Tighter regulations, rising costs, and as with most industries – technological innovation – are sending ripples throughout the global car industry. As a result of economic pressures, rising commodity prices and slowing growth in some areas, the markets themselves are shifting. Traditional players, such as Europe and Japan, are showing stagnation, while others, including Russia and Brazil, are bowing to macroeconomic constraints.
Elsewhere, China – now the largest market for automobiles – continues to grow, albeit not as fervently as in recent years, while the US is showing signs of stability and optimism for the coming year ahead. Yet all markets, despite their individual nuances and various stages of maturity, face the same overriding challenges to meet evolving regulatory and user demands.
Technological drive
Consumers have come to expect the latest technology features in all aspects of life, putting electronic content and connectivity with personal devices at the forefront of current demands within the industry. This creates a huge challenge for manufacturers as production lead times can range between three to five years, whereas rapidly changing technology can become out-dated in a matter of months. “The intersection of what is really a digital world – a semi-conductor, micro-electronics world – which moves along at Moore’s Law, is very antithetical to the automobile world”, says Evan Hirsh, Vice President at Strategy& and specialist in the automotive sector.
This contrast between the two industries has led to something of a convergence, with more tech companies venturing into the field, most notably Google with its self-driving car, and far more vehicle manufacturers seeking partnerships in order to stay ahead of the game. “For the last 100 years, most automotive solutions have been developed by automotive companies – what we’re seeing increasingly over the last two to three years, is that suddenly, a lot of the solutions have become technology solutions”, says Phil Harrold, automotive expert for PwC.
This technological drive and transformation in consumer expectations does not only involve the experience within a vehicle, but extends prior to the purchase as well. As such, the assimilation of information and culture of online shopping has also infiltrated the automotive industry. Although customers still consider the test drive a deciding factor, increasingly more aspects of the purchasing process are carried out online.
Despite this change in consumer behaviour, the industry has been relatively slow to keep up in this regard, “you wouldn’t say that the automobile dealers are a leading edge in terms of retailing”, Hirsh comments. Yet, fully embracing this culture of digital interaction could also offset another road humps facing the industry – a decline in brand loyalty.
At present, consumers have become more concerned with cost savings rather than maintaining a life-long allegiance to one brand, as was the case some years ago. In order to rebuild these long-lasting relationships, manufacturers must offer more in terms of services throughout the vehicle ownership, beginning with internet platforms that can permit greater engagement.
The safety belt
Increasing austerity in terms of environmental and fuel efficiency standards, as well as safety requirements, is another growing burden for manufacturers. “These are very complex products – huge amounts of investment go into making them, so in terms of what you can and can’t do, these constraints get tighter all the time”, Hirsh explains to World Finance. Consequently, meeting European and US standards has become an onerous and costly process, which shows no signs of abating, resulting in substantial consequences to the sector and slimmer profit margins for producers.
At this juncture within the industry, there is a need for constant modernisation; by investing in R&D, firms can meet these continually changing requirements, while also taming mounting expenses: “The challenge is about innovating, keeping the product relevant [and] keeping costs down”, Harrold comments.
More rigorous competition has led firmly established brands to reassess their business models in order to stay ahead of rivals and keep up with global demand, in spite of growing overheads. Firms are unveiling more products, yet with fewer differences between them, as using the same platforms and vehicle architecture enables producers to reduce costs and share common components across different models. In addition to benefiting from economies of scale, platform modularisation also offers a wider portfolio for customers, which is vital in an increasingly competitive market.
Due to a point that is close to saturation in mature markets, such as the US and Europe, (or some would argue, one that has already been reached), growth has stagnated to around one and two percent. Although positive signs are being seen in the US and while the industry is “part of the American psyche”, as Harrold puts it, there is a limitation to the rate of growth that can be achieved in the foreseeable future. “The market has come back almost to its peak from the pre-recession levels; all of that pent-up demand has finally been satiated”, says Tim Healey, Automotive Analyst at Mintel. “It’s probably going to plateau and peter out a little bit, and that’s going to be a challenge for automakers going forward to try to maintain that momentum.”
To counter balance this slowing trend in advanced markets, Western manufacturers are entering new areas where they can experience much faster growth. “China has definitely been a boom to certain brands”, says Healey. Jaguar Land Rover, Audi and Rolls Royce recently have had huge success there for example. “That’s the luxury end of the market, so it’s typically business people and government officials”, Harrold explains. Moreover, this is just one of two prongs behind climbing sales, the other stemming from the indigenous market, with demand for smaller and more basic vehicles being met by Chinese own-brands, such as Chery and Geely.
Slow and steady growth
Despite its rapid growth, numerous challenges also exist in China, such as the sizeable import duties that foreign exporters have to contend with – leading some big players, including Audi and Jaguar Land Rover, to set up production there. As Harrold explains, “one of the peculiarities is that to enter into China, you really have to get into a joint venture agreement with local manufacturers, and so again the Western OEMs have to change their business model.” Alongside such complex market conditions, sales are also decelerating in China amid the country’s slowing GDP and an anti-corruption drive (see side bar). That being said, with a growth rate of seven percent it is still significantly higher than anywhere else in the world.
Even with new markets to revel in, the underdeveloped infrastructure of emerging economies such as India, presents a big obstacle. Furthermore, despite an expanding middle class and growing prosperity in these territories, there is a limit to a continuous upswing in demand. “I think then the big question is, what is the realistic level of market penetration or vehicles per household in many of these economies? Which don’t have the infrastructure that we have, [nor] the space that many of the early motorising countries have, and which frankly, would struggle to reach our levels of ownership”, says Peter Wells, Professor of Business and Sustainability at Cardiff University.
Even in the event of an enduring upward trend, there exist restrictions in the ability for manufacturers to keep up. Essentially, this is because rising commodity prices are a mounting burden to export-driven economies; “meaning that revenue expectations and balance of trade expectations are considerably reduced”, Wells tells World Finance. The car industry is notoriously resource heavy, requiring a huge level of investment and ongoing financing in order to keep moving. As it is seen as a key market in many economies, governments have a tendency in times of extreme pressure to prop up their respective automotive markets. “Governments have been quite sedulous in trying to support and generally encourage the industry, in terms of offering subsidies for electric vehicles, offering scrappage incentives, adjusting tax rates and so on”, Wells explains.
Such involved state support, despite growing production costs and arguably an unsustainable model, infers that maintaining this modus operandi cannot last forever – even in the most developed economies. Some experts believe that this is not the case and that such governmental policies will not continue into the future, given what technology can do for the industry. Yet, it is difficult to deny the possibility of reverberating market pressures and future recessions, as these macroeconomic phenomena are seldom unique.
The automotive industry has reached a point wherein safety and the environment have become pivotal aspects of the business that are demanded by the authorities, as well as the people – this is not a bad stage in societal development of course, but it does necessitate a re-haul in how cars are made and function. Governments still have a significant role to play in encouraging consumer acceptance of new technologies, such as electric and hydrogen fuel cell-powered vehicles, through the creation of complementary infrastructure and financial incentives. While some argue that self-driving cars can raise the bar in terms of safety and efficiency, in ways that man cannot.
Consequently, manufacturers must continue to develop safer vehicles with futuristic features that are less harmful to the environment. Meanwhile measures are also required to improve the production process, making it more cost-effective and far less resource heavy. This is particularly important for the growth models of emerging economies, which require a long-term vision with a greater internal focus that leans away from a commodity-led export market.
Only by transforming the automobile into something that meets these evolving expectations can the industry thrive. That being said, the size of each market remains finite, limited by population and wealth, and so only those players willing to adapt, evolve and perhaps even shrink, can journey through to the next exciting era of automotive history.
