June 15, 2017
We are a very impatient species. We started as kids – “Are we there yet?” “How much longer?” To shut us up for a while, our parents responded “Ten more minutes.” Then we responded, “That’s what you said 30 minutes ago!” And it is only getting worse.
Today, you send an email or text to someone and if you don’t have a response in a few minutes you might start getting antsy. The instant-gratification phenomenon has taken full control over human behavior. Remember dialing up for internet and waiting for the annoying buzz? How do you react today if it takes more than three seconds for a website to load on your portable phone while you are hiking hours from civilization?
If we take this element of human nature and try to understand the size and breadth of the light vehicle market in the U.S. (or any region for that matter), it is understandable why there is a lack of appreciation for the time it takes for the market to change. Numbers are thrown around about fleet turnover, but do we really understand what that means? Do we appreciate how long it will take for a new vehicle feature to be widely available, let alone ubiquitous.
Let’s look at it from a very simple perspective. I used to call this a “back of the envelope calculation,” but given the demise of mail let’s call it “cocktail napkin math.” There are approximately 250 million registered light duty vehicles in the U.S. Between 12-15 million vehicles are scrapped each year and, for the last two years, more than 17 million new vehicles were sold annually. So, if every vehicle sold tomorrow was equipped with a blinking orange light on top of the dash (Why would we do that? Who knows, but it provides us with a reference point), how long would it take before half of the vehicles on the road would be so equipped?
Cocktail Napkin Math: Assume new vehicle sales stabilize at 16 million units per year through 2030 (yes, this is unlikely but it gives us a starting point and provides an optimistic view of fleet turnover) and that, effective January 1, 2017, every vehicle sold has a blinking orange light on top of the dash. Assume further that 12 million vehicles are “retired” each year (this accounts for a potentially longer life expectancy of new vehicles). What market share of the registered fleet would have a blinking orange light in 2030? My cocktail napkin says 73%.
This assumes every vehicle sold as of January 1, 2017 is equipped with this blinking light. It is important to recognize that this calculation has not taken into consideration regulatory structures, technology development, vehicle design lead-time, or anything else. It simply calculates how long it would take if every car sold since January 1 of this year featured this element.
Does this cocktail napkin math have any resemblance to professional fleet analyses? Well yes it does.
The Fuels Institute this month released a new report that builds on this concept. We commissioned Navigant Research to calculate when a new technology must be introduced and how many units must be sold each year in order to acquire 20% market share by 2025. For the study, we asked them to assess vehicles capable of operating on E25 as their case study. (“New Technology Adoption Curves: A Case Study on Delivering E25-Capable Vehicles to Market”)
Similar to my cocktail napkin math, we asked them to assume market readiness – manufacturing capabilities, lead time, regulatory hurdles were all set aside. Straight forward, if we started selling E25 vehicles in 2018, 2020 or 2022, how many would be required to be sold each year to reach 20% fleet market share by 2025. We asked them to also include the 20 million flex fuel vehicles that are currently on the road, which sort of represents a launching platform and head start with a current market share of 8%. So, the model actually only seeks to increase market share by 12 percent by 2025. Even with that head start, they came up with some pretty steep numbers.
If the E25 vehicles were sold starting in 2018, 629,000 units would have to be sold in year one. If introduction was in 2020, first year sales would have to hit 1.3 million in 2020 and 3.8 million if introduced in 2022. The ramp up in subsequent years can be seen below.
The new report has really nothing to do with E25 – it is an example of what it will take to bring a new technology to the market, once all of the R&D, product cycle development and regulatory red tape is resolved.
There are some who think the market can be switched out to something new in a very short time frame – I guess they are using a napkin from cocktail number 10. The U.S. light duty market is too big to expect rapid transition. Change can occur and be encouraged, but it is critical to think about the steps required and to be realistic (optimistic is fine, provided it passes the sniff test) as we set expectations for what might be feasible in a given time frame. Of course, transitions can be accelerated or slowed, but that too requires careful coordination and early recognition of what has to be changed to affect the pace of change.
Cocktail napkin math is not an exact science and poking holes in it (literally and figuratively) is easy, but it sets up a very basic reference point for further discussion. So, are we there yet? Maybe the bigger question should be, have we even left yet?