Lifecycle Changeover: Legacy ICE Giving Way To Early Majority PEVs
Tesla expects to be producing 500,000 battery electric vehicles (BEVs) per year by 2020, almost ten times today’s production. Nissan CEO Carlos Ghosn, in his keynote speech at last week’s NY Auto Show, said that their future is BEVs. Volvo expects 10% of their global sales in 2020 to be BEVs and much of the rest to be plug-in hybrid vehicles (PHEVs). While PEV sales (all plug-in EVs, so PHEVs and BEVs combined) make up less than 1% of the U.S. marketshare today, they already account for 25% in Norway, 11% in the Netherlands, and over 5% in Sweden, Japan, and China. Worldwide PEV marketshare has increased by over 60% each of the past 3 years and this is expected to continue.
The number of viable PEVs available to U.S. buyers will more than quadruple over the next 18 months. Battery costs per kWh are falling about 35% each year and the electric range of all PEVs is increasing.
Last week, Audi’s Stefan Niemand said “Those who have ever driven electrically are lost for the internal combustion engine for all time.”
Internal combustion engine (ICE) cars are now entering the legacy stage of the technology lifecycle. This is where CRT screens were in about 2003 when the new flat screens had been around for a few years, early adopters knew about and bought them, they’d proven themselves, they were on their way to becoming price competitive, and if you’d paid attention in Best Buy, you’d likely have seen two or three appear among the hundred CRTs on display. You thought their time was a ways off so you carried home a shiny new 40 lb HD CRT. Three years later, CRTs are no longer available in Best Buy but you’ve got a fairly new one in your living room. You’ll continue to use it but might wish that you’d waited. Fortunately, this wasn’t a monumental expense.
Cars have an extra bit though — resale value. Unlike CRTs, cars are a monumental expense for most of us. Then they lose about 10% of their value each year and if they’re not desirable, their price drops even more. If two years from now it is commonly known that an ICE costs $1,000–$2,000 per year more to operate than a BEV, how much will that ICE be valued?
And then came the Model 3. Everyone was prepped for a slow and orderly migration from gas to electric. New landscape. Since it’s release last week, over 300,000 people have plunked down $1,000 each to reserve a Model 3. This likely hasn’t been seen in the auto industry since 15,000 people ordered Model Ts within days of its release. No doubt folks at GM, Toyota, Ford, BMW, and every other manufacturer took notice. The BEV groups in those companies are likely getting a lot more resources this week, priorities are being changed, and some deadlines are being moved up. Volvo may be thinking that their prior week’s 10%-BEVs-in-2020 estimate is rather antiquated.
Here’s the fun part (now and later seeing how far I miss by).
Bloomberg are predicting that there could be an oil crisis by 2023, compliments of increasing numbers of PEVs reducing gas consumption, leading to the bottom falling out of the oil markets. I agree with their reduced consumption numbers but I believe that gas prices will rise. As demand falls, we’ll initially see a drop in prices, but then gas stations and refineries will begin to close, reducing competition. Those left will view legacy ICE drivers as captive customers available for only a short time. And they’ll milk them for all they can.
Here’s how I think things will unfold.
The gas stations that will be the first to go are those near more affluent communities. As cobo Rodreges pointed out two weeks ago, the average car lasts about 11.4 years, so it will take some time to replace all of them (and 15- to 20-year-old cars aren’t unusual). However, people in more affluent communities replace their cars much faster and are more likely to invest in a PEV of some sort. Probably not a good time to own a gas station that serves an affluent area.
Next in line will be those not near an interstate or state highway. As the number of PEVs continues to grow throughout the Twin Cities (and Duluth, Rochester, etc.), people will no longer need these stations for daily local driving and will purchase gas only infrequently for longer trips and minimally for lawn mowers and boats.
Then we’ll see the decline of PHEVs taking away even this bit of gas consumption. I’d guess that few people will ever replace a PHEV with a PHEV. Not because PHEVs are bad but because people will become comfortable with electric and thanks to increased range and charging options will replace their PHEV with an EV. And many of those older PHEVs may be converted to BEVs.
On top of all of that, I think that there will be some cycles that will hasten the decline of ICE vehicles ahead of that 11.4 year life. Fewer gas stations will cause those who still need gas for an ICE to have to drive farther to get it and along with fewer refineries may cause the price of gas to rise. This will further encourage people to migrate to PEVs sooner.
Trading in used to be about the car; it will now be about operating costs for those who own an ICE. Lower costs of batteries and of BEVs will create huge differences in total cost of ownership (initial purchase plus annual operating costs). Hanging on to a used ICE, even one that’s still fairly new, will increasingly not make financial sense.
Knowing the outlook for resale values of ICE vehicles, people will become increasingly reluctant to purchase them. I think we’ve now reached the point where buying a new ICE vehicle could be a poor decision financially, and personally I wouldn’t touch an ICE with a 10-foot pole because I think their value is going to plummet fairly quickly.
Keeping this in mind while planning for the future will be critical for cities looking to the future.
We already have more retail space than will be needed for many years to come. We may be seeing the beginning of the end of the big-box era, with cities and consumers asking for smaller, friendlier, and more local stores and restaurants. There is increasing demand for traditional mixed-use communities that better integrate residential with daily needs like schools and retail.
The vacating of gas stations and other ICE-specific services will be one more element, and a major one, in the reshaping of land and space use that will happen in our communities over the next few years.
(Cover Photo: Scarfone Photography)
 This is a very doable 57% annual growth rate. Prior to the launch of the Model 3, some analysts were saying that this number would be closer to 450,000 though. Tweets from Elon Musk reacting to the number of reservations (and the $300 million in cash they brought in to his coffers and the $13 billion in sales they represent) has said that they are re-evaluating and likely moving up their production ramp.
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