There are three ways I want to amend my estimates of when the ICE peak will occur. These take a bit more analysis, so I am not fully prepared to spell it all out right now, and perhaps it would be best to set up a separate thread to work through this topic. So below I will introduce these three issues with the hope of deepening the discussion.
Rate of growth. My initial guestimate of the rate of growth of the automotive market, between 2% and 3%, is way too low. I have been looking at sales, production and vehicles in use data from OICA,
OICA. I believe that the vehicle in use data give us the most reliable way to estimate longterm growth rates. From 2005 to 2012 the global fleet of vehicles in use grew at an annual rate of 3.62%. But the rate of growth in more recent months is just about 4%. During the last recession, the fleet continued to grow, but at a slower rate, while new car sales plumeted. It is hard to tell if the rate is truly increasing or just temporally up. But more realistic estimates of growth are in the range of 3.5% - 4.0%.
Size of market. Should we size this market just for personal cars or include commercial vehicles as well? My view is that for the purpose of understanting the potential of electric vehicles and when they will undermine growth in production of the internal combustion engine, it is best to include commercial vehicles. This is what gets us to 87.35M vehicles produced in 2013. The second issue wih sizing the market is whether we should focus on revenue or unit counts. Conventionally this market focusses on unit sales, but I do not believe this is adequate for understanding when the ICE industry come into genuine crisis. The ICE peak defined in terms of revenue is the year after which ICE makers perpetually fail to grow revenue. As Tesla is disrupting from the high priced end of the market, post the revenue peak traditional automakers may continue to grow unit sales of inexpensive vehicles in non-OECD countries. But the critical issue for traditional auto investors and lenders will be whether topline growth of will be possible. An automaker that has no credible way to grow revenue in the face of EV disruption will find it very hard to attract the capital they will need to survive this transition. So, I contend that we should value this market in revenue.
Global expansion of vehicle market. The third issue is particularly difficult to get a handle on. When I look at the size and growth of motor vehicles buy country or region, I see huge differences. The US is a highly motorized country with 791 vehicles per 1000 inhabitants. Here the fleet of vehicles in use grows at a mere 0.81% annually; moreover new car sales have been declining for quite a while. On the other hand, China has a very low motorization rate about one tenth of the US, 81 vehicles per 1000 inhabitants in 2012, but China's fleet is growing at 19.41% annually. I see three typed of markets: advanced economies with high motorization and low growth, advancing economies with low to moderate motorization and rapid growth, and underdeveloped economies with low motorization and low growth. Excluding China, Tesla has only entered makets with high motorization and low fleet growth. The fleet in Germany has actually been shrinking from 2005 to 2012, which is highly unusual. Naturally, these highly developed markets are where you will find the greatest numbers of high end car buyers, so this makes strategic sense for Tesla. But what becomes very hard to understand is where, geographically, the market will be 10 to 20 years from now. The best volume growth opportunies are in emeging economies in Asia and Latin America. The auto industry cannot be truly disrupted so long as ICE can grow at 5% or better outside of OECD counties. If we think of disruption happening in different markets at different times, we've got a very confusing picture, which invites incumbents to imagine that they still have game way past their prime. For instance, if the US is growing at 0.8 while Tesla advances revenue 50% each year, then Peak ICE in the US happens before Tesla reaches 1.6% marketshare by revenue. So this year the US market should be about $403B, and if the US remains about half of Tesla's revenue growing at 50%, then Tesla alone will for the US ICE peak by 2017. Is this enough to bring the auto industry into crisis? I doubt it. China is the oyster of the industry. Let's say that China's fleet continues to grow at 15% with the average car priced at $15000. This puts the size of the Chinese market in 2025 at about 120M cars and $1800B revenue. Even if Tesla had $180B (out of $350B worldwide) in revenue from China in 2025, other EV makers would need to produce about $360B to hit the critical EV penetration. But if Tesla has to sell more than half the EVs in China to disrupt this market, the peak ICE in China may arive well after 2026. I remain optimistic that Chinese EV makers will try to run well ahead of Tesla, which could lead to an ICE peak by 2025. In any case, it is clear that it will be much harder for Tesla to reach critical penetration in emerging markets, and this is where traditional automakers will continue go to grow their businesses.
So lets put this together. In 2015, Tesla aims for $6B in revenue, and grows 50% annually there after. In 2015, the global market is about 94M vehicles worth $1880B revenue, and grows 3.75% each year there after. By 2020, this puts Tesla at $45.6B and the global market at $2260B. Critical EV penetration is 7.5%. Tesla alone reaches critical penetration 3.56 = ln(0.075*2260/45.6)/ln(1.5/1.0375) years after 2020, that is 2024. If the rest of the industry is matching Tesla in EV revenue (Tesla has 50% EV marketshare) at the peak, then the peak happens when Tesla has 3.75% share of global revenue. Thus, the peak comes 1.68 = ln(0.075*2260*0.5/45.6)/ln(1.5/1.0375) years past 2020, or 2022.
So even after refining my analysis, I still get that global peak ICE will come in 2022 - 2024, but the auto industry may remain blind to this by imagining that ICE growth is still possible in Asian and Latin American markets. On a unit basis, this may be true, but on a revenue basis they will fail year after year. Complicating this may be that oil prices plumet before we reach the Oil peak in 2028. If oil is super cheap, under $35/barrel, then the developing conuntries of the world may well lap it up and increase motorization rates well before Tesla grade vehicles become available. So while Latin America may be growing its fleet at 7% with oil over $90, it may grow at 15% with oil under $35. So by the mid-2020s it becomes important for Tesla to address these emerging markets.
