1950s, the fund was set up to pay for transportation from direct taxes, rather than from the general Treasury. The current tax rate of 18.4 cents per gallon was set in 1993, 22 years ago. Congress and the White House are loath to propose raising the gas tax, which has long been the third rail in American politics. Today, unfortunately, the drop in gasoline consumption combined with the shrinking purchasing power of 18.4 cents per gallon has made the unthinkable closer to becoming reality.

Tabled

Mainstream business groups have proposed raising the gas tax, and the Republican leader of the Senate Transportation Committee, John Thune, said that raising the gas tax would be on the table for the current Congress. The head of the Senate Environment and Public Works Committee, climate change denier James Inhofe, agreed with that statement.

As of the end of March, though, there was still no clear legislative pathway to raising the gas tax.  The UMTRI report should set off alarm bells in Washington about the future of the Highway Trust Fund. The report points out that U.S. gasoline consumption has been dropping steadily since well before the 2008 recession. From 2004 to 2013, fuel consumption by light duty vehicles in the United States dropped by 11%. The report’s author, Michael Sivak, also noted that the U.S. passenger car population has decreased since 2008, which could be considered an artifact of the economic downturn, or a foretaste of millennials’ mobility habits.

Millennium Shift

This data confirms reports about the shift in attitudes about car ownership among millennials that have been widely reported, albeit mostly anecdotally. A 2013 U.S. PIRG report found that there is a permanent change in expectations about how to get around–with driving seen as just one of many options that millennials regularly use.  And increasingly stringent fuel economy standards are likely to further reduce total gasoline consumption.

Unfortunately, the White House’s proposal for the new transportation bill does not include a gas tax increase, so it will be left to Congress to determine whether the time is finally right to increase the rate–or find a new mechanism to pay for the maintenance and improvement of U.S. transportation infrastructure.

 

China Spurs EV Development

— April 28, 2015

China has aggressively supported the production and purchase of electric vehicles (EVs) since 2010. The government’s goal to deploy 500,000 EVs by 2015 may seem unrealistic. Nonetheless, this target serves as a reflection of the government’s intention to combat pollution and save energy by means of EV deployment. Chinese automakers have struggled to improve the fuel efficiency of conventional vehicles. Between 2010 and 2014, fuel efficiency improved by 5.8% annually in Japan, 3.3% in Europe, and 1.8% in the United States—but only 1.1% in China. As such, the government’s support for EV deployment seems to be the preferred solution for China’s situation.

Incentives Spur the Market

Only around 70,000 EVs were on the road in China during 2014. This is still an almost 250% increase from the 2013 figure, and many experts forecast strong growth in the coming years. To further spur demand for EVs, the government has implemented various incentive programs applicable to approved EV models, which are locally produced. As of 2014, there was a ¥35,000 ($5,600) purchase subsidy for plug-in hybrid electric vehicles (PHEVs) and a ¥60,000 ($9,700) purchase subsidy for battery electric vehicles (BEVs). BYD’s Qin, one of the most popular EVs in China, retails from around ¥210,000, but with government subsidies, customers usually pay between ¥120,000 and ¥160,000 for the PHEV. Qin sold 11,200 units in the first 10 months of 2014.

In addition, the 10% purchase tax is waived for new energy autos, which include EVs, PHEVs, and fuel cell vehicles (FCVs). The government plans to allocate around ¥4 billion for this tax initiative, which is in effect between September 1, 2014 and December 31, 2017. Because the tax break applies to imported EVs as well, foreign car makers have been eager to enter the Chinese market. In 2014, BMW’s i3 and i8 EVs, as well as the Daimler and BYD joint venture EV model Denza, were launched in China. On top of the central government’s efforts, incentive programs and EV targets exist in mega-cities, such as Beijing, Shanghai, and Shenzhen. Beijing plans to deploy 170,000 electric taxis and at least 4,500 electric buses by 2017.

Due to the strong government support, many Chinese automakers, such as SAIC Motor, Dongfeng Motor, FAW, and Changan, as well as automobile components companies, are nowadays interested in manufacturing EVs. In March 2014, Wanxiang, an auto parts manufacturer, acquired American EV maker Fisker. Also, Foxconn, an IT manufacturer, has partnered with Tesla to enter the EV market.

Opportunities and Challenges  

Even though it’s difficult for foreign companies to enter the Chinese EV market, some—including General Motors (GM), Nissan, Hyundai, and Daimler—have jumped on the bandwagon via joint ventures with Chinese companies. However, two major variables are critical to China’s future EV market growth—charging infrastructure and battery technology. While charging equipment and infrastructure investment became open to the private sector recently to speed up development and construction, China lacks a national infrastructure standard. This can lead to operability issues from one city to another.

In addition, Chinese EV battery technology is in a transition from lithium iron phosphate (LFP) batteries to manganese-series batteries. Most EV markets around the world use lithium manganese oxide (LMO) and lithium nickel manganese cobalt oxide (NCM) batteries, which have better performance than LFP batteries. However, Chinese battery manufacturers currently lag behind their competitors in Japan, South Korea, and the United States in this area. Therefore, battery technology, as well as charging infrastructure standards and governance, will significantly influence the future of China’s EV market along with the sustainability of the current incentive programs and subsidies.

 

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