There have been a slew of articles appearing on prominent websites in recent months sounding the death knell of the automotive industry. Authors of these articles cite the increased regulation of carbon emissions and the rise of autonomous vehicles as the beginning of the end for the industry as we know it. However, the alarmist tones of these articles are a touch misguided and whilst they should be noted, the prophecy is certainly not a 2025 viewpoint, although the technology and political drivers have already started to manifest themselves.
Adaptations for the automotive industry will centre upon greener, cleaner driving. Manufacturers across the board will increasingly incorporate electric elements to their combustion engines, in hope of alleviating some of the most pressing environmental concerns. Affordability will also become the focus for companies looking to gain an early foothold in emerging markets, with the search for cheaper and lighter construction materials already underway. These market forces will render a different look and feel to the automotive industry in 2025, but it will remain healthy and exhibit growth across several key markets.
State of the Industry: 2025
It’s no secret that the widespread concerns about both pollution levels and carbon dioxide emissions will drive change within the automotive industry. By 2025, a quarter of all new cars sold are predicted to be electrically-powered, representing an increase of 20% over the next five years. However, a large proportion of those cars will be hybrids as opposed to fully-fledged EVs. 95% of vehicles on the road in 2025 are due to rely on fossil fuels for at least some part of their power requirements. These global figures reveal that the demand for electric vehicles in developed Western economies will be tempered by emerging markets’ reliance on fossil fuels.
With regard to those emerging markets, several developing economies will reach a critical mass when it comes to vehicle purchases. Over the next five years, several economies will breach the $10,000 per-capita threshold associated with vehicle-purchasing proliferation. By 2025, over double the number of new cars will be sold within emerging markets versus developed nations.* On current trajectories, India will become the third-largest car market by 2025, and China will continue to stimulate demand despite experiencing its first drop in car sales since 1990 last year.
The fact that the number of vehicles on the road is set to increase, rather than decline, explains why total revenues of the global automotive industry are predicted to increase by 60% from 2017 to 2030 ($5.3 trillion to $8.9 trillion respectively). Given the maturity of this industry, the move to greener vehicles appears to provide an opportunity as opposed to a threat to its very existence. When assessing manufacturer market share, Toyota is set to top the pile, improving on its current leading mark of 10.24%.
They will be pushed hard however by the Volkswagen Group, who are desperate to put the emissions scandal behind them and instead become the flag bearers of “green driving.” Work on their own “Gigafactory” in Lower Saxony will begin later this year in partnership with Swedish start up NorthVolt. It’s hoped that this factory will build 22 million electric cars over the next 10 years, expanding their electric offering to 70 models.
Success in the automotive industry in 2025 will not come without its challenges. The biggest challenges will likely come in the form of supply chain issues and manufacturing headaches. The aforementioned regulatory pressures will force automobile manufacturers to shift to lighter materials to increase fuel economy performance. But these materials are much costlier to both source and use.
Standard steel costs a car manufacturer just $1 per kilogram. In contrast, those making the switch to construct cars using aluminium alloy (as Ford has opted to for the latest F-150) will have to swallow six times that cost per kilogram. Carbon-fibre-reinforced plastic (currently the lightest material available for car manufacturing) would necessitate an expenditure of $40 per kilogram. While it’s true that technological innovation could reduce the outlays associated with these materials, an overall increase in cost appears unavoidable.
Construction materials are just the beginning when it comes to manufacturing more environmentally-friendly cars. The cost of parts alone is going to increase supply chain expenditure. The weighted average cost increase of a vehicle made in 2025 will be $2,596, compared to just $274 in 2012. Manufacturers will have no option but to look for innovative solutions to keep a lid on swelling supply chain expenses. The uncertain future of essential raw materials such as cobalt and lithium (for battery production) presents yet another challenge in the supply chain upstream.
Next, there’s the challenge presented by new entrants to the industry. Electric vehicles have only a third of the parts of a conventional combustion-engine-powered vehicle, opening up the car to a wide range of cash-rich technology firms. Those best-placed to crack automated manufacturing and technological innovation within the automotive industry may not hail from the traditional powerhouses. With lower barriers to entry, established manufacturers need to remain agile to the threat posed by challenger firms launching low-cost electric vehicles.
Threats to the Automotive Industry
The two most significant threats to the automotive industry come in the form of ride-sharing and autonomous vehicles. The majority of cars are used for commuting or short trips, sitting idle for 95% of their usable life. This statistic presents an opportunity for ride-sharing firms that can match available cars with customers who need them. What’s more, the use of ride-hailing apps is undoubtedly proliferating. Today, 36% of adults use apps such as Uber or Lyft to arrive at their destinations. If these firms continue their trajectory, many individuals may forego car ownership, reducing demand.
However, there are still many stumbling blocks to be negotiated before this becomes a reality. First of all, ride-sharing is yet to work as a rural proposition despite the arrival of long-distance ride-sharing firms such as Bla Bla Car. Secondly, one only has to accumulate 3,500 miles a year at current prices to make owning a car more economical than making use of ride-sharing; a figure that 90-95% of drivers currently surpass. Therefore, while unquestionably a threat to the automotive industry, in 2025, ride-sharing will still have significant strides to make in order to influence vehicle sales dramatically.
Those strides may come in the form of a dovetail with self-driving vehicles. Fully-autonomous cars are undergoing daily tests, but in conditions that do not reflect the vagaries of real-life driving. For instance, Alphabet’s Waymo are using a quiet Phoenix suburb to test their latest self-driving vehicles. But how will that performance translate to the chaotic traffic of New York? Or Bangalore for that matter? Furthermore, while American roads provide easy to follow grid-style systems, the curving, undulating, and isolated roads of the Scottish Highlands may prove too much for a driverless vehicle to navigate successfully.
But perhaps the biggest obstacle to the proliferation of 100% autonomous cars is safety. The interconnected nature of autonomous vehicles of the future elevates the threat of hacking. As of yet, no software has proved total impenetrability. Additionally, there are still significant flaws in the current abilities of driverless vehicles to accurately identify and evade obstacles, human or otherwise, as was demonstrated by the recent Uber collision resulting in the death of a pedestrian in Arizona. There’s also the issue of software glitches and bugs. The recent case of the MCAS software built into Boeing’s autopilot on the 737 MAX demonstrates that the potential fallibility of mobility applications. In cars, humans need to be paying attention to take manual control in such a scenario. Thus, by 2025 it’s highly likely that only semi-autonomous vehicles will have government and regulatory approval and this approval will only exist in limited markets.
The automotive industry is, without doubt, on the edge of what may become the most transformational shift since Henry Ford’s introduction of assembly line manufacturing. By 2025, greener, cleaner, and lighter cars are inevitable in the move to meet the pressures of government regulations. This shift will increase costs and present a challenge to incumbent manufacturers from technology firms, looking to take advantage of superior technological innovation.
However, those costs and challenges will be offset by the growth of car ownership in emerging markets. Furthermore, the threats posed by ride-sharing and self-driving vehicles will have their effects felt much later in the decade since the technological and safety improvements are still much further away than some publications would have you believe. Here at Haig Partners, we are watching the developments within the automotive industry with a keen eye and we will update on those impending innovations as and when they arrive.