For the UK, 2016 Was Likely the Year of Peak Demand for Internal Combustion Cars

The Car Market In the UK Has Now Fundamentally Changed

2016 probably marked the peak of sales growth for conventionally-fuelled, non-electric internal-combustion vehicles in the UK – meaning they are now likely in long-term sales decline.

A short-hand way of describing this is “Peak ICE”, Peak Demand for Internal Combustion Engines – and it has now occurred.

Cars have started to become more like devices rather than stand-alone commodities.

Peak ICE in the UK

To see how this works, let’s focus on UK car sales over the past few years.

For motor manufacturers the trend in growth is as important, if not more so, than the actual sales number – are sales growing each year or declining?

Total new car registrations (a close match for sales) in the UK 2010 – 2016 are summarised below – data sourced from SMMT here.

On the face of it this shows an upward trend of new car sales from 2011 to 2016, although actual numbers are only just above a previous peak over a decade ago in 2003.

To be precise, in 2016 in the UK 2.69 million new vehicles were sold, versus 2.63 in 2015 – so incremental growth of about 60,000 cars, or 2.3%.

It seems obvious that in the UK car sales are growing. But that single growth percentage number masks two distinct types of increase.

There are in fact now three discrete types of mass-market car available in the UK (and globally) in significant numbers (1): conventional internal combustion engine vehicles (ICE), hybrid petrol-electric vehicles and plug-in hybrid and full electric vehicle (HEV/PHEV/EV).

Whilst overall UK car sales have grown steadily, the sales of HEV/PHEV and EV automobiles have grown far faster.

In 2016, Conventional UK ICE sales grew by 1.6% to 2.60 million units from 2.56.

But sales of UK hybrid and plug-in vehicles grew by 25% to almost 90,000 sales, from 71,000 in 2015.

This means that of the 60,000 vehicles of extra growth sold in 2016 over 2015, 40,000 were conventional, but 20,000 hybrid or electric. So, alternative vehicles constituted 33% of new sales growth, and up from 15% the year before.

Put another way, although EVs and hybrids were only 3.3% of total UK sales in 2016, they constituted 33% of the growth is sales.

It’s an important distinction.

This is the sort of information financial markets and automotive manufacturers do not miss. As we have noted before, any major OEM who decides to concentrate all of their investment and innovation into conventional ICE vehicles is now betting their capital on a declining market, and potentially avoiding the large growth of hybrids, plug-in hybrids and all-electric vehicles along with their new features such as autonomy and software services.

This increase in new model offers is now critically important in the UK because near-term sales of all passenger cars are forecast to actually fall in 2017 and 2018. SMMT now predict a decrease in total UK car sales of about 5% in 2017 and 1.3% in 2018 due to sterling weakness and economic uncertainty.

However, the growth in UK hybrid and EV sales is likely to continue at strong positive rates due to at least three factors: general price and running costs reductions plus government incentives, greater infrastructure access (the UK is leading Europe in this regard), and heavier marketing of plug-in and hybrid vehicles by automotive firms.

Add to this the base rate momentum of growth, and we can reasonably assume that non-conventional vehicles will continue to grow rapidly in market share.

If we suppose that a downturn in UK sales of 5% will also slow the pace of electric and hybrid growth from 25% in 2016 to 20% in 2017 and 2018, we can simply model the overall shape of the new vehicle demand picture below, showing the trends in both ICE vehicle and electrified vehicle/hybrid demand.

If this is run further forward until 2025 with 20% EV/plug-in/hybrid growth assumed, and flat for all vehicles, the trend is clearer.

Note alternative scenarios show the same feature – Peak ICE – even if EV sales weaken to say 10% growth rather than 20%, and ICE sales drop only by 2-3% this year rather than 5%.

In fact, even if hybrid vehicles are excluded from the tally as they are not plug-in electrics, the same trend still emerges – the growth in EV/PHEVs becomes too large for future growth of ICE vehicles to ever regain a positive trend.

The bottom line is that sales of ICE cars have peaked under almost every reasonable scenario. This is simply because conventional ICE vehicles in the UK have reached a plateau and downturn in sales at the very same time as the investment and availability of plug-in and hybrid car models has taken off, along with supporting infrastructure.

Timing is everything.

2016 was indeed Peak ICE for the UK automotive market.

Why the Rapid Growth of Non-ICE Cars in the UK is Sustainable

This analysis hinges on the fact that HEV and PHEV/EVs will sustain their growth rates at least in the medium-term.

This is a robust assumption for the following reasons.

The Global Picture

Energy Independence and Urban Health
Although climate change and CO2 production have been major issues behind non-fossil fuel vehicles in the past, more immediate issues are now acting as prime movers.

The markets of greatest vehicle growth – China and India – are exposed to increasing energy import dependence due to limited home-grown oil production. In addition, chronic health issues in large conurbations in both China and India due to CO2 and NOx-compromised air quality, are causing both countries to look rapidly for solutions to fossil fuel energy dependence. The VW diesel situation adds a strong European and US dimension to this issue.

Both these factors generate accelerated electric vehicle production and adoption.

As large European and US cities follow this trend, investment levels of major manufacturers continue to respond, leading to rapid EV/PHEV development and cost improvements to access the US, EU and quickly growing Asian markets.

Given this, global sales for PHEV / EVs, led by China, are likely to pass through the 1 million pa mark this year.

In fact, Peak ICE globally is within reach in the next 2-3 years as incremental growth of all light vehicles is only around 1.5million units per annum.

Technology and Incumbent Investment
Although Tesla Corporation has been largely credited with reviving the interest in EVs, the uptake by the major OEMs such as Ford, GM, VW, BMW and others is even more critical. Each of these companies has committed multi-billion annual capital and R&D costs for the next 4-5 years to ensure they create a wide range of EV, PHEV and Hybrid addition to their model ranges – typically about 20-25% of their corporate investments.

As these companies are current industry incumbents, their switch to electric power-trains is hugely significant and accelerative. Each firm views electric cars as a growth opportunity into new sales and “mobility services” unavailable via conventional vehicles.

Consumers do not now have to switch to unknown brands and models – merely to choose between the conventional, hybrid, and plug-in versions from familiar ones.

Price Parity – then Price Leadership
The cost of electric car batteries is the most significant cost element of the vehicle – about 40% of total production costs.
Partly-catalysed by Tesla’s efforts, the costs of batteries are falling rapidly as they access economies of scale as sales take-off. Prices have fallen by about 65% over the past 5 years and are headed toward $100-150/kWh in the next couple of years – a point at which most auto-manufacturers believe they can sell electric vehicles for similar prices to conventional ones.

And then – and then, prices will continue to improve, as will battery performance improving range and fuel efficiency.

Today, fuelling costs for electric vehicles are about 15-20% the cost of conventional fuelled vehicles. This will only reduce further, so that the overall running costs of electric vehicles will soon match, and then surpass the economics of ICE cars – even factoring in expected re-sale value.

Why the UK Adoption Rate is Likely to Continue

Track Record – the UK has the Highest Absolute Sales of Electric Vehicles in Europe
Over the past three years the uptake of all electric vehicles in the UK has over-taken those of the other two large European markets (Germany and France) – the UK now accounts for over 15% of all European EV/PHEV sales.

In addition, the UK’s subsidies for EV/PHEV sales will also continue into at least 2018, and UK duties on petrol and diesel are also relatively high ensuring recent oil price moves are passed on to consumers.

The First to Pass a Self-sustaining Threshold
The classic S curve adoption of innovative products has been outlined by Everett Rogers – in this framework a critical mass of innovators and early adopters is required to make any innovation self-sustaining. In rough terms, when a product breaches 10% of market share of sales growth, it has potentially reached this tipping point. As shown earlier, the UK will likely achieve this threshold by around 2021

Current Leadership in Infrastructure Development
In terms of electric vehicle charge point growth and absolute coverage the UK leads the other major markets.

Peak Petrol Demand and City Air Quality
Continued momentum of EV adoption will reduce the UK’s fossil fuel dependency, home-grown or imported. Peak ICE coincides naturally with Peak Petrol Demand – in the projection above fuel consumption would reduce by 15% or £6-7bn pa by 2025.

Major UK cities such as London are also pursuing non-fossil fuel initiatives to reduce the health risks of poor air quality which are favourable to EV deployment.

Brexit Impact
Whilst the trade outcome of Brexit negotiations is uncertain, this will impact all car sales, not just PHEVs/EVs. In any event, the impact will not be known for over 2-3 years, and so the trends analysed here will continue in the short-medium term at least.

The Road Ahead
The decline of the traditional ICE vehicle will be hard to detect quickly as the fleet will still be dominant in size on the streets for years to come.

But their growth has peaked and soon the fleet will begin to decline as well.

The car as device has now emerged, allowing the stand-alone car as commodity to begin to pass into history, at least in the UK.

(1) – We have excluded Hydrogen fuel cell vehicles and diesel-electric hybrids as their numbers are too small for the current analysis

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