Major Industry Trends
Far-reaching innovations in technology, plus rising demand and increased manufacturing capacity in emerging markets are set to change the automotive sector dramatically. A report by Deloitte (2009) argues that the current situation, with 15 major players 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 automotive 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 latter 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 even sub-£10,000 car. This is the vehicle type that will sell best to a rising lower-middle class consumer base with little disposable income.
The shift in power to emerging markets from advanced markets is underscored by an APCO Worldwide (2010) report on China’s automotive industry. Sales of 17 million vehicles in China in 2010 matched the highest total ever recorded in the United States. In 2012, according to the China Association of Automobile Manufacturers (CAAM), automobile production in China reached 15,720,100 units by October, with two months’ production still to come. Since October’s production alone was just over 1.5 million cars, that suggests that total production for 2012 could be in excess of 18 million units.
By comparison, according to a report by Rosen and DuBord (2012) on the US auto industry, US producers and importers were expected to sell some 13.8 million cars in 2012, including a large number of foreign brands. With a large proportion of these sales being small, fuel-efficient Japanese and European cars, US domestic car production will be dwarfed by China’s levels.
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 underway 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 a very important role in determining engine preferences at 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 the state’s dependence on foreign energy resources. By 2020, Deloitte says, electric cars and other “green” vehicles will represent up to a third of total global sales in developed markets, and up to 20% in urban areas of emerging markets.
The recent joint report from the International Energy Agency, the Rocky Mountain Institute, and Clean Energy Ministerial (IEA et al., 2012) points out 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 EV 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 foreword to the report says. 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 report, thanks to the cumulative national targets for EV and plug-in hybrid EV (PHEV) vehicles announced by Electric Vehicle Initiative (EVI) member governments, there is likely to be some 20 million EVs on the road by 2020, amounting to 6% of total vehicle sales each year. The IEA recognizes that there are real challenges to the widespread deployment of EVs, but it points out that some 40,000 EV cars were sold worldwide through 2011, the highest total to date.
The Deloitte report is somewhat more subdued on the subject of EVs, pointing out that of the 49.6 million cars on the road in Germany, for example, only around 1,500 of them are EVs, with a further 22,300 being hybrid models. Deloitte highlights four major challenges to the widespread adoption of EVs: the elevated cost, their limited range, the lack of infrastructure, and the lack of government incentives or subsidies to hasten their adoption.
The Growth of Cities and the Demand for Cars
The continuing movement of global populations into cities and away from the countryside 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 environs of their cities, crowded city roads and limited parking spaces will drive consumer choice towards smaller, more compact vehicles. According to the Deloitte report, about three-quarters of the population in developed countries currently lives in urban centers, while the figure for developing country populations is around 45%, and 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 likely to continue until at least 2015, 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 centers 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 was forced on the sector by the decline in sales during 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 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 Major Players
Volkswagen once again came out as the world’s top auto manufacturer in Forbes’s survey of the world’s top 2000 companies (Campbell, 2012). It ranked 17th in the survey, up seven places from 2011, and has had a stellar 2012. Volkswagen Group recorded a 10.2% increase, to 7.5 million vehicles, in the nine months from January to October 2012, with output rising to 14.6% in October, at 788,700 vehicles. There were strong performances in North America, China, and Russia. Volkswagen grew its sales to customers in North America by 25.4%, and in Russia by 46.7%, albeit from a much smaller base. In the Asia-Pacific region, sales grew by 19%, with some 2.15 million vehicles being sold. However, difficult market conditions in Europe saw Volkswagen’s sales there sliding by 5.8% (Volkswagen, 2012).
Toyota came in as the second in the industry, ranked 25th overall. Up to October 2012, the company had produced 8.469 million vehicles worldwide in the calendar year, with October seeing the first increase in Toyota production for two months, thanks to increased production in Australia, Asia, Latin America, and North America (Toyota, 2012b). Of the company’s two other brands, Daihatsu enjoyed its second consecutive month of increased production, and Hinos its 16th. Announcing its financial results for the first half of fiscal 2013, Toyota (2012a) reported net revenues were up by 36.1%, compared with the same period last year, a significant rebound which saw a loss of ¥32.6 billion turned around into a profit of ¥693.7 billion. Toyota put the turnaround down to good marketing and cost reductions of some ¥230 billion.
Daimler, which owns Mercedes-Benz, is the next-highest-placed auto manufacturer in 37th, up six places on 2011. The company reported net profits of €1,205 million for the third quarter of 2012, slightly down on the same quarter in 2011, but Group revenues were up by 8%, to €28.6 billion (€26.4 billion in Q3 2011). Daimler’s chairman, Dieter Zetsche, who also heads up Mercedes-Benz, called the results good, in light of difficult market conditions.
Ford came up 10 places to 44th, followed by Japan’s Honda Motors at 59, with Germany’s BMW coming in at 61. Next was General Motors at 63, down two places from 2011.