Episode 770 05.10.22
Edward Sanchez, senior analyst, global automotive practice, Strategy Analytics, joins Peggy to talk about trends in the automotive industry and those in our homes. He says it’s inevitable whenever there are price hikes in energy, it raises consumer interest and awareness in the fuel economy and the need for more economical vehicle choices.
Peggy Smedley: I want to narrow in today if you don’t mind on energy in automotive because there’s a lot in consumer preferences today. I think there’s a lot happening with our homes and our vehicles, I’d love to get your take on that. I mean, I’ve heard a lot of different takes, but I think you bring a really good perspective. Give me your views on that if you would?
Edward Sanchez: Well, I mean, there’s several different ways we could kind of slice this pie. I think the first is, it’s kind of inevitable whenever there’s dramatic price spikes in the cost of energy, specifically liquid fuels gasoline and diesel, it increases consumer interest and awareness in fuel economy and more economical vehicle choices.
But I think the big thing that’s changed over the last decade are the vehicle choices out there, specifically crossovers, which really didn’t… I mean, you could say they kind of date back to the early ‘90s in kind of a rudimentary form with the Toyota RAV4 was the first one out, and following that the Honda CRV, but they didn’t really become a defacto vehicle segment I would say, until probably the early to mid-2000s. And today, I would say the most popular vehicle segment, certainly in North America, and rapidly becoming one of the most popular globally.
So, what’s interesting about the crossover is it kind of combines… The cynics would say, oh they’re just so generic and just bland, and they all look the same. But from a purely functional perspective, it’s kind of the best of both worlds of a car and an SUV. They’re relatively lighter weight, so it brings the fuel economy of a passenger car with the utility of an SUV. So, I think that’s something that has really resonated with consumers, and they have a lot more choices today for something that’s both economical and practical, than they did even 10 years ago. I don’t know if that exactly addresses what you were kind of getting at, but I think it’s kind of, have your cake and eat it too, from that perspective.
Smedley: Let’s get into the weeds about consumer’s buying habits…. of crossovers?
Sanchez: Well, I think it’s a combination of factors. I think it’s government regulations, kind of the classification of vehicles as light trucks or passenger cars, consumer preference, and just the auto manufacturers getting a little more savvy in terms of the features that customers really wanted. And I think it’s a combination of all those factors together that made crossovers more popular.
Smedley: Are we talking about body, the chassis?… When you look at cars, and a lot of people… I mean, they say that women are the ones who really look at a lot of this. So, it’s kind of an interesting thing when you want to get into those weeds, because you say what made them? It’s not a minivan that changed people’s mindset, and they didn’t want to drive those kind of things….
Sanchez: Yeah, I think you touched on something really kind of poignant and critical is the influence of women in the car buying process. And one stated kind of attribute that has really stood out in terms of women buyers of cars is visibility over traffic. So I think that’s where crossovers kind of hit that happy medium, where it gives you a little better view of the road, but it’s not this hulking huge monster truck.
So, it sits a little higher than your typical passenger car, yet you don’t have to climb a ladder to get in the cab. So I think that really resonated with women in focus groups. And when they showed these concepts to consumer clinics, they’re like, oh I like the visibility. I like how it kind of sits on the road. So I think a lot of it was driven by women buyers actually.
Smedley: Have we changed now though? Because now as I look at what’s happening, we have to think differently. What was a few years ago, maybe in the last decade of how we think about car buying, to what we think today and government regulations. And now we look at car companies are different, the mobility companies, right?
Smedley: They’ve changed the way they bring things to market. I mean, look at Elon Musk, he’s changed the way we think about what is an EV now and how we want to have this car. So, does energy really drive, no pun intended, the way we look at a car, and how people really want maybe an electric vehicle to really be something that’s a little sleeker? But I also think we have to think about the equity issue, because I think that’s going to play a very big factor, but it’s not so far. So, it’s like the yin and the yang here in this discussion.
Sanchez: Well, I think even though we’re I’d say about 10 years into the modern era of the EV, which I would say kicked off with the Nissan LEAF and the Tesla Model S, we’re still relatively speaking in the early days. And I still think there’s a little bit of a disconnect between kind of the fantasy and reality of an EV.
I mean, I’m an EV owner, I own a Tesla Model 3, and I love it, but I have run into some challenges as an owner, in terms of charging, charging availability. That’s a real issue, it continues to be an issue. I have friends and family that have bought an EV, kind of believing in what I call the rainbow and unicorn aspect of them, and like, oh, I’m saving the environment. They’re so great, blah, blah, blah. And they kind of run into the issue of charging like I just said. And they’re like, you know what? This isn’t for me, it’s too impractical. I can’t get a full charge in the time I need. I’m just going to go back to a gas car.
So yes, I do think there’s going to be increased interest in EVs, but I don’t think the infrastructure’s really caught up to where it needs to be to really facilitate mass adoption. So that’s one area I’m still kind of concerned about.
Smedley: So, let’s talk about that for a second. So we have 6.6 million worldwide that have been sold. Now you’re telling us the infrastructure’s not there because first of all, we do have a mess of an infrastructure, and something’s got to be done about it, right? So if we think about that, Tesla himself has sold what? Almost 2 million, 1.9 million that they’ve sold. So if we put all that together, but yet you still have a charging problem, you still have… But yet, we need to have people think about these battery chargers. Or Ford trying to say, hey, your Ford truck can charge your home now. I mean, now we’re going backwards. We’re on the opposite way of saying, look, this will charge your home for three days, you know?
Smedley: I mean but look at who got to buy those. I mean, it’s not cheap. So, when you bought yours and you said, hey, I bought it, now I’ve got to find the way to keep it charged. But now we’re saying we want to take energy from you as the consumer and then power our world from it. Exactly what you just said, how long is that going to take? Is it a decade? Is it two decades? We as a society have to be able to transform our world. How far away are we to really realistically make that happen?
Sanchez: I think optimistically, I would say about a decade. The utility companies are very aware of the situation, and they are extremely motivated to facilitate infrastructure build out with hardware partners like the charging networks and so forth. They definitely see the business opportunity here.
So, I think they’re trying to push this as hard as they can. A lot of it depends on government policy. I mean, obviously the current administration is a lot friendlier to EVs than the previous one was. But there’s also a big difference in the charging network density of the U.S. versus some other countries. Like the Netherlands, I don’t know if this is still the case, but at one point, they actually had more charging points than there were EVs in the country.
Smedley: So, they were ahead of their time. So that’s kind of a thing. So if we look at this, is the manufacturer, the automotive manufacturer really ready to make that happen? I mean, we seem to be having to wait for cars, and you have to put your order in, you got to put your money in, but some cars aren’t going to be ready for 2023. So, yet we’re saying, hey, we want them, but you got to wait for it. I mean, it seems to be we’re putting the cart before the horse. Again, is that a good thing or a bad thing?
Yeah. To be fair, that’s not specifically an EV problem. That’s just an automotive problem, and modern cars reliance on microprocessors and chips. And the chip shortage has affected the entire automotive industry, not just EVs. But it is also an issue with EVs in particular. So, the whole dealer markup model shortage, it’s kind of across the whole industry. But to your point, especially with EVs, just because there’s such high demand.
And I think a lot of the automotive companies are kind of, they were very conservative in their estimation of the consumer demand for some of these vehicles. They said, oh, we’ll build like 30, 40,000, and that’ll meet consumer demand. And all of a sudden, they get order banks for a 100,000-plus models. They’re like, wow, there’s a lot more demand for this than we anticipated.
Just this past week, Jim Farley at Ford, the initial targets for the F-150 Lightning, I think was about 40,000 units. And they’ve now committed to cranking that up to 150,000, just because they’ve had such an overwhelming interest in demand for the vehicle.
Smedley: Well, but let’s talk about that. Let’s take a step back. Constructions been booming. But now if the housing market starts seeing, I don’t know if it’s a bubble or not. I mean, we’ve got to talk about everything that’s happening. If construction’s doing good, and that industry says, look, we’re doing great, we can go buy a truck. And we can go buy an EV truck, and we can see that great, and the industry’s good. But all of a sudden, people start fearing it’s not. And all those tradesmen and women say, well, I can’t afford a truck and now it bucks and they put their money down. I guess my question is, and I don’t want to start darkening all the positives here. But I mean, the fact is, the average gasoline right now is at $4.14 cents or whatever it might be, $4 and a half or whatever it might be.
Sanchez: It’s way more than that in California, I can tell you.
Smedley: Okay, so think about that. If that’s what’s happening, that pushed a lot of this idea of going EV. I mean, there’s a lot of the moving parts on the chessboard here. I mean, it’s a lot of moving parts on this board that we’re looking at, a lot of pawns here. Do we have to worry about that? And those are the decisions that change things very rapidly?
Sanchez: Well, there is some correlation between truck sales and the housing market, and economic cycles to an extent. But I would note that the Ford F-Series has been the best-selling vehicle in North America for over 40 years.
And in that time, there have been multiple up and down cycles in terms of the housing market and so forth. I mean, if anything, it might kind of relieve a little bit of the pressure on Ford if the housing market takes a downturn. Because maybe some people might cancel their orders, and then all of a sudden, you could actually walk into a Ford showroom and buy one off their showroom floor rather than have to special order it and wait a year. So that actually could work to Ford’s benefit ironically.
Smedley: There’s a lot of things we have to look at all these things and say, there’s opportunities depending on what happens, and yet there’s risks. So, when we’re looking at really the market right now, I guess for you, what do you think right now are the biggest trends that we’re seeing for automotive that we need to kind of recap here? I guess for you as someone you’re seeing this, and we look at this and say, look, for consumer preferences with either automotive or EVs, what are you seeing?
Sanchez: Mm-hmm. I’d say the biggest kind of potential red flags or headwinds are kind of the supply chain issues, for one thing. And this is kind of a controversial topic, but it’s being discussed more and more, is kind of how much of a chokehold that China has on the whole EV supply chain. Whether you’re talking raw materials, finished batteries, battery technology, they have a very commanding control of that. So that’s kind of come to the attention of a lot of people. A lot of companies are trying to onboard more of the manufacturing and R&D, and frankly, the raw materials to North America or to the Western Hemisphere. So that’s a factor.
The other factor is I think just consumer awareness and education about really what’s required to charge an EV at home, some of the costs involved with that. Yes, you can charge an EV on a standard wall plug, but it takes, I’m not exaggerating here, as long as two to three days to do it that way, as opposed to several hours, if you have a higher-powered plug. And sometimes the cost involved in doing that, and upgrading your home electrical systems to support an EV, can run into thousands. So I think a lot of people are kind of shocked by that. They’re like, wow, I didn’t expect that I have to spend that kind of money to support this, but that is a factor.
For more information go to strategyanalytics.com