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(originally published by Booz & Company)


The Coming Boom in Hybrid Cars

Evidence from innovation theory and auto-industry history suggests that the market share for hybrids is about to accelerate sharply.

Hybrids — the fuel-efficient autos that combine electric motors with internal combustion engines — have been getting a lot of buzz in the U.S. lately, especially with gasoline prices of US$4.00 to $5.00 per gallon. There are waiting lists for the most popular hybrids, such as the Toyota Prius, and automakers are scrambling to introduce dozens of new models. But hybrids' share of the new-car market is still in low single digits, and skeptics question whether they will really break into the automotive mainstream or whether sales will dwindle if gasoline prices fall back from their recent record highs. An analysis of the theory of innovation and the history of the auto market suggests that the hype about hybrids is justified and indicates that hybrids should account for a robust 17 percent share of total vehicle sales as early as 2010. Moreover, history suggests that these market-share gains are not dependent on high gasoline prices and that the market share of the next generation of hybrids — the plug-in hybrid — should grow even more quickly.

One tested method of estimating the growth of market share for an innovation in an existing market is the S-curve, a mathematical model that was first used in biology to predict the growth rates of living things and has since been adapted by economists and management theorists to describe the growth paths of innovations. The S-curve has predicted accurately the exponential, cumulative rate of adoption for innovations as varied as the automobile in a market for horses, fuel oil in a market for coal, and TV films in a market for full-length features. The three stages of growth for an S-curve innovation are commercialization, adoption, and maturation.

My research shows that the market penetration of the hybrid car, since its launch seven years ago, forms a nearly perfect S-curve when graphed. Furthermore, the circumstances surrounding the proliferation of hybrids conform perfectly to the stages that S-curve theory dictates they should. For instance, in the commercialization stage, market share rises slowly from 0.1 percent to 1 percent as sales are driven by early adopters and enthusiasts — those adventurous consumers who are willing to pay a premium and accept the risks of investing in a cutting-edge technology. In the adoption stage, an S-curve innovation should be in a period of rapid public acceptance as the product gains greater visibility and consumer trust, and as scaled production drives down manufacturing costs. In this stage, market share should rise from 1 percent to 10 percent in the same amount of time that the market share in the commercialization stage went from 0.1 percent to 1 percent.

For hybrids, the commercialization stage lasted from 2001, when the first hybrids became widely available, to 2005, when market share surpassed 1 percent. Within this stage, the fastest increase in the rate of market penetration came in 2004, when Ford released its Escape hybrid SUV, the first model outside the subcompact and compact categories, putting the new technology firmly into the automotive mainstream.

Because hybrids accomplished the commercialization stage in approximately four years (between 2001 and 2005), the S-curve predicts that hybrids, now in their adoption stage, will achieve a 4 percent market share in 2008, which seems likely. Hybrid market share broke 3 percent for the first time in April 2008, and record gas prices sent summer sales through the roof. As the adoption stage continues, the S-curve suggests a hybrid market share of around 10 percent by the end of 2009. Well in line with this rule of thumb, my data, based on recorded growth rates and market-share figures from the past seven years, predicts a 9 percent market share for hybrids in 2009 and a ripe 17 percent share by the end of 2010. Should sales fall slightly short of the S-curve’s predictions, it may owe less to consumers’ purchasing preferences than to supply issues, as manufacturers are struggling to keep up with demand. There are six-month waiting lists in parts of the country for the Toyota Prius, the best-selling hybrid model.

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  1. Managing Creativity and Innovation, Harvard Business Essentials Series (Harvard Business School Press, 2003): Chapter two of this book, “The S-Curve: A Concept and Its Lessons,” provides a compact account of the concept’s history and implications. 
  2. Theodore Modis, Predictions: Society’s Telltale Signature Reveals the Past and Forecasts the Future (Simon & Schuster, 1992): A physicist’s in-depth examination of how the S-curve can be used to predict social phenomena such as the life cycles of products.
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