Everything about the automotive industry is changing instantly – Economic Postman

Going to the first car was a problem. The Benz Patent Motorwagen, which hit the streets of Germany in 1886, required drugstore “stain cleaner” for oil, hand-lubricated mechanical parts, and full oil and water tanks. Then you had to turn the big flywheel to start the engine, grab the control that controlled the front wheel, and push the lever forward to engage the drive belt that set the car in motion. The process was repeated every 10-15 km until the fuel and water ran out. However, the freedom of travel by putting a combustion engine in a car soon caught the attention of the public.

A huge industry with nearly $3 trillion in annual revenue has grown to provide transportation to the masses. More than 1 billion vehicles transport passengers on the world’s roads. There were many pioneers with the Germans. The French gave words like coupé, chauffeur and cabriolet. America developed mass production with the Ford Model T in 1908 and then captured the market in the 1950s. Japan invented extreme reliability and high-speed production. Europe set the standard for luxury, advanced engineering and new technologies such as anti-lock brakes and airbags.

The next phase of the industry’s history will be one in which technology companies and the Chinese will come to the fore. Elon Musk’s Tesla has brought electric cars to the fore everywhere. China may be new to the industry, but it is growing fast. By the 1980s the country produced only a few cars, such as the Hongqi limousine that carried Mao Zedong to military parades and tractor factories. But the 40-year rise that took it to the level of a major economic power has created a similar car industry. China overtook America as the world’s largest market in 2009. Last year, it overtook Germany to become the world’s second largest exporter.

The emergence of Tesla and the Chinese as major competitors represents an unprecedented upheaval in the industry. The obvious change is electricity. Although some automakers are still experimenting with hydrogen fuel cells, lithium-ion batteries have become the dominant technology. In 2022 approximately one in ten new cars sold worldwide will be a battery electric car. If we add to this plug-in hybrids (PHEVs), which combine a small battery and an internal combustion engine, then 13% of all sales, or about 10.5 million vehicles, were electrified.

China accounts for 6.1 million sales of what it calls new energy vehicles (electric and hybrid). However, Tesla is the world’s largest electric car maker, selling 1.3 million vehicles in 2022. China’s BYD is second in battery-only vehicles and far ahead in new energy vehicle inventory. Of the old guard, the Volkswagen Group (VW) is the boldest when it comes to electric motors. However, it is only in third place, with sales of 570,000 electric vehicles, 7% of its total production.

Electrification is changing the automotive industry. Older brands relied on the complexity and cost of internal combustion engines to keep competitors at bay. Having to spend $1 billion on an internal combustion engine and $1 billion on printing machines, paint and production lines to enable a new line to produce 150,000-200,000 units per year creates significant barriers to entry. It is not surprising that, from the second world war until the arrival of Tesla, there were very few new brands that succeeded in going international. Those that did, such as Toyota and Nissan in Japan and Hyundai-Kia in South Korea, relied on government support and protected domestic markets.

The relative simplicity of batteries and electric motors breaks down many barriers to entry. A number of startups in China (including Li Auto, Nio and Xpeng) and America (such as Fisker, Lordstown, Lucid and Rivian) are now following Tesla’s lead. Electrification has given a boost to established Chinese automakers, which were long blocked from global markets by a major barrier to internal combustion engine technology. China, in one way or another, has persuaded state-owned and private companies to build a domestic electric vehicle industry, partly to move away from gasoline.

Oncoming traffic

The arrival of a host of new competitors will make a highly competitive industry even more competitive, not least because car sales may already be past their peak. Enthusiastic Chinese consumers gave the market its biggest boost in decades. But now the brakes are on. Car sales fell in the three years after 2018 as a saturated market, worsening economic conditions and the effects of Covid-19 took their toll. The production of cars in the world has also reached a peak, with about 73 million passenger cars in 2017. The decrease in Chinese demand has been attributed to the shortage of chips that are packed in all modern cars. By 2022, global vehicle production will drop to around 62 million.

Forecasts vary widely, but the growth of auto sales in the near future may be limited. Pedro Pacheco of consulting firm Gartner estimates that sales will eventually return to 2019 levels, but never go higher. A series of scenarios by McKinsey, another consultancy, puts the annual number between 70 and 95 million by 2035, but the biggest growth will be in emerging markets in Africa, India, South America and Southeast Asia, where most of the demand will be found. be for cheap cars. The European and American markets have certainly already reached their peak and China is likely to get there soon. Even optimists see growth in China at just 2.3% per year in the decade after 2019, compared to around 7% in the previous decade.

Legacy automakers face a major challenge as newcomers, especially the Chinese, are likely to have a clear advantage. Ola Kalenius, the boss of Mercedes-Benz, does not underestimate the “huge industrial task” of changing the engine and raising 130 years of history of the internal combustion engine, but says that “what is happening on the software side is much bigger”. In the past, car companies were defined by the sophistication of the machinery used to handle them, their horsepower, the prestige of their hoods and the pleasant sound of the doors closing on the most expensive car.

In the cars of the future, companies will be differentiated primarily by their user experience, which is now determined more by their software than their hardware. Software-enhanced cars, which today resemble supercomputers on wheels, will increasingly have features and functions such as infotainment, ambient lighting and audio control, features that will be upgraded wirelessly and automatically after the car leaves the factory. This will open up new avenues of profit exploitation by car manufacturers.

Many of the incumbents are jealous of Tesla, which claims to be a technology company that happens to make cars. Since its roots in Silicon Valley, Tesla has built a decisive leadership in software. However, in China Tesla is only one of many electric car manufacturers. China’s auto manufacturers, startups and technology companies have partnered to provide an experience that surpasses those found elsewhere. BYD, Nio and Xpeng have been ahead of Tesla in offering karaoke microphones in cars. Young Chinese who expect and even demand their cars to provide an extension of their digital lives are leading the rest of the world.

The race for autonomous driving is also underway. Although the road to fully autonomous vehicles is fraught with obstacles, a smaller “freedom” that takes over driving duties first on highways and eventually in some urban areas is close to commercial development. Automakers are rethinking their involvement in online taxi hailing and car-sharing programs, with the key question of mobility being a better way to monetize consumption rather than just ownership, sparking a rethinking of the auto retail business.

The latest attempt comes from new geopolitical tensions, particularly between the US and China. Rising tariffs, increasing barriers to technology transfer, reforming supply chains and greater subsidies for domestic production threaten to halt or even reverse the globalization process. Automakers will have trouble adapting to such changes.

For legacy companies all this requires major changes and re-engineering. They retain many advantages: manufacturing know-how, strong brands and access to large amounts of capital in an industry that is growing with challenges. But startups aren’t constrained by the heavy legacy of decades-long engineering-focused organizations and burdened by complex product portfolios that drive costs. Not all legacy companies will survive the coming changes.