2024 Market Outlook: Thematic #3

The beginning of the end for ICE Vehicles - sales will decline for the first time as a direct result of EV adoption and by 2031 internal combustions engines will be almost completely obsolete.

The year 2024 stands as a pivotal moment for the automotive industry, with internal combustion engine (ICE) vehicles reaching a critical juncture. I anticipate that this year will mark the first significant decline in total ICE (inc. hybrid) vehicle sales as a result of the relentless rise of electric vehicles (EVs) capturing market share. My broader forecast posits that by 2031 (in 7 years), economic factors alone will render ICE vehicles nearly obsolete, possibly with the exception of certain heavy-duty vehicles.

(Red annotations my own modification and expectation)

Countries like Canada have banned pure ICE vehicle sales by 2035 – to great protest (notably creating a loop hole for hybrids). It’s my belief that governments will not need to regulate such a transition as market forces will drive it sooner than 2035.

The shift from ICE to EVs is not merely an evolution in technology and manufacturing; it represents a transformation as profound as the transition from horse-drawn carriages to motor vehicles – a “phase shift”. This change is unfolding rapidly, set to outpace expectations in North America, where many are yet to fully grasp the magnitude of the electric revolution.

Grasping the immediacy of this transition is difficult as we’re used to linear change. The technology is evolving so rapidly that not just performance but cost will drive the transition to EVs – including even short haul aviation for routes 800 miles or less - again sooner than we think. Many fail to appreciate the step change that electric will bring.

Who views a future where these are powered by diesel?  … probably not many.

And already these are pretty effective – with human drivers… let alone as autonomous delivery networks.

Stanford’s, Tony Seba, is even more aggressive in his predictions. Of note, he’s been more correct than just about anyone on the rapid advancement of EV technology. In 2014, he predicted that in 2023 there would be a $15,000 EV (with no subsidy) with 300 mile range which was laughable at the time. BYD surpassed that on both fronts in 2023.

The BYD Seagull, is a five-seater electric car available in China for less than $12,000 USD.

This vehicle heralds a future of minimal maintenance, especially as Tesla aims to produce comparable, but higher quality, models with similar characteristics. The Seagull is not only more affordable in terms of maintenance but also promises lower energy costs per mile and a lifespan four times longer than traditional ICE vehicles. When equipped with autonomous driving capabilities, the insurance costs could plummet compared to those of human-operated cars.

Meanwhile, established ICE manufacturers like Stellantis (Dodge, Chrysler), GM, and Ford seem to be lagging in the race toward autonomy and continuing to build “engines on wheels” instead of “computers on wheels” that will allow Tesla’s products to have far greater longevity and relevance through software updates – autonomous driving being the obvious software-driven innovation to come.

It's true, I have a personal affinity for the rugged, outdoor-ready appeal of vehicles like the Mercedes Sprinter van.

Adapting to this new era, where economically viable options like the Seagull, and possibly a future Tesla model, offer significant savings in operation costs, represents a considerable shift. Yet, it's clear that society, especially urban society, is likely to transition towards substantially lower cost options.

One step further down this line of thinking is forgoing car ownership altogether. Instead of bearing the burdens of an ICE vehicle that remains unused 70% of the time and incurs annual expenses of $20,000 in maintenance, depreciation, and fuel, imagine subscribing to a $150/month service or TaaS - “Transportation as a Service”.

This service would provide on-demand access to autonomous vehicles tailored to your travel needs. For a sizeable segment of the population, the convenience and cost savings of such a service present an attractive alternative to traditional car ownership. This is a world envisioned by Tesla and many others. Ownership of cars globally could decline significantly. This would be a major blow to high price, high-cost ICE manufacturers that rely on regular replacement cycles, and in some cases, the sale of replacement parts to make up the bulk of their margins.

After this lengthy introduction, let me discuss my outlook and expectations for 2024 on this front.

First of all, I expect Tesla to continue to expand as quickly as they can to obtain the best possible economies of scale vs. their ICE peers. And notably, skeptics pay attention, they should do that with little to no regard to the bottom line until further notice. The quicker they expand the less space there will be for higher cost, lower volume (and lower quality) competitors. Their real competition (BYD) is already higher volume than them and it’s a game where economies of scale and automation matter.

As it stands the ICE incumbents are having trouble competing even with Tesla’s current cost structure. Stellantis’ CEO on Friday just warned of an EV “bloodbath” and “race to the bottom” if car makers follow Elon’s lead and start cutting prices. He’s also said previously that Stellantis is walking a tight rope moving towards EVs – in part because Dodge’s customer base in particular isn’t very fond of EVs and prefers the growl of a Dodge Hellcat engine. There’s a very narrow set of positive outcomes for Stellantis in this global battle for the EV market. Currently many Dodge Ram buyers wouldn’t even consider an electric truck as they are considered substantially subpar. Though with even today’s battery technology the Tesla Cybertruck puts the Ford F350 (diesel) to shame in a towing test.

Though, of course over a much larger distance combustion engines will still win but the tides are turning very quickly. Again, quicker than most believe. Soon, the question will be why would you buy a more expensive truck, with inferior specs that costs a whole lot more to maintain – a lasts a fraction as long? With that value proposition to contend with even truck buyers will start to jump ship – perhaps begrudgingly at first.

So to reiterate, my view is ICE vehicle sales decline overall by 2M or more units in 2024 vs 2023. With EVs picking up an increasing share. I view the cost of EVs declining materially over the coming years making the economic decision easier with each passing year. As per my crude diagram I’d view ICE sales as being around 50-60M (~35% decline from 2023) in 2026 and declining rapidly thereafter.

As I continue to reiterate, “someone” will need to pick up the slack and Tesla remains exceedingly well positioned to do so. They’ll be able to sell whatever they can produce in the coming years (2M+ preorders for the Cybertruck alone with an expected run rate of 200,000 units or so in 2025. Clearly not enough…

The focus on volume (which has hurt Tesla stock) is likely more strategic than most appreciate. It is also my belief that Tesla is engaged in a race towards being THE self-driving platform. Much like Android and Apple dominate the software end of phones - Tesla aims to be the platform that cars (GM, Ford etc. - should they survive) run on in the future. This is critical and a race already well underway with Google amongst others.

In summary, the year 2024 is expected to be a watershed moment for automakers that have positioned themselves as high-volume producers and cost leaders worldwide, such as Tesla, BYD, Geely, and potentially VW, despite its higher cost base. We are likely to witness an intensified downturn for traditional car manufacturers, as they grapple with a rapid decrease in cost competitiveness and a diminishing strength in their product offerings relative to these market leaders.

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