Editor’s Note: This is a guest post from Will Sierzchula, a researcher who analyzes factors which influence the development and adoption of alternative fuel vehicles.
Despite being available for purchase since the late 1990s, hybrid-electric vehicles (HEVs) still account for less than 4% of US light-duty auto sales. While HEV sales experienced consistent growth to 2009, since then they have largely stagnated (see Figure 1). This trend contrasts with forecasts from consulting firms such as J.D. Power and Associates and Navigant, which predicted that the hybrid market share would continue to grown. Oliver Hazimeh, director and head of global e-mobility at PRTM predicted that by 2020, hybrids would comprise 20% of new vehicle sales.
Figure 1. US HEV market share of new vehicle sales 1999-2014
Some of the main factors contributing to consumer purchases of hybrid vehicles are: lower fuel costs; a reduced environmental impact; and the opportunity to use new technology. However, the appeal of each of these factors has been reduced due to improvements in engine efficiency; a change in consumer sentiment; and the commercialization of plug-in vehicles, helping to explain why HEV sales have not met projections. Once seen as being a promising option for car of the future, there is the very real possibility that HEV market share could continue at its low level and even retreat. While the future for HEVs may be bleak, targets from the federal government’s Corporate Average Fuel Economy (CAFE) standards could end up being their salvation.
The economics of buying a hybrid
Additional mechanical components, including an electric motor and battery, result in HEVs having a higher purchase price and lower fuel costs relative to internal combustion engine vehicles (ICEVs). To explore these differences, it is helpful to look at models that are available with both ICEV and HEV powertrains. The Honda Civic, Toyota Camry, Ford Fusion and Hyundai Sonata are some of the most frequently purchased automobiles available in both ICEV and HEV formats. Figure 2 shows how purchase prices between HEVs and ICEVs with similar trim levels (option packages) e.g., the Civic Hybrid and Civic EX, have varied over the past eight years though the gap appears to be closing. For example, in 2006 the Toyota Camry Hybrid purchase price was almost $6,000 above that of the Toyota Camry SE but was only $3,000 in 2014.
Figure 2. HEV purchase price premiums relative to ICEVs
While manufacturer suggested retail prices (adjusted for inflation) of Honda Civics, Hyundai Sonatas, and Toyota Camrys have been decreasing since 2006 (prices for Ford Fusions have been going down since 2011), the HEV versions have been doing so at a significantly faster rate than their ICEV counterparts. For example, prices for the Toyota Camry hybrid have been decreasing at almost $450 per year as opposed to $123 for the gas version. Recent HEV premiums range from $1,700 for the Sonata to $3,000-$4,000 for the other models. The purchase price differences between HEVs and ICEVs in Figure 2 have been narrowing between $200 and $600 annually, but interestingly the gap has barely changed for most of the models since 2012. However, HEV purchase prices will likely continue to approach those of ICEVs as auto manufacturers introduce next-generation hybrid models in the coming years.
Nevertheless, incremental improvements in purchase price gaps may not be enough to entice many consumers to buy a HEV. Previous studies noted that the premium required to buy an alternative fuel vehicle (such as a hybrid) has a profound and negative impact on adoption rates. A 2011 survey from the Boston Consulting Group found that 56% of U.S. respondents would not pay more upfront for an alternative fuel vehicle while 38% would need to recoup initial pricing premiums within 2.5 to 3 years; none of the HEV models in Figure 2 are able to do that for the average car driver at today’s gas prices. These figures make hybrids unappealing to a large portion of U.S. car buyers unless gas is very expensive AND an individual is a prolific driver.
HEV and ICEV fuel efficiency figures have been going up partly due to increased stringency of environmental regulations such as US CAFE standards. But because both types of automobiles are improving at a similar rate (about 0.7 mpg a year) and cost savings are greater when mpg figures are lower, the fuel efficiency advantage enjoyed by HEVs has been steadily eroding. For example, assuming that a car owner drives 12,000 miles in a year and gas is $3.50 per gallon, improving a vehicle’s fuel efficiency from 15 to 16 mpg would save more in fuel costs than an improvement from 30 to 31 mpg ($175 and $45 respectively). Also, lower gasoline prices, such as those available today, further result in a decrease for HEV fuel savings in monetary terms, making the automobiles less appealing to cost-conscious buyers.
In addition to financial aspects such as purchase price and fuel savings, there are other reasons why individuals have purchased HEVs. Research shows that some consumers have historically been willing to pay a premium for HEVs because the automobiles were good for the environment and also seen as being innovative. Results from Strategic Vision’s New Vehicle Experience Survey raise the possibility that today’s consumers do not consider hybrids to be as green or as innovative as they once did. Analysis of Strategic Visions data shows that for ICEV and HEV buyers, the importance of these factors in their automobile purchase decisions has been converging over the past 10 years (see Figure 3 ).
Figure 3. The importance of environmental impact and technical innovations to auto purchase decisions
Since this convergence has not coincided with an increase in HEV market share, it could be that hybrid buyers are becoming less willing to pay a premium for their car’s low environmental impact or having the latest technology. If this interpretation is correct, then HEVs will have to compete with ICEVs primarily on purchase price and fuel cost, which does not lead to a favorable comparison.
Competition from plug-ins
A final factor which has adversely affected HEV market share is the rise of plug-in electric vehicles. Even though these automobiles have limitations such as a higher purchase price, long charging time, and limited charging infrastructure, they also trump many important elements of the HEV value proposition. Relative to hybrids, plug-in vehicles are more environmentally friendly, have lower fuel costs, and better represent the latest technology. Whereas HEV fuel efficiency numbers usually range in the 40-55 mpg range, plug-ins often achieve figures above 100 mpg. Plus, plug-in cars are frequently depicted as next-generation hybrid vehicles and their innovative appeal to consumers increases since they only recently became available for purchase.
Currently, there is a substantial purchase price gap between plug-ins and HEVs, but because of their different technological requirements these two types of automobiles may advance at different rates (similar to HEVs and ICEVs). Fully electric plug-in vehicles such as the Nissan LEAF offer the possibility of a steeper improvement curve and subsequently a faster decline in costs. According to Tesla’s Elon Musk, Lithium-ion battery prices (in $ per kilowatt-hour) improve at about an 8% annual basis, which if continued would result in dramatically lower purchase prices for plug-in vehicles. These gains would also reduce hybrid costs, but because plug-in vehicles use bigger batteries, they stand to benefit more. If purchase prices come down at an accelerated rate, plug-in vehicles are likely to attract ever-more potential HEV buyers and likely would result in a steady decrease in HEV sales.
CAFE as a potential savior
Two possible exceptions could result in an increase in HEV market share. Firstly, dramatic improvements in the purchase price gap between HEVs and comparable ICEVs could lead to commensurate growth in hybrid sales. Secondly, if HEVs offer a more economical way for auto makers to meet fuel economy or emissions standards, then hybrid technology might be incorporated into cars by default. CAFE standards require that vehicles such as the Honda Civic need to reach 43 mpg by the 2025 model year. While the Civic Hybrid currently achieves these figures, the ICEV model needs to improve by over 8 mpg to be in compliance. If auto makers are unable to meet CAFE requirements though measures such as using lightweight materials (see the new Ford F150) and more efficient internal combustion engines, then they may turn to hybrid technology.
Recent changes in the automotive market have reduced the appeal of many factors which historically encouraged consumers to adopt HEVs, leading to stagnation in sales. Grounds for optimism include a narrowing of the purchase price gap with ICEVs and their potential introduction into the general fleet due to CAFE standards. However, the competitive vise of improving ICEVs from bottom and plug-in vehicles from the top suggests a dark outlook for the future of HEVs.
 2014 Sonata figures were not included because of a model shuffle which distorted comparison of the hybrid version to the SE trim.
 The scale in Figure 2 goes from 5 being ‘extremely important’ to 1 being ‘not at all important’.
1. All graphs created by the author.
2. Photo of Honda Civic hybrid by Mariordo Mario Roberto Duran Ortiz and used under this Creative Commons license.