Major Industry Trends
The automotive industry is still in the early stages of a fundamental transformation that is being driven both by growing pressure to lessen the environmental impact of the sector and by disruptive innovation on a number of fronts. These pressures, allied with rising demand and increased manufacturing capacity in emerging markets, are set to change the automotive sector dramatically. Along with this is the fact that global demand for new vehicles in 2014 looks set to grow by between 3% and 4%.
IHS Automotive (Polk) is predicting an increase in new passenger vehicle registrations for 2014 for all major markets, with China leading the way. Even Europe should be returning to positive sales growth the forecast says. Estimates from the Organisation Internationale des Constructeurs d’Automobiles” (OICA) put total world car sales plus new registrations at 85.39 million units.
The expectation that interest rates will rise in the United States as the US Federal Reserve starts to taper off its quantitative easing program suggests that financing new vehicle purchases in the United States will be more expensive in 2014, which accounts for the expectation of a slight pullback from the 4.3% growth achieved in 2013.
According to the US auto sales forecaster Edmunds.com, US sales in 2014 are set to reach 16.4 million units—the highest since 2006, when the figure reached 16.5 million. In part, sales will be driven by the fact that the average age of passenger cars has climbed steadily to the point where the average is now 11.4 years. Used car supply is tight, with elevated prices, suggesting that many buyers will look to replace their aging car with a new model. However, a portion of the sales will be returned leased cars, with only 15.5 million being new cars. At this level the US market will grow by 6% year on year in 2014.
The Boston Consulting Group (BCG) is predicting that the BRIC countries (Brazil, Russia, India, and China) will between them account for 30% of world auto sales in 2014, with year-on-year growth in those countries ranging from 3% to 15%, versus what the BCG thinks will be an average of 2% growth in the advanced markets. China is expected to extend its share of total BRIC auto sales from 53% in 2013 to 61% in 2014, with Brazil as the second largest contributor.
A report by Deloitte’s Global Manufacturing Industry Group entitled “A new era. Accelerating toward 2020—An automotive industry transformed” argues that the current situation, with 15 major automobile manufacturers located in just four countries, is inevitably going to see a contraction in manufacturer numbers even as it sees India and China joining the ranks of top automobile producing countries.
According to the Deloitte report, we will see the number of original equipment manufacturers (OEMs) capable of producing high volumes of vehicles shrinking to 10, spread across six major markets instead of the current four. Major players will look to establish headquarters and/or operations in the new manufacturing hubs in China and India, and both these countries will become centers of design and manufacturing for OEMs, breaking the current dominance enjoyed by Western Europe, Japan, Korea, and the United States.
The key technology trends that will drive the industry through this period, the report says, are advances in powertrain technology and the move to electric motors, the shift from mechanics to electronics, and what the report calls “low tech mobility.” This term simply points to the huge potential market for low-cost, attractive, but extremely basic vehicles such as the Tata Nano in India, which comes without power steering and with few of the features of a modern sub-£10,000 (approx. US$16,500) car. However, the Tata Nano has run into problems with poor safety test scores and dismal sales results. Whether Tata can turn things round and make the Nano more appealing without dramatically adding to the cost remains to be seen. Its current strategy appears to be to try to move the Nano out of the absolutely basic market into the not-quite-so-basic market, with more frills and a higher price bracket.
One of the most exciting and far-reaching innovations, though still more or less in the lab, is the self-driving car. Ultra Global, manufacturers of the United Kingdom’s groundbreaking self-driven “pod” system that conveys passengers from the car park to London Heathrow’s Terminal 5, is in talks with Taiwanese partners, China Engineering Consultants, to produce a “personal rapid transit” system in Taiwan, and specifically in New Taipei City. The Heathrow pod implementation, consisting of 21 self-driven cars running on a dedicated guide road, recently completed its millionth driverless mile. The United Kingdom has a pilot program due to launch in 2015 which will see small autonomous vehicles driving around in Milton Keynes—a town 70 km northwest of London—on dedicated roads. The driverless car concept has the potential to completely transform the motor industry, moving cars from being a possession to being a pay-as-you-go service providing connectivity and mobility. Possessing a car could end up simply being an option for enthusiasts, with car owners finding themselves excluded from more and more city centers.
The Impact of Climate Change on Auto Demand and Design
Customer demand and regulatory pressure driven by climate change concerns are already interacting to transform the way manufacturers think about vehicle and engine design. Fuel efficiency is fundamental to reducing CO2 emissions, so there is already a considerable effort under way to improve powertrain technology. In its report on the auto industry to 2020, Deloitte argues that improved fuel efficiencies from advanced combustion engines will enable petrol and diesel engines to extend their reign over alternative engines such as electrical and gas-driven engines. However, Deloitte sees scope for considerable advances in electric vehicles, with the bulk of the demand coming from advanced markets, while emerging markets favor “flex fuels” such as ethanol and natural gas.
Government policies will have an important role in determining engine preferences on a national level. In setting these policies, governments will be driven by at least two major factors. One will, of course, be a desire to tighten carbon emission standards. The second consideration for a number of countries will be the desire to lessen dependence on foreign energy sources. By 2020, Deloitte says, electric cars and other “green” vehicles will represent up to one-third of total global sales in developed markets and up to 20% in urban areas of emerging market countries.
The International Energy Agency (IEA) points out in a recent (2012) report that a number of cities around the world either already have or are busy formulating transport policies within their environs that will mandate the use of electric vehicles, as these cities work to become fossil fuel-free. The IEA is working with a group of cities that are collaborating to launch the World EV (electric vehicle) Cities and Ecosystems web portal, the aim of which is to share best practice in electric vehicle deployment. “By working together and sharing knowledge, cities from diverse regions and countries will realize the benefits of electric mobility and achieve a sustainable energy future” the IEA says in its foreword to the 2012 report. All of this will have a real impact on the auto sector over the next few years. With transportation accounting for approximately one-fifth of global primary energy use and a quarter of all energy-related CO2 emissions, governments have a considerable incentive to prioritize “green” vehicles, despite any strides the auto industry might make in developing fuel-efficient combustion engines.
According to the IEA, thanks to the cumulative national targets for EV and plug-in hybrid EV (PHEV) vehicles announced by member governments of the Electric Vehicles Initiative (EVI), there are likely to be some 20 million EVs on the road by 2020, amounting to 6% of total vehicle sales each year.
Europe has been at the forefront of EV sales, with Norway—which offers generous incentives to drivers to switch to EVs—leading the way with some 15,000 vehicles sold. France has seen significant growth, with 20,000 EVs now on the road, while Italy and Germany have 7,500 EVs each, and the Netherlands has 11,000. The United Kingdom has around 7,500 EVs, but the government has set an ambitious target for “almost” every car and van to be a zero emission vehicle by 2050. The UK Department of Transport, through the Office for Low Emission Vehicles, is providing some £400 million (US$670 million) in funding to advance ULEV (ultra low emission vehicle) development, with an additional £500 million (US$840 million) capital investment promised by 2020 to speed up the development of infrastructure, such as electric charging points for cars.
The Growth of Cities and the Demand for Cars
The continuing movement of global populations away from the countryside into cities is going to have an inevitable impact on the kinds of vehicles that consumers are going to want. In addition to the likelihood that city planners and authorities will want to prioritize fossil fuel-free vehicles within the bounds of their cities, crowded city roads and limited parking spaces will drive consumer choice toward smaller, more compact vehicles. According to the Deloitte report, about three-quarters of the population in developed countries currently live in urban centers, while the figure for developing country populations is around 45%, a share that is set to rise strongly in a number of countries. By 2020 the world will have at least 24 megacities with populations in excess of 10 million. Current research suggests that by far the biggest demand in these cities will be for compact EV cars with great infotainment systems.
Economic Crisis and Structural Transformation
Deloitte points out that the economic crisis which began in 2008 and is only now starting to give way to more sustained global growth has accelerated deep structural change in the automotive industry. “High cost exporting countries will see domestic capacity closed as vehicle production continues to migrate to the ‘new Detroits,’ namely lower cost centres dotted across India and China, and other locations in the regional trade zones of the North American Free Trade Agreement (NAFTA) and the European Union,” the report says.
Manufacturers are already reconfiguring their production capacity around high-volume global platform architectures. To support this, we will see the emergence of new business models characterized by alliances with key players in other industry sectors that have the new skills required by advances in technology and electronics. There will also be a “recalibration” of the automotive industry supply chain, which is being forced on the sector by the decline in sales through the period from 2009 to 2012. This, together with the emergence of new manufacturing capacity in India and China, has created global overcapacity, which is particularly evident in plants in Europe and North America. “Profitability for OEMs has been hurt and margins for suppliers have sunk below the break-even level,” the Deloitte report warns. A rash of bankruptcies and the high-profile government bailout of key auto industry players in the United States and elsewhere underscore this point. The future, however, looks brighter for a reconfigured automotive sector, with current predictions cited by the report pointing to around 70 million units being sold worldwide by 2015.
The Five Major Players
Volkswagen kept its top spot among motor manufacturers in 2013 according to Forbes, and is on course to fulfill CEO Martin Winterkorn’s goal of being “the world’s most profitable, fascinating and sustainable automobile manufacturer by 2018.” He is targeting an annual production quota of 10 million cars and trucks worldwide and a profit margin of 8% or higher. VW ranked 14th in the Forbes Global 2000 companies for 2013.
Toyota took second place among the motor manufacturers in 2013, and ranked 31st on the Forbes Global 2000 list for that year. Toyota was behind both General Motors and Volkswagen in 2011. The company had a tremendous second quarter in 2013, boosted by a weak yen and a strong US dollar, generating more profits than Ford and General Motors combined on revenues of US$5.5 billion. It has predicted annual sales for 2013 of 10.12 million units. A major blemish on its 2013 performance, however, was the emergency recall of 6.5 million cars with quality control issues.
Daimler was in third position as far as motor manufacturer rankings in the Forbes Global 2000 list is concerned (31st overall). The fact that Germany has simultaneously abandoned nuclear power generation and mandated a drive to zero emissions manufacturing is likely to add significantly to the company’s cost base going forward, as against its major competitors, for the short term at least. Professor Ferdinand Dudenhöffer of the Center for Automotive Research at the University of Duisburg-Essen argues, however, that this will be a long-term win for the German automobile sector as it will come to have more experience in zero-emission production than its competitors.
Ford Motor Company was fourth among motor manufacturers and 53rd on the Forbes Global 2000 list, with BMW fifth (no. 55 on the Forbes Global 2000 list), and GM sixth (no. 70 on the Forbes Global 2000 list).