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Hybrid Vehicles - How to Assess Lifecycle Costs for 2008 (posted 11/14/07)
Since fuel prices are not showing any signs of decreasing, today’s companies are pressured to find ways to hold or even decrease the total cost of ownership for their vehicles. Given that higher fuel prices are currently the major contributor to increasing vehicle expenses, operating more fuel efficient models, such as hybrids, seems like an easy solution to lower overall costs.
 The improved fuel economy from hybrids will, in varying degrees, result in lower fuel expense, but the other two major vehicle expenses – maintenance/repair and depreciation – must also be considered in order to ascertain if hybrids are the answer to lowering
overall costs.
Tax Incentives reduce government leasing costs
Cost is but one factor to consider; clean air and other long term objectives must also be met. Government agency purchase decisions are simplifed by eliminating the moving target of tax incentives from the formula. However, businesses do receive tax breaks for buying hybrids, including companies such as Acme Auto Leasing, which pass on the savings to its government clients.
Hybrid Maintenance/Repair Costs a Wash
An early concern about hybrids was the fact that the lower fuel expense might be offset by higher maintenance and repair costs for this new technology. Although data is still limited, both internal Acme data and early industry consensus point toward similar overall maintenance and repair expense curves for hybrids as compared to their non-hybrid counterparts within normal vehicle replacement parameters.
Hybrid Battery Issues
One long-term consideration when buying a hybrid is the relatively untested maintenance history of battery packs. If a hybrid battery fails, it will be quite expensive to replace - likely at least $5,000 and perhaps as high as $10,000 depending on the drivetrain's complexity, says Jack Nerad, editorial director of auto research firm Kelley Blue Book.
Fortunately, hybrids have experienced few major repair problems over the past few years. And while consumers may consider these vehicles new, they've actually been in production for a while, giving manufacturers time to refine them. The first Prius hit the road in 1997 in Japan and came to the U.S. in 2000.
Warranties
Most hybrids come with long warranties on their powertrain technologies-eight years or 100,000 miles for the Prius. Still, after the warranties end, it's unclear what problems might crop up in an expensive battery pack. There's no experience with this since few, if any, people have owned a Prius for more than eight years. A spokesman for Toyota says the company placed extended warranties on the Prius to address just such uncertainty but adds that issues with the vehicles' batteries have been "virtually nonexistent." He says the company actually expects Prius batteries to live well beyond the eight year warranty.
High Hybrid Value Retention, Low Depreciation
This third major vehicle expense in evaluating a vehicle’s overall lifecycle cost is well documented over the past two years: Market value retention on hybrids has been exceptional, even considering the higher transaction prices. Established hybrid vehicles selling for 80 to 85 percent of Manufacturer’s Suggested Retail Price (MSRP) after two years, a very low rate of depreciation compared to non-hybrid company vehicles over the same period. This phenomenon bears further analysis as present supply and demand ratios adapt to market environments.
Are Hybrid Demands Still Exceeding Supply?
For the past couple of years hybrids' high value retention has been a direct result of demand exceeding supply. Growing waiting lists at dealerships turned impatient hybrid buyers toward the pre-owned/secondary market, for which supply in 2007 was very low. In 2003, only two hybrid models (47,000 vehicles) were produced, and in 2004 four hybrid models (83,000 vehicles) were produced. This combination of high demand and low supply resulted in higher auction proceeds, and favorable depreciation curves, for hybrids.
By 2006, the supply has increased to 10 hybrid models and 250,000 vehicles. By 2007, there were 16 hybrid models available with actual production numbers not yet finalized. Over 215,000 hybrid were registered in the first seven months of 2007, projecting to over 350,000 by year end. Factors most contributing to demand appear to be unchanged or on the increase - namely, foreign oil dependency and historically high fuel prices.Toyota accounted for nearly 80 percent of hybrids sold in the United States, with over 25% of these sold in California.
Used Hybrid Supply Increasing to Meet Rising Demand
Used hybrid vehicles enter the secondary market may balance the demand, assuming that it remains constant. Adding to the mix are the many other fuel efficient vehicles (compacts, subcompacts and diesels) that will soon be competing in the secondary market. These factors will result in lower future secondary market prices, and increased depreciation expense for hybrids.
Hybrid values determined by suitability to conditions
With new hybrids abundant and the secondary market supply rising, hybrids represent the most significant value when matched compatibly with an organization's vehicle preferences. Urban areas with typical stop-and-go traffic conditions, for example, will benefit more by leasing full hybrids which realize the greatest fuel savings. On the other hand, areas with off-road driving conditions requiring 4-wheel drive pulling should compare mild hybrids with nonhybrids for optimal benefit.
Acme recommends analyzing all of the current factors (highway vs. city driving, replacement cycle, transaction price, tax benefit considerations, other fleet factors) when looking towards hybrids as a solution to lowering the lifecycle costs of a vehicle.
Accepted Depreciation Methods for 2008
How can a company estimate hybrid depreciation? Companies can use industry-accepted practices to estimate depreciation on hybrid models. Because of the uncertainty surrounding hybrids outlined above, some popular residual value guides currently do not publish residual values for hybrids. In the absence of guidebook data, an acceptable method in the industry is to use hybrid residual value percentages equal to the similar make and gasoline vehicle type to estimate residual values.
Where both hybrid and nonhybrid counterparts exists, the comparison is easy. In other cases, a comparable vehicle of the same make will have to be used. It is an accepted practice at this time to use this method to estimate accurate market values/auction sales (same age and mileage)two to three years from now.
Two-Tiered Hybrid Valuations - Mild vs Full
Mild Hybrids
Not all hybrids are created equal. A mild hybrid shuts off the engine at a full stop; uses regenerative braking, utilizes dissipated energy from braking to recharge the battery and uses the electric motor to help power the gas engine. Most similar to their nonhybrid counterparts, difference in fuel economy between these two is smaller. For these types of “mild” hybrids, the spread between these two vehicles in the secondary market will compress at a fast rate or diminish altogether. As a percentage of MSRP, the higher-priced "mild" hybrid may have a lower residual value than its non-hybrid counterpart over two or three years. The ultimate value of a mild hybrid (or any vehicle, for that matter) lies in the suitability of the vehicle for its intended purpose, and the habits of its drivers.
Full Hybrids
Full hybrids do not operate the gas engine while at a full stop. Some do not activate the gas engines until a certain speed or power requirement is demanded by the driver. The fuel economy of full hybrids is substantially higher than non-hybrids, and in most cases, higher than mild hybrids. Proportionately, while MSRP costs are also higher, the residual values are retained at a proportionally higher rate after two to three years. The number of full hybrid models coming off the production line will soon be outnumbered by the less-economical mild hybrids.
In coming years, the secondary market supply of Full hybrids is expected to lag behind secondary market supply of Mild hybrids. This reveals two economic phonomena in the valuation of end-to-end Life Cycle costs. (MSRP + Fuel Costs + Maintenance/repair + Resale Value)
- Mild vs Full Hybrid Life Cycle Valuation Diverges (High MSRP + Poor mileage improvement = lower residual value)
Mild hybrids which carry disproportionately high MSRP relative to a minimal improvement in fuel economy, will result in a lower residual value percentage than its non-hybrid counterpart.
- Full Hybrid Life Cycle is better Value
In many cases, full hybrids do not have direct non-hybrid counterparts, and thus percentage depreciation cannot be accurately compared between these models. However, the broader gauge of full life-cycle value is more relevant.
(see table of examples)
- "Plug-in" Hybrids operate exclusively on battery for a limited time, then revert to either full or mild hybrid operation.
Dawn of the Hyber-Brids (Plug-in Hybrids)
The Chevrolet Volt, expected within the decade, is designed to travel up to 40 miles on its $10,000 lithium-ion battery alone, beyond which the vehicle will operate as a mild hybrid. When the engine eventually comes on to recharge the battery, the Volt could puportedly travel another 600 miles without stopping. While the costs of recharging are yet to be determined, it is clear that a new market is emerging in what could be called "hyperbrid" technology.
Toyota Prius "third generation" plug-in hybrids are now being tested at the University of California at Irvine and Berkeley. Confident with its technology, Toyota is placing a higher priority on gauging consumer expectations than on beating GM to market with the plug-in hybrid.
Moore's Law for Autos?
"Moore's Law", so widely quoted as a rule of thumb in latter-day technology development, states price-performance as doubling every 18 months (i.e., twice the performance or half the cost, or some combination in between). Perhaps costs of future automobiles will go the way of other electronics, computers and household appliances.
Fuel Factors
Another fuel-saver on the horizon: diesel.
Many Americans think of diesel engines as noisy and dirty, but the introduction of cleaner diesel fuel in the U.S. that can meet tough emissions standards promises less pollution and wider use. European diesel hybrids designed for 100 miles per gallon, are illegal in the United States due to emission standards. Auto makers are ramping up plans to put diesels in light duty pickup trucks and passenger cars. U.S. auto companies may also employ diesel-hybrids to boost fuel economy in freight-performance trucking.
Hybrid Ethanol Vehicles
Ethanol-based or E85 fuel burning vehicles, have shown to be more of an ecological than an economical solution. While reducing greenhouse gases, carbon emissions and dependence on foreign oil, these vehicles do not deliver the performance of traditional gasoline. Vehicles like the "mild" Ford Escape Hybrid E85 vehicles already exist, but the high price and limited availability of Ethanol have so far kept such vehicles from full market acceptance. Contrary to its original promise, price fluctuation of E85 fuel has closely mirrored that of its petro-siblings.
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