In this article, I explain how Wright’s Law is impacting legacy auto sales in the US, Europe, and China, explaining the factors most affecting each market.
Image from DALL-E, created with the prompt “create a photo of the the grim reaper and an auto manufacturing car line. The grim reaper should be scary but the auto factory manufacturing line should be bright and clear.”
Background On Wright’s Law
ARK Investment Management has been promoting Wright’s Law for years. Wright’s Law is similar to the famous Moore’s Law of semiconductor progress, which has been pretty accurate for almost 60 years at predicting that the number of semiconductors (and therefore computing power) doubles every 2 years. Wright’s Law is more general, because it predicts price declines for all mass produced products. Wright’s Law states that the price of production for a given product will go down a fixed amount (different for different products) every time the cumulative number of units doubles. The insight this gives you is that costs go down in products that are relatively new and early in their production ramp.
I realize electric cars have been around for over a 100 years, but very few units were produced until recently. Now they are doubling their cumulative volume one to two times every 2 years, while gas and diesel car and truck production is at about 70 million units but with declining volumes, on a base of 2.2 billion. That means, in theory, it would take more than 31 years to double fossil fuel vehicle volume — if sales weren’t declining, that is, and if cars and trucks lasted that long. I think we all know there won’t be many gas or diesel cars made after 2030. In this article, Sam Korus discussed a reduction in costs of 15% every doubling in volume for the auto industry.
How This Is Playing Out Between Now and 2030
So, what does this mean for the auto industry? It means that electric car prices will continue to drop dramatically over the next 4 doublings in volume, which should be by 2028 to 2030. If you do the math (.85 times .85 times .85 times .85), that predicts a 48% reduction in the price of electric cars. Possibly because of stricter emissions and safety regulations, the price of cars has been going up 4.12% a year over the last 5 years in the US. With my above prediction of about 8% a year reduction in electric car costs and assuming the 4% increase in (mostly gas) car costs continues, that predicts electric vehicles get 12% more price competitive every year!
US Situation
Credit: Cox Automotive Q1 2023 Industry Insights and Forecast Presentation. Monday, March 27, 2023
I’m writing this before I see Tesla’s Q1 delivery and production volumes, but Cox Automotive published this excellent analysis a few days ago that does a great job summarizing the situation. Tesla’s shocking price cuts on January 13 allowed it to dramatically increase sales in relatively flat auto market. With Tesla’s rumored Model 3 and Model Y refreshes (Project Highland and Project Juniper, respectively) focused more on cost reduction than styling updates, and with Tesla Investor Day confirming that Tesla’s next-generation product is all about lowering costs to make it affordable to the masses, legacy auto will have a lot of trouble over the next few years trying to sell very many $60,000 vehicles when Tesla (and others) will have a wide range of electric vehicles available for under $40,000, including some models under $15,000 with the benefit of the tax credit (which will be point of sale credit instead of a tax credit you get up to 16 months after buying a car — starting January 1st, 2024).
Europe
If you read CleanTechnica religiously (as you should), you would know Europe is way ahead of the US in converting to electric vehicles with 20% of its vehicles able to run on electrons. The two big problems for traditional big sellers in Europe — like Volkswagen, Toyota, Mercedes, BMW, Peugeot, Audi, Renault, Ford, Skoda and others (who are all electrifying their cars, but at relatively high costs and prices) — are that Tesla and the Chinese manufactures, like BYD and Nio, are making electric cars at a much lower costs, since they have a lot more experience making them. As an example of that, just yesterday, we wrote that BYD is launching three successful models in Spain, spanning from the low-priced Atto 3 to the luxurious Tang SUV. I’m sure many of the local makers will find a way to survive with a combination of cutbacks and government bailouts. Toyota will be especially challenged since it doesn’t have any electric cars to sell.
China
If you thought Europe was moving quickly, the world’s largest auto market — China — is moving even more quickly, with 33% of its new vehicles electrified (mostly fully electric). The big news that has barely been covered by the media, but Sam Evans (The Electric Viking) has highlighted several times recently, is the impending change in emissions regulation in China. Whether it happens in July or is extended 6 months until January 2024, many gas and diesel cars that legacy automakers have used to make billions in profits over the last decade will be illegal to sell in China without paying a huge fine or buying emissions credits from someone like Tesla that has extra credits (since they don’t sell any gas or diesel cars).
Conclusion
As you can see, the manufacturers that have been sitting on their hands (or worse, thinking lobbying against ICE vehicle bans would save them) are starting to see the handwriting on the wall. It isn’t the 2035 bans that they have to worry about — it’s the ultra-competitive electric cars coming out over the next few years that will put them in a world of hurt.
It’s playing out just like Tony Seba has been predicting for over a decade — disruption is slow in the early stages (10 years or so) and then hits a tipping point (at about 5% EV penetration) where adoption shifts from early adopters to the general public and quickly goes to 80% or 90%.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], Hertz [HTZ], and several ARK ETFs. But I offer no investment advice of any sort here.
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