The Importance of Understanding Markets as They Present Themselves

It is good the automotive electronic sub-assemblies markets in Japan are doing well. Toyota and Honda have engineered a remarkable technology in the Prius® and Civic architecture. As the global production platform for all cars and light trucks, about 58 million vehicles, begins to accept Hybrid Electric Vehicle (HEV) technology in a rapid way, somehow disclosing the fragile middle class in America and Asia, who truly are affected by high fuel prices.

On recent trips to California, Ohio, and back home in North Carolina I’ve noticed a growing number of Prius and Civics on the highways and roads, which made the new HEV technologies real to me.

Forecasts shown below for global production for HEVs between 2006 and 2015 should be viewed as conservative, using the Toyota formula for ICG penetration of HEVB as percentage of sales over five or ten years, with the maximum variable being the change in fuel price over the next five or ten years.  Once all platforms are counted globally based upon prototype and production start date, we extrapolate that like at Toyota, each platform will reach 6% penetration in five years. As each start date looms, component demand becomes constrained.

Global Production Forecasts for Hybrid Electric Vehicles: 2006-2010; 2011-2015

Using the Toyota penetration formula as described in the “source” below, the conclusion is that a conservative estimate of 3 million HEV-enabled vehicles by 2010 and 8 million HEVs by 2015. This would represent 6% of global internal combustion engine (ICG) production in 2010 and 13% in 2015. This represents conservative penetration rates, in my opinion, over the next decade.

Summary Table 1:
Global Production of Hybrid Electric Vehicles: 2006 CY to 2015 CY
(In Units)

Source: 2002-2006- HEV Manufacturer’s Data; 2006 – 2015, Paumanok Publications, Inc. Forecasts Based Upon Five Year Penetration Rates at Toyota into their total ICG production platform- Compared with existing ICG output per car manufacturer today, with a 5 year estimate of 6% per car manufacturer for each year they have announced they will create a vehicle with an electrified powertrain. Thus we have clear visibility at least to 2010, and our 2015 estimate is pure conjecture; and based upon our formula of a based of 58 million cars, our penetration rate is extremely low. Hence, if anything, even our estimates are conservative and other analysts who have predicted lower production volumes in the past for HEV were all surprised by the success of the PRIUS and have rushed platforms into production. Dusting off old technical libraries are Ford and GM. If we use a global average of $25,000 per vehicle we note that in dollar value that the global HEV market at retail will be $200 billion USD, with manufacturer's revenues at 80% of that number.

2006 Forecasts for Hybrid Electric Vehicle Production Worldwide:

The outlook from a strict economic point-of-view looks quite refreshing for the automotive industry. Toyota and Honda have developed a new segment that is not necessarily based upon fuel consciousness, but on better performance of the powertrain, with promises of advanced hybrids offering substantially more electronic solutions as functions of the powertrain and boost power to infotainment systems across the board.

Paumanok Publications estimates HEV (light duty only) global production to have been approximately 295,000 vehicles in 2005, and only a slight increase in production in 2006 due to component shortages. These shortages were brought about by an avalanche of new HEV product introductions between 2006 and 2010 that will create a viable segment of all market segments in the automotive electronic subassembly marketplace. Both Toyota and Honda have sited transition of manufacturing footprint for HEV products for more rapid and efficient production, which is also an obvious movement because the Prius, for example, has electronic content that drastically exceeds that of a traditional gasoline powered automobile.

Source: 2002-2006- HEV Manufacturer’s Data; 2006 – 2015, Paumanok Publications, Inc. Forecasts Based Upon Five Year Penetration Rates at Toyota into their total ICG production platform- Compared with existing ICG output per car manufacturer today, with a 5 year estimate of 6% per car manufacturer for each year they have announced they will create a vehicle with an electrified powertrain. Thus we have clear visibility at least to 2010, and our 2015 estimate is pure conjecture; and based upon our formula of a based of 58 million cars, our penetration rate is extremely low. Thus if anything, even our estimates are conservative and other analysts who have predicted lower production volumes in the past for HEV were all surprised by the success of the PRIUS and have rushed platforms into production. Dusting off old technical libraries are Ford and GM. If we use a global average of $25,000 per vehicle we note that in dollar value that the global HEV market at retail will be $200 billion USD, with manufacturer’s revenues at 80% of that number.

Is the Prius® Profitable?

Many analysts point toward the higher economics of the electrified powertrain, and tasked Toyota to show that Prius was profitable. Toyota, to my knowledge, has never made such a statement. However, it is apparent that a whole company, like Honda, was profitable in FY 2006, which ends in March. Their overall costs to produce were much lower than the median. However, during the course of Paumanok’s research there were dramatic price breaks for both Toyota and Honda in the late 2004 through June 2006 time frame. Honda has excellent pricing for electronic subassemblies as well, while newcomers like Ford are outsourcing and must pay higher prices.

Subsequently, in three separate inquiries in Nevada, California and Ohio, the price of the Prius is now $26,000 USD but still availability is limited.

As for inventories in the car business, these are easily calculated because they must move product by ocean going vessel, which is a slow and predictable process. Volumes can be counted to single digits as manifests do not change as much as in other industries such as travel and tourism.

Any shortage in the Prius was logically at the plant location, or because of a diversion of fixed assets to the regions that offered the highest dollar value for the entire supply chain. At least Toyota underestimated the success of the Prius as did Honda. But still, these are the types of problems one wishes for in business.

The Prius is profitable. In 2006 pricing for expensive electronic subassemblies consumed in the Prius have declined by 55% in the past 24 months at Toyota and by 37% at Honda due to volume assembly going past 250,000 and 100,000, respectively. At the same time the $20,000 price tag for the Prius increased by $6,000 (at least at retail, but this is what happens when a vendor goes on allocation).

For example, HEV requires an 11-fold increase in capacitor costs for car manufacturers and a 13-fold increase in battery costs per vehicle, plus the new inverter costs, which raises electronic content from the traditional 20% ($6,000 USD) of vehicle cost to 30% ($9,000 USD per vehicle cost). Some of these costs are depleted by recouped costs by the elimination of specific electromechanical components with emphasis upon exhaust, transmission, and starter alternator.  We estimate approximately $2,000 USD is recouped during production, which increases the electronic content production cost by $1,000 per automobile. With an MSRP of only $20,000 USD, the Prius, we believe, is not yet profitable, but they achieved dramatic market acceptance in the face of alternative technologies.  It also has redefined the global supply chain to the automotive electronic subassembly business. Toyota is successfully applying the economic formula for HEVs toward more profitable segments, such as power boost for performance automobiles, which is Toyota’s future car concept, in effect, reversing the economic formula away from the cost-conscious consumer, toward the driving enthusiast, who tend to pay margins for even the slightest variation in powertrain technology. Electronic subassemblies will take on entire new meaning, and the market will grow substantially.

Using the Toyota model as the perfect solution to a complex economic equation — involving fuel costs, environmental impact, meeting or exceeding stringent Federal and individual (California) state mandates for emissions, seating capacity, tank driving miles, plus customer satisfaction — there is the possibility for a major impact on the market. Since so many automotive manufacturers are rushing HEV concepts into production, the electronic component supply chain is straining to its maximum levels as automotive electronic subassembly markets collide with industrial, defense and electric rail markets that traditionally consume the high voltage capacitors now needed in mass quantities by the automotive industry worldwide. 

Big Winners in HEV Technology:

Panasonic and its energy storage device solutions will continue to be the best economic indicator of component shortages at Toyota and Honda because both of these manufacturers were clever enough to go into the motor assembly business themselves. They built captive supply chains over the most expensive portion of the electrified powertrain. Panasonic was well aligned to aid Toyota and Honda in their dual development of HEVs by supplying key subassemblies used in traditional locomotive schematics, the energy storage devices, with emphasis upon nickel metal hydride batteries, power film capacitors and double layer carbon supercapacitors. Panasonic has developed and successfully implemented a strategy of being a blanket supplier of subassemblies to the HEV effort.

EPCOS of Munich Germany is also well known, and has positioned itself well in the supply chain for supplying energy storage devices. EPCOS is part owned by Panasonic (a small percentage from the former Siemens + Matsushita GmbH days) and even though they are two companies traded separately now, they still share a significant amount of technology and have similar market strategies, as evidenced by the sale of Panasonic’s tantalum capacitor plant in Tianjin and EPCOS’s subsequent sale of their tantalum capacitor operations in Heidenheim and Evora.  EPCOS maintains a clear presence in OPP film capacitors for the DC link used in HEVs and has been active in EDLC supercapacitors for many years. The company does not offer batteries like Panasonic. A similar diversity exists at Sanyo Components, who already supplies batteries for HEVs, including advanced lithium ion battery technology for next generation hybrid designs. Sanyo offers no capacitance energy storage solution to the automotive industry, which is unfortunate because they are lauded by many scientists at their competitor as having some of the best electrolytic capacitor minds in the business. Capacitor products for HEVs seem a logical extension of that strategy.

Obviously the additional big winners in the electrification of the powertrain were Honda and Toyota, who had the foresight to produce the DC motors captively in order to cushion the risk.

Other vendors of note include Nippon Chemi-Con of Japan; Arcotronics Italia SpA of Bologna Italy; Nichicon of Japan; Asahi Glass of Japan, who would be supplying energy storage and link capacitors for the emerging European and American HEV markets; Shin-Kobe, who supplies NiMH batteries for hyoid electric truck designs; and Maxwell Technologies of San Diego, California.

Separately, we consider Nissan Motor Corporation, the closest global vendor with a similar strategy to Toyota and Honda, in a league by themselves because of greater depth and control over their supply chain, including captive production of key passive energy storage devices, which none of the other car companies can do.

Potential Future Winners:

The movement of electrified portions of the powertrain to the merchant market seems logical as Toyota and Honda look to increase throughput of manufacturing. It is our impression that they will obtain the intellectual property and have DC Motor Vendors and powertrain vendors build to their precise specifications from prototypes developed in Japan.

The traditional powertrain vendors to the 58 million cars and light trucks produced each year have been quite busy developing platforms for HEV propulsion as they see this as the next big technology shift.  All known vendors have some program for its development and have joined forces with other vendors of electronic subassemblies that will play a vital role in the over system development of the vehicle. Global vendors who are actively developing electrified powertrains for HEVs include: Nippon Denso of Japan, Robert Bosch GmbH of Germany, Hitachi Limited of Japan; Ricardo PLC; Continental AG, Siemens VDO; Switched Reluctance; Velwo Corporation, Visteon Corporation, ZF Zachs among others.

These vendors will in turn be outsourcing to component suppliers such as Toshiba of Japan, the world’s largest DC Motor Vendor, Johnson Controls and Crompton of the UK. Additional nickel metal hydride battery vendors include Johnson Controls (quite well positioned), and Exide. And outside sourcing in Europe for inverter technology could also go to Eupec/Infineon.

Health of the Supply Chain for Hybrid Electric Vehicles:

Paumanok notes four primary materials that will be impacted by the electrification of the powertrain. These materials include:

• Nickel Electrode Powders
• Metallized Polypropylene Film
• Activated Carbon Cloth
• and Powder

Major vendors of nickel into the electronics industry include Inco of Canada, Umicore of Belgium and Norilsk of Russia.  Nickel content in the hybrid is no more than 33 pounds. Major vendors of metallized polypropylene include Toray Plastics of Japan, who is already supporting and benefiting from the need for 8 pounds of polypropylene in each HEV, and Kuraray Chemical of Japan for their activated carbon cloth; and Westvaco and WL Gore of the United States for their activated carbon materials.

Everyone Needs Parts!

It has become apparent through primary interviews that sales of HEVs have slowed in the first half of 2006. Toyota has noted this was because of a shift in manufacturing and vendor issues as many sub-assembly vendors in the energy storage segment (the only external glimpse we can see inside the giantess of Toyota), noted that they could not produce parts fast enough to pace the sudden shift in demand, so the process was slowed on the Prius while Toyota expanded laterally to grow the market by licensing powertrain subassembly technologies to the multiple car vendors who needed a rapid platform enhancement no later than 2008. This is a catalyst for rapid growth in electronic content into the powertrain, where very little content was in tact before, outside of the engine control units. As we noted, there is also a beehive of activity throughout the supply chain for DC motors, inverters and energy storage devices feeding the demand for component subassemblies that is also coming laterally from the powertrain producers as well as the car manufacturers as each makes their strategic gamble for HEV platforms of the future. Ford seems genuinely excited at being number three that us analysts fall back on, but they do have reason to be optimistic, as their patents in this field are very strong going back to the 1970’s, and General Motors seems equally optimistic.

This market momentum in HEV technology, this sense of victory disease among the global mindset, is that the combination of the two propulsion systems can solve all the requirements set forth by a 14/42 power net, but with much greater AC and DC energy at the driver’s disposal. A true electric motor or series of motors will be operated independently by computer to add or reduce power based upon friction and other road variation.

The concept of associated fuel savings with hybrids captured a substantial portion of the global TAM which was impacted by the necessity for saving money at the pump. There are many more customers out there who are still filling in that 6% TAM and are waiting to comply based upon brand loyalty and technology availability. The variable is fuel cost, and apparently at each $0.50 increase per gallon of fuel, the demand for HEVs increases by 100,000 units, which in the car industry is a typical platform worth about $22 billion USD.

Future Thought: A Big V-8 With a 750 VAC Variable Speed Drive?

The solution associated with flipping the mathematical equation is also equally compelling, as the burst power of a 750 VDC motor and a 300 HP gasoline engine would have the same affect as burning nitrous oxide. Thus, the concept of combining the two for both speed and performance has also been considered. Lamborghini, at 9 miles per gallon, is the lowest mileage per gallon auto commercially available, while Toyota and Honda have average real life driving records of 46 miles per gallon. So logically, any inclusion of a DC motor, or motors, as part of an advanced hybrid system would make any car it is applied to either fuel efficient, or a powerhouse in the mind of the consumer.

It could be concluded from this that the electrification of the power train, will be a massive global undertaking that will increase the value of electronic content per automobile with respect to value, and elevate it to a place more consistent with the global economy. This process will entice innovation and global development, especially in DC motor assembly, energy storage and power conversion electronics in such a large economic way that it will spill over into the traditional merchant markets for powertrain subassemblies, and consequently will raise the importance of the automotive electronic subassembly to a greater stature in the global high-tech economy.

For a visual reference of the marketing concept flipped from fuel efficiency to power performance, see “The Volta” at Toyota’s Website www.toyota.com

For the full presentation: Global Markets for Hybrid Electric Vehicles: 2006-2015

Please contact Dennis M. Zogbi at dennis@paumanokgroup.com