Will Enormous Projected Auto Demand Drive the Hybrid Electric Vehicle Market?

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Yesterday my colleague Stuart penned a piece following on a report released by JustAuto.com suggesting US consumers might not buy all of the small cars currently in production from US auto makers. Yet despite that report, the analysts have gone on record in recent days suggesting that auto sales, “may rise 20% on enormous pent-up demand. And one analyst firm, the highly respected Center for Automotive Research (CAR), suggested a number of 12.4m cars for 2010. Other industry analysts including CSM Worldwide Inc, JD Power & Associates, Edmunds.com and IHS Global Insight Inc also project auto sales of between 11.3 11.8m units in 2010.

All of this sounds like a rose garden compared to 2009 with a projected meager 10.3m units expected to sell. We have seen conflicting reports though about the automakers own forecasts. In this article, Ford suggests, “we’re not planning for a huge pickup next year. If we get one, great, we’ll ride it(puns intended I’m sure) but in a meeting with President Obama, Bill Ford, suggested the company would move conservatively, albeit with its smaller car fleet to include the Fiesta and the Focus. Yet the CNN Money article quotes Ford as projecting 12.5m units for 2010, closer to the CAR projection. According to the Bloomberg article, however at 11.3m 11.8m light vehicles for 2009, both GM and Chrysler would make money. The break-even point for GM requires sales of 10.5m units (of course we don’t know the specific market share assumptions used by each of the Big 3 to determine absolute break-even).

So, assuming these analyst firms are correct and demand reaches the low end of the range 11.3m units in 2010, will the Big 3 reach profitability based on their current product mix? (Isn’t that the billion-dollar question?) Arguably, the next issue becomes one of cost and product selection. I’d contend (and I know that I have been very wrong in the past, particularly for the Cash for Clunkers program) that people still make buying decisions based on total life cycle costs. True, the Prius, when it came out, carried a higher price tag than other cars in its class (though no other hybrid vehicle initially compared) and attracted the early adopters. Since then, the buzz factor created a superstar, sales remained brisk and costs eventually came down. After all, one can purchase a Prius for $22,400 today. But how will costs impact plug-in hybrid electrical vehicle adoption?

According to a a recent study conducted by the National Research Council, “hundreds of billions of dollars in government subsidies will be needed over many years to make plug-in hybrids cost-effective for consumers. The report also indicated it would “take several decades before the fuel savings offset the higher initial costs. In all fairness, the Prius has nearly “made it (check out this total cost of ownership with a few vehicles I selected).  The Prius does not do too badly I have to say. The question becomes how quickly will other OEM makes and models reach mass market economies of scale and cost structures that make those types of cars the consumer’s Ëœbest’ buying decision? I’m not sure but if that “enormous pent-up demand” gets released in 2010, we’ll sure get a good idea. 

–Lisa Reisman

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