The Accelerating Rate of Diffusion of HEVs and the driving forces behind their success

University Degree Business and Administrative studies

Contents

Introduction………………………………………………………………………p. 3

Diffusion Profile & Driving Factors………………………………………………p. 4

Marketing Efforts…...……...……………………..…………………………...…..p. 7

Consumer Perceptions...……………………………………………………..…..p. 10

Future HEV Diffusion………………………………………………...………....p. 12

References……………………………………………………………………….p. 15

Appendix………………………………………………..……………………….p. 18

Introduction

The aim of this essay is to assess the nature of the diffusion process involving hybrid electric vehicles [HEVs]. What are the driving forces behind this relatively recent technology? What are the perceived uncertainties troubling potential buyers? What will the future look like for HEVs? Various models along with primary and secondary data will be used to analyse the diffusion process in an attempt to answer these questions. HEVs are cars which promise better fuel economy than conventional internal combustion vehicles [ICVs] by combining an internal combustion engine [ICE] running on fossil fuel, with an electric motor powered by batteries. The latest hybrids are able to recharge their batteries with kinetic energy gained from braking and with a generator which is spun by the ICE, thus completely eliminating the need to connect the HEV to a power outlet. The main assumption is to reduce fuel consumption and emissions by using the electric motor to aid the ICE in certain driving situations where the fuel consumption of the ICE would be high, e.g. city traffic. Therefore the ICE of a HEV can be much smaller and economical than that of an ICV.

Diffusion Profile & Driving Factors

Hybrid electric cars have been around much longer than the common belief might assume. In fact Dr Ferdinand Porsche built a hybrid vehicle in 1898. Throughout the 20th century numerous companies and individuals around the globe began experimenting with HEV technology receiving rather limited demand from consumers, mainly due to inherent disadvantages HEVs had over ICVs. For instance, their travel radius used to be very limited due to weak batteries and their average speed was only slightly faster than a bicycle. Another factor influencing the success of hybrids before the 21st century was alleged lobbying against them by oil companies and governments. An example is Dr Victor Wouk, a private inventor who engineered a HEV in 1974, which was tested by the US government and certified to meet the requirements for a clean-air auto programme but subsequently the government rejected the approval of the car for no apparent reason (Hybrid Cars, 2006 b). Behaviour like this lead most companies to completely drop their HEV efforts, until Honda managed to release the first commercially successful HEV in 1999 – the Insight. With the arrival of the new millennium also came new HEVs which are now in great demand, largely due to the ever increasing fuel price. Consumers wanting to buy the hugely successful Toyota Prius often wait six months for the delivery of their car (Hybrid Cars, 2006). Many manufacturers now want a share of the HEV ‘pie’ which is currently dominated by Honda, Toyota and its subsidiary Lexus. Among the newcomers are Audi, Mercedes, Porsche, and even Ferrari who are all working on HEVs due to be released soon (Union of Concerned Scientists, 2007). Toyota managed to capitalize on its heavy in-house HEV R&D spending ($800m for the Prius) by securing 650 hybrid patents (Rechtin, 2005). Some of these patents have been licensed to other manufacturers, for instance Ford uses Toyota technology for its Escape hybrid SUV model (Zaun, 2004). Last year global HEV sales amounted to 414,396, currently accounting for around 0.8% of the world’s total vehicle production (OICA, 2007). The most profitable market for hybrids is definitely the USA, where in 2007 nearly 290,000 were sold, followed by Japan with 58,027 and the UK with 14,009. In the USA and Japan sales doubled since 2006, whereas in the UK they tripled. In the USA in December 2007 almost 50% of the sales were accounted for by the Prius and nearly 80% by Toyota vehicles overall (Hybrid Cars, 2008).

Rogers’ (2003) ‘diffusion model’ explains how the members of a social system act in the diffusion of a technology. He classifies them into adopter categories: ‘innovators’, ‘early adopters’, ‘early majority’, ‘late majority’, and finally ‘laggards’. Much of the recent success in the diffusion of HEVs is down to their ‘innovators’ and ‘early adopters’, among them many public figures such as media celebrities Brad Pitt and Cameron Diaz who are actively trying to show their conscience for the environment by buying a HEV and promoting them in the media. The producers of the US TV show ‘24’ have gone as far as to reduce the whole show’s carbon footprint by using HEVs in most transports in and around the show (Fortini, 2008). Thanks to numerous ‘early adopters’ and support from governments the diffusion of HEVs has now reached the stage where the ‘early majority’ has started to buy them, as being ‘green’ and owning hybrids is becoming ever more fashionable. Here the “bandwagon-effect” can be noticed, as the preference toward HEVs increases with the number of individuals adopting the technology. The difference between the earlier adopters and the later adopters probably lies in what they seek to gain from a hybrid. The ‘innovators’ and ‘early adopters’ possibly see the hybrid more as a fashion-accessory and must-have piece of technology and to a lesser extent also care about the ‘environmentally-friendly’ image the car gives them. Whereas the ‘early- and ‘late majority’ will be more interested in the money they can save from tax benefits and lower fuel-consumption. Additionally, the ‘late majority’ typically has limited resources and will adopt hybrids when the market has been flooded making the cars cheaper to buy, both new and used. Finally, the ‘laggards’ will only buy a HEV when there are few alternatives left.

This is a preview of the whole essay

The main actors in the diffusion of HEVs are said to be governments, oil companies, car manufacturers, and customers (Rits & Kypreos, 2003). Specifically, many driving factors in the diffusion process of HEVs stem from government politics. The UK government has launched a £20m fund to encourage manufacturers of HEVs to produce hybrid vans. The fund will be available to public sector companies such as the police and royal mail to buy hybrid vans once they are available. The UK transport minister said: “By using the public sector's considerable purchasing power, we aim to give manufacturers confidence in the existence of a market for lower carbon vans to encourage them to bring them to market more quickly than they would do otherwise" (Professional Engineering, 2007). New York mayor Michael Bloomberg stated that the city’s entire yellow-cab fleet will consist of HEVs by 2013 (CILT World, 2008). The UK offers company-car tax-cuts to companies running hybrids, as an added incentive to buy such a car (Keefe, 2007). “The European Commission is preparing legislation to require average CO2 emissions from new cars to come down to 120 grams per km by 2012” (Just Auto, 2007). This encourages many manufacturers to develop HEVs. Generally also technological advancements in the production of HEVs are an additional driving factor.

Marketing Efforts

Manufacturers are now recognizing the different consumer characteristics calling for different types of hybrids. Not all consumers want a simple environmentally-friendly family HEV. A lot more potential lies with other car segments that are still ‘un-hybridized’. There is no mass-production hybrid sports-car available at present. Honda, Toyota and several other makers are working on models to be released soon, which promise to be a real competition for conventional top performance cars. Toyota wants to face the issue some consumers have with the limited availability of hybrids in some segments at the moment, by promising to “offer a hybrid version of every model in its car range to [also] help it achieve its goal of selling 1 million hybrid cars a year” (Marketing Week, 2008). Lexus has managed to take the hybrid technology one step further by introducing it to the luxury-performance segment with its LS model, moving away from the family-car image hybrids had until then (Lexus, 2008).

Interestingly not all manufacturers take the same angle in marketing hybrids. Toyota seems to be advertising mostly the increased performance and better mileage (Toyota, 2008). GM is taking the approach of marketing the pickup Sierra as a “mild” hybrid, offering only 10% lower fuel consumption over the standard Sierra compared to 30% for a Prius. However, the Sierra’s batteries and electro motor can be used when parked to power appliances like a fridge from its 120V outlets (Lorio, 2005). Hybridization of cars lately has become very popular in the SUV segment with GM, Lexus, Toyota and others releasing hybrid SUVs. “SUVs are particularly ripe for hybridization since they can benefit from the power boosts possible and because their relatively poor mileage makes fuel efficiency gains more cost effective than for higher mileage sedans” (Marcus et al. 2005).

Honda offers a ‘Hybrid-Cost-Calculator’ on their website helping potential buyers determine how much they could save if they bought a HEV from Honda (Honda, 2008). Honda’s calculator looks more like a profound marketing attempt to promote their hybrids and really make consumers believe they will save money, whereas true saving depends on many dynamic variables playing together. An application developed by the US National Renewable Energy Lab called the ‘Hybrid-Electric-Fleet-Cost-and-Benefits-Calculator-Tool’ suggests that “a hybrid’s higher price is offset by fuel savings and better resale value” (Thilmany, 2006). Thilmany also found that “over seven years a hybrid SUV will cost $1,400 less than a conventional SUV, and will emit 37,000 fewer pounds of CO2”. So, the lower emissions are given but the savings will be spread over the various owners cars usually have throughout their lifetime. The first owner is actually, therefore, likely to benefit the least from a hybrid since they are the ones who carry the initial loss of value and on average will sell their new car after three years, forfeiting another four years to make up for the premium they paid. Lexus set up an online discussion forum to determine the impact of HEVs on society. “The forum will have a panel of expert contributors” involved in climate change discussions (Marketing Week, 2007).

The Technology Acceptance Model [TAM] by Davis (1989) distinguishes between two parameters: The perceived usefulness of a system and the perceived ease of use, the latter referring “to the degree to which the prospective user expects the target system to be free of effort” (Davies et al., 1989). The TAM model can help in understanding the success of the HEV technology with its ‘innovators’ and ‘early adopters’. Producers try to accelerate the market acceptance of HEVs by promoting their usefulness in advertisements through various techniques described previously. Furthermore, it can be said that HEVs are marketed as being effort free to the same degree that an ICV is. In other words, users should expect that owning and driving a hybrid is in theory not more complicated than with an ICV. Additionally, to further push the perceived usefulness of HEVs, usefulness can be divided into ‘utility’ and ‘usability’ and both parts can be addressed.

Marcus (2005) states that HEVs are not worth the extra cost at the current level of fuel prices. Unless fuel prices rise substantially over the expected 15 year life of a hybrid there is no real economic reason to buy one. However, most hybrids are bought by affluent people who are used to spending more on a car than the average person. Thus, Marcus (2005) suggests that manufacturers of HEVs focus their marketing on the cars’ intrinsic values not the cost saving, and R&D should concentrate on adding innovations to make hybrids as unique as possible and further accelerate the market acceptance and diffusion. Alexander et al. (2007) conducted a study which shows that consumers tend to follow-through with purchase intentions on ‘incrementally-new’ products more often than they do with ‘really-new’ products. Thus, the success of HEVs might be down to the newness of the technology being perceived as psychologically ‘incrementally-new’ in that it is an adaption to the ICV, only trying to bring about improvement to an existing technology.

Consumer Perceptions

In order to determine the wants and needs of potential HEV buyers as well as the uncertainties they are concerned with, research was conducted in the form of semi-structured interviews to facilitate self-expression (see Appendix Figure 1). The interviewees gave their permission before the interview. In total five females and five males were interviewed, each separately. Nowadays with hybrid cars available in many segments, from small family-cars like the Prius and Honda Civic to luxury sedans like the Lexus LH and even SUVs like the Chevrolet Tahoe, HEVs have become a serious alternative when shopping for a car. Nonetheless, the feeling persisted among the subjects that there weren’t enough hybrid models to choose from.

The most memorable hybrid was thought to be the Prius which is not surprising considering the market share it has, when asked about other hybrids subjects were unfamiliar with most of them and uncertain of what to expect from them. Yet, seven admitted having seen various hybrids around. Subjects agreed that they would like to use their HEV just as they would use any other car, e.g. for both trips and day-to-day errands. However, six out of ten stated that they were unsure as to the reliability of a hybrid on longer journeys. Additionally, the (unfounded) long term reliability in general seemed to make buyers reluctant. Specifically the battery breaking down and the whole hybrid technology breaking down and being costly to replace worried the majority. However, research by Marcus (2005) showed that the batteries used in the latest HEVs last well over 100,000 miles.

Generally, the opinions on hybrids seemed to be based on rumours; few subjects had actually ever come in contact with a hybrid car, let alone driven one. Nevertheless, respondents were aware of the considerable price difference between a HEV and an ICV when looking at the same model. For instance the stock Civic costs £13,410 whereas the cheapest hybrid Civic costs £17,100. Generally the price premium was deemed justified in the light of the promised savings from lower fuel costs, tax cuts, avoiding congestion charges in the UK, and being able to use the car-pool-lane in the US. Being environmentally friendly was not considered being worth the difference in price. Equally, the overall cost saving was the main incentive to buy a hybrid and not the lower emissions themselves. When asked about adverts of HEVs respondents were aware of them and admitted finding out about hybrids mostly from adverts. The most recalled features of the adverts were the lower fuel consumption and emissions of hybrids but also the lower running costs.

Regarding the perceived ease of use of HEVs, the interviewees of whom most had not done much research on hybrids, expected these cars to be difficult to use and showed worries as to how much they would have to change their behaviour from driving an ICV. However, these fears are unsubstantiated as Wang (2008) suggests that the behavioural change or ‘value capturing’ required for HEVs lies on a medium level compared to electric cars which require a high degree of change. HEV producers make the lower change required on the user side possible through a high ‘value creation’ or product change level, compared to the production of a non-hybrid car. This behavioural compatibility between users and the product minimizes resistance to adopt hybrids.

Future HEV Diffusion

The Bass (1969) model could be used to predict the further rate of adoption of HEVs in the future in countries where they are popular already, but also in new undeveloped markets where the ‘innovators’ are just starting to adopt hybrids. The model is also useful for determining the speed of diffusion and adoption to come.

Collantes (2007) used an adaption of the Bass model in a closed scenario to show how fuel-cell vehicles [FCVs] may come about to replace the ICVs and in turn the HEVs. He states that once FCVs are actually introduced to the market they would be considered a higher-risk technology than the HEVs, being a completely new technology rather than a combined technology like hybrids. Consumers adopting FCVs first would be the same risk-taking ‘innovators’ who initially bought HEVs. Collantes describes the HEV as a transitional technology which may only be popular until the perceived risks of FCVs (e.g. safety and availability of hydrogen) have diminished to the level of HEVs. At this point in time owners of ICVs will have a balanced choice between HEVs and ICVs. When FCVs will have matured to the stage of HEVs in the market, ICVs would be replaced by HEVs and then further on hybrids may be completely replaced by FCVs (Collantes, 2007).

Sakaguchi (2000) predicts that “it is unlikely that hybrid cars will dominate low fuel consumption automobiles in the near future” because as he says the automotive industry will probably only release one or two new types of hybrids per year. Further, Sakaguchi argues that rapid diffusion of FCVs is also unlikely because “their commercialization requires the construction of necessary infrastructure, specifically refueling stations, in addition to research efforts for further technical improvements and cost reductions”.

Although, currently HEV sales are showing epidemic-like growth, especially in the US-market, where figures have pretty much doubled every year since 2000, J.D. Power (2006) predict that by 2012 annually only 780,000 HEVs (see Appendix Figure 4) will be sold in the USA, suggesting that a slower growth rate should be noticeable as of 2008. However, at the same time other markets should open up and the current second and third strongest markets (Japan and UK) may grow further. "Future growth will be the result of more vehicle manufacturers entering the hybrid-electric market and a greater number of hybrid models," said Anthony Pratt, senior manager of global power-train forecasting (J.D. Power, 2006).

The vast majority of hybrids on sale now have petrol engines; the next step will be to introduce diesel-powered HEVs. Wilson (2004) argues that “most European diesels already go toe-to-toe with hybrids on fuel economy and they will positively blow their doors off performance-wise”. He thinks that the ‘ultimate niche-player’ will be the diesel-hybrid, which could further stretch the mileage of hybrids. In the commercial sector diesel-hybrid trucks are already popular, with nineteen different models on sale in the USA in 2007 (Leavitt, 2008). A further adaption to today’s HEVs will be the new plug-in hybrids (see Appendix Figure 2) which work in the same way as the hybrids discussed in this paper but in addition they can also be charged with electricity from a standard wall socket. This will facilitate the use of the electric motor more than normal HEVs use it today, thereby further reducing emissions of hybrids (see Appendix Figure 3).

So far the HEV seems to be a success altogether, but it has its downsides too. Some of the lesser known facts about hybrids are: chances of a non-dealer mechanic being able to fix a hybrid are slim, requiring possibly expensive parts and service at the dealership; exposure to battery acid and high voltage in the event of an accident is likely; and the lighter weight makes HEVs more unstable on the road and more unsafe in a crash (Sterling, 2007). However, it seems consumers are catching on to the problem that in order to save noteworthy money with a hybrid considering the price premium, there will have to be a significant rise in fuel prices. Honda's US chief planner said: "There won't be a giant surge in hybrid sales unless there's an oil crisis" (Welch, 2007). Marcus (2005) states that a further downside is “the possibility that drivers, as they absorb the fuel savings from their hybrid, will spend it by driving more and/or at higher speeds thereby diminishing the social gains”.

To conclude, although the diffusion of HEV technology took more than a century to arrive where it is today, the process is nowhere close to being complete. Arguably, hybrids have been a success in the last decade, and the dynamics of the oil market and politics among other factors discussed in this essay will serve to further affect the diffusion of HEV's.

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Appendix

FIGURE 1

State your gender.
What is the first thing that comes to mind when you think of an HEV?
Which brands come to mind when you think of hybrid car?
Would you consider owning a hybrid as your only car?
When do you plan on using a hybrid?
What do you feel uncertain about when considering buying a hybrid?
Is the price difference an issue for you?
How reliable to you think HEVs are compared to ICVs?
Do you feel there is enough choice in models in the HEV segment?
What do you seek to gain from a hybrid car?
What would be incentives for you to buy a hybrid?
Have you seen HEVs on the road?
Have you seen adverts for hybrid cars?
What do you recall from the adverts?
How easy do think hybrids will be to use?
Do you think there will be much behavioural change involved when driving/owning a HEV?