It’s a new year and a new decade and time to make a bold prediction regarding developments in the energy industry and associated transportation industry. The last few years have been a wild ride for electrical vehicles (EVs) with Tesla continuously in the headlines. Will Tesla go bankrupt? Will Tesla change the way the world views automobiles? Is Tesla stock a good buy at $250/share (2019) or $550 (2020)? But other automakers have made their own headlines: Jaguar began sales of its iPace EV, Volkswagen began sales of its eTron, and Ford introduced its Mustang Mach-E. A prediction concerning EVs is warranted, but OWOE is going to go beyond EVs and make a prediction concerning the broader automobile industry: Within this next decade one of the three US legacy car makers will cease to exist.
This prediction is not an outcome of Tesla getting so big and garnering such a large share of the market that legacy US car makers - GM, Ford, and Fiat Chrysler (subsequently referred to here as "L3") - cannot compete. It is based on the recognition that the younger generations of Americans do not want cars from the legacy car makers. Let's look at some statistics first.
Much news has been made of the fact that sales of sedans from the L3 have plummeted in recent years. The headlines have stated that Americans no longer want sedans. USA Today reported in June, 2019 : "Americans are ditching passenger cars in droves...That puts pressure on the automakers to make up for the lost sales with new SUVs. Luckily for them, the nation's SUV boom is alive and well..." Detroit News reported for 2019: "It's all trucks and SUVs, as General Motors, Ford and Fiat Chrysler increasingly abandon the sedan and small-car markets for what they see as more profitable, in-demand vehicles."
But the reality is that overall sales of sedans in the US did not drop nearly as the headlines implied. Detroit News continues with "industry leaders outside the U.S. are angling to scoop up buyers who decide they don't want a new crossover or SUV in their driveways." Japanese, Korean, and German auto companies continued to sell sedans ranging from low price Kias to luxury Mercedes. And Tesla increased sales of its EV lineup by 50% from 2018 to 2019, driven by its mass-market Model 3 sedan. (See the OWOE blog on Tesla's Model 3.) Clearly, there is still a large market for sedans. Americans just aren’t buying sedans from the L3.
Why is that? Tesla sales are driven by the fact that they are the best performing cars in any segment; they are cheaper than similar size luxury sedans; they are cheaper from an overall cost of ownership than smaller, lower-end sedans; and they have tapped into a market that values the benefits to the planet of driving an EV. Plus, and this is a big plus, they have captured the imagination of younger drivers with their application of technology. Much like the iPhone crushed its legacy cell phone competitors when it was introduced, Teslas have demonstrated how technology can change the driving experience. German sedans continue to sell because of their reputation for good engineering and a certain prestige factor, and Japanese and Korean sedans continue to sell because of a combination of quality and low cost. The L3 automakers fail on all counts - they don't excite, haven't figured out how to integrate technology to enhance the driving experience, they still struggle from a low-quality reputation that they haven’t been able to shake-off from the 1970s and early 1980s, and they can't compete on cost and durability.
Now, let's look at demographics, public policies and personal choices. Young adults are driving less than ever before, prefer to live closer to work, and are delaying having families. Ride sharing is quickly becoming the preferred transport choice, particularly among young adults, for short trips, leading to greater efficiency in miles per vehicle. Many cities are improving the public transportation option by upgrading/expanding their public transportation infrastructure, encouraging development along public transportation corridors, or implementing congestion pricing for driving into city centers. Now throw in the fact that the life of a Tesla is estimated at between 300,000 and 1 million miles, or a factor of 2-7 times the average internal combustion engine (ICE) vehicle. Will Texans give up their pick-up trucks? Will big families stop needing SUVs? Not likely. But all of these trends point to reduced purchases of ICEs, which are the L3's primary, if not exclusive, product.
And how will the L3 react? Most likely, just as they always have, by focusing on the short term. They will concentrate on their big vehicles with the highest profit margin, foresake R&D because they are strapped for cash, and head blindly into oblivion. What about GM’s decision to turn Cadillac into an EV business? Maybe, but there’s hardly a single young person who would consider buying a Cadillac - that’s their parent’s or more likely grandparent’s car. What about Ford’s plan to shift heavily to EVs? Maybe, given the response to their Mustang Mach-E, but it’s still targeting a small market compared to its F150 pick-ups.
OWOE's prediction - in the next 10 year (and possibly much sooner) one of the L3 will successfully transition to the EV market; one of the L3 will stand by their current big vehicle strategy and successfully maintain market share by cannibalizing their competitors; and one of the L3 will cease to exist. The question is which one?
Indeed it is very likely that a few other large, traditional, international auto manufacturers may also go bust before the decade ends.