Has the novelty of hybrid and electric vehicles worn off? After record sales in August, alternative-fuel vehicles suffered paltry sales in September and October despite a surging auto market. Using data from the HybridCars.com monthly dashboard, Misix determined that September hybrid sales were 3.6% lower than September 2012, and October managed only a 0.8% year-over-year gain.
More concerning, however, are falling take-rates: the percentage of shoppers who, given the option between a hybrid or conventional option, choose the hybrid. HybridCars.com reports the take-rate of the entire market—that is, the number of hybrid sales divided by total U.S. auto sales—fell into the 2% range for September and October following 11 months in the 3% range, suggesting waning consumer interest. On top of that, clean diesel sales declined to their lowest number since May, and although electric sales rose to 10,100 in October, that represents less than 1% of monthly U.S. auto sales and is insignificant to the automotive market.
In addition to poor sales over the last two months, hybrid and electric vehicles have faced market headwinds:
- Tesla is in the midst of a public relations nightmare and may receive a government safety inquiry following its third vehicle fire in five weeks.
- Forbes reported that only 13 out of 33 hybrid vehicle models offer savings after five years of ownership.
- A Kelley Blue Book survey reported consumers rank high gas mileage as the eighth most important factor when considering purchasing a car, behind traits such as reliability, safety and affordability.
- Toyota announced the launch of a hydrogen fuel-cell car in 2015, introducing competition (or a death knell) into the already underperforming electric market.
Some might argue falling gas prices have led hybrid vehicle sales into the doldrums. While this assertion appears cogent, it is not empirically supported. Data analysis by Misix showed average monthly gas prices are not strongly correlated with hybrid or total alternative vehicle sales (r=.15 and r=.2, respectively). Introducing seasonal adjustment, monthly or three-month lags do not significantly affect these values.
Given that average U.S. monthly gas prices have hovered between three and four dollars a gallon since January 2011, it is likely that consumers do not adjust purchasing behavior based on marginal weekly or monthly gas price increases. Rather, improved fuel economy standards are the likely culprit limiting the popularity of alternative fuel vehicles.
The Corporate Average Fuel Economy (CAFE) standards, which aim to increase the average fleet fuel economy to 54.5 mpg by 2025, are driving auto manufacturers to produce vehicles that are more fuel efficient. With conventional models now easily achieving 30-40 mpg, hybrid and electric vehicles have steep competition from options that are relatively inexpensive and have the infrastructure, reliability and horsepower alternative fuel vehicles cannot match. Hence, consumers may determine that hybrid or electric vehicles cannot substitute for the inexpensive fuel efficiency of conventional gasoline models.
To illustrate this point, Misix conducted a baseline analysis of four popular models that offer a hybrid option to determine at what point the higher sticker price is offset by fuel-cost savings:
- Ford Fusion—75,000 miles traveled.
- Toyota Camry—100,000 miles traveled.
- Honda Accord—150,000+ miles traveled.
- Honda Civic—150,000+ miles traveled.
While the analysis considered only sticker and gas prices for four models, the federal government has provided a useful tool in analyzing the years before a hybrid provides a positive return for multiple models, accounting for several factors (found here). The dashboard demonstrates how annual miles traveled, type of driving and assumed gas price can drastically affect the years until payback.
Also of note, the government dashboard does not include insurance costs for the more expensive hybrid vehicle, additional repair costs or the time-value of money, all of which increase the total cost of ownership. These facts all lend themselves to the notion that improving fuel economy in conventional models limits the cost competitiveness of hybrid vehicles.
Despite this, production of hybrid and electric vehicles will increase as automakers strive to meet state and federal guidelines. To meet the 2025 benchmark set by the CAFE standards, auto manufacturers will need to boost production of hybrid and electric vehicles from current levels. But the market is already flush with supply of electric vehicles, and producers have relied on government tax credits and significant price cuts to spur demand.
So, is the age of the hybrid over? Will electric vehicles fail to garner market acceptance? These are questions that will be answered in the coming years as automakers precariously balance the production of vehicles that comply with state and federal regulations with overall appeal to cash-strapped consumers. But one thing is certain: Hesitant market demand belies the necessity for alternative fuel vehicles. Resources are scarce by definition, and debate rages as to when we’ll reach the point of peak oil.
As good economists, we trust the market will adopt suitable energy and transportation alternatives by that point. But to be honest, we’re really hedging toward the market choosing self-driving cars. Because riding around in one of these would be so cool.