Thursday, March 22 2018
By Dawn Baetsen, president of D.E. Baetsen & Associates LLC
The race for automotive market share is intense, while the race for mobility dominance is inspiring and spectacular. The mobility culture disrupts the automotive industry in every aspect. We are at a crossroads where the world needs efficient, safety-first movement by land as we travel increasingly more miles to transport people, goods, and services. The automotive industry is finding the paths where it can make a difference as new vehicle sales growth narrows. OEMs seeking to survive are leaping to further identify with, and reside in, the mobility economy where service revenues will be critical for survival. The genesis of the mobility economy evolves and transportation’s emerging alternatives away from personal ownership to mobility as a service (MaaS), rises demand for drivetrain fueling alternatives and movement to autonomous vehicles impact the industry and how it will operate in the future. Countless new, competing entrants bringing innovative technologies or providing service alternatives to traditional automobile ownership challenge the conventional industry business model. Automakers are profitable now and invest significantly in research and development to redefine the future business models that will well-serve the mobility economy. There are multiple paths to serving the mobility economy, but it is certain the industry must have a vision to evolve and integrate ever-changing technology. Government involvement influences the industry and personal mobility as it seeks safety first. Regulations impose restrictions on emissions, set policy goals for more greener cars on roads, and seek to reduce traffic injuries and fatalities with ever-growing miles travelled. Government must be part of the solution for investing in infrastructure, while it also considers entering the mobility ecosystem itself adding car services into city mass transit systems. Many predict and bet on who will survive and become dominant. We are spectators to a fiercely innovating, global, competitive race that may never slow down.
The automotive industry basks in record sales and profits from its traditional asset-based business model since the broken industry of 2009. However, the auto industry transitions again and redefines the business model that has been so successful. The industry is moving at an unconventional pace to replace revenues expected to narrow from declining personal car sales. It’s imperative to maintain profitability from sales to investments in the future of the industry. Overall, 2017 global auto sales grew in most major markets including China at two percent, Europe at three percent and Japan at 5.8 percent. Smaller markets improved as economies also improved growing significantly in Russia (11 percent), India, and Brazil. The USA was the only major market to experience weaker sales. Personal light vehicle sales in the U.S. reported a 1.8 percent decline to 17.25 million new vehicles sold; however, it was considered another record year as sales exceeded an unprecedented $17 million and profitability was realized. Automotive manufacturers effectively managed inventory levels and incentives to avoid the trappings of the recession and closed plants where markets don’t support revenue generating production levels. As a result, the industry invested heavily in research and development in alternative fuel technologies, autonomous technologies and business models and services that lead to establishing a residency in the mobility economy. The industry will need continued revenues from new vehicle sales to pursue these ventures to grow its presence as a dominant player in mobility.
Globally, vehicle sales for 2018 are projected to grow at a modest pace of 1.5 percent to 95.9 million units. China and Europe are expected to grow sales less than one percent over 2017 according to IHS Markit. Other markets will contribute to overall growth in India (11 percent), Russia (15.9 percent) and Brazil (12.5 percent) due to tax reforms, a stronger ruble and oil pricing, and pent-up demand and credit availability, respectively, boost these markets. For the U.S., another modest decline in sales is predicted but doesn’t mean another disaster by any means. A robust economy and demand for higher profitable trucks and sport utility vehicles in the U.S. is expected to support diminishing sales in 2018. Analysts predict U.S. sales to range between 16.6 million and 16.9 million for 2018. Although this sounds ominous, there is economic justification the domestic industry will book another profitable year, as those consumers buying vehicles are willing to pay on average $30,000 for a vehicle. Worldwide sales will continue to grow and resulting revenues will fuel the critical research, development, and analytics supporting ongoing transition of the industry. However, the industry remains vulnerable to economies susceptible to setbacks, more stringent government policies and regulations, ever-changing consumer preferences, and emerging competition, with any one or more possibly impacting current projections.
Resolution of NAFTA negotiations is a critical factor for vehicle sales in North America. Executives are watching NAFTA negotiations closely, many concur the agreement benefited Mexico the most where cheap, quality labor prevails. However, if NAFTA changes in any way, the potential for rising production costs or tariffs on imported cars and parts will affect the cost of new cars and profitability. New plants coming online this yerar in Mexico are at risk for tariffs under final NAFTA negotiations. It is therefore critical the industry continues its quest for innovation, transformation, and survival despite a potential for limited revenues due to NAFTA or other emerging government policies. Already, the effects of an uncertain NAFTA is evident with Toyota plans for a new plant in Alabama, investment in existing Midwest plants, relocation of production from Mexico reported by the big three, and suppliers expanding or locating across the U.S.
IHS Markit recently unveiled its 'Reinventing the Wheel?
Mobility and Energy Future', an ongoing study on mobility and its effects. The study projects mobility service revenues will reach $1 trillion by 2040. Experts agree mobility is the number one disruptor to the automotive industry. This global phenomenon compels the automotive industry to challenge and compete in this new and rapidly-changing face of a digital, connected service culture. The highly-competitive mobile economy with new entrants daily, demands collaboration and integration of assets, industries, innovation, and transportation expertise. The automotive industry can build and retain dominance over outside emerging competitors with its experience in design and development, the right vision and willingness to lead. The automotive industry is investing in shared services, fleet-based markets, and technologies to diversify from the traditional owner-driver-retail profit base model to meet the demands of consumer mobility. The industry is systemically racing to integrate its expertise with connectivity, mobility solutions, and customer experience, utilizing data analytics to fully understand the customer. Automotive OEMs are moving various strategies forward to serve mobility. Ford has a broad systems approach and will complement efforts with recent acquisitions of two companies, Autonomic and Transloc for example; and, General Motor’s Maven, a MaaS subsidiary, is focusing in on customer servicing and autonomous fleets; Tesla and BMW are leaders in autonomous vehicle technologies, while Volkswagen offers autonomous bussing systems. However, revenue streams from these endeavors are not yet profitable.
Alternative fuel vehicles and autonomous technology vehicles are best introduced to consumers in MaaS systems. IHS Markit reports miles driven under a MaaS vehicle is five times the annual miles driven for a personal owned car; and therefore, cost effective for mass testing as infrastructure for charging and vehicle-to-vehicle and vehicle-to-infrastructure communications can be centralized. Price Waterhouse Coopers predicts vehicles will be fully connected by 2022. Expanded MaaS markets provide OEMs opportunities to expand fleet management systems, test alternative fuel and fully autonomous vehicles, and extrapolate data of consumer preferences for future design and services. For example, Maven will be General Motors’ resource for introducing a fully autonomous vehicle fleet in 2019 and digital analysis' from fleet utilization will track customer preferences and needs. To achieve this, General Motors is working collaboratively with government and other transportation experts in Macomb County on vehicle-to-infrastructure capabilities in real time on existing road systems to address safety first and build trustworthy technologies for autonomous vehicles.
The KPMG Global Automotive Survey of 2017 raised electric vehicles as the #1 key trend to watch through 2025. The industry invests heavily in alternative fuel vehicle technologies as governments pressure the industry for green vehicle alternatives with goals to eliminate the internal combustion engine in some countries by 2030. The KPMG survey reports most believe the internal combustion engine will remain in the mix of vehicles offered for a very long while despite consumer preference for alternative technologies. The push for battery electric vehicles isn’t yet convincing the consumer, it’s the best alternative to a gas fueled engine as cost, battery life, charging times, and absent long-distance capabilities inhibit mass purchasing of electric vehicles. Battery electric vehicles are infrastructure dependent and long-distance travel is yet to be fully addressed. Price Waterhouse Coopers does predict by 2030 the cost of battery electric vehicles will fall below the price of internal combustion engine vehicles. Executives responding to the KPMG survey agree while the internal combustion engine will be prevalent in the near term, and there will be a balance of use between hybrid vehicles, electric vehicles, and the internal combustion engine.
A focus on further developing autonomous vehicles was keenly deliberate during 2017. The autonomous vehicle is operating in our midst, but there are roadblocks to overcome including safety on roads with human controlled vehicles and pedestrians, safety features to address the unexpected, and basic infrastructure needs necessary for vehicle-to-infrastructure communication and management to fully support autonomous vehicles. The 2018 Consumer Electronics Show showcased autonomous vehicle technologies with mixed acceptance. Limited multiple rider autonomous vehicles are operating on campus-type sites or specified service route environments which move from a defined point A to point B. Autonomy will also be utilized in emerging green cities like Babcock Ranch in Florida where residents use autonomous vehicles to move around town. Babcock Ranch was designed where walkability, bike ability, and autonomous transportation alternatives are normal with their own government-owned Babcock Ranch bikes, electric and autonomous vehicles, and car/bike sharing programs.
The industry is in pursuit to understand what it means to consumers to utilize, call up, and maybe own an autonomous vehicle. For government and the consumer, it is safety first and the ability to trust safety in a fully autonomous vehicle and the necessary infrastructure required. The consumer seeks transportation that will allow for effective use of time while travelling. The industry continues forward -- expanding digital experiences and analytics, identifying and serving the mobile consumer, and preparing for a vehicle design extending home comforts to a driverless vehicle. Most technologies supporting a fully driverless vehicle is seen, touched, and experienced already in luxury vehicles, and those successful technologies are found in less expensive standard vehicles and in MaaS vehicles. The industry appears to have rushed fully driverless cars to testing grounds and in controlled environments on public roads and highways. However, autonomous vehicles still have a long way to go to get to zero-error capabilities necessary for a safe driving experience. Navigant predicts that the first fully autonomous or driverless ride will be from either General Motor’s Maven or Google’s Waymo. The race for autonomous vehicles as a MaaS resource or for purchase is brutally challenging and very near realization.
Transforming the industry for what’s inevitable is critical for survival. Mobility connectivity, services, and modes of transportation don’t necessitate new physical plants for the industry; it does require new, more diverse, flexible business models that include uniting multiple industries with the flexibility and dynamics to advance the industry and keep pace with the mobility economy. The industry learned to drive out of recessionary despair, and further equipped its business model to re-define and establish itself as the king of innovation and creativity enjoying record sales. Automotive can reinvent itself again with the right vision. It remains to be seen whether all will survive or just a few who embrace and choose to drive in the new automotive mobility era.
About the Author: Dawn has over 28 years of site location, incentives, and economic development consulting experience. She is considered an industry expert in negotiated incentives and managed compliance. Before starting D.E. Baetsen & Associates LLC (“Baetsen Associates”), she co-founded and managed Atlas Insight, LLC now in New Jersey. Dawn was also the Midwest Regional Practice Leader in the Business Location Incentive and Site Selection group at BDO Seidman, and was formerly Managing Director of the Michigan Economic Development Corporation’s Global Attraction Division. Throughout her career Dawn has assisted numerous companies, economic development organizations, small businesses and government agencies with their business attraction and retention policies and has helped write and implement incentive legislation.