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.

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2017: 21st Century Energy Gets Underway

2017  is the year when all energy eyes will be on OPEC and the US, but that will miss the beginning of the broader conversion from 20th century to 21st century energy. The incremental growth in energy demand will be mostly consumed by scalable solar and wind technologies, forcing existing fuels into long-term decline.

Centuries may not get into their stride for a decade or two.

This blog assumes that there is a major energy transition underway: from a 20th century model to a 21st one, from a giant-size but inflexible, extractive and stand-alone system, to a more scalable, manufactured and grid-connected version.

Now, with its sixteenth year about to close, maybe this century has had enough time to show itself in terms of the start of this conversion.

On that basis, we will briefly look at three large-scale themes in the energy world, and see how they played out in 2016 – and what that might mean for 2017 and beyond:

• Incremental Growth versus Total Supply,
• The Relentless Rise of Scalable Technologies, and
• The Manufacturing of Global Energy

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The End of the ICE Age: The Internal Combustion Engine Could Soon Become A Stranded Asset

A number of forces, technical and economic, are conspiring to unseat the internal combustion engine (ICE) as the prime mover for transportation. The future powering of China and India looks more electric, efficient and urban, stranding ICE vehicles and oil product demand with it.

The Internal Combustion Engine Stalls
The internal combustion engine (ICE) won the original battle with electric vehicles (EVs) in 1900-1910, but in the grand arc of history, this may be only a 100 year lead in a much longer race.

There are about 900 million passenger cars and light-duty trucks on the road worldwide – most of which are gasoline or diesel powered.

On top of this, the automobile industry sells about 75-80million new ICE cars a year.

This number is increasing, but only by about 1-2 million cars a year, mostly from growth in India and China as sales plateau in many other OECD countries.

And now, as ICE vehicle growth momentum tails off, electric vehicles have re-entered the market after a 100-year hiatus.

The re-emergence of EVs is due to several reasons, but three are key: global policies toward lower emissions and fuel efficiency, Chinese and Indian transportation strategies to solve air quality problems in urban centres and avoid fossil fuel dependence, and the investment in EV technology from Tesla and others driving down EV costs, forcing incumbent car producers to react.

This is especially problematic for future ICE projections, as the presumed growth engines, China and India, look set to pivot strongly towards electric vehicles to avoid a long-term dependency on fuel imports for transportation.

As a result, sales of EVs have risen to almost 1 million new units per year from practically zero ten years ago. With growth rates still remaining high (and highest in China), at over 50% pa, this means that sales of 2m EV cars will happen in the next year or two.

Assuming, reasonably, that most EVs displace a conventional new ICE vehicle purchase, by 2017-2018 the annual growth in new ICE car sales will be cancelled out, stalled, and ICE vehicles will start a long-term sales decline as EV sales increase.

Many observers will point out that EVs represent a vanishingly small percentage of the world-wide car market. That is true today – but its also history, and not looking at the shape of the incremental forward demand curves.

The Car Industry’s Defining Diptych

Today’s EV high growth rates can’t last forever, but sustained annual growth rates of over 20-25% for some time are feasible.

We can use various projections – the ones below are a slightly more aggressive version than that of Bloomberg New Energy Finance (BNEF),, by assuming that by 2030 50% of all new cars sold are EVs and by 2035, EVs hit 80% of new sales.

If correct, here’s how that piece of maths, represented in the chart diptych below, probably look to a automobile manufacturer CEO:

ICE Market Development & EV Market Development 2016 – 2040

diptych

source: BNEF, Carbury Consulting estimates

That forward ICE growth line looks terminal. If your prime market is ICE cars only, you are facing a world of mature, globally-installed competition vying for a diminishing stream of revenue.

However, the rise of the EV curve presents great opportunity – and a great threat too, especially if your competitors react to it quicker and more effectively than you do.

Too aggressive? Let’s take a look at how giant automaker Ford sees this world from their analysts presentation of September this year:

ford-ev-uptake

Although this is a schematic, if we take the proportions seriously Ford is calculating about 60% of vehicle sales will be HEV (hybrid EVs) or ZEVs (zero-emission EVs) by 2030. Irrespective of the precise numbers, and hybrid / plug-in hybrid ratios, the general trend is now clearly causing a strategic shift in car industry investment and priorities.

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The Flat-Packing of Energy

The Emergence of a Less Fragile, More Flexible and Scalable Energy System

Three reasons why the energy world is undergoing rapid change: manufacturing-based economics, energy security and scalability.

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“Fragility occurs when big is forced into doing what was best left to the scalable.”      

                          Bent Flyvbjerg,   Big is Fragile

The traditional global energy system is big, but fragile.

The international fossil fuel system is continuously under threat of supply and demand mismatches, causing huge price volatility. Trade embargoes disrupt its product flow, Infrastructure damage creates major power outages, producer cartels can deliberately reduce supply to increase prices to consumers.

Normally, fossil fuels are seen to have two drawbacks: first, they are finite, or non-renewable – they can only be extracted, not created, and have been formed in economic quantities in only a limited number of locations. The world therefore has a fixed set of fossil fuel winners (net producers) and losers (net consumers).

Second, they emit CO2 and other combustion by-products, which over time accumulate in the atmosphere creating serious implications for the world’s future climate, as well as present-day health issues with poor air quality in large developing urban centres.

However, despite these disadvantages, many studies suggest that any meaningful change to the dominant fossil fuel energy system will take a very long time, likely decades or more from today. They typically see today’s 86% of primary energy use of fossil fuels dropping only to about 70-75% over the next 25 years.

The global energy transition debate often centers on issues around environment, and health. These are hugely important, but as current political events show, they can often be mired in quite combative and sustained ideological debates. Despite general agreement on the major downsides, for instance, no international carbon tax policy framework has yet been implemented.

Nevertheless, the energy industry continues to undergo major change because of other powerful drivers.

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How do you keep Oil above $50/bbl forever?

In a world of flattening and changing energy demand, with more dense and varied supply, Saudi Arabia’s latest, lone effort to manage global oil prices looks forlorn

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Everyone seems to like an oil price around about $50-60/bbl these days.

Saudi Arabia, one of the world’s largest oil producers appears to be depend on it, as does much of the international private oil industry.

In fact, a “Goldilocks Zone” has been ascribed to this price span – not too hot to cause consumers pain, not too cold to force producers to make major structural adjustments.

The recent move by OPEC (mainly the Kingdom of Saudi Arabia, KSA) to trim back production by a target 1.2mb/d was also pretty explicit about $50-60/bbl being their preferred outcome.

Why these exact numbers? What does it tell us about the business model operating today in this late extraction period of the oil industry, and what does it suggest for the future?

Can it keep oil above $50/bbl forever? Does this have Goldilocks benefits?

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