The future's bright, the future's hybrid - Emirates24|7

The future's bright, the future's hybrid

Hybrids – the fuel-efficient autos that combine electric motors with internal combustion engines – have been getting a lot of buzz in the US. There are waiting lists for the most popular hybrids, and automakers are scrambling to introduce dozens of new models. But hybrids' share of the new-car market is still in low single digits, and sceptics question whether they will really break into the automotive mainstream.

An analysis of the theory of innovation and the history of the auto market suggests that the hype about hybrids is justified and indicates that hybrids should account for a robust 17 per cent share of total vehicle sales as early as 2010.

One tested method of estimating the growth of market share for an innovation in an existing market is the S-curve, a mathematical model that was first used in biology to predict the growth rates of living things and has since been adapted by economists and management theorists to describe the growth paths of innovations.

The three stages of growth for an S-curve innovation are commercialisation, adoption and maturation.

The market penetration of the hybrid car, since its launch seven years ago, forms a nearly perfect S-curve when graphed. The circumstances surrounding the proliferation of hybrids conform perfectly to the stages that S-curve theory dictates they should. For instance, in the commercialisation stage, market share rises slowly from 0.1 per cent to one per cent as sales are driven by early adopters and enthusiasts. In the adoption stage, an S-curve innovation should be in a period of rapid public acceptance as the product gains greater visibility and consumer trust, and as scaled production drives down manufacturing costs. In this stage, market share should rise from one per cent to 10 per cent in the same amount of time that the market share in the commercialisation stage went from 0.1 per cent to one per cent.

For hybrids, the commercialisation stage lasted from 2001, when the first hybrids became widely available, to 2005, when market share surpassed one per cent. Within this stage, the fastest increase in the rate of market penetration came in 2004, when Ford released its Escape hybrid SUV. As the adoption stage continues, the S-curve suggests a hybrid market share of around 10 per cent by the end of 2009. My data predicts a nine per cent market share for hybrids in 2009 and 17 per cent share by the end of 2010. Should sales fall slightly short of the S-curve's predictions, it may owe less to consumers' purchasing preferences than to supply issues, as manufacturers are struggling to keep up with demand.

Some commentators question whether hybrid sales will fall if petrol prices decline from their recent record highs. They draw an analogy to the fate of small, fuel-efficient cars in the late 1970s and early 1980s – the last time there was a major rise and fall in fuel prices. I believe this will not be the case for two reasons. First, although record petrol prices certainly enhanced the hybrid's appeal, allowing the benefits of scale and visibility to root faster in the adoption stage, the market-share increases of hybrids were closely following the S-curve path even before the recent spike in gasoline prices.

Second, the analogy with the experience of small cars during the last fuel crisis is flawed. During the oil crisis of the 1970s, mini-compacts, such as the Mini Cooper, achieved their highest market share in 1978, when petrol prices were high. But mini-compacts never really caught on, and their market share declined even as petrol prices rose further. The slightly larger sub-compacts grew market share only when prices were rising, and lost share from 1982 onward. Compact cars, however, became widely popular, and the compact class has held the single greatest market share of any segment for nearly every year since 1980. The compact has proven to be the most popular compromise between size and efficiency.

Today, the most popular hybrids fall into the compact category, providing the spaciousness that consumers have demanded but offering fuel efficiency as good as or better than the mini-compact and sub-compact models of the late 1970s. Moreover, hybrid power trains are being successfully adapted to most vehicle classes, allowing them to appeal across all market segments. All that currently stands to dissuade car buyers from choosing hybrids is a lack of variety and, in times of low petrol prices, a slight price premium compared with otherwise similar models. As production prices fall during the adoption stage of the S-curve, the price premium should disappear.

Automotive history suggests that the next iteration of hybrid technology – the plug-in hybrid – may be poised to make even larger market-share inroads. Although plug-ins are not yet commercially available, prototypes have been tested extensively. Automakers are pouring billions into their development. These vehicles feature rechargeable lithium-ion batteries that can be recharged from a conventional electric outlet and can store more energy than the nickel-hydride variety used in the current generation of hybrids. In plug-in hybrids, the electric motor is the primary source of power, and a small internal combustion engine serves as an auxiliary power source. The biggest limitation on plug-in technology currently is the cost of the lithium-ion batteries. But as battery prices come down, plug-ins could capitalise on the trail blazed by the current generation of hybrids, which has helped consumers grow more comfortable with nontraditional engine types. Across industries and product lines, consumers characteristically respond more aggressively to improvements made to a successful innovation than to the initial innovation.

The plug-in has all the positive attributes of the conventional hybrid, as well as significantly better fuel economy. The plug-in will certainly need a new S-curve of its own, and both auto manufacturers and dealers should be prepared for a faster-than-expected increase in demand. In the meantime, however, we can place confidence in the S-curve's prediction that the conventional hybrid, regardless of the future path of gas prices, is here to stay.



Courtesy The New York Times Syndicate's Global Business Perspectives

 

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