In this article, I’ll explain how Wright’s Law affects sales of obsolete cars in the US, Europe, and China, and explain the factors that most impact each market.
Image of DALL-E, taken with the prompt “take a picture of the Grim Reaper and a car production line. The Grim Reaper should be scary, but the car factory production line should be crisp and clear.
Background information on Wright’s law
ARK Investment Management has promoted Wright’s law for years. Wright’s law is similar to Moore’s famous law on the progress of semiconductors, which has predicted quite accurately for almost 60 years that the number of semiconductors (and therefore computing power) will double every 2 years. Wright’s law is more general, as it predicts price declines for all mass-produced products. Wright’s law states that the price of production for a given product will fall by a fixed amount (different for different products) every time the cumulative number of units doubles. The insight this gives you is that costs are falling in products that are relatively new and early in their production phase.
I realize electric cars have been around for over 100 years, but very few were produced until recently. Now they are doubling their cumulative volume once or twice every 2 yearswhile Production of gas and diesel cars and trucks is about 70 million units but with diminishing volumes, at a base of 2.2 billion. That means, in theory, it would take more than 31 years to double the volume of fossil fuel vehicles — if sales weren’t falling, that is, and if cars and trucks lasted that long. I think we all know that not many petrol or diesel cars will be made after 2030. In this article, Sam Korus discussed a 15% cost reduction for every doubling of volume for the automotive industry.
How this plays out between now and 2030
What does this mean for the automotive industry? It means that electric car prices will continue to fall dramatically during the next 4 doublings in volume, which should be between 2028 and 2030. If you do the math (0.85 times 0.85 times 0.85 times 0.85), that predicts a 48% reduction in the price of electric cars. Possibly due to stricter emission and safety regulations, the the price of cars in the US has increased by 4.12% per year over the past 5 years. With my above prediction of about an 8% annual reduction in electric car costs and assuming the 4% increase in (mostly gas) car costs continues, that predicts that electric vehicles will become 12% more price competitive each year!
American situation
Credit: Cox Automotive Q1 2023 Industry Insights and Forecast Presentation. Monday March 27, 2023
I’m writing this before I see Tesla’s Q1 shipment and production volumes, but Cox Automotive published this excellent analysis a few days ago that gives a great summary of the situation. Tesla’s shocking price cuts on January 13 enabled it to dramatically increase sales in a relatively flat auto market. With the rumor of Tesla Model 3 and Model Y updated (Project Highland and Project Juniper, respectively) focused more on cost savings than styling updates, and with Tesla Investor Day confirm that Tesla’s next generation product it’s all about cutting costs to make it affordable for the masses, legacy car will struggle to sell very many $60,000 vehicles over the next few years when Tesla (and others) will have a wide variety of electric vehicles available for under $40,000, including some models under $15,000 with the tax credit benefit (this will be a point-of-sale credit instead of a tax credit you get up to 16 months after purchasing a car – starting January 1, 2024).
Europe
If you read CleanTechnica religiously (as you should), you would know that Europe is well ahead of the US in converting to electric vehicles 20% of its vehicles can run on electrons. The two major problems traditional big sellers in Europe — such as Volkswagen, Toyota, Mercedes, BMW, Peugeot, Audi, Renault, Ford, Skoda and others (all of which electrify their cars, but at a relatively high cost and price) — that is Tesla and the Chinese manufacturers, such as BYD and Nio , make electric cars at a much lower cost because they have a lot more experience making them. For example, just yesterday, we wrote that BYD launches three successful models in Spainranging from the low-priced Atto 3 to the luxurious Tang SUV. I’m sure many of the local creators will find a way to survive with a combination of government budget cuts and bailouts. Toyota will be especially challenged because it has no electric cars to sell.
China
If you thought Europe was moving fast, the world’s largest car market – China – is moving even faster, with 33% of its new vehicles electrified (mostly fully electric). The big news that has barely made it through the media, but that Sam Evans (The Electric Viking) has brought up several times in recent times, is the impending change in emissions regulations in China. Whether in July or extended for 6 months until January 2024, many gasoline and diesel cars that have made automakers billions in profits over the past decade will be illegally sold in China without paying a huge fine or buying emission allowances from someone like Tesla who has extra credit (since they don’t sell petrol or diesel cars).
Conclusion
As you can see, the manufacturers who have been sitting on their hands (or worse, thinking lobbying against ICE vehicle bans would save them) are starting to see the handwriting on the wall. It’s not the 2035 bans they need to worry about – it’s the ultra-competitive electric cars coming out in the next few years that will send them into a world of pain.
It plays out like Tony Seba has been predicting for over a decade — disruption is slow in the early stages (10 years or so) and then reaches a tipping point (at about 5% EV penetration) where adoption shifts from early adopters to the general public and quickly moves to 80% or 90%.
Disclosure: I am a Tesla shareholder [TSLA]BYD [BYDDY]Nio [NIO]XPeng [XPEV]Hertz [HTZ], and several ARK ETFs. But I am not giving any investment advice here.
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