CHAPTER 7

Challenges and Opportunities for the Motor Vehicle Industry

This chapter identifies future challenges faced by the motor vehicle industry in the production and sale of its product. On the production side, the principal challenge facing the motor vehicle industry is planning for the depletion of essential resources, especially petroleum. Most critical is the development and manufacture of alternatives to the gasoline-powered internal combustion engine. On the sales side, the principal challenge is adjustment to a rapidly shifting distribution of demand around the world. Motor vehicle sales are growing rapidly in some countries, especially in Asia, while prospects for growth are limited in Europe and North America.

Resource Depletion

The most fundamental resource depletion issue is the uncertain future of petroleum. The proven reserve of petroleum remaining to be extracted from conventional fields is limited. However, substantial reserves appear to exist in unconventional sources such as the Alberta, Canada, oil sands. But exploiting unconventional sources is strongly opposed by environmentalists because of the potential for adverse impacts. For example, oil sands (termed tar sands by environmentalists) are exploited through strip mining, which despoils the landscape and pollutes water supplies. Technically feasible alternatives to petroleum are available, but all carry significant economic penalties at this point in time, though the future may brighten for some of them.

Vehicles powered by electricity accounted for 40% of sales in 1900, and those powered by steam 38%. Only 22% of vehicles had ­gasoline-powered internal combustion engines that year. Electric vehicles were popular in large cities, especially as taxi cabs. But electricity became much more expensive than gasoline, especially after vast quantities of cheap oil were found in 1901 at Spindletop, Texas. Outside big cities, electric cars were not powerful enough to navigate the poor roads, and charging stations were rare (though some did exist). Steam power reached a technological dead end. In 1905, all but a handful of vehicle sales had internal combustion engines, and through most the 20th century, no realistic alternatives to gasoline power were offered for sale to consumers.

A century later, carmakers are again producing serious alternatives to gasoline-powered vehicles. Carmakers recognize that petroleum is a nonrenewable resource. While new fields are constantly being discovered, especially in unconventional sources, the prospects of reduced supplies and much higher prices for petroleum have spurred carmakers to hedge their bets by investing in alternative power sources. Government mandates discussed in the previous chapter for lower emissions as well as improved fuel efficiency add to the urgency for carmakers to identify alternative sources of power.

Numerous alternatives can be manufactured and displayed in dealers’ showrooms. However, it is unclear which—if any—of the alternatives will ultimately prove financially rewarding to develop and which—if any—will attract enough consumers to justify the enormous investment. It is also unclear which technologies will continue to improve and which will end up as dead-ends. And while no technology is currently a money-maker, it is unclear which alternatives can be priced to return a profit in the long run and, therefore, are worth subsidizing in the short run. Not even the largest carmakers have sufficient resources to invest in all alternatives. So each carmaker is placing bets among the various alternatives in allocating scarce development and marketing resources.

The U.S. Department of Energy (DOE) identifies six types of alternative fuel vehicles: flex-fuel, diesel, hybrid electric, all electric and plug-in hybrid, micro hybrid, and gaseous and fuel cell. Flex-fuel and diesel involve making more efficient use of the remaining petroleum reserves. The other four alternatives are variations of electric power:1

• Flex-fuel. Ethanol is fuel made by distilling crops such as sugarcane, corn, and soybeans. Sugarcane is distilled for fuel in Brazil, where most vehicles run on ethanol. In the United States, corn (maize) has been the principal crop for ethanol, but this has proved controversial because the amount of fossil fuels needed to grow and distill the corn is comparable to—and possibly greater than—the amount saved in vehicle fuels. Furthermore, growing corn for ethanol diverts corn from the food chain, thereby allegedly causing higher food prices in the United States and globally. Ethanol production consumes 40% of the U.S. corn crop. More promising is ethanol distilled from cellulosic biomass such as trees and grasses. Factories producing cellulosic ethanol are expected to open in Iowa and Kansas in 2014.

• Diesel. Diesel engines burn fuel more efficiently with greater compression at a higher temperature than conventional gas engines. Most new vehicles in Europe are diesel powered, where they are valued for zippy acceleration on crowded roads as well as for high fuel efficiency. Diesels have made limited inroads in the United States, where they were identified with ponderous heavy trucks, poorly performing versions in the 1980s, and discharge of pollutants. Biodiesel fuel mixes petroleum diesel with biodiesel (typically 5%), which is produced from vegetable oils or recycled restaurant grease.

• Hybrid electric. In a hybrid vehicle, a gasoline engine powers the vehicle at high speeds, but at low speeds, when the gas engine is at its least efficient, an electric motor takes over. Energy that would otherwise be wasted in coasting and braking is also captured as electricity and stored until needed. Sales of hybrids increased rapidly during the first decade of the 21st century, led by Toyota’s success with the hybrid Prius.

• All electric and plug-in hybrid. A full electric vehicle has no gas engine. When the battery is discharged, the vehicle will not run until the battery is recharged by plugging it into an outlet. In a plug-in hybrid, the battery supplies the power at all speeds. It can be recharged in one of two ways. While the car is moving, the battery can be recharged by a gas generator. When it is parked, the car can be recharged by plugging into an electrical outlet. The principal limitation of a full electric vehicle has been the short range of the battery before it needs recharging. Motorists can make trips in a local area and recharge the battery at night. Out-of-town trips are difficult because recharging opportunities are scarce. In large cities, a number of downtown garages and shopping malls have recharging stations, but few exist in rural areas. Using a gas generator to recharge the battery extends the range of the plug-in hybrid to that of a conventional gas engine.

• Micro-hybrid. A micro-hybrid vehicle is powered by a conventional gasoline engine. The micro-hybrid systems manage engine operation at idle.

• Fuel cell. Hydrogen forced through a PEM (polymer electrolyte membrane or proton exchange membrane) combines with oxygen from the air, producing an electric charge. The electricity powers an electric motor. Fuel cells are now widely used in small vehicles such as forklifts. Fuel cell vehicles are on the streets in a handful of large East and West Coast cities, where hydrogen fueling stations have been constructed.

According to the DOE, 2.5 million alternative fuel vehicles were sold in the United States in 2011. The total included 1.6 million with flex-fuel, 540,000 diesel-powered, and 250,000 hybrid vehicles. The other electric types had much lower sales, including 56,000 gaseous and fuel cell, 15,000 micro-hybrids, and 5,000 plug-in and all-electric vehicles. The DOE forecast in 2012 that 7.3 million alternative fuel vehicles would be sold in the United States in 2025, approximately 40% of total vehicle sales. The forecast includes 4.2 million with flex-fuel, 1.3 million micro-hybrid, 825,000 hybrid electric, 600,000 diesel, 319,000 plug-in and all-electric, and 86,000 fuel cell (Table 7.1). Indicative of the extreme volatility and uncertainty in forecasting future demand, the DOE just 2 years earlier had forecast a 50% market share for alternative fuel vehicles in 2020. Most auto industry analysts consider even the lower DOE forecasts to be too optimistic, given current projections for petroleum supply and price. On the other hand, hybrid vehicles got off to a slower start than plug-in and all-electric vehicles.

Petroleum is not the only natural resource with reserves of concern to the auto industry. Platinum is needed to manufacture catalytic converters and fuel cells. All but 3% of the reserves of this extremely rare metal are in South Africa. Lithium, essential for electronic devices, including electric-powered vehicles, is currently imported, primarily from Bolivia, although Wyoming may become an important source for the United States. China possesses 97% of the world’s supply of rare earth elements.

Changing Markets

Prospects are bright for continued growth in demand for new vehicles. Worldwide sales are forecast to increase from 80 million in 2012 to 100 million in 2017. Although the high cost of vehicle production remains a significant barrier to entry for new companies, the forecast of continued substantial increases in global demand entices unprofitable and marginally profitable carmakers to remain in business. The arithmetic is compelling: the projected annual increase in worldwide vehicle sales is equivalent to the current level of sales of one of the current leading carmakers. In short, industry analysts expect enough growth to potentially satisfy every carmaker.

The principal challenge for existing and potential carmakers is adapting to changes in the market even in the midst of overall growth. The substantial worldwide increase in vehicle sales is based primarily on expectations in China. On the other hand, sales in North America are not expected to increase beyond the level achieved prior to the severe 2008–2009 recession, and sales in Europe are not expected to rebound even to the pre recession level. Carmakers are especially struggling to attract young people in Europe and to some extent North America.

Distribution of Demand

Vehicle sales are increasing rapidly in developing countries, especially in Asia, while stagnating in developed countries. In 1990, the five largest markets were the United States, Japan, Germany, France, and Italy. In 2020, only the United States will remain among the top five. From a peak of 19 million in 2007, vehicle sales in Europe (excluding Russia) declined to 14 million in 2012, and forecasts expect at best a modest increase in vehicle sales, though below the region’s historic peak. Vehicle sales have also plummeted in Japan, from a historic high of 8 million to an anticipated 4 million in 2020. Only the United States is expected to show a slight improvement in the years ahead from its historic pre recession high.2

Joining the United States among the top five markets will be China, India, Brazil, and Russia. Vehicle sales in China increased from 600,000 in 1990 to 5 million in 2000 and 18 million in 2010, and they are forecast to reach 30 million in 2020. India’s vehicle market has increased from 400,000 in 1990 to 700,000 in 2000 and 3 million in 2010 and is forecast to hit 11 million in 2020. Brazil’s growth is less dramatic, from 700,000 vehicles in 1990 to 1 million in 2000, 3 million in 2010, and an anticipated 7 million in 2020. Russia’s vehicle market is expected to double from 2 million in 2010 to 4 million in 2020.

Given the fundamental economic attraction of assembling vehicles near where they are to be sold, the shifting distribution of demand in the years ahead will result in the need for more production capacity in Asia and less in Europe. In principle, this seems like a straightforward ­calculation on the part of leading carmakers to close assembly plants in Europe and build them in Asia. But this is easier said than done. Closure of plants in Europe is extremely difficult because of the legal rights of workers. Opening of plants in Asia is also challenging because partnerships are needed with local carmakers and government agencies.

At this time, the best-selling vehicles in Asia come from leading international carmakers. China’s sales are led by VW and GM. GM’s Buick brand and VW’s mass-market products have been especially popular in China at a time when both are struggling in North America. On the other hand, Japanese carmakers have had additional challenges in China because of long-standing political and military tensions between China and Japan, extending back to Japan’s militaristic policies during World War II and more recently over control of a chain of small uninhabited islands known as the Senkaku in Japan and the Diaoyu in China.

In Europe and North America, where demand has not increased in the 21st century, the sale of vehicles to younger people has been especially stagnant. The mean age of buyers of new vehicles in the United States increased from 48 in 2007 to 51 in 2011. The median age increased more sharply in Europe, from 43 in 2006 to 46 in 2007 and 52 in 2011. The share of buyers of new vehicles who were under age 45 declined in the United States from 45% in 2007 to 33% in 2011. The decline was from 29% to 22% for buyers aged 35–44 and from 15% to 10% for buyers aged 25–34. On the other side, the percentage of all buyers of new vehicles aged 55–64 increased from 18% to 23%, and the percentage aged 65–74 increased from 9% to 13%. The trends are similar in Europe.3

The rapid aging of buyers of new vehicles affects all companies and makes about equally. The average age of buyers of the four best-selling makes—Ford, Chevrolet, Toyota, and Honda—was between 51 and 52 in 2011. A generation ago, Japanese-owned makes such as Honda and Toyota had significantly younger customers on average than did U.S.-owned makes such as Chevrolet and Ford. The average age is higher even for the customers of the higher priced makes of U.S.-owned companies—60 for Ford’s Lincoln, 59 for GM’s Buick, and 57 for GM’s Cadillac.

Unclear to carmakers is the reason for the rapidly increasing age of new vehicle buyers in North America and Europe. Three possible explanations are offered:

• Lower birth rates since the late 20th century, combined with the aging of the baby boom generation born in the 1940s and 1950, have produced a short-term imbalance in the age distribution of the population in Europe and North America. Fewer vehicles are being sold to younger people because there are fewer of them in the population. Once the baby boom generation passes on in the 2030s, so this argument goes, the average age of new vehicle buyers will decline again.

• Younger people are buying fewer vehicles because they cannot afford them. The severe recession of 2008–2009 hit younger people harder than older people. The lingering effects of the recession in Europe have continued to depress demand among younger people, who have a higher unemployment rates and lower incomes than older people. Because of the poor economy, young people are more likely to delay moving out of their parents’ home, getting married, and having children. Delays in obtaining a driver’s license and buying a new vehicle are consistent with the pattern. Economic recovery, so this argument goes, will restore demand for new vehicles among young people.

• Interest in ever owning a new vehicle has declined among young people. Shiny stylish new motor vehicles are no longer viewed as “must have” products for younger people. Nor are they attracted by revving powerful engines, drag racing down Main Street, and making out at the drive-in movie. Vehicles are responsible for resource depletion and global warming. Young people will buy vehicles only to the extent necessary for practical errands, but, so this argument goes, the ­century-old love affair with the car is over.

The first two possible explanations are related to short-term demographic and economic cycles. It is the third of the explanations that most worries carmakers.

Performance and Connectivity

The most effective way to entice younger people in wealthy countries may be through in-vehicle electronics. Electronics comprise nearly 40% of the content of motor vehicles and the share is growing. The average new vehicle in 2011 contained more than 40 electronic controllers, five miles of wiring, and more than 10 million lines of software code, and the number of processors in vehicles was expected to double in 5 years. Electronics play two principal roles in motor vehicles: performance and connectivity. Performance has been the principal function of electronics, but connectivity will be of increasing importance in the future, especially for younger drivers.

Two aspects of performance have been especially impacted by electronics:

• Refining the powertrain to reduce emissions and improve fuel consumption: Examples include sensors linking the engine and transmission, electrically activated turbocharging, and electronic steering.

• Refining chassis, body, and interior to improve vehicle safety: Examples include airbags, electronic stability control, adaptive cruise control, and active lighting systems.

Connectivity was until recent years the distinctive function of the vehicle radio. Motorists stayed in touch with the outside world only by tuning the radio to news or entertainment programs provided by their favorite local stations. Now, everywhere they are, people demand instantaneous and continuous Internet connectivity and voice communications through their smartphones, tablets, and other portable electronic devices. “Everywhere” includes inside vehicles. Carmakers are still installing radios, but motorists expect other forms of connectivity. Of most importance to motorists are voice activated wireless communications, integration of their portable digital media players with the vehicle’s entertainment system, and monitors on the instrument panel for clear display and control of the various connected devices.

Designing these connectivity functions has been especially challenging for carmakers. Instead of creating unique proprietary systems as they have in the past, carmakers need to permit connectivity inside the ­vehicle that is seamless with the portable electronics motorists are using in their homes, offices, and classrooms. The leading manufacturers of portable electronics are a new group of suppliers with whom carmakers must develop constructive partnerships.

The rapid pace of change of smartphones, tablets, and portable music players adds a further challenge. Carmakers make major changes in their vehicles every 4 to 6 years, whereas new versions of consumer electronics appear every year or so. Furthermore, vehicles are used for many more years than personal electronics, so carmakers must build in flexibility that minimizes obsolescence and accommodates future trends in personal ­electronics—to the extent that anyone can make accurate forecasts about these trends.

Given the high standards of design, assembly, and servicing for all contemporary vehicles, the ease of use of the connectivity system has become an increasingly important differentiator of consumer perception of quality. Carmakers increasingly market their vehicles on the basis of their distinctive approaches to connectivity.

Meanwhile, NHTSA considers driver distraction as a result of in-car electronics to be a major issue. In 2011, one-fourth of all accidents involved the use of cell phones. More than one-half of U.S. motorists admit to having used a cell phone while driving, and more than one-third have sent text messages. Text messaging, which is considered especially dangerous, has been banned in 39 U.S. states, yet more than three-fourths of young adults say that they can safely text while driving. Ten states have banned use of all hand-held devices while driving.

Carmakers expect greater integration of the connectivity function of vehicle electronics with performance, especially safety. Features being introduced into vehicles include:

• Cameras to make blind spots visible when the vehicle is backing up;

• Warnings when the vehicle leaves a lane;

• Communications with other vehicles to improve collision avoidance;

• Navigation systems that adjust the engine to the terrain;

• Systems that find and reserve parking and place the vehicle in a tight space.

Prototypes of driverless vehicles are now in service. The principal obstacles to their use are legal and behavioral rather than technological. The states of California and Nevada have legalized the use of driverless vehicles on public roads, but other countries and localities do not permit them. Unsettled is liability in case of an accident or a failure of a driverless vehicle. Would the fault lie with the carmaker, the motorist, or the vehicle owner? But given the predilection of so many motorists to use their electronics while driving, driverless vehicles could take care of the distracted driving problem.