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.]
Your thinking that if you buy a ICE car buy a inexpensive one is wise. In a few years BEV will cost much less while EV choice and value will increase rapidly. Used ICE car prices are going to collapse. Remember Hummer? GM couldn't give that brand away, and Hummer owners found them to be unsellable.
ReplyDeleteThanks Don!
DeleteSmaller companies may have an advantage in the future because they can adapt to lower total production volume, and respond more quickly to technology changes. Instead of producing 5 or 10 million vehicles a year across 25-30 different models, a successful car company may only sell 1 million vehicles across 3 - 8 models.
ReplyDeleteThe best path for the current shareholders of the giant automakers may be for the companies to spin off profitable sub units of the company, while shutting down others. This may allow the parent corp to take the bankruptcy hit while allowing some of the subsidiaries to survive for the benefit of shareholders, employees, and consumers.
GM and Ford have the same weakness: trucks. Trucks and utility vehicles are the strongest parts of their income statements, and are also the most vulnerable to disruption. Trucks and utility vehicles are generally the most expensive to own and operate. However, most of the people who own them only need the special utility offered by these vehicles occasionally (apart from commercial needs). Most truck owners don't need the truck's special utility daily, but take advantage of that utility when they do yard work, or outdoor activities. Sharing an expensive vehicle instead of owning one offers the greatest savings of all when use is occasional. The lower maintenance costs of electric trucks will make them great vehicles to share, and could cause the size of the truck fleet to shrink significantly.
ReplyDeleteRecent data releases about vehicle sales mask the trend. The last two quarters (Q1 & Q2 2018) show increases in vehicle sales of 1% each quarter over the same quarter prior year, however a deeper look at the data shows that SUV and truck sales carried the day. Car sales declined by 10 and 12 percent compared to prior year respectively. Industry experts say consumers are preferring trucks to cars. I disagree. Truck and car buyers are very different people. I find it more likely that 'red-state' truck buyers are feeling buoyant about the economy and are making upgrades, while metropolitan car drivers are holding out for the electric vehicle of their choice to come available, or are, in ever increasing numbers, moving away from vehicle ownership.
ReplyDeleteCORRECTION: 200% growth rate originally cited in article to should have been 100% annual growth rate. This is based on fully electric vehicles (not hybrids), of which 100,432 were sold in the US in 2017 and over 200,000 are expected in 2018.
ReplyDeleteTIMELINE:
ReplyDelete07/28/2016 - FCAU announces end of passenger car production in the US by the end of 2017.
04/25/2018 - Ford announces it will terminate production of most of its passenger auto fleet by the end of 2020.
11/01/2018 - As of October, US passenger auto sales down 13.3% year to date compared to 2017.
11/14/2018 - Uber year to date revenue after Q3 is 50% higher in 2018 over the same period in 2017.
11/26/2018 - GM announces plans to idle 5 factories in North America, all of which are primarily engaged in passenger auto and power train manufacturing.
Renoult, Nissan, and FCA consider a combination. Why? Perhaps consolidation will allow them to downsize more effectively; keeping the best selling models of each company. Expect to hear more announcements of model discontinuations and factory closings.
ReplyDeleteSeptember 9, 2019: Moody's Investor Service cuts Ford's bond rating to 'junk' status.
ReplyDeleteWhy is Tesla massively outselling all other EV manufacturers in the US? Their cars are better? Yes, but not by that much. The Jaguar and Audi offerings are very attractive, and even the Bolt should appeal to many. What is different about Tesla? No dealerships. Tesla's competitors HAVE made some very good vehicles - as promised - but their dealership network wont sell them. The dealers are fighting the transition, probably because they recognize it as their end. They're right.
ReplyDeleteValue of use luxury autos are falling, making it harder to sell the new ones, according to Automotive News. The Tesla effect...
ReplyDeletehttps://www.autonews.com/used-cars/luxury-residuals-fall-some-cite-tesla
The mistake I made on this article was not breaking vehicle sales down into segments. I think my projections of large manufacturing companies having financial difficulties by 2021 or 2022 is still possible. My projection that EVs will outsell ICE it 2021 is certainly not probable, however it could be true in the passenger auto segment. Crossovers/SUVs will follow a couple years later, and trucks a year or two after that.
ReplyDeleteEV passenger cars may outsell ICE in 2021 for a month or two - possibly. Probably not the year total.
Delete