How Will Automakers Respond to Megatrends?
5 Juin 2015 - Automotive News
After 30 years of intense convergence in the auto industry -- a period that has seen most mass-market products and brands evolve toward near-interchangeability -- shifting dynamics appear to be pushing cars into an unpredictable new future.
This shift has not been triggered by the abrupt, secular shocks that many predicted (think oil prices and new technologies) but by the steady maturation of the auto industry and the markets it serves. Even as potentially disruptive technologies and business models have emerged, the industry remains wholly resistant to the kind of revolutions preached by Silicon Valley and its Wall Street allies.
This tension between evolutionary reality and revolutionary vision is on full display in Goldman Sachs' recent report on the seven megatrends it sees dominating the future of the car. About half these trends reflect the industry's deep conservatism; the other half represent far more uncertain forces that hold the potential to radically transform it.
Potential disruptions may make the most headlines, but the majority of Goldman's list emphasize the auto industry's continuity. These four points demonstrate that automakers may not be nimble, but their ability to co-opt and adapt to new challenges should not be underestimated:
Endless powertrain advancement. The steady march toward hybrid, electric and fuel-cell vehicles -- which began when the Toyota Prius established the market niche around the turn of the millennium -- will continue. But because the most extreme drivetrain innovations are driven more by regulation than economic reality, Goldman is probably correct in assuming that gasoline and diesel will still fuel 75 percent of the global fleet 10 years from now.
Autos on a severe diet. Vehicles will become lighter as efficiency gains in gasoline and diesel-based drivetrains begin to approach the point of diminishing returns. Fuel economy and horsepower have both increased dramatically in the U.S. market since 1975, but average vehicle weight remains practically unchanged, according to data from the Environmental Protection Agency. Advances in steel, cheaper aluminum and carbon fiber-reinforced plastics make weight loss an obvious route to future efficiency gains.
Shift to emerging markets. Such a focus has been in place for even longer than hybrid drivetrains, as Japan, Europe and, increasingly, the U.S. have begun to mature as automotive consumers. Tighter regulation and higher consumer standards for innovation have coupled with flattening demand to make developed markets increasingly competitive. Meanwhile, emerging markets tend to have less regulation and lower standards for automotive technology, allowing producers to make huge gains in volume in these markets using only legacy technology.
That will remain an attractive strategy well into the future, but rather than the "shift" Goldman predicts, it will likely be more of a bifurcation: Traditional auto industry values will thrive in developing markets, providing a foundation from which the industry will seek to tackle falling profits and looming disruption in developed markets.
Power shift to megasuppliers. Goldman's prediction falls in line with a trend that has long been intensifying and most recently produced the megamerger between ZF Friedrichshafen AG and TRW Automotive Holdings Corp. Competitive convergence in the auto industry has kept prices low and pushed the burden of cost reductions onto suppliers, as McKinsey explains. While this has driven brutal consolidation, the suppliers that have survived now enjoy a larger role in research and development, and therefore value creation. As automakers increasingly become final-assembly and marketing companies, their inability to make meaningful market-share gains will continue to erode their negotiating power with large suppliers.
The other three trends Goldman identifies, however, are cyphers. Though their potential has been much discussed, a huge number of questions remain about how they will be deployed and what their real impact will be:
Connected cars and shared mobility. The latter has particularly made some real-world impact. But even as Uber, Lyft, Relay Rides, Zipcar and other mobility-sharing apps have begun to affect how consumers use cars, their potential to disrupt the auto industry itself remains unmet. Taxi services and car rentals are feeling some pressure from new apps, but such apps have yet to prove themselves as a popular alternative to car ownership itself. Until mobility apps begin to meaningfully raise the low rate at which cars are utilized, they won't reduce aggregate demand for cars or replace taxis and rental companies as the auto industry's main customer.
Autonomous driving on horizon. Even Goldman says such a move isn't imminent, with full autonomous-drive capability being singlehandedly pushed by a non-automaker: Google. The technology's transformative potential is nearly endless, but so too are the social, economic and regulatory changes needed to realize it. Though Google has set a target for the "when" of autonomous drive, with an unspecified public deployment scheduled for 2017, Stanford professor Sven Beiker told me the "where" is the more crucial -- and as yet unanswered -- question.
Just as mobility apps are displacing taxis and rentals without fundamentally eroding auto demand, so too might Google's technology affect trucking, trains and other non-car businesses before coming close to transforming the market for private, human-driven cars.
New entrants afoot. Goldman argues that electric and autonomous-drive technologies have reduced the industry's notorious barriers to entry. Tesla's success in building a desirable electric car and Google's relentless drive toward autonomous capability may give that impression, but even fans have to admit that both of these companies are a long way from realizing any kind of real influence.
Google's inability to articulate even the roughest deployment or commercialization strategies in discussions with major automakers has left even forward-looking industry executives unconvinced that the tech giant is "for real." As for Tesla, its brilliant execution of the Model S is increasingly being drowned out by a growing laundry list of unmet promises and mounting challenges. Having proven that a luxury-electric segment exists, Tesla is about to be assaulted by competition. As Google or Apple or Uber proves that demand for autonomous cars exists, the industry will respond in kind, probably in partnership with suppliers like Delphi and Continental.
Though new technologies, ideas and companies are challenging the entire automotive paradigm and upsetting almost a century of stable evolution, the industry's ability to adapt should not be underestimated.
"Every innovation tends to diffuse rapidly throughout the auto industry," Horace Dediu pointed out in an analysis of Tesla's much-repeated disruptive potential. Compared to almost every other high-tech paradigm, the automobile has shown a remarkable ability to endure and co-opt changing technologies.
Until consumers begin demanding fundamental changes in mobility -- and there's little evidence that they will soon begin doing so -- at least a few of the world's major automakers will survive, and possibly even help define, the new era of automotive technology.
The "revolution" will come only for those who can't afford to keep up, and they will ultimately fall victim to the same competitive, consolidating pressures that have ruled the industry for more than 100 years. The more things change in the car industry, the more they seem to stay the same.