No.

114 February 1, 2007

Upcoming Advances
in the Hybrid Vehicle Market

Yuki TANAKA, Yukio SHIGETA

 NRI Papers No. 114
February 1, 2007

Upcoming Advances
in the Hybrid Vehicle Market
Yuki TANAKA, Yukio SHIGETA

Previous Trends in the Industry

Hybrid vehicle market expands rapidly as more and more manufacturers make
their entry
Current Topics
Approach varies depending on the manufacturer
Market Prospects
Reductions in costs and wider product lineups seen as keys to expanding the
market
Changes in Industrial Structure
Market growth offers new opportunities to manufacturers of electrical
equipment and components
Suggestions for the Industry
Motor manufacturers should establish an open development system with related
suppliers

T he market for hybrid vehicles has been growing explosively. These vehicles first appeared on
the market ten years ago, in 1997, when they were touted as a means of suppressing growing
CO2 emissions. Against a background of increased environmental awareness and higher oil prices,
2004 proved to be the second consecutive year in which sales of hybrid cars doubled, and 2005
saw sales reach about 300,000 units.
Despite these figures, even after being on the market for ten years, hybrid cars still account for
less than 2 percent of all new car sales. To determine the factors that would lead to a faster spread
of hybrid vehicles, NRI conducted a questionnaire-based consumer survey. As a result, we identi-
fied three main factors, namely, (1) lower cost, (2) wider product lineups and (3) more opportuni-
ties to actually experience using hybrid vehicles. If manufacturers could respond to these demands,
we estimate that the market for hybrid vehicles would rise to 2.2 million vehicles by 2012, while
giving birth to a hybrid-related component market amounting to 760 billion yen.
Unfortunately, however, it is not easy to reduce the cost and size of the components used in
hybrid vehicles. If this were to be realized, the vehicle manufacturers and parts suppliers would
have to establish some kind of open development system.

Copyright 2007 by Nomura Research Institute, Ltd. 1

 NRI Papers No. 114 February 1, 2007

look at the source of these emissions, we find that the

Previous Trends in the Industry transportation sector is the second-largest contributor,
and exhibits the highest rate of increase. Within the
Hybrid vehicle market expands rapidly as transportation sector, emissions from passenger cars
more and more manufacturers make their constitute almost 90 percent of the sector total.
entry Therefore, reducing the CO2 emissions of passenger cars
would make a large contribution toward reducing
Hybrid vehicles offer the key to controlling CO2 Japans overall total.
emissions To reduce the CO2 emissions of passenger cars, most
Japan is the fourth-highest producer of CO2 emissions in attention has been concentrated on hybrid vehicles,
the world. According to the Kyoto protocol, adopted in which combine a gasoline engine and an electric motor.
1997, by 2012 Japan is required to reduce its level of While fuel cell vehicles and electric cars have also been
emissions to a point 6 percent below that of 1990. developed, it seems unlikely that they will ever be mass
However, by 2004, the nations CO2 output had risen by produced due to technical issues and problems related to
140 million tons (12%), as shown in Table 1. When we manufacturing costs and infrastructure.
It is true that clean diesel vehicles and those powered
by bio-ethanol fuel have also been commercialized (the
Table 1. CO2 Emissions by Sector in Japan
latter, already very popular in Brazil, runs on a blend of
(Unit: Million tons)
gasoline and ethyl alcohol that is produced from sugar
Increase/ Change cane, etc.). If, however, we consider the effect of reduc-
Source of emissions FY 1990 FY 2004 decrease in rate
ing CO2 output and the costs related to infrastructure,
Industrial sector 482 466 16 3%
hybrids appear to be the best choice for the environment
Transportation sector 217 262 44 20%
Business and other sectors 164 227 62 38%
(Figure 1).
Household sector 127 168 40 32%
Energy conversion sector 68 81 12 18%
Manufacturing 62 53 9 15% Size of hybrid market doubles every year
Processing waste 23 36 14 60%
The number of hybrid cars on the roads has increased in
Total 1,144 1,286 142 12% step with consumers environmental awareness. In 2003,
Note: CO2 emissions after electric power generation and/or heat generation sales reached a mere 80,000 units. However, high oil
are allocated to each final consumption sector. prices and the introduction of new hybrid models
Source: Greenhouse Gas Inventory Office, The GHGs Emissions Data of
Japan (FY 1990 FY 2004), August 2006. nudged sales up to about 170,000 units in 2004 and
some 300,000 units in 2005. This annual doubling of

Figure 1. Advantages and Disadvantages of Vehicle Driving Systems

CO2 reduction effect

Outline (regarding CO2 emissions by gasoline as 1) Vehicle cost Infrastructure cost

Gasoline Vehicles powered by

vehicles Well to tank
gasoline
Tank to wheel

Hybrid vehicles Vehicles that combine a A motor, inverter and No new infrastructure
(gasoline) gasoline engine and an battery require an is necessary
electric motor additional 200,000 to
300,000 yen

Diesel vehicles Vehicles powered by a Prices are 10-15% higher No new infrastructure
motor using light oil as than those of gasoline is necessary
fuel vehicles due to the need for
processing exhaust gas

Bio-ethanol Vehicles using a blend of
vehicles gasoline and ethanol as
fuel (CO2 emissions from
blended ethanol can be
treated as zero because
CO2 emissions from bio-
ethanol are not counted)
Relatively few changes are Little ethanol
Produced from corn required on the vehicle production volume (2
side (if the ethanol to 3% of gasoline
concentration becomes consumption
Produced from higher, fuel-related parts volume); ethanol
sugar cane must be changed) supply infrastructure
is required
1.0 0.5 0.0 0.5 1.0

Notes: Well to tank: fuel efficiency (from drilling, transportation to production of fuel), tank to wheel: vehicle efficiency (consumption).
Source: Data on the CO2 emission reduction effect on a well-to-wheel (from drilling to consumption) basis are based on material published by Toyota Motor.

Upcoming Advances in the Hybrid Vehicle Market

Copyright 2007 by Nomura Research Institute, Ltd. 2

 NRI Papers No. 114
Figure 2. Increase in Sales of Hybrid Vehicles
(1,000 units)
350
Others
300 Europe
US
250 Japan
200
150
100
50
0 driving performance, and which the company intends to
1997 98 99 2000 01 02 03 04 05 (%)
Source: Compiled based on interviews with automobile manufacturers.
the market is illustrated in Figure 2. When we look at the
market by region, we find that the US accounts for 70
percent of sales, Japan 20 percent, and Europe 8 percent.
Thus, the majority of the market growth is in the US.
European and US manufacturers look to tie-ups to
enter market
Toyota Motor has been the main driving force in this
market, and currently holds about an 80 percent share in
terms of the number of units sold. After Toyota, Honda
has a 16 percent share, followed by Ford of the US with
4 percent. Currently, the hybrid market has seen the
entry of only three manufacturers. However, other manu-
facturers are reviewing their clean vehicle programs
and will undoubtedly be entering the hybrid market.
In 2005, General Motors of the US, and Daimler-
Chrysler and BMW, both of Germany, jointly estab-
lished a hybrid development center in the US, where
around several hundred engineers from all three compa-
nies jointly work together to develop new hybrid tech-
nologies. GM plans to launch a new hybrid model
incorporating the jointly developed systems in 2007.
Germanys Volkswagen, jointly with its Audi and
Porsche group companies, has chosen to develop its own
hybrid technologies, which are scheduled to appear in a
new model in 2008. The chief aim of the joint develop-
ment between US and European manufacturers is to
maintain/increase their share of the all-important US
market, as well as remain in compliance with new envi-
ronmental regulations.
Similarly, in Japan, Fuji Heavy Industries has acceler-
ated its efforts to develop a hybrid vehicle through a cap-
ital tie-up with Toyota. Nissan, however, has abandoned
its tie-up with Toyota, and has instead decided to go it
alone to develop its own hybrid system. In Korea, also,
Hyundai Motor Company is developing hybrid technol-
ogy, which should appear on the market in 2008.
Upcoming Advances in the Hybrid Vehicle Market
Copyright 2007 by Nomura Research Institute, Ltd.
February 1, 2007
Current Topics
Approach varies depending on the
manufacturer
Toyota aims to offer a full lineup of models by
emphasizing the output power of its hybrid system
Since first offering the Prius in 1997, Toyota has
remained the leader in the hybrid car market. By early in
the 2010s, the company aims to double its lineup of
hybrid cars and is aiming for an ambitious worldwide
sales figure of one million units per year. Toyota has
developed a new drive system called THS2 (Toyota
hybrid system) that offers improved fuel economy and
use to offer a much wider lineup of hybrids, including a
large SUV (sport utility vehicle) and a luxury car
(Lexus) (Table 2).
Toyota has chosen to pursue the development of
hybrids because, in comparison to clean diesels and bio-
ethanol vehicles, they have much lower levels of CO2
emissions and do not demand any investment in infra-
structure. In addition to these points, Toyota seems to
give great importance to its strategy of using hybrid
technology as a tool for conspicuously differentiating it
from other manufacturers. In the European market, in
particular, hybrids are regarded as the means to increas-
ing the companys share of the market.
Honda concentrates on the development of small
cars
The concept behind Hondas IMA (integrated motor
assist) hybrid system is one of engine first, motor sec-
ond. While Toyotas hybrid system uses two high-output
motors of about 100 kW each, Hondas system uses only
one motor of around 10 to 20 kW. In addition, Honda
uses a battery that only has about half the capacity of the
Toyota system. Rather than stressing power, Honda
emphasizes fuel economy and cost.
Honda has announced that it intends to concentrate its
hybrid efforts on smaller cars. In 2007, Honda plans to
start the development of a hybrid version of its Fit
compact model. To improve the fuel economy of its
mid- to large-size cars, however, Honda plans to rely on
clean diesel engines.
GM develops several systems in parallel
GM is developing three varieties of hybrid systems. The
first is the light hybrid system used in pickup trucks
such as the Chevrolet Silverado and Chevrolet Sierra.
The second is its medium-output BAS (belt alternator
starter) system and the third is the high-output AHS2
(advanced hybrid system 2), developed jointly with
Daimler Chrysler and BMW.
GM plans to apply the BAS hybrid system to sedans,
while the AHS2 system will appear in large vehicles
3
 NRI Papers No. 114 February 1, 2007

Table 2. Manufacturers Plans for Sales of Hybrid Vehicles

Body type Market

Manufacturer Model name Release year Compact Sedan Minivan Pickup Japan US Europe Strategy
SUV
Toyota Motor Prius 1997 S S S S Aiming to achieve
Estima 2001 S S annual sales of
Crown 2001 M S one million units
Alphard 2003 S S early in the
Harrier 2005 S S S S 2010s.
Highlander 2005 S S S
Camry 2006 S S Increasing the
Lexus GS450h 2006 S S S current 7 models
Lexus LS600h 2007 S S to 17 models.
Lexus IS Not determined S S
Lexus ES Not determined S S

Honda Motor Insight 1999 M S S S

Civic 2001 M S S S
Accord 2004 M S
Fit 2007 M

Nissan Motor Altima 2006 S S Developing

Not determined 2010 systems
independently

Hyundai Motor Not determined 2007

Ford Motor Escape 2004 S S Aiming to achieve

Mercury Mariner 2005 S S annual sales of
Mazda Tribute 2005 S S 250,000 units by
Fusion 2008 S S 2010.
Mercury Milan 2008 S S Developing
hybrids for more
than half of major
brand models

GM Chevrolet Silverado 2004 M S Developing

Chevrolet Sierra 2004 M S hybrids for 12
Saturn Vue 2006 M S mass-production
Chevrolet Malibu 2007 S S models
Chevrolet Tahoe 2007 S S
GMC Yukon 2007 S S
Suburban Not determined S S

DC Durango 2008 S S

VW Touareg 2008 S
Touran 2008 S
Audi Q7 2008 S S
Cayenne 2008 S

BMW Not determined 2010

Notes: (1) S = strong hybrid system (driven only by a motor), M = mild hybrid system (a motor is used for auxiliary power), (2) DC = Daimler-Chrysler
Corporation, GM = General Motors Corporation, SUV = sport utility vehicle, VW = Volkswagen.
Source: Complied based on news releases and material disclosed by each company.

such as SUVs. The company has announced that it will
be producing hybrid versions of its 12 models, with the
majority of these using the AHS2 system.
Ford Motor Company has announced that it expects to
be selling 250,000 hybrid units per year by 2010.
Because the company will be offering these on the
American market, it is fair to assume that Ford will be
concentrating on large cars.
European manufacturers offer hybrid systems as
options
In addition to the high-output hybrid system being
developed jointly with GM, Daimler-Chrysler and
BMW are also developing their own relatively low-output
systems. The VW Group is also developing its own rela-
tively low-power system. The European auto manufac-
turers are developing their own low-output systems for
use with existing transmissions, while relying on tie-ups
to reduce the investment risk of developing high-output
systems by considering their high development and
manufacturing costs.
Although progress is being made in hybrid vehicle
development, the clean technologies of the European
manufacturers are focused on making diesel engines
cleaner. Their chief reason for developing hybrid vehi-
cles is to ensure compliance with US regulations.

Upcoming Advances in the Hybrid Vehicle Market

Copyright 2007 by Nomura Research Institute, Ltd. 4

 NRI Papers No. 114
Figure 3. Ratio of Hybrids among Car Sales in Japan, the US and Europe (2005)
Hybrids 1.5%
Japan
Other than hybrids
98.5%
Note: Compiled based on a variety of information released.
Accordingly, it is impossible to deny that they are tak-
ing a passive stance of only offering the required mini-
mum in the first instance. The European manufacturers
have not announced any specific plans to introduce
hybrid models.
Because the European manufacturers are positioning
hybrid systems as just another option, it is thought that
they are not placing as much emphasis on the develop-
ment of their own systems. This also points to their pas-
sive attitude toward hybrid vehicles.
Market Prospects
Reductions in costs and wider product
lineups seen as keys to expanding the
market
The size of the hybrid car market has been expanding,
and the manufacturers who are targeting this market are
accelerating their development strategies. Nevertheless,
in 2005, in terms of units sold, hybrids accounted for
less than 2 percent of all sales (Figure 3).
Will the market for hybrid cars continue to grow, or
has it already reached its peak? To analyze the hybrid
car market, NRI conducted an Internet-based survey of
car owners in Japan (Table 3). By identifying the differ-
ences in opinion between owners of hybrid automobiles
and other owners, and examining the factors that con-
tributed to the popularization of hybrid cars, we have
attempted to forecast market growth. Our results are
introduced below.
Hybrid cars purchased for their economy, quiet
ride, and environmental friendliness
In the first instance, what do users require of hybrid
cars? When we asked hybrid users about the reasons for
their purchase, we found that the most prevalent reasons
were excellent fuel economy, quiet operation and
clean exhaust emissions (Figure 4). Among those
Prius owners who had bought their car before the launch
of the second version (2003 and earlier), excellent fuel
Upcoming Advances in the Hybrid Vehicle Market
Copyright 2007 by Nomura Research Institute, Ltd.
February 1, 2007
Hybrids 1.3% Hybrids 0.2%
US Europe
Other than hybrids Other than hybrids
98.7% 99.8%
economy was by far the most common reason. Among
the owners of the second model (2004 and after), the
reasons for purchase were much more varied. These
owners seem to expect much more from a hybrid car.
Another benefit of hybrid technology, namely, better
acceleration, does not figure highly overall in users
expectations. Among owners of the Harrier and Lexus
GS, however, acceleration was a highly regarded factor
(while the size of the sample was relatively small, accel-
eration figured in the buying decision of 70 percent of
these owners). For some models in which high output is
a selling point, the extra acceleration gained from the
use of the hybrid system has become a factor affecting
the decision to purchase.
Satisfaction among hybrid car drivers is generally
high
Next, upon asking users of hybrid cars about their level
of satisfaction, their responses revealed high satisfaction
in terms of quietness, clean exhaust, latest technol-
ogy and fuel economy (Figure 5). These results sug-
gest that users high expectations in these areas are
generally met. In addition, satisfaction with accelera-
tion was around 20 percent higher among the buyers of
2004 and later models, compared with those who had
bought their vehicles in 2003 or earlier. The reason for
this is thought to be the introduction of better-performing
hybrid cars.
In contrast, however, satisfaction was extremely low with
regard to the cost of the vehicle itself and maintenance
cost. Users are dissatisfied that hybrids tend to be
200,000 to 300,000 yen more expensive than conven-
tional cars, while the cost of changing the battery pack
every a few years runs to around 100,000 yen.
Hybrid owners are very likely to be repeat
purchasers
We asked users of hybrid cars whether they would con-
sider purchasing another hybrid car in the future. We
found that 30 percent said that they would definitely
buy another hybrid and 64 percent said that they
would give first priority to purchasing another hybrid
5
 NRI Papers No. 114 February 1, 2007

Table 3. Outline of Survey on Hybrid Cars

Survey targets: Those who fall under either of the following categories
(1) Owners of hybrid cars
(2) Owners of passenger cars and/or mini-cars that are not hybrid cars

Survey method: TruNavi, an Internet research & marketing research service provided by NRI,
was used.

Survey date: September 19, 2006

Number of effective responses: 900

Figure 4. Reasons for Purchases of Hybrid Cars

Excellent fuel economy

Quiet operation

Clean exhaust emissions

Preferential tax treatment

Latest technology

Better headroom and legroom Purchasers in 2003 or earlier

(N = 100)
Purchasers in 2004 or later
Better acceleration
(N = 200)

0 20 40 60 80 100 (%)
Source: Survey on Hybrid Cars by NRI, September 2006.

Figure 5. Level of Satisfaction with Hybrid Cars

Quiet operation

Clean exhaust emissions

Latest technology

Excellent fuel economy

Preferential tax treatment

Better headroom and legroom

Better acceleration

Cost of vehicle itself Purchasers in 2003 or earlier

(N = 100)
Purchasers in 2004 or later
Maintenance cost
(N = 200)

0 20 40 60 80 100 (%)
Note: Ratio of those who are satisfied.
Source: Survey on Hybrid Cars by NRI, September 2006.

Upcoming Advances in the Hybrid Vehicle Market

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 NRI Papers No. 114 February 1, 2007

if the conditions were right, (Figure 6). These re- Figure 6. Whether Hybrid Users Intend to Purchase
sponses indicate that as many as 94 percent of hybrid Another Hybrid
users have already considered the purchase of another Want to give priority Never buy a hybrid again
to other systems 1%
hybrid car. It is probably fair to say that this is a reflec- 5%
tion of the high level of satisfaction among hybrid
owners. Definitely buy
However, when we asked users what they would most another hybrid
like to see improved in hybrids, many responded with 30%

better value for the money, reflecting the aspect that

indicated the greatest degree of dissatisfaction (Figure Give first priority to a
7). Many users mentioned that they would like to see the hybrid if conditions are right
64%
cost of the vehicle itself and the maintenance cost (bat-
tery replacement) come down. If the manufacturers of N = 300

hybrids cannot solve these issues, the chances of hybrid

users replacing their vehicles with hybrids again are Source: Survey on Hybrid Cars by NRI, September 2006.

likely to fall.
After better value for the money, users most wanted
to see a wider lineup of models. When we asked users Figure 7. Improvements Requested by Hybrid Car Users
which type of vehicle (by body type) they would most
Better value for the money
like to see offered as a hybrid, the top three responses including fuel economy and
were sedans, minivans, and mini-cars. As hybrid vehicle purchase price

sedans and minivans are already on the market, these Want a hybrid version of a
responses point to users hoping to see an even wider particular body type
variety of hybrids being offered. We found that 40 per-
Better environmental
cent of respondents wanted to see hybrid mini-cars. friendliness
Because mini-car users are very demanding in terms of
cost, we can see that there is a need for a low-cost, com- More comfortable ride
pact hybrid system.
Hybrid car users exhibit a high degree of loyalty, and More power as I
are extremely likely to replace their hybrid vehicle with enjoy driving

another. Nevertheless, there remains a strong demand for Improved design such as
better value for the money and wider model lineups. external appearance and
interior appointments
Manufacturers will have to strive to reduce overall costs,
Enhanced driving
including the purchase price of the vehicle itself and the performance such as
cost of maintenance. In addition, systems will have to be better cornering

downsized if hybrid versions of a wider variety of vehi- New functions (e.g.,

intelligent parking assist N = 300
cles are to be offered. systems)

0 20 40 60 80 100 (%)
Users of conventional vehicles also demand lower
Source: Survey on Hybrid Cars by NRI, September 2006.
costs and wider product lineups
We asked users of conventional cars (passenger cars and
mini-cars) whether they would buy a hybrid version of
Figure 8. Intention of Conventional Car Users to Buy
their current car if the price could be reduced to a more Hybrid Cars
reasonable level. We found that 45 percent of the respon- Maybe not buy Not buy 4%
dents answered definitely buy or maybe buy (Figure 9%

8). If we add those who answered would think about

buying, this figure rises to 87 percent. Therefore, we
Definitely buy
can say that if enough appealing hybrid models were 20%
offered, it is likely that more users would consider
switching to them.
Of those persons considering the purchase of a hybrid Would think
Maybe buy
car, we went on to ask what they would expect of the about buying
25%
42%
hybrid vehicle. Relative to existing hybrid users, we
found that expectations are higher across the board N = 600
(Figure 9). That is, the responses point to a demand for a
more capable car at a lower price. Such potential
buyers are unlikely to entertain the tradeoff of a vehicle Source: Survey on Hybrid Cars by NRI, September 2006.

Upcoming Advances in the Hybrid Vehicle Market

Copyright 2007 by Nomura Research Institute, Ltd. 7

 NRI Papers No. 114 February 1, 2007

Figure 9. Conventional Car Users Expectations of Hybrid Cars

Excellent fuel
economy

Clean exhaust
emissions

Preferential
tax treatment

Quiet operation

Latest technology

Passenger car users

Low vehicle cost (definitely buy + maybe buy,
N = 1152)
Better acceleration Mini-car users
(definitely buy + maybe buy,
N = 1118)
Better headroom
and legroom Hybrid car users (N = 1300)

0 20 40 60 80 100 (%)
Source: Survey on Hybrid Cars by NRI, September 2006.

Figure 10. Reasons Why Conventional Car Users Shy Away from Buying Hybrids
Think so Do not think so
Poor cost performance

No hybrid versions offered

for model type that I want
High maintenance cost

Poor design

My preferred manufacturer
does not offer hybrids
Breaks down easily

Others
N = 270
0 20 40 60 80 100 (%)
Note: Survey targets are conventional car users who answered definitely buy or maybe buy.
Source: Survey on Hybrid Cars by NRI, September 2006.

that is economical and friendly to the environment
but expensive to buy.
Then again, users no longer seem to be looking for
leading-edge technology. These results suggest the fact
that hybrid cars are gradually losing their novelty, and
are coming to be seen as part of mainstream technology.
Why is it that users of conventional cars did not pur-
chase a hybrid model, even though they considered a
hybrid vehicle as part of their buying process? Upon
asking these users why they shied away from the pur-
chase of a hybrid, many responded with the cost perfor-
mance is poor, I couldnt get the type of car that I
really want, and maintenance costs are high (Figure
10). If the size of the hybrid car market is to grow, it is
essential that manufacturers increase their offerings of
hybrid models, reduce purchase prices and limit mainte-
nance costs.
Hybrids will not become popular until the cost
differential is no more than 200,000 yen relative to
conventional vehicles
Consequently, to what degree must the cost performance
of hybrids be improved to persuade users to purchase
them? Given that fuel economy is already reaching the
maximum possible with current technology, the only
measure left available to manufacturers is cost reduction.
We asked those users who said that they would defi-
nitely buy or maybe buy a hybrid to define the maxi-
mum cost differential that they would tolerate relative to
the cost of a conventional car. Among these users, about
40 percent said that they would not consider a premium
in excess of 200,000 yen (Figure 11). While the price
differential differs substantially depending on body type,
hybrids are invariably more expensive than their conven-
tional counterparts, with Toyotas Prius being around

Upcoming Advances in the Hybrid Vehicle Market

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 NRI Papers No. 114 February 1, 2007

Figure 11. Permissible Price Differential of Conventional 400,000 yen more expensive than its non-hybrid coun-
Car Users terpart. This differential will have to be cut in half.
(%) Among the same group, 4 percent said that they
100 100
N = 270 would tolerate a cost difference of up to 600,000 yen. If
79
we consider that current hybrid owners account for only
80 less than 2 percent of the total, we can also conclude that
the small lineup of models also has a major influence.
60
Percentage
of those Need for a means of letting consumers know about
who can
38
the advantages of hybrid cars
tolerate 40
If users of conventional cars are given the opportunity to
drive or ride in a hybrid, their interest in hybrids doubles
20 16 (Figure 12). If users of conventional cars could be given
6 4
a chance to drive hybrids, we could expect the market to
0 expand. We are seeing a phenomenon whereby rental car
Up to Up to Up to Up to Up to Up to customers who have been assigned a hybrid model and
50,000 100,000 200,000 300,000 400,000 600,000
experienced the excellent fuel economy subsequently
Note: Survey targets are conventional car users who answered definitely
buy or maybe buy. ask specifically for a hybrid.
Source: Survey on Hybrid Cars by NRI, September 2006. Currently, users of conventional cars do not under-
stand hybrids well. Of this group, 66 percent could
explain them to another person or understand them to
Figure 12. Those Who Considered Buying Hybrids as
some degree (Figure 13). This is a little lower than the
Influenced by Driving/Riding Experience
78 percent who claim to understand gasoline-powered
Considered Did not consider cars. If we consider that hybrid car users have the same
buying a hybrid buying a hybrid
level of understanding of their vehicles as that of con-
No experience
driving or riding ventional cars, it is clear that we need some means of
(N = 474) improving the level of understanding hybrids.
Drove or rode
at a car dealer Projected market of 2.2 million units if problems
(N = 26)
can be resolved
Drove or rode a rental If we consider the questionnaire results, as described
car or a car borrowed
from a friend, etc. above, it should be possible for manufacturers to
(N = 82) increase the size of the market for hybrids by first
Drive or bringing costs down (both purchase price and mainte-
ride every day
(N = 18) nance costs) and offering a wider lineup of models while
educating consumers on the benefits of hybrids so that
0 20 40 60 80 100 (%) more hybrid models are sold. Then, relying on consumer
Source: Survey on Hybrid Cars by NRI, September 2006. satisfaction with the hybrids, manufacturers will see fur-
ther subsequent purchases of hybrids.
Based on the results of our analyses, we have attempted
Figure 13. Users Level of Understanding about Cars to create a forecast of the Japanese domestic hybrid car
(%) market. Specifically, we used the following methods of
100
88
91 forecasting.
80 78

66
(1) For each different body type, we estimated the
60 initial cost and running costs of hybrid and con-
ventional cars.
40 (2) Based on the annual mileage profiles of vehicle
users, we estimated the ratio of users whose total
20 costs of hybrid cars are less than those of gaso-
line-powered cars.
0 (3) If car users would respond rationally to cost, we
About About About About
gasoline cars hybrid cars gasoline cars hybrid cars multiplied the number of new car sales by the
above ratio for each body type that exhibits a cost
Hybrid car users (N = 300) Conventional car users (N = 600)
advantage to forecast the sales of hybrid vehicles.
Note: Percentage of those who could explain hybrids to another person
and understand hybrids to some degree. (4) We performed a simulation of hybrid car sales,
Source: Survey on Hybrid Cars by NRI, September 2006. assuming the initial costs and running costs based

Upcoming Advances in the Hybrid Vehicle Market

Copyright 2007 by Nomura Research Institute, Ltd. 9

 NRI Papers No. 114 February 1, 2007

on future trends in technological development and Figure 14. Forecast of Size of Hybrid Car Market
gasoline prices. (million units)
2.5
Europe
Using these methods, we estimated that, in 2012, the
domestic Japanese market for hybrid cars would stand at US
2
460,000 units (Figure 14). Applying the same estimating Japan

technique to the American and European markets, we

obtained figures of 1.68 million and 50,000 units, 1.5
Number
respectively. of units
In 2012, hybrids are expected to account for 6 percent sold
1
of the combined Japanese, US and European markets
although they should reach about 10 percent of the mar-
ket in Japan and the US. 0.5
Hybrids are not expected to perform so well in the
European market because annual mileages are shorter
0
than those in the US market, and car driving speeds are 2005 06 07 08 09 10 11 12 (Year)
high as no speed limits are applied. Therefore, hybrid Note: Figures for 2005 are actual results.
versions of vehicles will not offer better fuel economy,
while diesel vehicles that run on cheap diesel fuel will
detract from the appeal of hybrids. Figure 15. Forecast of Size of Hybrid Car System Market
(billion yen)
800
Changes in Industrial Structure
700

Market growth offers new opportunities to 600

manufacturers of electrical equipment and
components 500

Based on our forecast for the hybrid car market, we also
examined the market for related parts and components.
We used the method of multiplying the demand for
hybrid vehicles shown in Figure 14 by the estimated
annual per-unit component cost. We can see that, as of
2012, the combined Japan, US and Europe hybrid com-
ponent market will be worth 760 billion yen (Figure 15).
Due to the excellent fuel economy of hybrids, the effect
that we see here is one of value being partly shifted from
the oil industry to the automotive industry.
We can break down this market into four subsets,
namely, electric motors, inverters, batteries and other
components. For the electrical equipment and compo-
nent manufacturers, this is a major new business oppor-
tunity.
The combined value of the Japan, US and Europe
automotive component markets is around 60 trillion yen,
with hybrid components accounting for no more than 1
percent of this total. Nevertheless, we cannot ignore the
impact on the individual component markets.
For example, the size of the market for the lithium ion
batteries used in consumer electronics is around 700 bil-
lion yen. If we assume that this type of battery were to
be adopted for all hybrid models, we could expect to see
an increase in the size of the market by 30 to 40 percent.
(Hybrids currently use nickel-hydrogen batteries, but
lithium-ion batteries are expected to be adopted around
2010.) For related manufacturers, this market cannot be
ignored.
Sales 400
300
200
100
0
2005 06 07 08 09 10 11 12 (Year)
Notes: (1) These figures indicate the market size of electric motors,
inverters, batteries and other components. (2) The estimated figure is used
for 2005.
The growth of the hybrid car market will require that
hybrid systems be made smaller and offered at lower
cost. For the electrical equipment and component manu-
facturers, the automotive industry provides a much more
stable outlet than other industries because once a compo-
nent is adopted, the industry continues to use it for sev-
eral years. Conversely, the industry demands a high level
of quality and is always putting pressure on its suppliers
to cut costs.
Regarding hybrid components, some members of the
automotive industry worry that component suppliers
will be unable to make a profit if costs are driven any
lower. If, however, component manufacturers were able
to refine their technologies so as to miniaturize compo-
nents and consequently reduce their manufacturing
costs, they should be able to profit from their participa-
tion in the hybrid car market.

Upcoming Advances in the Hybrid Vehicle Market

Copyright 2007 by Nomura Research Institute, Ltd. 10

 NRI Papers No. 114
Suggestions for the Industry
Motor manufacturers should establish an
open development system with related
suppliers
Through only efforts in which car dealers offer consult-
ing services to conventional car users, it is likely that we
would be able to see some increase in the size of the
hybrid car market. However, there is no escaping the fact
that the market must have a wider lineup of models
offered at prices that are more competitive. To this end,
the major issue facing the industry is how to offer
smaller-sized components that can be manufactured for
lower cost. However, because motor manufacturers do
not necessarily have the experience or expertise needed
to manufacture these parts, there is a need for a system
whereby components are jointly developed by motor
manufacturers and electrical equipment and component
suppliers.
Many electrical equipment and component manufac-
turers are showing interest in the growing market. This is
not just limited to those manufacturers who are familiar
with the auto market. While many major electrical
equipment and component manufacturers have set up
dedicated automotive marketing divisions and research
centers, they do not have any means of identifying the
needs of the motor manufacturers. Without knowing
what motor manufacturers actually need, it is impossible
Upcoming Advances in the Hybrid Vehicle Market
Copyright 2007 by Nomura Research Institute, Ltd.
February 1, 2007
to set clear component development objectives. If truly
needed development objectives cannot be identified, the
specifications are likely to become excessive, making
cost-cutting difficult.
Some electrical equipment and component manufac-
turers believe that if they can learn exactly how a vehi-
cle is to be used, they can develop optimum components
at the lowest possible cost. Other electrical equipment
and component manufacturers have a stance of if the
automotive manufacturers will take the component
manufacturers under their wing from the component
design stage, the chances of a breakthrough are greatly
improved.
Given the importance of their core technologies, it is
difficult to expect motor manufacturers to make this
information available. However, there is surely a need to
establish a relationship whereby the electrical equipment
and component manufacturers are involved in more of
the process from the initial stages of development with
both sides striving to reduce costs so as to produce more
compact hybrid components at the lowest possible cost.
Yuki TANAKA is a consultant at NRIs Technological and
Industrial Consulting Department I. His specialties include
business strategies and operational support for the materials
process technology, industrial machinery and automotive
fields.
Yukio SHIGETA is a consultant at NRIs Technological
and Industrial Consulting Department I. His specialties
include business strategies and operational support for the
energy, battery, vehicle and chemical fields.
11
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