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back to index backEUROtalk April,  2005

Hybrid Electric Vehicles in Europe

There is no doubt that in some parts of the world, we are witnessing the birth of an age where sales of full hybrid electric vehicles (HEVs) will be measured in the hundreds of thousands or possibly even millions.

Conventional wisdom has always been that Europe is very unlikely to go down this route since we already have diesel as the fuel-efficient option, with uptake of diesel across Western Europe now running at 50%. This is in stark contrast to the regions where HEVs are gaining a foothold. Diesel penetration among US light vehicle sales was estimated at 3.4% in 2004, while among Japanese passenger cars it was effectively zero. At present, regulatory conditions in those markets effectively prevent the profitable sales of all (or any) diesel cars. So while Europe has been able to switch to diesel in order to successfully bring down vehicular CO 2 emissions, the choices available to most other regions, are at present, different.

While vehicular CO 2 reduction is not often mandated in many (if any) regions, there do exist reduction targets agreed between vehicle manufacturers and regulators in some areas, and with road vehicles being a visible contributor to global warming, these will persist and indeed strengthen.

So the impetus to introduce fuel-efficient cars is coming mainly from the manufacturers, rather than from the market.

Of course as such vehicles become available, car buyers do their sums and decide whether the premium they may pay up front to buy one will be returned in fuel savings during their period of ownership. So far in Europe this calculation has led an increasing number of drivers down the diesel route, aided by cheaper diesel fuel (relative to gasoline) in most European countries, as well as huge improvements in diesel engine technology.

There are two key reasons why HEVs, in almost all instances, do not form part of the short-list of potential purchases. Firstly, there are simply very few such vehicles available in Europe. While the choice remains small in any market, in Europe to date it has been effectively limited to one car – Toyota's Prius, which was voted European Car of the Year 2005.

Secondly, when the calculation mentioned above is applied to HEVs they lose out significantly to diesel and gasoline simply because of the above average transaction price. Therefore buyers so far have been limited to those who are prepared to pay a premium for what they see as either cutting edge technology, or as the most non-polluting mainstream car available.

So for HEVs to gain in popularity in Europe we would need more consumer choice, and any new models would need to be seen as true competitors to current diesel and gasoline cars in functionality terms. Additionally the purchase price of these vehicles would need to be set at such a level whereby there would not be a significant financial penalty to pay during the ownership period, when compared with gasoline and diesel alternatives. But will either of these two restraining factors change any time soon? Toyota has already been winning more sales of the Prius as the product has improved.

Estimated European sales of the Prius in 2004 were 8,000 units, and Toyota has just revised upwards its 2005 forecast from 15,000 to 20,000 units. While this is an impressive growth rate, is Toyota still just tapping into the limited number of environmentally conscious (and probably well-off) people mentioned above, or are they winning over mainstream buyers?

Logic tells us that, at present, it is the former, and this means that although Toyota and the like will see hefty percentage increases in HEV sales, market share will continue to be measured in fractions of a percent unless we see a structural shift in availability or cost-benefit versus the mainstream alternatives.

The chart outlines development of the European HEV market over the last few years as well as expected medium-term growth. How long this growth rate will continue depends on the size of the pool of buyers who are attracted to this technology regardless of the purchase cost premium. The pool would increase in size if, for example, road pricing schemes which favour HEVs proliferate. We expect this to happen, certainly in Europe's more congested markets. But it is hard to escape the notion that a vehicle that in effect contains two separate powertrains cannot be built for a price that competes with conventional gasoline, or even diesel powertrains. Toyota, however, claims to be heading in this direction, and if that is the case, then the future for HEVs, even in Europe, is bright.

Source: J.D. Power and Associates - GAI

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