The potential for hybrid and electric cars is significant with 1 million predicted to be on UK roads by 2020. But brands are not explaining their benefits clearly enough, and purchase prices need to be reduced.
The UK is proving a promising market for manufacturers of hybrid and electric vehicles, but their penetration remains low for the time being, according to a study seen exclusively by Marketing Week.
Research firm Datamonitor’s analysis of the sector reveals that the market has grown at an impressive rate in the UK, but from a very low base. Between 2005 and 2009 new registrations enjoyed a 20% compound annual growth rate (CAGR), a figure which averages the year-on-year growth over the period.
However, that only represents an increase from a 0.4% to a 0.9% share of the new car market in that time. In terms of cars on the road, it translates as an increase from just over 22,000 to nearly 76,000.
Datamonitor senior analyst Anuj Chandna says uptake of the vehicles in the UK is better than in mainland Europe. “If you look at the volume number from 2009, the sales of hybrid and electric cars in the UK are the highest of any country in Europe, so sales growth has been good.
France, Spain and Italy have increased at a higher CAGR between 2005 and 2009 than the UK, but the growth has been from a lower volume base.”
It is the Netherlands where the technology currently has the highest share of the new car market at 2.8%, thanks to high subsidies to corporations buying them as company cars.
But the greatest growth is yet to come. Datamonitor has forecast figures up to 2020, which show the market gaining momentum relatively slowly until 2015. Analysts predict sales in the UK will reach about 75,000 a year by then, up from an estimated 21,600 in 2010.
Over the following five years, however, sales are predicted to multiply by 3.5 times, reaching just over 261,000 by 2020. There are forecast to be over 1 million hybrid and electric vehicles on UK/European roads by that time.
The UK will still retain its lead over the rest of Europe in sales according to the report, and one of the contributing factors to this will be financial incentives for owners provided by the government.
These include a 25% discount on list prices of electric vehicles, plug-in hybrids and hydrogen fuel cell vehicles up to a maximum of £5,000. This scheme started in January and will run until at least March 2012.
In addition, drivers can park for free in London, are exempt from the city’s congestion charge and can recharge for free at public charging points. The subsidies do not extend to the currently more common hybrids whose electrical power is generated as the car drives.
However, these incentives are perhaps not being fully exploited in the marketing of the cars, with more than half of those surveyed saying they aren’t aware of them. Nearly a third of people surveyed say these factors would have a high influence on whether they buy an eco-friendly car and a further 26% say the discounts would have a medium amount of influence when deciding to purchase.
Increasing awareness of government incentives will undoubtedly help in maximising sales opportunities, but Chandna points out that the market will eventually have to stand on its own feet without depending on subsidy. “We believe that in the long run the industry has to evolve and gain a real commercial shape in the sense of mass production. Then the technology has to evolve. The industry cannot survive just on the basis of government incentives,” he says.
A viable model of mass production is crucial to the progress of this market because cost is a major factor when someone decides to buy a car.
The initial purchase price is the most important factor for consumers buying any type of new car, according to the research, with 72% of respondents saying it is of high importance. The cost of running comes close behind, with 68% saying this is key, which is well ahead of the third highest response rate, for after-sales service on 46%.
Hybrid and electric vehicles are currently perceived as being far more expensive to buy than petrol or diesel cars, though they are seen more favourably in terms of running costs, given the lower tax and fuel bills that they attract.
There are other issues giving drivers cause for concern such as a lack of charging points available nationwide and the perceived cost of replacing a battery.
While the former clearly requires a significant improvement in infrastructure, the latter is in fact probably less of a problem than consumers believe, since manufacturers generally provide lengthy battery warranty periods of around eight years or 100,000 miles.
Yet Honda UK marketing director Martin Moll notes that bringing down the purchase price is fundamental to increasing uptake in future (see The Frontline, below). Even with reduced running costs, travelling around 8,000 miles a year the average driver could take 10 years before getting payback on the additional up-front cost, he says.
Neither do the government’s subsidies make enough of a dent in the current price difference between buying new hybrid versus petrol or diesel cars. Moll says: “It does not bridge the gap to the cost of the car in the first place.
“The cost of a small car can be in excess of £20,000, and that is after subsidy. If you are looking at spending £15,000 then it is irrelevant how much the government has or has not supported. It depends on the unit cost in the first place.”
Competition might eventually contribute to bringing prices down, as more options encourage consumers to consider the products, thus growing the overall size of the market and giving manufacturers greater scope for exploiting economies of scale. This has been a long time coming, as many companies have lagged behind the leaders in terms of investment in the technology. However Chandna sees the situation slowly changing.
“So far, only two serious players have emerged – Toyota and Honda. There are not many models of hybrid cars available in the market, so the customer does not have a good deal of choice. But vehicle manufacturers see this as a potential growth arena,” he says.
While it appears that there are good opportunities for an increase in sales of hybrid cars, there are serious doubts about whether fully electric cars are ever likely to gain much traction. Plug-in hybrids, the next generation of hybrids that depend less on conventional fuel but can drive for longer than electric cars, are predicted to be the fastest-growing category of ’green’ vehicle during the next five years, Chandna says.
However, the potential size of the electric car market might not justify development of a national charging infrastructure, and consequently consumers are likely to remain worried about being stranded on roads.
In any case, the endgame, according to Moll, is the hydrogen car. It might be a decade or more before they begin to appear in numbers on the streets, but this is ultimately where technological efforts are directed.
WE ASK MARKETERS ON THE FRONTLINE WHETHER OUR ’TRENDS’ RESEARCH MATCHES THEIR EXPERIENCE ON THE GROUND
UK commercial director
Over 3 million of our hybrid vehicles have been sold globally since their launch in Japan in 1997. Our strategy for the future is to build on this and we will be launching 10 new or fully revised hybrid models in Europe across the Toyota and Lexus brands by the end of 2013.
We experienced record hybrid sales in Europe in 2010 of more than 70,000 units, up 29% from the previous year. Plug-in hybrid represents the next step in this technology, allowing much greater distances to be driven on electric power alone, but without any of the range anxiety associated with full electric vehicles.
Increasing the model line-up will bring greater economy of scale – which is important – as the research says cost is a big factor when someone is buying a car. We will introduce the Yaris hybrid in 2012, which will become our cheapest hybrid to date.
Campaigns to promote hybrids prominently feature the savings to be made by switching to this technology. With high fuel prices, cost of ownership is increasingly a key concern for customers. Hybrid models have lower fuel consumption and taxation, so they can save owners thousands of pounds in terms in comparison with other vehicles.
Low carbon dioxide and environmental awareness tend to go hand in hand and the decision to purchase a hybrid can be made for environmental reasons, cost reasons, or both. While the current focus is very much on carbon dioxide as we head towards 2015 and the introduction of Euro 6 emission regulations, particulate matter and nitrogen oxide emissions will feature more prominently in terms of air quality and human health.
UK marketing director
The hybrid phenomenon in market terms is perceived as being relatively new, but for us it started in 1999 with our original Insight model and now we want to expand the current range.
The next transition we see is the electric plug-in – notably, this can happen at home rather than at a fuel station because there is an infrastructure issue that will take several years to accommodate. The industry view is that only 5% of the market will be electric, so it is quite a large amount to spend on what could be a quite small niche.
The third phase is a zero-emissions electric car. We already have an electric vehicle concept, but if you take a concept like Nissan Leaf, which is already in the market, it is a small car that is £23,000 after a subsidy from the government. That’s a lot of money, but until you have volume, you can’t reduce the cost.
But what we are most focused on is the hydrogen car. It will be, conservatively, 15 years before you get mainstream hydrogen-powered cars. It is not just the research and development investment, but also the infrastructure that is behind it.
Hybrids will proliferate. Electric vehicles are already out there, but because the cost is so high I am not sure many consumers are prepared to pay at the level it is today. Unless that comes down dramatically, it would require manufacturers to produce in masses and then hope people buy at that volume rate.
Where there is a fear is in the look of the car and the cost upfront. We have got to normalise the car and not focus on the technology, because it scares people. They just want to know it is economical.
20% The compound annual growth rate of new registrations for hybrid and electric vehicles in the UK, between 2005 and 2009
72% The portion of people who list initial purchase price as being of high importance in choosing a new car.
68% The portion of people who list ’cost of running’ as a key factor when choosing a new car.