AAH #641 - Is the Auto Industry Pricing the Middle-Class Out of the New Car Market?

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your journey. Hey, Gary, John, good to see him. Good

to see you again after we saw each other in San Diego two days ago.

Yes we did, but we can't talk about it. Well, we

got to let the audience know. You know, we were out driving the

Prius Prime, that's the pH version of the Prius, and we also drove the Corolla Cross Hybrid. And yeah, about another week or so next week's

show, we could probably talk about these cars, but they're under embargo right now, which the car companies do just to give everybody a fairer shot, everybody at the media, because we come in in different waves to be able to test drive these things, and right, it wouldn't be fair to let the first wave start spilling their guts about the car before we got a chance to get into it. Sure, at this very minute, there are people

who are out there driving the car, so you know, play to them.

But we have lots to talk about. Yeah, tell us about it.

Gary. So, Um, this is I would say this is a

somewhat special show. We've got Christian Dzek who is the Automotive Policy Advisor to

the Federal Reserve Bank of Chicago and a long time I don't want to say it that way. A person who has depth of knowledge in the auto industry,

unlike many people we know, and you know, long career at the Center for Automotive Research, Kristen is just a wealth of information. So we

got her and you can just call me old. It's fine. I didn't

want to. I called myself on that. I'm so very sorry. And

um, we've got Jeff Schuster, who is the president of America Operations and Global Vehicle Forecasting for LMC Automotive, a global data company. That I get

that, right, Jeff, Yeah, okay, So I just wanted to make sure that we got it all in there. Yeah, we've made the

parent company happy. Now check that box absolutely. So what should we talk

about today? Well? Okay, So, so here's what I want to

do. I want you guys to level set this for us. Okay,

So, so, Kristen, Jeff, I mean, let's start by each of you talking about, you know, how you characterize the period we're in right now in the auto industry. I mean, what, what what are

the things that people really need to be paying attention to? Well, you

know, I'll say nothing is normal still. Um, it's getting back to

normal, but nothing is normal. And you know there we started the year

with I think Jeff might agree cautious optimism that this year some things would start to work out and get a little better. Um. You know, production

recovery is underway. You know, there's company that are managing their their inventory

a little bit more closely. Prices, they're starting to mediate and level out

to address some of the affordability. And there's still a whole lot of pent

up demand out in the retail customer as well as fleet. Um. You

know, one of the fleets that we don't think about too much as government fleets. And many states, and you know, the federal government in particular,

are looking to buy evs or plug in hybrids and they haven't been able to get them, and they haven't been able to get them at the prices that governments usually pay. So there's uh, you know, I talked to

a state that you know, was getting ready the legislature was going to pull their budget because they put in their orders in October when their fiscal years started, and getting around to the end of the year, they still didn't have the vehicles. So there's a lot of demand out there. We just have

to see how strong it holds up this year. Okay. I got to

jump in here just to ask because it just hit me as you were talking about that, if the government buys evs, so the government get a rebate from the government to buy them, um, Well, I don't know if state governments might um. And I think that that's some of the stuff we're

looking for. When you know, Treasury puts out some of the more teeny

tiny details that they're expected to put out on how exactly these programs are supposed to work. We're expecting that soon. I'm going to do a webinar on

that on April sixth with some of the top people who have been in the mix on the IRA next steps of revealing how this is going to work.

Well, Well, if the federal government buys electric cars and gets a rebate and gets all that money back, then nobody should be worried about all the subsidies because the money is back in the in the bank, so to see.

I don't think the federal government's going to get the subsidy, but I could be wrong. We'll waiting to see how Treasury works that out. But

it seems unlikely. So sorry, Jeff, I don't to interject, but

yeah, to Gary's question, how do you see thing? Yeah, you

know, I definitely would agree. I might change cautious optimism to cautious chaos.

Um. It seems like and this is just a continuation obviously through the

from the pandemic to where we are now. Things are certainly not normal.

Um, but I think the you know what normal is is up for debate as well. Um, the industry is improving, Um, So I think

that's where the the the optimism was there at the beginning of the year, and I think it still should be there to be to be fair, Um, but I think there's a lot of questions on what happens through the remainder of this year. Um. You know, I think disruption is less than

it was. There is still demand out there, Pricing is leveling off,

but is still a problem. So the market has the new car market has

shrunk, The new vehicle market has shrunk, and I think we may not go back to the size that it used to be. So I think that's

you know, as we look at transitioning here, and there's a whole lot of transitioning going on in the industry. I think that's one of the questions

is is where does you know, where does it finally fall to something that is normal or at least repeatable. So well, and you know there's implications

from that too, like if we've underproduced vehicles for the last three years, Yeah, so we've underproduced future used vehicles, and so the used market is going to be tighter, prices will be higher, and affordability where remain challenged there because there just aren't those vehicles coming off lease. We haven't had many

leases, and people are holding onto their cars because they know it's hard to get a new one. So it's I think that you know, things are

just not flowing the same way as they were when we were making sixteen seventeen million vehicles a year. So, Jeff, if the entire market is smaller,

is this a case as perhaps Christian who is suggesting that people are holding onto their cars and that's going to become the new normal as it were that you used to have a card that's ten years old and you think that's normal.

I think that could be an element of what becomes normal. Um.

I think there's there's definitely a change in the consumer's behavior because they went and looked for a vehicle and it wasn't there, or the price wasn't affordable or so or some combination of the two of those things. So I think,

you know, we've all gotten used to waiting for things and maybe putting off some of those decisions, and I think that is going to be part of what becomes normal as we look forward. So why do you think the market

is shrunk and where do you think it's going to settle in it? Because

what you just said there, Draff, that has massive implications for this industry over capacity and a whole bunch of other things, and that that isn't that is something we're watching. Over Capacity is it is a concern, and we

can get into that as we talk about I'm sure we're going to get into EV, so we'll talk about that in the EV element. But I think

when we look at where does the market settle and why, I think it comes down to price. So prices inflated so much, incentives are not being

used to the extent that they were to help offset that where interest rates have increased. Obviously that's not a permanent situation, but I think there's an element

of that that plays into this. It comes down to affordability. And I

think if the industry, and I'm talking about the OEMs, if the OEMs continue on the path of we don't need to build as many as we did previously and sell them at a discount, that will play into this and keep prices inflated to a degree. Now I think they're going to come down,

but maybe not to the level that allows the industry to get back to the size that it was previously, and that has all kinds of implications. As

you mentioned, John, I think if you look at eventually, if you have less new ours or less turnover UM, your used car market doesn't get the feed that it did before. So this kind of plays off of itself

and certainly has has major issues with consumers that are on the fence of being able to afford a new vehicle. Well, you know, it's it's interesting

that UM. Earlier this week, Jack Hollis, who runs Toyota in the

United States, says that he said sees us going to above fifty thousand bucks as an average price for a vehicle. I mean, so he sees things

going north. And you know, and here's a guy who's who's operating a

company that basically has vehicles at all price points, you know, from a from a you know, a Corolla all the way up to Alexis and um, the other OEMs basically mainly those couple in town have gotten away from their UM sedans and so on and focusing on trucks and SUVs, which are more expensive vehicles. So I mean, where does the affordability come from? I

mean, Kristen, do you see any opportunity for there to be changes there?

You know, affordability comes when there is when you're manufacturing at scale.

And I think this is a big problem as we go through this EV transition that will be losing scale on the ice side of things, UM, and we'll be gaining scale but not quite there. So these lines are kind of

crossing as you know, the EV ramps up and the ICE ramps down.

UM, that we're not going to be producing vehicles very efficiently, and that leads to you know, cost inefficiencies as well. So we lost christ and

they're a sec Well, Jeff, I'll love you. Come back to you

until she comes in. I think I'm back. Yeah, okay, good,

yeah, well you were back yet, So Jeff, a good market was, you know, pre COVID seventeen million a year. What do you

see you settling in at. You know, I don't think it's going to

be massive reduction, but I think we're looking probably in the sixteen range is somewhere, you know, where we think is likely a healthy industry and an industry that's sustainable. And I think you know what, Christen, where you

were going, I'll let you jump back in, but I think absolutely there is a balance here between pricing and incentive structures and plans and the manufacturing side, and right now it's completely out of balance, and I think that does need to sort out. And if you lose efficiencies because you're at lower volume

and you aren't or can't produce at those levels, something has to give well.

And you know, those volume constraints impact the supply chain as well.

So if you're a supplier that's used to lying on say, you know, the biggest program there is the F one fifty on the ice side of things, you're going to be losing volume as they shift over to selling more lightnings and losing that volume you're you know, you may need to have different way of approaching that, and maybe those UH contracts that don't look as appealing U for the supply base after some time. You know, they're all trying to

make this transition to EVS as well, So like, how how do they stay in ice with lower volumes? Um? It's it's going to be tough

and and have to invest because we'll likely see um new regulations for fuel economy and greenhouse gases. I mean they're expected to come out for the twenty twenty

six and beyond. And you know, I don't know that anybody thinks they're

going to be weaker. UM, So like, uh, you know,

how are they going to stay up on the technology and push that forward at lower volumes? Is over? Sorry? Go ahead, Gary, you go

ahead, No, after your gust on. So so both Jeff and Christa,

we'll start with Jeff, do where do we stand in terms of capacity in the North American market right now? Because if you're right, Jeff,

and a good year is a million units lower than what a good year used to be used to be. I mean, the fallout is gonna be drastic.

Well, and I'll cut to the chase as well. I think it's

as we're going through this EV transition and that capacity comes online there's not enough being taken out of the industry in terms of ice capacity to offset it, so we're end up you end up increasing capacity, and then if if the the sales side of the market doesn't pick that up, which we don't anticipate it fully picking up, then you've got utilization problems. And I think that's

what we're looking at. You know, globally, we used to look at

the industry as healthy at say US seventy seventy five percent. It's eighty and

mature markets typically capacity capacity utilization. Yeah, yeah, and we we're you

know, we've been in the fifty pushing to sixty percent range now and and right now our forecast is suggesting as as it stands, we're at about a sixty five percent utilization globally, you know, five to seven to ten years out. So that's not sustainable. Um. So I think that's where we're

going to have to either see some movement on the demand side to get more you know, sales churn if you want to, you know, want to look at it that way, so it could be leasing and to get people out of their vehicles sooner than they are right now. War it's going to

mean some capacity, and probably that's that's going to be focused on. Ice

capacity is going to have to come out sooner because that's really been a hedge.

You know, as we go through this transition, the manufacturers that they don't want to completely let go of the ice just in case and as consumers are moving in towards the electrification direction, case it doesn't go with the pace that they expect. So you've got you've got a bit of a hedge here,

and I think that hedge is going to cause inefficiencies in the industry and certainly pressure on profits. So Christian, same thing to you. I mean,

I've asked automakers about this, the legacies, how are they going to handle this transition, you know, from ice to BEV and they know that they're going to have to take out capacity. They don't want to talk about

it. They will certainly not to me, They will not talk about it

at all. How are they going to handle this? Well, why would

they talk about it? I mean, I'm not going to talk about it.

Jeff is really you know, he's the forecaster. He's looking out there.

We are adding capacity to old evs um. You know, there's new

plants, there's new operations coming online and the fallout is not known. But

you know, letting it be known in advance is not advantageous to to anybody in them in the industry. So I Jeff's the expert. I'm gonna let

him talk about it, all right, all right, Jeff, So let me let me put this to you. So, so UM Consumer Reports come

out with a study today excess demand the looming EV shortage, and one of the points they made is, and I will quote here, cumulative ice vehicle sales between twenty twenty and twenty twenty two fell by nine point four million compared to the twenty nineteen rate, while cumulative sales of b evs, pehaves and hybrids increased by only one point eight million. So I mean, you talk

about a disparity there, you know, four point nine one point eight I mean it's crazy. Yeah. Yeah, Obviously there was a pandemic in there

that might have caused some of the sales of the ice vehicles to drop as well. So I think, yeah, compared to twenty nineteen. You know,

obviously there's other things that happened, but but no question about it is you know, again, as we go through this this shift, the capacity is coming online, and it's it's moving quickly. To be fair, it's

probably moving a little faster than than I would have expected if we were to go back five years. We certainly didn't forecast what we're forecasting now in Bev's

or even other electrified versions of vehicles. So it's the industry's all in on.

It's just a matter of when and what that trajectory looks like. And

then it's our consumer is going to come along for the ride or are they going to have to come along for the ride? I think that's that's where

we're at. Well, in this smaller market, I think we can agree

that consumer has changed a bit. I mean, this is a much more

affluent consumer um you know, was relatively buffered through the pandemic, and so you know it these are more expensive vehicles, and to the fact that they are, you know that the what's being produced is more expensive and what they're buying is more expensive, you know, leads to this is just a really different mix of consumers than we had before twenty twenty. So Christen and this

is you know, the headline for the show, are we pricing the average American out of the new car market? Yeah, that's a hard thing to

talk about. But well, let me put it this way. Remember there

used to be a guy in Detroit here, David Littman, I think he worked at Comerica Bank, and every year he would put out a study that said how many weeks of income the average household had to spend to buy a new car, and it was typically around twenty four weeks, you know, so just under half a year's pay. And uh, I think right now,

the average house did income is what about sixty five thousand dollars? Yes,

right, yes, so you know half of that. You know that

if it were to hold to the historical standard, the average car today should cost about thirty two thousand dollars thirty three thousand dollars. And instead it's it's

knocking on the door of fifty grand. In fact, you guys know it's

going to go over fifty grand in the next month or two. And so

I mean that leaves the average household either going into much longer payments or much more debt, or just saying, forget it. I can't even afford a

new car. I have to buy used. Well, m Cox and Moody's

do that index now, and I think it's been around forty two weeks.

Wow, so that has gone up quite a bit. You know, it's

unprecedented, that is up. I wasn't aware of that number. Yeah,

and they updated every month along with the average payment which was you know in the seven eight hundred dollars range average payments. Um. You know that's that's

a huge number for most you know, sixty five thousand dollars average households to to take on. And you're right, UM, you know, transportation in

this country, at least, this is how we get to work. Um.

There's very few cities where you can go without have a car. Without

having a car. Um. The ARTA National Labs did this great study about

where the oldest vehicles that travel the most miles are. So these are the

the most polluting vehicles. They're owned by people of lower income status, and

they're in inner cities and rural areas. And that's those are the people who

drive the most in the oldest cars. UM. And that's you know,

if we're looking at UM. You know, there are public policy goals out

there to have a cleaner environment, less polluting vehicles. This is the ev

transition is supposed to address this. UM. Then you know, affordability has

to be part of this, and you know it's I come back to its scale, Like, until we can get this at scale and get some of the battery chemistries sorted out and get that at a at a much lower cost, we're going to be a ways away from that. See. But Jeff,

did the OEMs have an incentive for scale when they're able to make profits by making fewer vehicles just higher margin vehicles. I mean, you know,

to the point of what I was just looking in and kbb's latest number is forty eighty seven hundred and sixty three dollars is the average transition price for a vehicle. Okay, this must make people really happy because they don't have to

People at car companies very happy because you know, they're making a lot of dough so you know, why should they why should they shift? Well,

I think, I mean that does have implications. I think if we look

and this really has to do with that capacity issue that we talked about earlier.

Is not letting go of that ice capacity um because the the investment, the the push into adding or converting factories over to ev UM capability, that's all taking place. UM. So yeah, Well, that's happening. These

profits that are you know, that are that are going on today are paying the bills um and I think that's part of the problem as we look through this is when you know, when can you make that full flip where the evs, the EV technology and vehicles start essentially paying and contributing to profit and uh, you know that's that's certainly a ways away yet, So that is it is a big concern. I think it's a big issue with with each

of the OEMs as they look at their their individual plans on this transition and on the commitments, because the commitments are there. Again, it comes down

to that that time frame and time period. Well and you can remember the

late thirtyo Kona when he spoke about the one of the evs he had in his lineup and he was at Brookings and he said, please don't buy this car. I lose fourteen thousand dollars on every one of them. Please do

not buy my car. It was quite a switch from Leaya Coca from the

Quintessential salesman too, don't buy my car. But you know that's ahead of

the sand attitude. I mean, come on, you look at Tesla right

now. It has the highest per unit profit by far, double Mercedes Benz,

which heretofore had been the highest profit per unit car company in the world, not counting the exotics like the Ferraris and the Rolls Royces and the like.

But yeah, for a CEO to say please don't buy my product is about as crazy as it gets. Well, that was a long time ago

too, and he was in a different position. But I mean, what

Tesla has his scale right right, and you know, starting from the ground up and not having to manage this shift, they're just the legacy, right, Absolutely, it's a huge advantage. Yeah. So, Jeff, you

were suggesting that that the OEMs are basically hedging their bets somewhat by maintaining ice capacity, and you know, you look at what's going on in Europe now, where basically they're saying, Okay, in twenty thirty five, you can still have an internal combustion engine as long as this is running on e fuel.

Isn't there the possibility that in this country the same sort of thing would happen, Because I mean it seems to me that that you know, in part, the auto companies are going all in on evs because they see this as being a new, bright, shiny object that people want to buy, and there is the regulatory consideration. But you know, if regulations can change,

and you know we're seeing that in Europe because I mean, it seemed like a done deal. You know, if you had an internal combustion engine

after twenty thirty, ye, it was done right. Yeah. I mean

in the UK is still saying twenty thirty it's or you can't buy a new diesel or gasoline powered vehicle. So yes, So yeah, I think that

could potentially happen. And I think again that probably is contributing to the position

word right now not wanting to make a full like we can't back away from this now um shift because it's still very fluid. There's still a lot of

decisions that are needed to be ironed out. Things can change the you know,

get how we get to the endpoint. When that endpoint is certainly has

the there's a lot of paths there. So I think that's probably part of

the issue and part of the problem. And if you're running an OEM and

you're trying to maximize profitability, obviously shareholder wealth, you know, all of those things that drive decisions in the near term and you've got you've got a fluid longer term picture that you need to move into this direction. You know,

the path to that can take a lot of different scenario shapes, and I think they're clearly running different scenarios. But that is really challenging, and

I think that's just the environment we're in right now as an industry. If

I could jump in for a second. You know, if you look at

the recent history, the regulatory pendulum has swung back and forth in the US, in Europe. It's doing it now. But this is a global industry,

and so even when the regulatory put pendulum swung back in the US, the EV investment carried on and the move toward electric vehicles carried on because you know that it's going to swing back again and maybe swing back even further.

Plus you have to meet the regulatory requirements of all the other markets where you sell, and those were going forward at the time the US moderated the regulatory standards. So it's it's a very complicated multi level optimization problem that they're facing

with, you know, regulatory winds blowing back and forth. But you know,

if you look at the path, the path is more and more stringent over time. So even if it becomes less stringent with the growth rate slows,

it's going to come back or it has in the past. So um,

that's uh, that's what they're going into. So Jeff, you're the

forecaster. Everybody knows ice plants are going to have to close at some point

in your forecasting. When do you think they're going to have to start biting

the bullet and closing plants? Well, you know, I think if we

look at that that utilization that I mentioned, that sixty five percent in the in the outer years of our forecasts, and that's, as you said, that's not sustainable. It can't. You can't run the business absolutely not,

um not at not at a global scale level. So so here here's the

forecaster me somewhere between now and the end of our forecast horizon would say that's twenty thirty. Uh No, in all seriousness, I think there has that

has to be a phased in you know period. So I think we will,

you know, over the course of the next three to five years certainly see a fair number of ice plants that probably will get shuttered. That has

implications clearly across the industry, has union implications not only here but in other parts of the world and Europe, especially in Europe especially, Yes, exactly, So I think you know, what should be done, or should I should say, what needs to be done to get through this transition and ultimately ultimately how it's done probably are two different things. So it likely will take

longer than it needs to to uh again to run efficiently well. And we've

been through periods where we've had a lot of plant closures before, and not everything that's excess capacity gets closed. Um. There is reinvestment that happens.

You know, you can look back to you know, the raft of plants that were put on on ice during the last the Great recession, and several of those are producing vehicles now still um, and a handful of them closed.

So I think, you know, to think that just all excess capacity, you know, there's there's going to be some negotiations. What has happened

in the past is you know which states will give you good incentives and um, you know who really wants to keep those plants. Um. That's you

know, how how that all played out in the last big round of closures.

Jeff Doucy anticipation whereby there's like a one to one replacement for vehicles that Okay, the ice vehicles out, but the EV comes in, or is the industry going to change to a situation where the number of vehicles as a total is reduced on a global basis. I suspect we will see strategies that

look like that in both directions of that. So I think in some cases

there will be a certain segments, certain vehicles a one to one replacement, and others. I think it's going to be a different makeup. My gut

says the number of vehicles at least in this transition period, maybe not twenty years from now, but at least, And that's a whole other There's a lot of different issues around twenty years from now. But I think in the

mid term forecast range, I would suggest the numbers probably go down if we get the ice vehicles completely removed from the markets, because I think during that transition you maybe not maybe on a global scale, again looking at the major markets, because obviously emerging markets aren't going to be there yet. But I

think in the major markets you're probably looking at a transition that's not quite a one to one. So then we should take a quick commercial break, right

now fifteen second break, we'll come back and Gary, hold that thought and we'll pick it up again. How do you bridge don't entire stop shorter on

what roads? Is there hydrotrack technology, But you don't have to know how

the science works, just where the break is. What really matters is they're

bridged stone And thank you Bridgestone for making that this show possible. But sorry,

Gary, I interrupted you there. Well, so I was going to

go to the point that so, so Jeff, if we're going to have fewer vehicles being manufactured, because you know, through this transition, so in total there will be fewer, it would seem to me that that would mean that there's a likelihood that evs would continue to be more expensive than ice vehicles, which then gets to the point of the affordability thing. And because fewer

people are going to buy these vehicles, then this gets to the point of the volumes produced would be less because they wouldn't be demand for them. And

so it's a big mess. I mean, it's like a bowl spaghetti.

I mean it's just gets it. Well, it could be a bull of

spaghetti and add a chicken and egg in there as well, because I think you can you can get to scale, which will lower the price points.

And there's likely going to be some level of battery or other technology breakthroughs or improvements. Maybe not a breakthrough that is going to solve the pricing issue completely,

but prices will come down. So yeah, I think on average,

I wouldn't expect an EV to not be more more affordable than a than a nice vehicle through the forecast horizon. UM. You know, this idea of

parody, you know, maybe maybe not the case, UM, but there will certainly be improvements in that, and that will contribute to more affordable products.

I think we will see there is some white space in the industry, no question about it, and that is in an affordable entry level new vehicle.

UM. Will someone be able to jump in there and make a vehicle

an EV that's profitable? UM. You know there's a lot of talk.

I know Elon has talked about that as well. UM. So I suspect

we will see more affordable evs as we move through this, and I think we'll also see the numbers increase as we get towards you know, if we get out of the five year horizon UM and we get more through this transition, that I'm talking about. I think we will see the numbers start to

edge up. You're gonna you're gonna see additional UM competitors come in. That

competitive pressures is going to remain very strong. So that tends to drive a

lot of people moving in the same directions if someone gets there first. So

again, I think over time, we'll see those numbers back come back up in the model counts. Well, you know, the automakers are counting,

and this is them telling me, not me making it up, that they expect evs to be below the manufacturing costs of ICE before this decade is out.

But then the question becomes, and maybe Christian, we start with you will the public go? Well, the public, you know, there's vary

studies that show there's a significant part of the new car buying public that wants nothing to do with evs. But you know, maybe if they're cheaper,

I would argue they are a better driving experience. Can you change those people's

minds? Well, I think we're going to have We're going to see if

they can change a lot of people's minds. I mean you can look to

Norway, where you know they kind of creeped up, creeped up, and then the move from twenty percent of the market to eighty percent moved very very quickly. UM. And you know, a funny situation because there's one hundred

percent tax on ice vehicles, so you can literally buy an ice for half the price. But still people were so it was UM. But I think

the block for many buyers is the infrastructure and the infrastructure and you know range anxiety and charging. UM. You can look to you know, the Infrastructure

Act, the i I JA that passed last year that's putting think seven point five billion dollars into building out a charging network through the Navy. The program

that's a grant program to states to put every fifty miles on the major trunk lines at least four level three chargers. UM. I think when that becomes

faster, more available, more reliable, UM, than that could be that point where things start to take off. But you know, to to follow

with John is saying you know about the consumer demand for for evs, I mean it seems to me that you knows as we're still in what would be arguably the early adopter phase of this, and the numbers comparatively are low.

UM. There are a lot of people who do not understand you know,

the nature of owning and driving an ev UM. You know, they may

be more fun to drive, but unless you have charging at home, um, you know, waiting in lines at at charging stations, even if there are more chargers, and you know, there have been some estimates that even with all of these new charges being built, we're still going to be woefully behind what would be needed. Um, that people are going to say,

well, wait, I've got to wait twenty minutes behind this guy rather than five minutes as I do at Costco right now when I'm filling up my tank.

Um. You know, the whole convenience factor is going to I think

hit very hard and so um. Jeff, do you see that this might

be a possibility of there could be, you know, a growth like this and then a plateauing of interest in demand for evs when this, this whole new way of life hits people. Yeah, I mean, I think that's

an interesting thought. Clearly, the infrastructure is one of the big roadblocks.

I think in most consumers' minds. Obviously, price is still a factor.

The anxiety, I think it is still there, even if it's not real.

It may be just perceived. But I think infrastructure is real, and

and it's twofold. It's it's the weight, and it's also just trying to

you know, where are they? Where are the chargers? Are they convenient

for me on my road trip or or even around town? And then to

your point. Then you get there and you have to wait for it.

And I while I think we got used to waiting for things during the pandemic, I don't think this is one of those that anyone is willing to wait for, especially if it adds. So you've you've just driven out of your

way to find a charger on your road trip. Now you've got to wait

while you're there, So you're just adding time to get to your destination.

And I think that's a that's a significant problem. So I suppose there's that

possibility that you get a wave of buyers that come in, and maybe that's because of an incentive or just a general interest early adopters, you know, as they're moving into the vehicles, and then there's a pause because they're having those type of issues. I suppose that's a possibility if you get enough of

them come in that you you essentially over take the charging infrastructure before it can get to where it needs to be, So I think that's a risk, I think ultimately, and there's probably a gap when the charging infrastructure gets there before the consumer and ours knows that or realizes it, or is willing to give it a shot. So I think all of that comes into play on

the level of the transition that we go through. You know, I've talked

about there being three parodies for a long time. There's the cost parody that

we focused on earlier. There's this UM infrastructure parody that's being addressed through some

public money as well as you know, the private networks that are building out.

And the third one the auto industry is working very hard on, and that's UM, you know, the having the right vehicle. So the first

evs were small, little cars that not every family fit in, and now we have evs across the range of product um, you know, pickup trucks and SUVs and anything that you might want to buy there is an EV available.

So that's you know, the utility that is in a vehicle that people pick UM that's being addressed. So it's price parody, utility parody, and

convenience parody and convenience I think is a real challenge well, you know, a lot of it has just got to do with making people aware of chargers being out there, because I hear people tell me all the time there aren't any chargers out there. I don't see them. And you know, they

see gas stations with big signs and everything like that. And if you're driving

down the highway at by the exit, there's a sign that shows you which gas stations are at that exit, there's nothing that shows you where you can plug in. I mean, if I were the end of sign, I

start, yeah, that's right, But but you have to search the app and know about it. The only people who own evs are going to do

that. If the drum real public started seeing I don't know, an icon

of a plug and it said EV, all of a sudden, they start to realize, oh my gosh, there's a whole bunch more charging stations than I ever realized. I think that would help to break down the perception that

there's no place to charge in. Well, I think part of them,

by part, it's an infrastructure law at the seven point five billion dollars that is going into charging um. Part of that is about signage. Part of

that it's really about Yeah, I mean, there's there's a whole laundry list of things that you know are sort of unexpected, you know, in terms of you know, they want to be able to have transparency in pricing.

You know, there has to be the same ability to pay across the board.

But yes signs, Yeah, it signs, It takes all payments, it charges all vehicles. They have to have communications so that they can be

monitored for their reliability. There's reliability standards that they have to meet, which

is you know, it's quite frankly with the early adopters, they're running into some reliability problems. You find the charging station and you get there and it

doesn't take your payment, it doesn't fit your car, it's not working.

So you know, it's pretty wonky right now. But you know, this

is aiming to smooth it out at least along the major interstates um and every fifty months. And you know, states don't have to participate in this.

It's voluntary, but it's it's a grant to them to take that on.

And you know, if there's extra money after they have filled fulfilled the requirements of the program, then they can look at other roads as well. So

I'd like to get your guys input two on where you see the US economy going, because towards the end of last year, a number of automakers were forecasting, and another forecasters too. I don't know where your forecast was,

Jeff, but there was talk of a fifteen million units SAR in the US for twenty twenty three, and now everyone seems to be back and off that.

The most recent one I saw was fourteen point one million, you know, nine hundred thousand units lower than that, And it seems that late last year everyone was expecting twenty twenty three to be a whole lot better the year than maybe it's turning out to be. How do you see the years going

to go? Because again that's got a big implications for sales of electric cars

and for the health of the industry overall. It does, it does,

no question about it. Well, interestingly enough, we are actually our forecast

has gone up really in the most recent addition. So what's your number?

So we're at fifteen, so we will we haven't gone up a lot, but we went up a one hundred thous I'm gonna believe your number. I

like that number a whole lot better than fourteen million, right, It sounds a lot better, doesn't it. UM But I think, yeah, it's

there a risk that, of course there is, UM But I you know, our view is so there are a few things driving that we think the disruption is holding at a lower level and that has an increased So there was a question of you know, the last two years, we had this thought in the beginning of those years that oh, well, it's it's going to improve as the year goes on, not get worse. And obviously that wasn't

the case. UM And I think right now it does. It does feel

like the industries is performing much better. Inventories are building. I would argue

there's while there's still demand pent up. You know, when you pull on

the affordability issue, there is some issues that we see on the demand side, and it's just again it's that shrinking level of the market than it is.

Not that not that people wouldn't want to be buy a vehicle they could afford one. UM. But I think that is having implications here and that

could that could cause some concerns in the second half of the year. I

think, when you know, I'll leave the economy to Kristen as well.

But UM but but I think Our view in working with some of the folks that we do on the on the economic forecast, is that actually, now it may be pushing things out, risk out, but it actually is improving the outlook for the years improving as well. So yeah, there's still a

lot of risk, and I think there's still a good, you know, a good probability that we end up in a recession at at some level at some point. But when that is and what that looks like, I think

is still a big question mark. The consumer has been extremely resilient in the

in the auto space, and I think the other thing that we're putting a lot of merit in when we look at the volume fork as is this this rebuilding of the fleet markets, not just rentals, but rentals need vehicles really bad. But so does the government and commercial fleets that didn't weren't able to

get their orders over the last few years. So that alone, I think

it's going to create a levelest stability in the in the overall market. Now,

the retail market to consumers maybe isn't going to be as robust as as it might have been expected as as a recovery pace, but I think the combination of those two areas get us to that level. At least that's how

we see it right now. Christia, what do you think you see?

Well? Things doing pretty well of a pretty healthy year. Well, I

think this reminds me of something that I often forget because I've only been at the Fed about a year, um, that I have to have a disclaimer that when I speak about the economy, I'm speaking for myself, not anybody, not the Chicago Fed, not the Federal Reserve. I don't speak for

Jerome Powell. Um. But what I would like to go back to is

what we started with, is that things are not normal in a normal year.

When you know, I used to be a subscriber to Jeff's forecast.

We would get quarterly updates of the forecast. How many times did you update

last year? Jeff? Oh a lot more than quarterly? Yeah, were

you updating in November? When we get pretty forecasting the end of the year.

By the end of the year, actually the end of the year wasn't wasn't too bad, But to be fair there there it's it's really more of a real time forecast now than is deliverables on a quarterly basis. But things

are changing so rapidly. And you know, we started twenty twenty two,

um, not knowing that there would be a war um in Europe. Uh.

You know, we didn't know that China was going to lockdown on COVID like they did. UM. You know, we used to call these,

you know, the black Swan events. UM. But they're um kind of

knocking the recovery off kilter every so often. UM. So all I'm going

to say about the economy is that you know, the photo Reserve, the chairman is you know, they're committed to be getting inflation down. UM.

Inflation has been uh just way too high UM. And that uh, you

know is the goal of the Fed. And you know at their last meeting

they said that there would not be rate cuts this year. UM. But

you know, overall the they're still growth um in the uh in the Summary of Economic projections, UH, modest growth in the economy. UM. And

so that's where I'm going to leave it, like, modest growth in the economy, no rate cuts, that's what they're talking about. So so,

Jeff, I want to ask you, so you know you're talking about the end of your forecast horizons. So twenty thirty okay, So, so as

we're moving to twenty thirty UM, there will still be a massive number of vehicles sold that have internal combustion engines. UM. So I mean, how

do you how do you see the OEM's working through the change that you know, as we were talking about earlier. You know, on the one hand,

you want people to buy your brand new evs because you just sunk a ton of money into into new plans to build them. But at the same

time, you do like to pay your bills. Maybe you don't like to

pay your bills, but you have to pay your bills. You have to,

and therefore you need to get those ice sales as well. I mean,

how do you how do you see this being executed very carefully? And

I think you talk about change of a forecast, change of a plan because of consumer behavior, because of external factors. You know, shocks that are

going to happen between now and twenty thirty that I can forecast. I can't

tell you when or what they are, but I can tell you there will be disruptions. There will be things that that are positive and negatively get in

the way of what's expected between now and then. And I think, honestly

it's the vehicle manufacturers are going to have to monitor that and they're going to have to be ready to make fluid and flexible decisions. And I think again

that's part of the reason why there's some redundancy that we would expect over this midterm horizon to allow for changes in the path. And I think that's that

probably, I think more than probably suggests that the industry is just not going to be efficient over this period until we get to closer to that end point where you know, where you're at seventy evs and not, you know, not fifty fifty. So by twenty thirty we expect to be in that fifty

fifty period. So I think that progression that happens um you know, you're

going to see the evs continue to come on and the reduction of ICE, probably the lower and slower selling models as their counterparts that are electrified outtake them.

I think that's where you'll start to see that happen. I suspect the

those those high margin segments, as long as consumers are going to buy them, those are going to probably be the last to go, would be my expectation. But again, the regulatory environment could change that as well. Um

there's there's a lot of different angles here. Um so I think I think

fluid and flexibility is probably the name of the game. Well, and can

I jump in and say, you know, one of the things is this industry does learn from things that have happened. So you know, there was

this big tsunami in twenty eleven, there was great recession. There's you know,

fires, tornadoes, all sorts of things. I think we have a

much more resilient supply chain now, much more resilient and flexible, and there's just greater knowledge from you know, the automaker, the tier ones into their lower tiers of what's going on and where their risk points are. I mean,

every one of these things just revealed, you know, pull back the onion a little bit further and where are their issues and address them. And

you know, through this whole period of the of the pandemic, supply chain managers have been working over time. I mean, if if you you know,

were to give an award for you know, keeping the industry going through the pandemic, it's the supply chain folks who have had to deal with you know, potential rail strikes and all sorts of other things that could throw production off kilter, and still you know, continued to produce other than those two months that we were down in early twenty twenties. So the resilience is built

in. Every time there's an event and there's learning and they you know,

just figure out how to do this, and it's I don't know, it's quite frankly amazing to me how quickly things can get back online because this is all the financing is screwed up, like when you don't UM, you know, the payments come differently and all all kinds of other um implications for the suppliers, like you know, where their startup capital comes when you shot down UM. But that, uh, that's all been working pretty well, even

if there are these major disruptions that keep hitting us. Yeah, And I

think just to add on that really quickly, I think that the notion of learning that will happen during the EV transition as well, not just dealing with disruptions that will happen, but I think as as we go and progress further here, as we as we see a ten percent market share, a twenty percent market share, those events getting to those stages, those gates, that's that's going to there's learning that's going to come with that, and I think how to increase you know, from a manufacturing standpoint, how to do that

efficiently yet still produce both types of vehicles. I think there's going to be

additional learning there. It will likely lead to those that do it well and

those that maybe struggle or have a you know, a more difficult learning path.

But I think nonetheless, the industry will get better as as it goes through this transition. Well, and can I just one of the things here

is, you know, some of the evs that are in the market are evs that we're sort of bolted onto an ice platform or an ice architecture.

When we get to those vehicles that are on purpose built architecture and the efficiencies that come with that, then that could really be a game changer as well.

So there's there's you know, redundant parts in EV some of the evs have because they were an ice vehicle. You know, they have some carryover

parts that they don't actually need if there're any only an EV. So you

know, you can get to a lot more efficient production when you're on a purpose built platform. And again that's an an advantage that the newcomers who are

making only evs have Jeff, I want to go back to your your statement, you think that the US market will be at fifty percent ev are around twenty thirty. That's more bullish than than I am up for it, and

it's got huge implications for a number of automakers who do not believe it's going to be anywhere nearer that. Why are you confident it's going to be fifty

percent? Yeah, I mean maybe I was rounding up a little bit.

Um okay, So I think our officially and we do take our EV forecast on a little bit further. I think by twenty thirty five, and that's

a that's a big curve there. I think we're at fifty five to almost

sixty percent sent So yeah, I would say forty five, though I think we would expect to be close. So I think, yeah, there's for

us, it's it's this the two way push. It's it's the regulatory environment.

And again that could change, but I think our view is it will likely be continued continue to move in that direction. And then I think it's

it's the industry has said we're doing this. If you look at the investment

plans, and I think at some point. If you don't get to those

levels, this really doesn't work and we're going to have a much larger problem.

So it comes down to the consumer, comes down to those issues that we talked about that are driving or holding the consumer back, the price point and infrastructure being the biggest one. So I think as long as those come

along for the ride here, you know, we would anticipate getting to those levels of north of forty five to fifty percent by by that time horizon.

Can you say what you see, Kristen, Maybe we lost it. I

think we lost her again. A right, So Jef, you you were

mentioning that if if we don't if it doesn't make it to there, they're going to be some big consequences. What would those consequences be, like,

I mean more plant shutdowns or yeah, yeah, I think you just have If if we can't get through this transition, you're we're going to see increase EV capacity, increased model availability of evs. Essentially that would suggest those are

not then selling at the level that they need to, which you've got this massive investment that then doesn't pay for itself and you don't have enough ice to to offset it, and it it just creates a highly inefficient market and one that is certainly challenged on the profitabilities standpoint. I think then then you have

implications management structure, manufacturing, uh, you know, unhappy shareholders clearly.

So I think all of that just plays into a an industry that that we don't want to see. Yeah, of transition, but I said, the

valley of transition, would you know, the longer it goes on, the more difficult this is. UM. So you know, if the transition you

know, where we are not producing anything at full optimal scale UM, is short, then you can get to the other side and you know things are better. But if this gets drawn out for whatever reason, and Jeff's got

a lot of that covered, UM, then it just becomes much much more difficult. Yeah, well good, We'll look, we're just about at the

top of the hour here, probably a good time to to wrap it up.

But you're sure have given us a lot to think about here. My

gosh, this is going to be well, look, we've said it all along, it's gonna be fascinating to watch, but you guys put a couple of red flags up there that I think are going to make it even more interesting than I thought it might be, so thanks for coming on, Kristin d Check. Great to have you here. Jeff Schuster YouTube that really true?

Yeah, thank you, and Gary. We'll keep on doing this,

okay, see you next week. Autoline After Hours is brought to you by

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