Brian Gaynor: Car boom looks like last hurrah for petrol power - Milford Asset

Brian Gaynor: Car boom looks like last hurrah for petrol power

15 Jul, 2017

Categories: Brian Gaynor, Economy, News

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This article originally appeared in the NZ Herald.

Vehicle sales are booming but are we buying cars that will be obsolete before the end of their working life?

This issue has been highlighted by Volvo’s recent decision that all new models launched from 2019 onwards will have an electric motor. The company’s press release notes that this will mark “the historic end of cars that only have an internal combustion engine (ICE) and placing electrification at the core of its [Volvo’s] future business”.

Volvo’s decision is consistent with studies concluding that electrically-driven cars will progressively replace petrol driven automobiles over the next decade or two. This will have a significant impact on the automotive industry, energy usage and oil prices.

The New Zealand vehicle market is booming, as indicated by the accompanying table.

Motor Industry Association data shows that there were 107,880 new car sales in the year ended June, an 11.8 per cent increase over the previous corresponding period.

The record high prior to 2016 was 96,418 sales in the 1984 calendar year.

Commercial vehicle sales have also soared in recent years with 49,048 new sales in the June 2017 year, an 18.9 per cent increase over the June 2016 year. The pre-2014 record high was 30,492 sales in the December 1982 year.

The latest commercial vehicle sales figures reflect booming business conditions and a shortage of skilled drivers. The latter requires companies to upgrade their vehicles to attract new employees.

Second-hand imports are also rocketing with Statistics NZ reporting 155,876 imports for the May 2017 year. This is only 1096 below the all-time calendar year high of 156,972 in 2003.

The combined 2017 passenger, commercial and second-hand figure of 312,804 compares with just 190,094 in 2013.

These figures clearly demonstrate that car importers and dealers are experiencing unprecedented boom conditions. Consequently, the country’s total vehicle imports have increased by 15.8 per cent, in dollar terms, over the past 12 months and are our largest import category by a wide margin.

The huge stack of imported vehicles, both new and used, on the Auckland waterfront is a graphic illustration of this.

The two right-hand columns show total vehicle registrations as at May 31 and the increase over the previous year. The figures are the net outcome of new vehicle sales minus vehicles scrapped. Vehicles with an original date between 1990 and 1994 have the highest scrappage rate at present.

These vehicle registration figures explain why our roads have become more and more congested. The total number of registered vehicles has increased by 637,676 over the past five years with around a third of these, around 215,000, in Auckland.

Neither the Government, nor the Auckland City Council, anticipated this massive growth in vehicle numbers and our roads cannot cope with this volume increase. Another few years of national vehicle registration growth of more than 150,000 per annum will put further pressure on the country’s roads.

Ministry of Transport figures show that electric vehicle (EV) numbers are small but increasing rapidly. New EV registrations have grown from just 405 in the June 2015 year to 802 the following year and 2281 in the 12 months ended June this year.

The Ministry reports that the introduction of the Mitsubishi Outlander, Audi and BMW plug-in hybrids boosted the market three years ago but second-hand EV imports have made a greater contribution in recent months.

The Motor Industry Association’s new car sales figures show that 105 Tesla vehicles were sold in the first six months of the current year compared with 24 in the full 2016 calendar year and 21 vehicles in the 12 months ended December 2015.

EV advocates argue that these vehicles have several clear benefits including:

  • They are environmentally friendly as they run on clean energy and do not emit toxic gas or smoke.
  • Although electricity isn’t free, EVs are far cheaper to run than petrol-based vehicles.
  • EVs require less maintenance because they have fewer moving parts.
  • They generate less noise pollution.
  • They often have government subsidies to encourage lower pollution levels.

The main disadvantages of EVs are their limited battery capacity and long recharge time. One of the main objectives of EV manufacturers is to improve battery capacity to enable vehicles to travel further and reduce recharging time.

Volvo isn’t the only company to commit huge resources to electric vehicle development.

Mercedes has announced plans to spend US$11 billion ($15b) over the next five years on 10 EV models, Volkswagen has committed US$10b to EVs over the same period and General Motors has earmarked nearly US$4b.

Meanwhile, Ford has committed to develop an EV with a 480km battery range by 2020.

In addition, governments are very keen to promote EV usage. Norway has a target of 100 per cent EVs by 2025 while earlier this month Emmanuel Macron’s French Government announced that it would ban the sale of petrol and diesel vehicles by 2040 to meet its targets under the Paris climate accord. Several major cities want to ban older petrol based vehicles and China has a 20 per cent clean energy vehicle target.

A recent report by McKinsey & Company – Automotive revolution – perspective towards 2030 – had this to say about electric vehicles: “Stricter emission regulations, lower battery costs, widely available charging stations, and increasing consumer acceptance will create new and strong momentum for penetration of electrified vehicles (hybrid, plug-in, battery electric, and fuel cell) in the coming years.

“Hence, in 2030, the share of electrified vehicles could range from 10 to 50 per cent of new vehicle sales. Adoption rates will be highest in developed, dense cities with strict emission regulation and consumer incentives (tax breaks, special parking and driving privileges, discounted electricity pricing, etc).

“Sales penetration will be slower in small towns and rural areas with lower levels of charging infrastructure and higher dependency on driving range.”

Goldman Sachs is forecasting 22 per cent EV penetration by 2025 while most forecasters agree that EVs should be gaining strong momentum by the end of the 2020s.

The switch to EVs should have an impact on the price of oil as the International Energy Agency estimates that road transport represents 42.2 per cent of total world oil consumption. A substantial shift to EVs would have a negative impact on oil prices and the prosperity of oil-producing countries.

A bullish report by Bloomberg New Energy Finance (BNEF), released this week, forecast that EV sales would represent 54 per cent of new car sales by 2040 compared with its previous forecast of 35 per cent. BNEF analyst Colin McKerracher was quoted as saying: “This is economics, pure and simple economics, lithium-ion battery prices are going to come down sooner and faster than most people expect.”

Bloomberg believes that this seismic shift will see electric cars accounting for a third of the global auto fleet by 2040 and displace about 8 million barrels a day of oil production. This compares with Saudi Arabia’s current oil exports of 7 million barrels a day.

It is important to note that electrified vehicles include a large proportion of hybrid-electrics. This means that the internal combustion engine will continue to be relevant, albeit less and less dominant.

There is a strong incentive for the New Zealand Government to encourage greater electric vehicle usage because we have a plentiful supply of electricity, and annual petroleum imports of $5b represent 9.4 per cent of the country’s total imports.

The issue for New Zealand consumers is that the resale value of petrol-based vehicles could decline more rapidly than previously as electric vehicles become more popular and cheaper to operate.

Astute buyers, with a long-term perspective, will take this into account when purchasing a new vehicle or a second-hand import.

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Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so should not be viewed as investment or financial advice. If you require financial advice we recommend that you speak to an Authorised Financial Adviser.

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