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The Transformative Potential of

Hybrid Vehicles
We see hybrid vehicles as a breakthrough technology—one that will dominate road transportation
within 25 years, potentially breaking oil’s stranglehold on the global economy.

THE WORLD MAY BE ON THE CUSP OF A Humankind keeps finding better ways to do
wholesale transition to hybrid vehicles. things, and when innovations enhance produc-
Powered by electric motors in combination tivity and hence standards of living, they catch
with traditional internal combustion engines, on quickly. We expect that to be the case with
these vehicles significantly reduce fuel use. hybrid power.
This game-changing technology promises to
dramatically increase energy efficiency, allow
Hybrids Could Dramatically Reduce Oil Demand
for a range of fuels to power vehicles, and
reduce demand for oil from the key transpor- Transportation has driven growth in oil demand
tation sector. The implications for the global for the past 30 years, while other economic
economy and for global geopolitics—as well as sectors have managed to shift to a significant
for many industries—are vast. degree to cheaper substitutes. The International
Energy Agency (IEA) forecasts that global oil
Our prediction of hybrids’ impact may seem demand will increase from 84 million barrels
overly bold given that just under 1 million of per day to 121 million by 2030, based chiefly
these vehicles were sold from 1997 to October on demand growth from transportation.
2006; hybrids represent less than 0.2% of all
new cars and small trucks purchased during Within the transportation sector, cars and
that period. What’s more, our forecast of other light-duty vehicles (such as SUVs and
reduced oil demand from the transportation pickup trucks) are by far the largest users of
sector may also seem too good to be true: It oil. The IEA projects that this segment alone
conveniently comes just as many experts are will account for 16 million barrels’ worth of
predicting a disastrous shortage of oil. its predicted hike in total usage of 37 million
barrels per day by 2030.
Historically, however, resource shortages
have often been averted by developments in The IEA’s projections for growth in the
technology or in resource substitution. Most number of vehicles worldwide and in the aver-
famously, improvements in agricultural pro- age number of miles driven per vehicle seem
ductivity and distribution methods averted the reasonable to us. But the agency’s implicit
war, pestilence, and famine grimly predicted assumption that fuel efficiency between now
by Thomas Malthus in the late 18th century. and 2030 will increase hardly at all—from 23
Similarly, in the century before, coal sup- miles per gallon to 25—appears to us to be far
planted dwindling wood supplies in England, too conservative.1
preventing a fuel shortage that some feared
would cripple the country’s economy.
1
In World Energy Outlook 2004, the IEA published its high-level forecasts for aggregate oil demand and oil demand for transporta-
tion uses without disclosing the underlying assumptions, estimates, and calculations. Its model may be approximated by referencing
the joint work of the IEA and the World Business Council for Sustainable Development’s Sustainable Mobility Project (SMP).

WINTER 2006 | 9
Why do we think so? Our research has per- We estimate that in 2030 more than 70% of
suaded us that innovations will dramatically cars and small trucks will be hybrids, and
change how cars are powered. We believe that that these vehicles will have an average fuel
fuel efficiency could nearly double by 2030— efficiency rating of an amazing 62 miles per
thanks mostly to hybrid technology. Today, gallon. Based on these assumptions, we pro-
only about 15% of the energy that goes into ject that the global fleet of light-duty vehicles
the internal combustion engine of the typical (both internal combustion engines and hybrids)
vehicle is used to propel it or power its accesso- will average at least 50 miles per gallon then,
ries; the rest is wasted (Display 1). An electric double the IEA’s implied forecast (Display 2).
motor is five to six times more efficient: 80%
Display 2
of its output powers the vehicle or accessories.
Hybrids should sharply reduce global oil demand
Display 1
2002 2010E 2030E
Electricity powers cars more efficiently than gas 1,500
Vehicles on the Road 750
Internal Combustion Engine Electric Motor
(Millions) 0
Energy Energy Drive-
x
Input Input line
Loss 10,000
100% 100% (14)% Avg. Annual 5,000
(6)% Energy Miles per Vehicle 0
Output
Electric 80% ÷
Idle Drive- Resistance 60 50.0
Loss line Avg. Miles 30 23.1 23.5 25.1
Loss Energy
(62)% per Gallon 0
Output
Heat
(17)%
Loss (6)% 15%
40 32.1
20 21.8 21.5 16.1
5−6x More Efficient on Total Demand
Energy-to-Wheels Basis (Millions of Barrels 0
per Day)
Source: Toyota Motor, US Environmental Protection Agency, and
AllianceBernstein IEA AllianceBernstein
Source: International Energy Agency (IEA), SMP, and AllianceBernstein
Hybrids’ greater fuel efficiency stems from
several sources. The vehicles rely on their
electric motors—not their engines—during Consequently, we project that the oil demand
acceleration and low-speed cruising, and can attributable to cars and small trucks in 2030
use smaller engines without sacrificing per- will be 50% less than the IEA’s estimate—
formance. (In fact, because an electric motor and even somewhat less than the actual con-
delivers thrust more quickly than a gas engine, sumption figure today. Transportation-related
hybrids are faster off the mark than con- oil demand could be reduced further if buses,
ventional vehicles.) Moreover, when hybrid trucks, and military vehicles also migrate
vehicles stop in traffic, their engines don’t to some version of hybrid technology, as
idle; they turn off. Even the energy ordinarily we expect.
lost during braking gets captured and used to
recharge hybrids’ batteries, which also draw
storable energy from the running engine.

10 | BERNSTEIN JOURNAL: PERSPECTIVES ON INVESTING AND WEALTH MANAGEMENT


Better—Not Just More Efficient—Cars Hybrids do cost $4,500 to $6,000 more to
Automakers are gearing up for the hybrid build per vehicle than comparable conven-
era: Every major car company is entering the tional cars or trucks, and automakers pass on
market. Although they’ve introduced only about most of those additional costs to customers. By
a dozen hybrid models since 1997, automakers contrast, drivers can buy fuel-efficient diesel-
launched 10 models in 2006 alone. Production powered vehicles at a far lower premium.
is rising, and by 2009, more than 50 hybrid
models are expected to be released. Yet diesels require customers to accept a
trade-off between fuel economy and accelera-
Manufacturers regard hybrids as virtually a tion to cruising speed that hybrids do not.
“no-compromise” alternative to conventional And although diesels burn less fuel than
cars and trucks (Display 3). Hybrids offer an conventional vehicles, they are not as efficient
appealing combination of fuel efficiency, clean as hybrids. Furthermore, regulators around
emissions, convenience, and performance. the world are contemplating stricter vehicle
emissions standards that could erode diesels’
Display 3
up-front price advantage.
Hybrids are far more attractive than alternatives

Hybrid Flex- All Surmounting the Showroom-Price Barrier


Factor (Gasoline) Diesel CNG* Fuel Electric
Fuel Efficiency
Most analysts see hybrids’ price premium as a
Performance
major obstacle to their widespread adoption.
(acceleration) Drawing an analogy to the payback calcula-
Emissions/ tions that consumers carry out when they
Air Quality
Model Choice/
consider home improvements intended to save
Flexibility energy, analysts have determined how long
Convenience it would take drivers to recoup the purchase-
(range, refueling)
Load Capacity
price premium on a typical hybrid vehicle
through lower fuel bills. In the crucial US
Initial Cost
market, where the average car owner drives
Cost per Mile
12,250 miles a year, it would take drivers 12
GM
Representative Toyota VW Honda
Monte
Toyota years to earn back the premium at $2.97 per
Model Prius Jetta Civic RAV4 EV
Carlo
gallon without any tax incentives, and from
Attractiveness: High Medium Low six to 10 years with them.
*Compressed natural gas
Source: AllianceBernstein Some consumers, of course, may buy hybrids
for noneconomic reasons—because they regard
The only criteria on which hybrids come up them as better and cleaner than regular cars, or
somewhat short are load capacity and up-front to have access to high-occupancy-vehicle lanes
price. For pulling heavy loads at low speeds, when driving alone (many states permit this to
diesel engines have an edge. In time, however, foster reduced emissions and fuel-saving), or for
diesel-engine hybrids are likely to emerge that greater reliability (electrical systems break down
will provide the extra load capacity that driv- less often than mechanical ones). Others may
ers of pickups and heavy trucks demand. buy hybrids because they drive extensively, so
their payback period is much shorter.

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An analysis by the New York City Taxi & Rapidly expanding technologies typically lead
Limousine Commission found that the owner to massive economies of scale, such as those
of the average city cab, which logs about achieved recently by makers of lithium bat-
44,000 miles a year, would recoup the up- teries for laptops and cell phones (Display 5)
front premium on a hybrid in less than two and by manufacturers of electronic equipment.
years, even without tax incentives (Display 4). We expect a similar pattern with hybrids. The
Some 30% of all new vehicle sales in the US purchase-price premium for hybrids is likely to
are for heavily used cars or trucks, so the pay- fall to about $2,000 by 2010—and we believe
back period would be shorter for their owners that many people will gladly pay this to obtain
than for ordinary drivers (though longer than hybrids’ many advantages.
that for New York cabs).
Display 5

Display 4 New products’ costs tend to fall rapidly


The payback period for New York City’s hybrid taxis Consumer Batteries: Lithium-Ion
is short

Energy Density (watt-hour/kg)


200 4
Payback in Years*
Cost

Cost ($/watt-hour)
(Excludes Tax Incentives) 150 3
12.0
100 2
Energy
50 1

2.9 0 0
1.7 2.2 2.1
1.1 0.9 94 95 96 97 98 99 00 01 02 03

Hybrid Hybrid Hybrid Hybrid Hybrid Hybrid Average <$200 Million Sales >$4 Billion Sales
Ford Toyota Toyota Honda Honda Lexus US
Escape High- Prius Accord Civic RX400h Driver† Source: AC Propulsion, Advanced Automotive Battery Conference (2005),
lander and AllianceBernstein

*The NYC Taxi & Limousine Commission assumes each taxi travels 43,992
miles per year.
†Assumes 12,250 average annual miles driven, $5,000 average price
For an insight into the pace at which hybrids
premium, 50% average fuel efficiency gain, and gasoline price of $2.97 might win broad acceptance, we looked at the
per gallon
Source: Consumer Reports, New York City Taxi & Limousine introduction of other automotive technolo-
Commission, and AllianceBernstein gies (Display 6). The best analogue turned
out to be Europe’s introduction in 1997 of the
We expect this so-called high-travel group to so-called common-rail diesel engine, which
dominate hybrid sales over the next few years. greatly improved diesel performance by using
As a result, hybrids will, on average, record a high-pressure pump and a common rail
many more miles than conventional vehi- (pipe) for supplying all cylinders with diesel. In
cles—and thus have a disproportionate impact the ensuing decade, sales of diesels in Europe
in reducing oil consumption. In addition, the soared from 22% of new car sales to 50%.
high-travel group will constitute a sizable early
market for automakers, permitting them to In the US, a recent poll shows that over 70%
ramp up production and gain economies of of consumers would consider buying a hybrid
scale that will in turn make hybrids less expen- vehicle, implying potential demand in the
sive and thus more attractive to average drivers. millions. Supply is nowhere near that level,
however, because many automakers were late
to the game, and the market leader—Toyota

12 | BERNSTEIN JOURNAL: PERSPECTIVES ON INVESTING AND WEALTH MANAGEMENT


Display 6
By and large, electric utilities in the US and
Likely pace of adoption: lessons from history other developed nations have ample capacity
to accommodate overnight charging of plug-in
Years to Achieve
Penetration Rates of: hybrids. For instance, power suppliers in much
Technology/Innovation 20% 50% 80% of the American South and Midwest would
European Auto Sales need to make only modest investments in extra
Common-Rail Diesel <5 yrs. <10 yrs. NA
capacity, and their cost of electricity is low,
US Auto Sales
making overnight charging attractive in overall
energy-usage terms compared with relying on
Air Bags* 3 yrs. 5 yrs. 7 yrs.
oil-based fuels (Display 7). In other regions,
Front-Wheel Drive 6 9 13
utilities might have to add some capacity. But
Fuel Injection 5 9 13
for utilities with excess, and thus low-cost,
Multivalve Engine 3 10 20
capacity during off-peak hours, plug-ins could
Radial Tires 3 4 4
boost the revenues and profitability of under-
*Required by law
utilized assets.
Source: National Research Council, US Environmental Protection Agency,
Ward’s, and AllianceBernstein
Display 7

Motor—has been curtailing hybrid produc- US plug-in capacity is ample, but not always low-cost
tion, despite long waiting lists, because it
wants to avoid investing too heavily in produc-
tion capacity for a technology that is evolving
so rapidly.

Driving All Day on One Charge


Indeed, once high-energy lithium batteries
become available in five years or so, we expect Relative Cost
Attractive
a second phase of the hybrid revolution: the Neutral
introduction of so-called plug-in hybrids. A Unattractive

driver could charge his hybrid’s battery simply Note: “Attractive” reflects the likely availability of surplus low-cost, base-
load capacity and marginal costs of under $40 per million watt-hours.
by plugging it into an ordinary electrical outlet. “Unattractive” reflects likely unavailability of low-cost, base-load capacity
and marginal costs of more than $90 per million watt-hours. “Neutral”
reflects neither attractive nor unattractive. Analysis assumes natural gas
Plug-in hybrids with lithium batteries could prices remain at today’s relatively high levels.
dramatically cut fuel consumption. Those who Source: Energy Velocity, GlobalView, North American Electric Reliability
Council, Prudential Securities, and AllianceBernstein
drive less than 30 miles a day—about 60% of
American car owners—would rarely need to
The End of Oil Diplomacy?
use their gas engines at all: They would just
Ultimately, widespread adoption of plug-ins
plug in their hybrids at night to power the lith-
could decouple the crucial transportation
ium battery for the next day’s drive. For a long
sector from oil by enabling consumers to
trip, they could resort to the regular engine,
charge their batteries from the electric grid
avoiding the frequent stops for recharging that
when doing so would be cheaper than using
make pure electric vehicles unappealing. We
gasoline or diesel. Since oil is increasingly
estimate that plug-ins could average as much as
being phased out of electric generation, most
75 or even 100 miles per gallon of gas.

WINTER 2006 | 13
plug-in hybrids could be charged from an elec- would most likely gain market share. The oil
tric power grid that would ultimately be fired sector—refiners and distributors in particu-
by coal, nuclear power, natural gas, or renew- lar—would likely be hurt, for obvious reasons.
able resources rather than oil. Electric utilities and their equipment providers,
on the other hand, should benefit as plug-ins
Sharply curtailed oil usage would also have huge proliferate, pushing up off-peak demand.
geopolitical ramifications. For a century, many
nations have crafted their foreign and military Not surprisingly, technology companies could
policies at least in part with regard to securing be among the greatest beneficiaries. Electronic
the oil needed to fuel their economies. Such con- content makes up 45% of hybrids’ current
siderations would no longer be necessary. For component costs, and some experts predict
oil-exporting nations, however, the economic that electronics could in time represent 70% to
and political implications could be grim. 80%. Semiconductor and electronic companies
that sell power transistors, microcontrollers,
sensors, and a variety of other components
Technology Companies Among Biggest Winners
would enjoy the greatest boon. ■
Mass adoption of hybrids would have paradigm-
shifting implications for a host of industries.
Automakers and suppliers with hybrid expertise

14 | BERNSTEIN JOURNAL: PERSPECTIVES ON INVESTING AND WEALTH MANAGEMENT

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