Navigant Research Blog

European Turn from Diesel Unlikely Due to Scandals

— April 10, 2017

The revelation of Volkswagen’s (VW’s) diesel emissions cheating is nearing its second anniversary and the automaker is well along in the settlement process. Yet, skepticism about diesel remains strong. Global governments have maintained a steady stream of inquiries into diesel automaker environmental compliance efforts. The latest investigatory announcements are emerging in France and Germany, where diesels accounted for over 50% and 45% of the 2016 market, respectively. Fiat Chrysler Automobiles NV (FCA), VW, Groupe Renault, and the PSA Group are being investigated in France, while Daimler is under investigation in Germany.

Surprisingly, the sustained scrutiny of diesel has not gutted sales in Europe at a high level. A rising vehicle market on the continent lifted all powertrains, including diesel, last year, though diesel’s rise was markedly low compared to other powertrains. The relatively low rise might be partially attributed to ongoing scrutiny, but this would ignore the fact that diesel share has been falling in Europe since its peak in 2011 at over 55%.

In 2011, diesel accounted for around three out of four vehicle sales in Belgium, France, Luxembourg, Ireland, Spain, and Norway. The next year saw the first deployment of plug-in EVs (PEVs); since then, diesel sales have dropped considerably. Diesel share lost over 20 percentage points in France and Belgium, over 15 in Spain, and over 10 in Luxembourg. Ireland remains unchanged, but Norway, which has the highest level of PEV adoption at 24%, is down by over 45 percentage points. Diesel share in the region is down 6 points overall and plug-ins have been the primary beneficiary, growing from effectively nothing in 2011 to around 1.3% in 2016. Hybrids have also made headway, especially in 2016, moving from 1.3% to over 1.5%.

Across the pond, impacts from the diesel cheat are more striking. VW previously led the diesel car market, and its retreat has had a substantial impact. That impact was partly offset by the introduction of diesel SUVs and trucks from FCA (now also under investigation by the US Department of Justice, the Securities and Exchange Commission, and several state attorneys general), General Motors (GM), and Jaguar Land Rover (JLR). Overall, diesel sales fell 30% in 2016. Unlike in Europe, plug-ins have had less of an impact in the United States on diesel. This is largely due to the fact that diesel in the United States is competing in larger vehicle classes where plug-ins do not perform well. Instead, PEV gains are mainly affecting the once robust US hybrid market that is primarily dominated by small vehicles, where PEVs have the strongest value propositions.

What this means is that, assuming ongoing US investigations do not uncover new revelations that would take the new class of larger diesel vehicles from FCA, GM, and JLR off the market, diesel is likely to return to its marginal pre-VW-scandal share in the United States with some upward potential. But in Europe, dominated as it is by smaller vehicles, diesel sales may continue to fall as other fuel efficient options compete in those segments.

 

Dwindling Smart Sales Spark All-Electric Shift

— February 17, 2017

I first observed the smart car while traveling through Italy in 2006. Later that same year, the Da Vinci Code debuted back home in the United States, with smart deftly taking a page from Mini Cooper’s marketing playbook (playing starring roles in the likes of The Italian Job and Bourne Identity) by nabbing prime advertising space as Sophie Neveu and Robert Langdon’s escape vehicle. At the time, I considered the idea of this car revolutionary, in that it provided the space savings of a motorcycle partnered with the safety and comfort of a car.

Though the car didn’t seem right for me at the time, I figured if I was in a city my perspective might differ, and I wondered why that car wasn’t yet available in the United States. Two years later, in 2008, smart arrived and netted nearly 25,000 sales. That year was the company’s best in the United States, its second being the year immediately following. However, since 2009, sales have bobbed laggardly between 5,000 and 11,000. In 2013, smart joined the modern plug-in vehicle movement with the electric drive (ED) version of its offering. The ED has done relatively well, accounting for 17% of the brand’s sales since its introduction in the United States. Fast forward to the near future and the ED will likely account for 100% of the brand’s US sales, as Daimler is discontinuing the gas powered version of the vehicle in North America for the 2018 model year.

Gas Power Not So Smart Anymore

For the brand, sales are likely to retreat further. A refresh of the fortwo ED along with the expected range increase will probably encourage greater sales of the ED in 2017 than were witnessed in 2016. But the range increase isn’t substantial next to 2017’s new competitors like the Chevrolet Bolt, the Tesla Model 3, and more. Therefore, sales are unlikely to recapture smart’s small 5,000-11,000 sliver of the market unless a serious range increase or dramatic price cut is on the way for 2018.

Though the move will result in initial losses for the brand, it will likely benefit the parent. To start, sales of the gas-powered smart have receded, with a compound annual growth rate of -14% since 2012. The current low oil price environment isn’t going to change the trajectory here. Add to that the ever increasing range and affordability of plug-in powertrains in the microcar segment, and it was only a matter of time before the gas version could not find any willing buyers.

Additionally, canceling the gas-powered version while there is still some demand will increase the effect the ED has on the Daimler’s Corporate Average Fuel Economy and Zero Emissions Vehicle program compliance efforts. The regulations, designed as both stick and carrot, penalize automakers for noncompliance and reward others for overcompliance. Up to 2025, both programs’ sticks will become increasingly sharp, making the share of plug-ins relative to other powertrains a vital metric by which automakers maintain viability through their highly profitable, less fuel efficient offerings.

 

EV Market Needs More Practical Vehicles, Less Hype

— January 19, 2017

Please 2017, bring us more announcements of practical, production-ready, 200+ mile range battery EVs (BEVs), and fewer of the concept electric super cars or Tesla killers. Yes, these long-ranged, sleek, sporty thrill rides are pretty and may sell in small volumes to high-end buyers when (or if) they come to market. But startups that are seemingly overcompensating for inexperience by showcasing their engineering prowess and far-flung visions won’t provide the needed bridge to mass adoption.

Since Tesla found initial success with the Model S, the term Tesla killer is frequently part of the discussion around most new, long-range BEV introductions from both established and startup automakers alike. In 2016, one company that was the focus of such hype was LeEco, which invested billions in EV startups. These investments led to what was described as one of the more lackluster BEV debuts at 2016’s Consumer Electronics Show (CES): Faraday Future’s FFZERO1. Unfortunately, the company’s variable platform architecture and the way in which that architecture might advantageously position Faraday to achieve its lofty business goals received muted attention relative to the billboard-doubling tail fin.

As it is presented, the architecture should allow Faraday to expand and diversify its vehicle offerings beyond the initial flagship model with ease. Regardless of whether the platform accomplishes Faraday’s business objectives, maintaining focus on either this aspect or another business innovation would showcase the company’s pragmatism and flexibility—qualities desperately needed in a rapidly evolving market. Unfortunately, during Faraday’s attempt to debut its flagship model at 2017’s CES, there were wide reports of financial trouble as well as an executive exodus.

The Race Against Tesla

LeEco’s other two EV investments, Lucid and LeSee, have as of yet avoided some of the harsher skepticism surrounding Faraday. The cars presented by the company do look closer to being production ready. Given that, LeEco is playing catch-up alongside many of the established premium brands, as well as positioning to compete against Tesla. All are aiming to introduce their long-range, $100,000+ flagships sometime before 2020, begging the question: will there be room for all in the premium EV segment?

While these would-be competitors try to outdo each other and out-maneuver Tesla, Tesla continues to stress pragmatic business model innovations. This includes advancing electrification outside of costly premium vehicle segments, laying the groundwork for automated mobility systems, taking the lead in public infrastructure development, and expanding into home energy management. Moving quickly on all fronts is a tough ask for any company, but at least any stumbles Tesla makes are likely to be grounded in vision and not vanity. For their part, the established OEMs are less fallible of Tesla-killer glory and are moving quickly to deploy practical innovations in affordable long-range BEVs, ultra-fast charging developments, and new mobility services.

 

Ford CEO’s ‘Perfect’ Comments in Context

— December 22, 2016

EV RefuelingThe potential softening of US Corporate Average Fuel Economy (CAFE) standards that has been discussed of late has reignited the debate about consumer acceptance of electric vehicles (EVs). Under current regulation, EVs are crucial to automaker compliance strategies, but not all EVs are the same, nor are they treated similarly under the regulations. It’s an important aspect to clarify here as the debate about CAFE standards questions whether there is enough consumer demand for EVs to enable automakers to meet the standard’s targets. The administrators of CAFE, the Environmental Protection Agency (EPA), suppose it does, but some in the automotive industry disagree.

The most recent commentary provided to the debate was by Ford CEO Mark Fields, which Business Insider claimed “just perfectly summarized the biggest problem for electric cars.” Fields, in arguing there is not enough EV demand stated: “In 2008, there were 12 electrified vehicles offered in the U.S. market and it represented 2.3 percent of the industry … fast forward to 2016, there’s 55 models, and year to date it’s 2.8 percent.”

Hybrids and Plug-Ins

Fields’ data point deserves some deeper analysis. In the automotive industry, the term EV or electric car encompasses hybrids, plug-in hybrids (PHEVs), and battery electric vehicles (BEVs) because all these vehicles use electricity either harvested from vehicle braking and/or from the grid for traction. Within the design of current regulations, PHEVs and BEVs are heavily incentivized and provide far more benefit to automaker CAFE compliance strategies than do hybrids (though hybrids are an important component).

Fields’ statement is accurate when considering the entire pool including hybrids, but it does not address the demand of plug-in vehicles specifically, around which most of the debate has centered. To start, the laggardly market growth for EVs over this time period is specific to hybrids, which have contracted from the 2008 2.3% figure to 2% year to date. Of note, a vast majority of sales come from one automaker (Toyota). Meanwhile, plug-in (BEV and PHEV) sales started in 2011 and now have over 0.8% of the market year to date, and there is no one consistent or dominant market leader. Lumping all EVs together in regards to CAFE compliance is inexact when automakers are generally complaining about the requirements for plug-in EVs, which are in reality gaining market share and increasingly common among automaker portfolios, and are the vehicles which are most critical to automaker compliance.

Reasons for Decline

Given that, there are many reasons hybrid share may be in decline. One that usually gets a lot of attention is oil prices, which not only historically reduces sales of hybrids, but also has prompted a growing percentage of new vehicle sales to be SUVs and trucks (a market nearly devoid of hybrids) and fewer passenger cars. Another factor is the increasingly more fuel efficient non-EVs (due to CAFE standards), but the last and more critical reason is competition from the plug-ins themselves. Before the plug-ins arrived, hybrids were the energy efficiency leaders. Since plug-ins arrived, sales have arguably taken away from hybrids, and the impact to the overall hybrid-inclusive EV market has been relatively marginal in growing sales, which fuels the arguments for those who are critical of consumer demand for EVs.

Ultimately though, the feasibility of automaker compliance with current regulation hinges on consumer acceptance of plug-ins, not hybrids. To that effect, Fields’ data in relation to consumer demand and CAFE compliance is not perfect. Hybrids and other fuel efficiency technologies are certainly helpful but cannot be relied upon in isolation. Consumer response to battery cost and energy density improvements teased by the Tesla Model 3 and represented in the near-term BEV rollout of the Chevrolet Bolt will provide greater clarity here. However, regardless of the success these models may realize or have already realized, it is unlikely to have a significant impact on whether CAFE standards will be softened or not.

 

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