Tuesday, March 15 2016
By Dawn Baetsen, president of D.E. Baetsen & Associates LLC
The automotive industry is in a revolution that will change the traditional business model and industry structure as we know it. Despite global economic unrest, low oil prices, and stock market contraction, the automotive market is speeding forward, designing and producing cars that appeal to the masses, which are safer and increasingly safer for the environment. This movement is not without flaws as tensions intensified between automakers and government with unprecedented recalls and the fallout of “dieselgate.”
The automotive industry enjoyed a 6th straight year of growth in 2015, despite unruly economies and governmental stress. The major markets of North America, Asia/China and Western Europe fueled 2015 global sales growth for light trucks and cars. Scotiabank reports purchases in North America rose above 20 million units. The United States auto industry alone accounted for a sales record in excess of 17.4 million units contributing to the longest streak of annual gains since the 1920s and demonstrating an impressive come back. The Asian markets posted sales in excess of 33 million with China, the world’s largest automotive market posting sales of 19.75 units. Western Europe posted 5.6 percent growth in sales predominantly from Germany. India also saw an increase in sales by over six percent. Two of the BRIC markets, Russia and Brazil, experienced weakening economies resulting in declining sales. Russia in particular experienced nearly a 40 percent decline in sales. Brazil also had a decline in sales which is expected to persist into 2016.
The long term outlook for the industry is optimistic but with market wariness given a restless global economy. Experts suggest the rapid pace of technology is “disrupting” the traditional automotive business model and change is necessary in the new age of technology. For the short term, analysts predict a 7th-consecutive year of growth in automotive markets for 2016. Expectations are three percent global growth over the two percent growth rate of 2015. Unit sales for 2016 are projected to increase to 74-million units worldwide. The U.S. sales growth is expected to be modest expecting 17.7 million units to be sold. U.S. sales continue to be driven by low fuel prices, pent-up demand, low interest rates, ease of available credit, and a rise in household income. Analysts suspect a strong dollar, rising interest rates and contracting household income will slow growth of U.S. sales.
China, the number one target market in the world, is expected to reach sales of 21 million units and meet or exceed North American sales as charted by Scotiabank. Germany is expected to help keep pace for Western European growth. Other emerging markets like India and Indonesia should become important car markets depending on how those economies perform. Policy decisions on open trade markets will have a significant influence on emerging markets. However, key analysts and decision makers suggest 2016 could be the industry’s peak; consequently, a volume sales strategy alone is not expected to sustain any one OEM over the longer term. New demographic trends and the pace of technological change are hurtling the industry toward unprecedented change.
Prevailing Trends through 2025
The recent 2016 KPMG Global Automotive Executive Survey reports connectivity and digitalization ranks highest in business strategy among auto executives through 2025. Connectivity and digitalization requires real time management of data to support the multitude of applications and systems existing, and to be consolidated, added or expanded, to deliver a connected car that can collect, analyze, react, decide, drive, and report. The industry must not only satisfy the consumer, but also government regulators.
The automobile is and will be data driven. Data is ever more powerful whether generated by the car, the driver, mobile to mobile, or mobile to infrastructure. What will drive the industry and business models is the effective use of data of which 70 percent of executives in the KPMG survey suggest data is not fully optimized and only at an early stage of use. In addition, data security is an ever present risk from hackers and ownership of the data is subject to unresolved debate. Use of customer generated data is dependent on the customer and the necessary interface and to whom they will release that information. There is no limit to what a vehicle will be able to do in the future; however, risks are present in any coding process, particularly when human lives are at stake.
It will take new collaboratives and the addition of informational engineers to address countless design and engineering requirements for managing the car of the future. Clearly ICT companies already have the expertise to capture, dissect, disseminate and manage data and will be vital to design, development and investment in the smart car.
Hybrid electric and battery electric vehicles rank next in line and ranking fifth is fuel cell electric vehicles. Although low fuel prices have hindered sales of alternative fuel vehicles; automakers will continue to invest in research and development to meet emissions standards and reduce reliance on fossil fuels by 2025. New regulations require doubling the progress of emissions reduction from two percent annually to at least four percent annually. The industry is showing advances in the battery electric vehicle with emerging products like the Chevy Bolt and the Tesla 3. The industry also needs to continue to get more miles from a tank of gas from the internal combustion engine either from downsizing, lightweighting, or other technology. The roadblock here for an expanded eco-friendly sales base is the consumer who hasn’t made electric vehicles a significant purchasing criteria.
Emerging market growth has been a top trend and key market strategy the last several years but has dropped to fourth place in the KPMG survey report. A volatile global economy has an effect on the countries to target and enter. China is now the number one market for volume sales and to pilot and launch new products to a connected populace and megacities. South Africa and Southeast Asia, particularly Indonesia and Thailand, are considered markets to watch as these regions substantive economies could be suitable for market share.
Mobility as a service is a growing trend with a growing market and ranks 6th on the KPMG Survey report. Outside of mature markets, the consumer doesn’t view owning a car as essential. Consumers are focused on what optimizes their time, cost, and quality of life. The consumer is sophisticated and highly informed and seeks the optimal path whether full ownership, shared ownership or mobility as a service is the answer. Mobility as a service from the OEMs perspective can capture the customer and ever important relationship while also a way to generate revenue outside of the traditional business model. Uber addressed the need and Google has a foot in the door, but OEMs are also entering for example, GM invested in Lyft and will launch Maven, a car sharing service.
Finally, autonomous and self-driving cars continue in design, development and testing. Although a fully-autonomous car won’t be widely available to the general public in the next few years, many of the self-driving/autonomous features are already available on premium vehicles and regulators support autonomous/self-driving features that improve safety and crash avoidance as standard options in all models. The KPMG survey suggests self-driving cars will become important customer criteria in the next 15 years. Consumers are looking for time optimization and the self-driving car will allow the consumer to multi-task while commuting or traveling. However, cost is a criteria and the consumer needs assurance they’ve optimized value in relation to cost. According to KPMG, the ICT industry, particularly Google, are interested in the self-driving car to test applications and consumer interface to identify and design features for additional revenue streams. There is debate where ownership of the customer interface will land, with automotive or with ICT. Both industries see the potential for additional revenue from the customer, whether they own or share the vehicle.
Production and Location Opportunities
The opening of the new mega-canal in Panama this year will provide the capacity for much larger cargo ships to transfer goods back and forth from Asia and Latin America, target markets, to the east coast and other deep water ports connected to eastern seaways. This new canal will provide another cost effective option for transporting goods and is expected to have a profound impact on current trade patterns. The opening should benefit a variety of automakers and suppliers exporting product to Latin America and Asia.
In conclusion, growth trends the last several years provided cash for the automotive industry and it will be a crucial resource for change and transformation of the industry. Automakers and ITC companies will identify merge opportunities and pick up new technologies. Price Waterhouse Coopers reported a “near record year” in 2015 for transactions in the industry with almost 500 mergers and consolidations equal to $63 billion. As the need for consolidating existing technologies, enhancing and expanding capabilities, and the design and development of new systems and applications, further transactions are necessary to acquire the right expertise and broadest capabilities in engineering, design, and digitalization. There will be new supplier entries to the industry, large and small, as technology expands at a rapid pace and improves capabilities in vehicle to vehicle or vehicle to infrastructure communication systems and autonomous/self-driving cars. There will be significant new entrants and a new structure in the industry and the leaders will be those with the resources, technologies and ability to capture and retain the customer while satisfying regulatory requirements.