Friday, March 24 2017
By Dawn Baetsen, president of D.E. Baetsen & Associates LLC
The automotive industry enjoyed another year of growth; yet, the industry may face its most arduous task of effectively fusing rapidly-changing technology while providing product that satisfies the consumer experience, is built with the highest standards of safety and security, meets government standards, and is built to last while maintaining affordability for consumers. Government is in the driver’s seat regarding taxation, regulation, and protectionist policies all having tremendous long term effects on the industry. Relaxed regulatory standards and reduced corporate taxes encourage the industry; however, trade agreements and border taxes will have an impact and will increase the cost of automobiles. On the minds of all automotive executives is the effects of emerging political risks in the major markets of North America, the European Union, China, and Brazil. Social and economic disorder follows and regional market economies will significantly impact the global industry now and in the future. Despite overarching macro-economic risks, the industry is focused on the consumer driving markets while a new culture of vehicle access versus vehicle ownership emerges.
The three major markets for automakers grew during 2016 with China sales growing by 15 percent or to 24 million units. The United States grew by 0.2 percent or 17.9 million units, while Europe posted an 7 percent increase to 15 million units. The Japanese market for a second consecutive year declined -1.5 percent largely due to a sluggish economy while emerging markets of Brazil and Russia continued to fall off -21 and -11 percent, respectively, as reported by Euler Hermes Economic Research. India’s demonetization policy took a toll on vehicle purchases declining 50 percent during 2016. Most automotive research groups suggest maintaining a global presence is critical to sustaining growth as shifts to a mobility culture, particularly in urban areas, will impact light vehicle demand for size and type depending on the market and regional demographic nuances.
The evolution of transportation to mobility is by far the primary culture change evident in the industry. Demographic shifts require meeting traveler needs in the most cost effective and efficient manner. Mobility choice will drive regional markets and a new era surfaces where industry profits are realized, not by unit sales, but by services sold. Urban residents, particularly millennials, want transportation options whether it be new mobility services, on-demand, shared or personally-owned vehicles and will use a combination of options to meet their lifestyle and budget. While some markets have growing middle class populations with resources to own vehicles and contribute to industry growth, other markets see a decline in the preference to own and maintain a vehicle. The industry is refining analytics technology and business models to address market forces in real time to effectively manage market shifts and demands.
The automotive industry has embraced the shift in travel behaviors and the culture shift of vehicle ownership to usership. The industry is diversifying to meet the challenges of the new mobility ethos, adding new mobility and on-demand services to their respective balance sheets. Customer services rather than unit sales will drive revenues. In terms of unit sales, the Center for Automotive research reports production won’t be significantly affected as usership opens the door to new fleet markets and new vehicle financing models. Under this new business model the original equipment manufacturer may own vehicles while amortizing these assets; and, Mobility as a Service (MaaS) will be a revenue source. The Center for Automotive research forecasts trends in car sharing to impact United States production by a decline of nearly 13,000 cars annually through 2021. And, the domestic market will continue to experience a shift in demand from cars to trucks and sport utility vehicles in the near term.
Ownership preferences, geopolitical and global economic climates suggest a slowdown in 2017 vehicle sales growth for the major markets of China, the United States, and Western Europe. Euler Hermes Analytics 2017 Forecast identifies China to slow to 5 percent growth as its economy slows while Europe and the United States follow at 0 percent and -1 percent growth, respectively. Emerging markets of Brazil and Russia could turn around with a minor recovery in sales growth for 2017. Japan is expected to finally realize up to 3 percent growth as the economy improves and the pending sales tax increase is delayed until 2019. India sales, with the largest growing population to exceed China, may increase but not to the extent of China largely due to the India market viewing car ownership as a luxury and costly.
The political landscape both domestically and globally is at a critical crossroad for automakers. Any tax increase, particularly talks of border-adjustment taxes on imports or any adjustments in trade agreements, will increase the price of a car which concerns automakers and dealers alike. Imports represent 40 percent of annual volume in the United States. Vehicles are assembled with parts from across the globe regardless of where assembly is located. Small, narrow profit margin cars are difficult to build profitably in the Unites States where an automotive worker can make seven times the wages and benefits of the $8 per hour worker in Mexico. Currently, government driven fuel-economy and safety regulations increase the price of a vehicle as new technology is implemented. The domestic automotive market has weathered cost increases from regulatory induced technology installations thus far because the economy has experienced improved unemployment, continuing low interest rates, and consumer confidence. However, the International Automotive Dealers Association weighed in and expressed concerns that rising vehicle costs are already on the verge of blocking the average consumer from affording a new vehicle. A report by Baum and Associates indicates a 20 percent boarder tax is expected to raise the price of a car by at least $282 if buying a Ford; or, as much as $17,204 for a Jaguar or Land Rover vehicle import. This year is expected to begin to challenge and disrupt the industry as other geopolitical forces surface.
The Ernst and Young executive survey report places refining powertrain alternatives to the internal combustion engine as the top priority over digitization and connectivity which dropped to second this year. No one, new or refined powertrain alternative, electric, hydrogen, or biodiesel, is identified as a preferred technology. Furthest along and mass produced are battery electric vehicles which travel further between charges although charging requires time compared with fueling. Charging time and lack of infrastructure are inhibitors to consumers embracing battery electric vehicles and could be key in the success of growing the market. The executives surveyed by Ernst and Young predominantly agree other alternative vehicles like fuel cell electric vehicles quickly fueled at a gas station may be the consumer preference. Hydrogen fuel cells are at varying degrees of refinement, testing, and road ready. The internal combustion engine will continue to be available as it is the least costly and most convenient for the consumer. The consumer will consider cost and convenience when considering alternative fuel vehicles.
Automotive executives believe connected vehicle and digital technology will drive revenue and markets in the next several years. This requires increased cooperation and collaboration with Silicon Valley and Internet of Things (IoT) companies. The business model for the automotive industry will evolve to be service and data driven. The United States is a frontrunner in technological breakthroughs pursuing design, research, and testing of connected vehicle technologies. Automakers are refining machine learning-based vehicles which address cybersecurity and moves away from traditional anti-virus software proven to be insufficient to guard against new threats. Machine learning vehicles will be self-adapting, self-defending in real time, and will reduce the need for hands on human programming to address threats. Augmented reality, a sub-component of virtual reality will assist drivers to stay focused and alert for safety threats, including eye tracking to monitor and warn the driver to focus on the road. New technology will identify potential repair needs providing longevity using preventative maintenance alerts.
Ernst and Young surveyed executives that predominantly believe each vehicle will need its own digital ecosystem to provide both upstream and downstream data. These ecosystems will provide the consumer with options for comfort, infotainment, enjoyment, servicing, connectivity, safety, and security designed for personal preferences. This deep digitalization and connectivity will be the systems for significant revenue production outside of MaaS. As connectivity and data digitalization is refined, the autonomous drive vehicle motivates industry innovations in technology. New autonomous functions will be available in 2017 models while almost every vehicle will have self-parking and adaptive cruise control available. The Unites States has awarded funding to several regions for testing autonomous vehicles focusing on “zero error abilities,” critical for the success of fully autonomous vehicles. Infrastructure development is essential and as vehicle autonomy is designed so is the infrastructure necessary to upstream and downstream data.
Connectivity and digitization require the need for two industries, IoT and automotive, to somehow converge, and what industry will manage the new business model of customer service interface is debated. Ernst and Young suggests the automaker will either become a contractor providing the hardware or the grid-master servicing the customer. The executives surveyed predominantly believe the automakers will in the end be the primary customer interface as consumers place more trust in automakers for safety and security. Consumers trust the automotive industry to manage data and identify between personal customer behavior information and shareable vehicle information. New partnerships, venture capital resources, investment alternatives, and research and development ventures will surface as the road to autonomy is paved.
Automakers continue to research systems that will improve production efficiencies to keep new vehicle costs down. Production technology continues to impact the way vehicles are assembled and less human involvement in the assembly process reduces cost. Since the recession, automotive jobs in the United States shifted to design and engineering. The new business model requires talent in analytics and digital technologies. The Ernst and Young 2017 Global Automotive Executive Survey indicates talent is a priority, particularly attracting and retaining trained digital talent for big data analytics for plant production and inventory management as well as customer interface analytics. Use of big data allows dealer inventories to drive production, downtime, labor needs and production schedules to maintain healthy inventory levels. In turn, suppliers are affected and will maintain a base labor count while using contracted and temporary workers for short term shortages. Plans for new assembly and parts manufacturing plants in the short term are announced and in various stages of readiness. Manufacturing plants are sufficiently flexible to adjust to short term market demand. The changing political landscape is not expected to affect the industry during 2017; nevertheless, geopolitical policies and regulation will impact the industry should perceived risks be realized in the long term and in some markets the very short term.
In conclusion, the industry has likely plateaued and will not see significant growth in the short term. Consumers continue to drive sales beyond personal ownership. Technology and taxes will impact affordability of ownership for the average consumer. Automakers will locate and produce relative product as defined by regional market demand. Geopolitical and economic forces pose uncertain risk globally, particularly trade, and could be critically harmful to the future of the industry. Shifting revenue from services as well as unit sales will support overall profitability.