June 2014

NADA Market Review:

Hybrid Electric Vehicles

Perspective | June 2014

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TABLE OF CONTENTS

Introduction ................................................................................................................................. 2

Higher Gas Prices Remain, but Hybrid Volatility Wanes ............................................................. 3

ICE Fuel Economy Improves Substantially ................................................................................... 5

Looking Ahead: Near-Term Hybrid Outlook ............................................................................... 6

At NADA Used Car Guide ............................................................................................................. 8

Market Review: Hybrid Electric Vehicles

After starting off slowly due to unusually severe winter weather, new vehicle sales have

surged over the past few months. The new vehicle seasonally-adjusted annual rate

(SAAR) from March through May averaged over 16 million units, which is the first time

since the onset of the last recession that a similar streak has occurred. Better yet, May’s

SAAR of 16.7 million was the highest figure recorded in more than seven years. Overall,

new vehicle sales were up by 5% over the first five months of the year.

Used vehicle demand was equally strong over the period as the average price of used

vehicles up to eight years in age climbed by 0.5% from April to May thereby pushing year

-to-date prices nearly 3% higher than they were last year.

The year’s positive momentum hasn’t been universal, however.

Per WardsAuto data, hybrid electric vehicle (HEV)

sales are down 10% year-to-date and only a few out

of dozens of hybrid models have had sales improve.

This includes Toyota’s hybrid powerhouse Prius

where sales are off by 19% (deliveries of the smaller

Prius C are down by 1%).

The drop in hybrid sales amid a market that’s

expanding overall means that share for the group has

also contracted. Hybrid share of total new vehicle

sales has fallen from 3.1% in 2013 to 2.9% this year,

which is the first non-production related decline

recorded since 2010.

1.5%

2.2%2.4%

2.8%

2.4%

2.0%

3.0%3.1%

2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2006 2007 2008 2009 2010 2011 2012 2013 2014(thru

May)

Shar

e o

f N

ew

Ve

hic

le S

ale

s

Calendar Year

Hybrid Share of Total New Vehicle Sales2011's Japanese Tsunami adversely affected new hybrid sales

Source: WardsAuto

Perspective | June 2014

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© 2014 NADA Used Car Guide

As far as used hybrids are concerned, by-and-large

depreciation for group has historically been higher

than on comparable internal combustion engine (ICE)

models, and as a result, hybrids tend to retain less of

their original value over time. Toyota’s Prius has been

an exception to this, however.

Back in 2010 the percentage of new value retained by

a one-year-old used Prius was 65%, two-percentage

points higher than the Toyota Corolla’s figure of 63%.

The following year, an all-new design and

substantially higher gasoline prices widened the Prius’

retention advantage to 7-points, and even though the hybrid’s retained value fell from

83% to 79% in 2012, it stayed well above the Corolla’s figure of 75%.

But since then the roles have reversed. Last year one-year old Prius retention fell to

70%, 3-points lower than the Corolla’s 73%, and so far this year Corolla retention stands

at 75%, 6-points above the Prius’ 69%. In depreciation terms, Prius trade-in values for

2007 – 2013 models have fallen by an average of 12% year-to-date, while Corolla values

have dropped by a lesser 8%.

The recent softness in new hybrid sales and the moderation in used price depreciation

over the past couple of years can largely be tied to relatively consistent gasoline prices

and the improved fuel efficiency of ICE models.

Higher Gas Prices Remain, but Hybrid Volatility Wanes

From 1992 – 2003, gasoline prices generally hovered between $1.00 - $1.50 per gallon

and monthly changes in prices were predominantly in

the neighborhood of 4 cents. In the ten years since,

however, lower domestic production of, and

increased global demand for, crude oil have raised

both prices and their monthly volatility.

From 2011 - 2013, pump prices and their monthly

swings averaged $3.55 per gallon and 13 cents,

respectively – both figures three times more than

what was recorded back in the 1990s and early 2000s.

The dramatic surges in gas prices that occurred earlier

on in this period pushed many consumers toward fuel

efficient small cars and hybrids, thereby driving up both new vehicle sales and used

63%

76%75%

73%75%

65%

83%

79%

70% 69%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

2010 2011 2012 2013 2014 (thru June)

Ave

rage

Use

d V

alu

e R

ete

nti

on

Calendar Year

1-Year-Old Toyota Corolla & Prius Value RetentionRetention is calculated by dividing average trade-in value by equipped new vehicle price.

Corolla Prius

Source: NADA Used Car Guide

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Jan

-94

Sep

-94

Ma

y-9

5

Jan

-96

Sep

-96

Ma

y-9

7

Jan

-98

Sep

-98

Ma

y-9

9

Jan

-00

Sep

-00

Ma

y-0

1

Jan

-02

Sep

-02

Ma

y-0

3

Jan

-04

Sep

-04

Ma

y-0

5

Jan

-06

Sep

-06

Ma

y-0

7

Jan

-08

Sep

-08

Ma

y-0

9

Jan

-10

Sep

-10

Ma

y-1

1

Jan

-12

Sep

-12

Ma

y-1

3

Jan

-14

Ave

rage

Pri

ce

Period

U.S. Regular Grade Gasoline PricesRetail, All Formulations (USD/gal., NSA)

Source: U.S. Energy Information Administration

Perspective | June 2014

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vehicle prices. For example, sales of new Toyota Prius jumped by 28% on an annual basis

in March 2012 as gas prices went soaring from roughly $3.30 per gallon at the start of

the year to $3.90 per gallon in April. Granted, new vehicle sales are historically strong in

March (the month is usually one of, if not the, strongest in a given year), however, the

Prius’ growth was more than double the 13% improvement recorded by both Toyota

and the overall market.

The effect gasoline prices have on hybrid fortunes is perhaps even clearer when looking

at used vehicle price data. Again using Toyota’s Prius as a proxy for all hybrids, the

average wholesale price of a 2010 Prius rose by a whopping $5,400 when gas prices

jumped by nearly 80 cents to an average of $3.91 over the first five months of 2011.

Certainly some of this increase was due to stalled Prius production stemming from the

tsunami that struck Japan in March of that year, but Prius prices had already accelerated

by $3,400 before that event occurred.

Another acute increase took place the following year when 2011 model year Prius prices

improved by $1,800 as gas prices rose by 60 cents over Q1 2012. But while hybrid price

growth was well above average for the season (overall market prices grew by $1,100), it

was substantially less than what was recorded in the year prior. In fact, fast forward to

$3.00

$3.10

$3.20

$3.30

$3.40

$3.50

$3.60

$3.70

$3.80

$3.90

$4.00

$14,000

$15,000

$16,000

$17,000

$18,000

$19,000

$20,000

$21,000

$22,000

$23,000

$24,000

Jan

-11

Feb

-11

Ma

r-11

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-11

Jan

-12

Feb

-12

Ma

r-12

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-12

Jan

-13

Feb

-13

Ma

r-13

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

De

c-13

Jan

-14

Feb

-14

Ma

r-14

Ap

r-1

4

Ma

y-1

4

Gas P

rice (p

er gallo

n)A

vera

ge P

riu

s P

rice

Period

Used Toyota Prius Prices vs. Gasoline PricesThe average wholesale price for a given model year Toyota Prius versus regular grade gasoline prices(all forumulations, national average)

Reg. Grade Gas $ 2010 Prius 2011 Prius 2012 Prius 2013 Prius

Perspective | June 2014

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2014 and we see that this reduction in used hybrid price volatility has continued, despite

gasoline price volatility changing relatively little.

Gas prices spiked by 40 cents to $3.85 per gallon from July to September 2012, but

unlike in the past, Prius prices actually fell. Similarly, there was no lift in used Prius prices

through Q1 2013 when gas prices again increased by 40 cents.

While two-year old Prius prices did grow by $700 through March this year,

the increase was less than the $1,000 improvement recorded for the

overall market and can be attributed to typical seasonal factors rather

than the roughly 25 cent rise in fuel prices.

Hybrid sales trends of the past few years strongly suggest that consumers

have become desensitized to dramatic and rapid changes in gas prices as

the occurrences have become more frequent. Essentially, consumers have

adjusted both expectations and household budgets to today’s higher level

of fuel prices, to the detriment of hybrid demand. Compounding matters,

fuel economy advances in gasoline powered vehicles has cut into the

efficiency advantages of hybrids.

ICE Fuel Economy Improves Substantially

Data from the U.S. Department of Transportation shows that new car corporate average

fuel economy improved from an average of 32.9 miles per gallon (mpg) for 2009 model

year cars to 36 mpg for 2013 models. Admittedly, some of this 9.4% increase was due to

shifts in segment share (i.e. more small cars sold versus fewer big sport utilities), but

efficiency gains on gas-powered autos – which comprise more than 93% of all new

vehicles sold new – played a major role.

Specific examples of gas car mpg progress include 4-cylinder versions of the Chevrolet

Malibu and Honda Accord, where combined city and highway fuel economy improved

by 16% and 25%, respectively, from model years 2009 to 2014. Fuel economy for the

Toyota Prius also increased, but by a smaller 9%.

Improvements in ICE fuel economy mean that it takes longer for hybrid savings at the

pump to offset their higher upfront costs. For example, assuming current gas prices and

manufacturer rebates (if any), as well as 15,000 miles driven annually, it would take

nearly five years of fuel savings to negate the higher purchase price of a 2014 Toyota

Camry XLE hybrid versus a gas-powered XLE. It would take roughly four years to reach

this point for a consumer who had elected to purchase a Ford Fusion SE Hybrid rather

than a gas-only Fusion SE. A Lincoln MKZ hybrid buyer would be ahead immediately

Essentially, consumers have

adjusted both expectations

and household budgets to

today’s higher level of fuel

prices, to the detriment of

hybrid demand.

Perspective | June 2014

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because hybrid and gas variants carry the same MSRP; however, Lincoln’s hybrid pricing

strategy is an exception.

Looking Ahead: Near-Term Hybrid Outlook

Given historical trends, used hybrid prices moving

forward will be largely influenced by changes in

gasoline prices, which are expected to dip over the

next few years mainly because of increased domestic

production of crude oil made possible by new

technologies.

In its 2014 Annual Energy Outlook report, the U.S.

Energy Information Administration (EIA) projects that

the extraction of oil from tight formations will drive

U.S. crude production to 9.6 million barrels per day

(MMbbl/d) in 2019, 3.1 MMbbl/d higher than in 2012

(when gas prices reached a record annual average). The increase in domestic crude oil

production is expected to not only reduce the U.S.’ dependence on imported petroleum,

but also keep gasoline prices at or below current levels through 2021.

The EIA’s Reference case projection, which is described as “a business-as-usual trend

estimate, given known technology and technological and demographic trends,” has

gasoline prices falling from an average of $3.62 per gallon in 2013, to $3.27 per gallon in

2017. Prices are projected to gradually increase thereafter, but aren’t forecast to exceed

2013’s level until 2022. Gas prices could also moderate more than predicted. The EIA

goes on to say in the AEO2014 report that “there is greater upside uncertainty than

downside uncertainty in oil and natural gas production.”

The organization also states that regulatory mandates to improve fuel efficiency will

reduce light-duty vehicle energy use and in turn lead to lower gasoline consumption

over the projection period (U.S. corporate average fuel economy, or “CAFE”, regulations

require that manufacturer fleets achieve an average of 54.5 miles per gallon by model

year 2025, up from 35.5 mpg in 2016). The required improvements in fuel economy

would also reduce pressure on gasoline prices.

Given the predicted stability in gasoline prices, NADA forecasts that hybrid depreciation

will remain higher than it will for similar gas-powered counterparts. As an example,

trade-in prices for the 2012 model year Toyota Camry LE hybrid are expected to fall by

13% and 18%in 2014 and 2015, respectively. By comparison, prices for the gas-only

Camry LE are forecast to drop by 8% and 13%. While the 10% and 13% losses expected

$3.62

$3.49

$3.33$3.27 $3.27 $3.32

$3.38$3.49

$3.59$3.71

$3.83$3.95

$4.05

$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

$3.75

$4.00

$4.25

2013Actual

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Pri

ce p

/gal

.Calendar Year

Gasoline Price ForecastU.S. EIA reference case forecast of average gasoline prices, all grades, including taxes. Nominal dollars.

Source: U.S. Energy Information Administration, Annual Energy

Outlook 2014

Perspective | June 2014

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on the ’12 Toyota Prius hybrid are less than other hybrids, these figures are above the

9% decline anticipated for the gas-powered Toyota Corolla.

Moderating gas prices and the increased competitiveness of ICE vehicles

will also do little to elevate demand for plug-in EVs; as a result, NADA

forecasts that deprecation for plug-in hybrid electric (PHEV) and plug-in

electric (PEV) vehicles will significantly outpace both traditional hybrid and

gas-powered losses over the period.

In closing, hybrids will remain a viable choice for consumers who live in

urban areas or those adhering to environmentally-friendly ideals, and

Toyota has proven with the Prius that hybrids can be strong performers in

both new vehicle sales and used vehicle retention.

However, the likelihood that gas prices will at least remain at current

levels near-term, the federally-mandated requirement pushing fuel

economy to improve and a lower price point for non-hybrids enhance the

practicality of gas-powered vehicles. As a result, hybrids will likely be more

challenged to woo new consumers into the EV fold over the coming years.

NADA forecasts that

deprecation for plug-in hybrid

electric (PHEV) and plug-in

electric (PEV) vehicles will

significantly outpace both

traditional hybrid and gas-

powered losses over the

period.

Forecasted Annual Change in Used Vehicle PricesNADA's used price forecast for select 2012 model year gasoline, hybrid and plug-in hybrid electric models

Make Model Trim Level Fuel Type CY 2013 v. 2014 CY 2014 v. 2015

Chevrolet Volt Sedan 4D 1.4L I4 PHEV Plug-In Hybrid Electric -24% -24%

Honda Civic Sedan 4D 1.5L I4 HEV Hybrid Electric -14% -16%

Honda Civic Sedan 4D LX 1.8L I4 Auto Gas -11% -15%

Honda Insight Hatchback 5D EX 1.3L I4 HEV Hybrid Electric -16% -20%

Kia Optima Sedan 4D 2.4L I4 HEV Hybrid Electric -23% -18%

Kia Optima Sedan 4D LX 2.4L I4 Gas -15% -15%

Toyota Camry Sedan 4D LE 2.5L I4 Gas -8% -13%

Toyota Camry Sedan 4D LE 2.5L I4 HEV Hybrid Electric -13% -18%

Toyota Corolla Sedan 4D L 1.8L I4 Gas -9% -9%

Toyota Prius Liftback 5D 1.8L I4 HEV Hybrid Electric -10% -13%

Toyota Prius Liftback 5D 1.8L I4 PEV Plug-In Electric -19% -21%

Source: NADA Used Car Guide

Forecasted Annual Change in Used Price

Perspective | June 2014

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