The Great Car Crash of 2023
Imagine you’re the captain of the RMS Titanic at the very moment he realized they had no hope of avoiding a massive iceberg in their path. Welcome to the internal combustion engine producing automotive industry.
The convergence of self-driving autonomy and electric cars will disrupt the automotive and transportation industries, causing a number of internal combustion engine (or, ICE) auto manufacturers to file for bankruptcy by 2022, and the value of the majority of used ICE cars to fall below zero by 2023.
Let’s reverse engineer this collapse, piece by piece.
The adoption curve of electric cars is rapidly accelerating. The year over year growth rate of electric car sales is over 100% in the US. All major car manufacturers (who are predominantly ICE makers) are promising to ‘go electric’ in the next few years, and several are already terminating a number of their ICE models. Electric cars generally cost more than ICE cars, but cost significantly less to operate, have three times longer expected useful lives (in terms of miles), and are much more compatible with autonomous technology. Finally, the cost of solar electricity is steadily falling (20% per year), which will impact all energy prices. Soon the cost of charging an electric car will be nominal.
Full self-driving autonomy will cause the cost of transportation as a service (TAAS) to plummet for two primary reasons: low operating cost, and high fixed cost absorption. Autonomous electric cars will have very low operating costs due to: the absence of a driver, low maintenance cost of electric cars, low cost of electricity, and lower insurance cost (due to fewer accidents). The higher purchase cost of an autonomous electric vehicle (approximately 20% higher) will be more than offset by very high utilization. Currently, privately owned vehicles sit idle 95% of the time. If an ICE vehicle cost $50,000 to buy, and was driven 300,000 miles, the fixed cost per mile would be $.17/mile. An autonomous electric car which cost $60,000 and was driven 1,000,000 miles would have a fixed cost per mile of $.06/mile.
After considering the full cost of vehicle ownership, including value depreciation and storage (having a larger garage to accommodate multiple vehicles or renting parking space), the vehicle ownership cost of an average American could fall from approximately $10,000 per year to $2,000 per year by utilizing TAAS. This 80% savings will cause a majority of Americans to choose not to own a vehicle, causing the size of the American auto fleet to decline by 60% or more. The impact of TAAS is already visible; in 2017 10% of all vehicle sellers did not buy a replacement vehicle.
By 2021, the sales of new ICE vehicles will decline dramatically. First, there will be significantly fewer new vehicle buyers due to TAAS adoption. Second, a majority of the remaining new vehicle buyers will be choosing electric vehicles. Third, the growing number of used ICE vehicles available will cause the price of used vehicles to fall, resulting in a new to used value comparison that is heavily in favor of buying the used vehicle.
Due to their enormous investment in ICE vehicle production capacity, few of the current car makers will survive the transition to electric car manufacturing. Producers will have to completely redesign their fleet, re-tool their production lines, and re-source their supply chains. Additionally their engine and transmission assembly plants will have to be closed, and the overall scale of their operations will have to be reduced by 60%. The demands of long standing union contracts and debt heavy balance sheets will force many into bankruptcy.
The financial failures of big ICE producers may begin as soon as 2021 or 2022. As each one fails, a flood of unsold ICE car inventory will be released into the market at discounted prices, causing more downward acceleration in used ICE vehicle prices. Currently Ford and GM have more than 4 million new cars in their dealerships and inventory. By 2022, there will be virtually no demand for these cars. The abundance of ICE vehicles of all makes will cause most used cars to be sold for scrap. By 2023 we may be paying to have them environmentally disposed, and abandoning a vehicle will be a crime.
For today, consumers should avoid spending more than $20,000 on any ICE vehicle, and make plans to economically dispose of your ICE vehicles by 2020. And the employees of ICE vehicle manufacturers? Please calmly proceed to the lifeboats.
[This article was inspired by the work of speaker and author Tony Seba, and the Now You Know vlog.]