September 3, 2018
These days, if you have a keyboard and an internet connection, you have the ability to connect with the world and wield significant influence over what people believe to be true. (“If it’s on the internet, it must be true.”) I guess it is sort of like when Beck had two turntables and a microphone back in 1996 – he strung together a bunch of seemingly nonsensical words and got everyone’s attention using this simple vehicle:
“There’s a destination a little up the road
From the habitations and the towns we know
A place we saw the lights turn low
Jig-saw jazz and the get-fresh flow
Pulling out jives and jamboree handouts
Two turntables and a microphone
Bottles and cans and just clap your hands and just clap your hands”
How in the world is this relevant? Well, we have seen coverage about the proposed changes to U.S. fuel efficiency policy (I also wrote about it last month) and I was wondering how much impact these changes might have on the global automotive industry. Will the industry fall in line behind the U.S. or will other markets wield greater influence? In other words, in the big scheme of things, I want to know Where It’s At – where should we be looking for indications of industry trends?
Let’s look at some statistics and projections to see if we can derive a little insight into the driving forces (pun intended) behind the automotive industry’s potential evolution.
Fuel Efficiency is a Global Initiative
This subhead is literally true – there is an organization called the Global Fuel Economy Initiative which has a stated goal of doubling the fuel efficiency of the global fleet by 2050. This organization is led by some serious hitters and is motivated to achieve its objectives. I encourage you to check them out to get a feel for the momentum behind the effort.
Last year, Fuels Institute published a report, “Global Initiatives,” which among other trends took a look at the status of fuel efficiency programs throughout the world. The following map shows that these efforts are not restricted to just a few countries. In fact, 80% of new light duty vehicles sold globally are subject to some form of a fuel efficiency program.
Countries That Either Have or Plan to Put into Place Fuel Economy Targets, Including Those Countries That Set Fiscal Policies to Encourage Fuel Economy
The U.S. Is the World’s Biggest Market, But Not For Long
In 2017 the U.S. boasted the world’s largest fleet of registered light duty vehicles (LDV), but the People’s Republic of China bested the U.S. in sales by more than 4 million units. According to forecasts by Stratas Advisors, due to strong year-over-year sales growth, China’s vehicle inventory will surpass the U.S. in 2022 and, by 2035, the fleet will be 1.6 times larger.
So, from this data it would seem that the U.S., China and Europe (represented here by the five largest markets – Germany, UK, France, Italy and Spain), command a significant share of the global market and are forecast to maintain that position for the next two decades. So how do they compare?
As this next chart shows, the U.S. and Europe-5 basically stagnate in terms of overall fleet size, at least compared with the trajectory of the Chinese market. The auto industry needs to satisfy all markets; therefore, as one considers the impact of public policies pursued by western governments, you have to consider how they relate to policies being enforced in China as well. By harmonizing production across markets, OEMs can achieve economies of scale and strengthen their bottom lines.
Sales Forecasts Indicate the Direction of Trends
Most accept that the Chinese market will become the largest in the world, but will it also lead with regards to vehicle technology? A lot has been made of the Chinese ambition to go petro-free in the next few decades – what influence might that effort have on the global market? The following three charts plot market share forecasts of vehicle sales by powertrain. Sales provide the clearest indicator for the direction of the market. Take a look at these and then let’s discuss what we see.
Remember, this data is from one forecast from one company and there are likely other forecasts that could contradict this information. But Stratas Advisors has been doing this for a long time and are well respected. If the forecast is even directionally accurate, change is going to be driven by Europe. But first, a comment on the charts – Europe is so much more colorful because the vehicle pool is much more diversified than either the U.S. or China. Here is what we see in this data:
- Sales of internal combustion engine (ICE) vehicles in China (not including plug-in hybrids) are projected to drop from 95.5% in 2017 to 69.8% in 2035, which is a significant drop but remains a long way from a petro-free market.
- Sales of ICE vehicles in the U.S. are projected to drop from 98.5% of vehicles sold to 86.1% in 2035. This forecast assumes the Obama-era CAFE program is in effect.
- Sales of ICE vehicles in the Europe-5 drop from 95.9% to 62.6%, a more aggressive drop across five different countries than what is expected in China.
- Within the Europe-5, gasoline ICE drops to about 8% of sales, diesel ICE falls to 18% and hybrids jump to almost 37%.
- Total electrified powertrains in the Europe-5 grow to 65% of new vehicles sold in these countries will be electrified. This compared with 38% in China and 23% in the U.S.
- Total electrified vehicles sold in China in 2035 will be double total units sold in the Europe-5 because of the relative size of the markets, but terms of market share the impact of these sales will be greater in the Europe-5.
Think Globally, Act Locally
Every country will pursue its own policies relative to fuels and vehicles, but those who actually serve the consumers within those markets will be looking at the big picture to find efficiencies in production that can simultaneously satisfy customer and regulator demands. We must always look for indicators of trends throughout the globe and not get hamstrung by focusing too intently on our own backyards.
The market is changing and the pace at which it changes will be influenced by policies and economics, but it is impossible to isolate market influences to one or two factors – the inputs are too numerous to reduce the analysis to such simplicity. It will be fascinating to see how these forecasts, and others, will change in the next few years and conditions evolve.
So, with all the data available, what should we do now? I suggest we take Beck’s advice and grab some “bottles and cans and just clap your hands and just clap your hands.”