Earlier this month Deloitte Touche Tohmatsu Limited’s Global Manufacturing Industry group rained all over the plug-in vehicle parade when they published the results of a survey of over 13,000 individuals in 17 countries that concluded:
"The reality is that when consumers actual expectations for range, charge time, and purchase price (in every country around the world included in this study) are compared to the actual market offerings available today, no more than 2 to 4 percent of the population in any country would have their expectations met today based on a data analysis of all 13,000 individual responses to the survey."
While Deloitte's conclusions didn't surprise me, they did clarify my thinking about the market for ultra-high efficiency vehicles and the changes I've been following for the last three years. While I'm usually pretty opinionated, this article will focus more on uncertain market dynamics that aren't clear today but will become self-evident over the next couple years.
The niche market for ultra-high efficiency vehicles has only existed since 2000 when Toyota (NYSE:TM) introduced the Prius. For the first nine years, the only real contenders were hybrid electric vehicles. Beginning in 2008, we saw demand emerge for new classes of ultra-high efficiency vehicles including "clean diesels" and plug-in vehicles like the Tesla Roadster (NASDAQ:TSLA), which was recently joined by the Nissan Leaf (OTCPK:NSANY) and the GM Volt (NYSE:GM). The common characteristic of all ultra-high efficiency vehicles is a price premium that ranges from $4,000 in the case of a clean diesel to $15,000 or more in the case of a plug-in.
The following stacked graph shows total U.S. sales of ultra-high efficiency vehicles since 2000 and estimates 2011 sales based on sales through September 30th.
Over the last three years, the niche market for ultra-high efficiency vehicles has basically stagnated, averaging about 3% of new car sales. While that number ties nicely to Deloitte's conclusion that plug-in vehicles would satisfy the expectations of 2 to 4 percent of the population, the more fascinating thing about the graph is that while the trendline for the ultra-high efficiency vehicle class isn't all that bad given the financial turmoil we've experienced since 2008, it's crystal clear that clean diesels and plug-ins are eating into the HEV market instead of attracting new converts to the ultra-high efficiency vehicle fold.
Logically it makes sense to me that only a small percentage of U.S. car buyers would be willing to pay a $4,000 to $15,000 premium for an ultra-high efficiency vehicle, but we'll need to see at least a couple more years of data before drawing any definitive conclusions. Until we see a major upswing in the overall market penetration rate for the ultra-high efficiency vehicle class, however, I have to assume that plug-ins, clean diesels and HEVs will compete hammer and tong with each other for the 3% of the new car market that doesn't care about cost premiums and be politely ignored by the 97% of the market that thinks the green in their wallets is more important than the green in their cocktail party conversations.
Usually when I get to this point in an analysis, the EVangelicals start trotting out their subsidy arguments to justify the exorbitant costs. While a wide variety of subsidies and incentives have been adopted over the last couple years, I don't believe they have any long-term viability because the world has reached a tipping point where governments can no longer afford to throw public money at an ideology embraced by the 1% at substantial cost to the 99% who are finally taking to the streets in sheer unfocused frustration. While today's protestors lack the coherent goals that we had during the civil rights and anti-war movements of the 60s and 70s, public fury over government policies that benefit the new royalty at the cost of the masses is mounting and it's only a matter of time before people come to grips with the inherent immorality of taxing Peter to buy Paul a new car, particularly when Paul is part of the 1%. When you add in recent developments like a car dealer Congressman who fired an employee over the unauthorized purchase of a GM Volt for his dealership, I have to conclude that today's immense but wholly unjustifiable eco-bling subsidies will quickly become little more than footnotes in automotive history.
My favorite reader comments are the ones that breathlessly compare Tesla and other EV developers with Apple (NASDAQ:AAPL). The comparisons are actually quite apt, but not in the way commenters intend. For the first 15 years that I used Apple's computer products they focused on the 3% to 5% of the market that was willing to pay a stiff premium for something different and clearly superior. The stock was one of the worst investments in the tech sector and those of us who loved Apple's computers spent a lot of time worrying that the company would fail. The dynamic didn't change until Apple rolled out its iPod line for the masses in late 2001. Since then serial successes with mass market products including the iPhone and iPad have Apple them the success story of the new millennium. The possibility that Tesla or any other EV developer will be able to make a comparable splash with four wheels, a massive battery and a 25 foot power cord is laughably remote.
The graph clearly shows that the ultra-high efficiency vehicle market has temporarily if not permanently flat-lined at a 3% market penetration. While it may be a fun place for technology geeks to marvel over the latest gee-whiz press release, it's not a market for serious investors because there's no upside unless the market penetration rates change significantly. For the next five years, the solid potential for market beating performance will be in un-loved battery industry stalwarts like Johnson Controls (NYSE:JCI), Exide Technologies (XIDE) and Enersys (NYSE:ENS) and emerging technology developers like Axion Power International (NASDAQ:AXPW) that are working on less dramatic fuel efficiency technologies for the 97% of the market that doesn't care about premium priced eco-bling and believes baby steps matter.
Since September 30th, the broad market indexes have gained an average of 6.7%. During that period JCI has gained 20.6%, Exide has gained 12.5%, Enersys has declined 0.4% and Axion has declined 1.9%. All four companies have rebounded convincingly from recent bottoms and appear likely to outperform the market on a go-forward basis.
Disclosure: Author is a former director of Axion Power International (AXPW) and holds a substantial long position in its common stock.