Car makers across the world are reeling from a steep fall in sales, but once the current crisis subsides, the priority of the industry is once again expected to shift to the production and design of more environmentally friendly vehicles. GARETH LEATHER suggests that emerging markets, rather than the developed world, will be the first to adopt such technologies.
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The global automotive industry is facing the most difficult year in its history. After strong growth in 2004-2007, the final few months of 2008 saw car sales go into meltdown across the world. Many markets experienced unprecedented collapses in passenger car sales – a trend that continued in the first half of 2009. The bad economic news from the US, Japan and Western Europe, but also from most developing countries in Asia, Latin America and eastern Europe, means that global passenger car sales will fall sharply in 2009. The 20% or so fall in car sales that is likely for 2009 will lead to massive overcapacity, plant closures, and lay-offs. Moreover, given that only a modest economic recovery is forecast for 2010 and beyond, the suffering is likely to last for some time yet.
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Companies focusing on survival
The steep fall in car sales has led to serious problems for automakers across the globe. The crisis has been most dramatic in the USA, where two of Detroit’s ‘Big Three’ car companies – General Motors (GM) and Chrysler – were forced into Chapter 11 bankruptcy. In Japan, car companies (which are in much better financial shape than those in the USA) have been hit hard, not just by the collapse in demand, but also by the sharp appreciation of the Japanese yen. Toyota, Nissan, and Honda, all reported huge financial losses. In Europe, where demand has also fallen sharply, despite the introduction of some successful car scrappage schemes, national governments’ have helped by propping up teetering car companies in a desperate bid to prevent factory closures and keep jobs at home.
Problems in the sector had been expected to lead to a long overdue consolidation of the sector. However, so far the only country where any consolidation has occurred is in the US, following the merger of Chrysler (which emerged from Chapter 11 bankruptcy) with Fiat of Italy. Fiat had also hoped to take over the European arm of GM, which had also been forced into bankruptcy. But Opel has instead been bought by the Canadian components manufacturer, Magna, thus thwarting Fiat’s plans to create a new European automotive giant. One other likely merger is that between Volkswagen, and its much smaller German rival, Porsche.
Emerging giants to the rescue?
With sales in the US, Japan and much of Western Europe still very weak, car makers’ last hope is that sales in the emerging markets will help make up some of the slack. Many car makers feared the worst at the end of 2008 and in early 2009 when car sales in even the strongest and most robust emerging economies such as China and India started falling. However, over the past few months, car sales in China have recovered strongly, with sales in August increasing by an eye-popping 90% compared with the same month last year. Passenger car sales in India have also recovered in recent months, although not as strongly as in China. With sales in the developed markets of the European Union (EU), USA, and Japan likely to struggle for years to come, growth will increasingly come from elsewhere. The role and influence of China, India, and other big emerging markets will continue to expand.
Environmental concerns
The overwhelming priority of every major car company at the moment is survival. However, once the current crisis subsides, and car markets begin to stabilise, the priority of the industry is once again expected to shift to the production and design of more environmentally-friendly vehicles. Indeed, green issues have the potential to bring about massive change in the global automotive industry. Two main factors are driving this change. First, there is growing concern about climate change, and of the role the auto industry has in reducing emissions. Second, countries and governments around the world are becoming increasingly worried about their growing dependence on oil imported from potentially unstable countries.
All of the major automotive manufacturers are busy investing in new environmentally-friendly technologies. However, Japanese companies are so far leading the way in terms of bringing new technology to market, with the standard for hybrid-electric vehicles being set by Toyota and Honda. Despite this, a number of other companies have stepped up their development of new fuel-efficient cars. GM, for example, is planning on releasing the Volt, an electric car with a petrol-driven engine which will help generate additional electricity, by 2010. Nissan also has plans to introduce a low-priced electric car, the Leaf, in Japan and the USA by 2010.
A number of car makers from developing countries are also rapidly increasing their investment in new environmentally-friendly cars. In China, one of the world’s biggest battery manufacturers, BYD (which is 10% owned by the US investor, Warren Buffet), has developed a battery technology which it believes has some important advantages over both lithium-ion and nickel-metal hydride batteries. BYD claims that its ferrous batteries are not only cheaper, but can be charged to 50% of capacity in ten minutes. Meanwhile, India’s Tata Motors (part of the local Tata Group) has a controlling stake in a small Norwegian electric vehicle company, Miljo Grenland/Innovasjon. The Norwegian company will produce electric vehicles based on Tata’s products.
Which kind of technology will prevail?
Hybrid technology, however, is regarded by many only as a stop-gap, which will over time face increased competition from other technologies. In the short-term, hybrids in the USA will face increasing competition from diesel-powered vehicles, which are 20-30% more efficient than petrol vehicles, particularly with the advent of cleaner (reduced NOx) diesel and higher-performance diesel engines. In the USA (where the market is dominated by petrol engines), the Environmental Protection Agency has described ultra-low sulphur diesel (ULSD) as the biggest advance in clean fuels since the removal of lead from petrol in the 1980s.
The most attractive option in environmental terms remains hydrogen-powered fuel-cell vehicles, which only emit water and steam from the exhaust pipe. Another exciting new technology, with much greater mass-market potential, is the electric car powered by a lithium-ion battery. At present, the batteries need to become more reliable and more powerful, but this is an area where a great deal of new investment is currently being ploughed. The second biggest factor holding back the development of electric cars (and indeed hydrogen fuel-cells) is the investment needed in order to build an infrastructure to cope with such vehicles. However, investment is likely to be encouraged by regulators anxious to reduce emissions.
It is unclear which of the competing technologies will win out. This means that car makers have to hedge their bets by spreading research and development investment over many of the available options. Given the constraints on cash caused by the current market downturn, this will prove particularly difficult.
Legislation in developed countries
Demand for change is currently being driven in the developed world, in particular by new legislation which is being introduced by the EU and the USA. In the EU, at the end of 2008, a new set of obligatory emissions standards was finally decided upon after the perceived failure of a voluntary agreement. This will see car makers in Europe being required to reduce their fleet average emissions to 130 g/km in a three-year phase-in period between 2012 and 2015. Although developments in the USA have continued to lag behind those in Europe, on May 19th 2009 US president, Barack Obama, announced plans for a set of strict new fuel economy standard rules. Mr Obama’s new rules bring together the efforts of various authorities to regulate vehicle emissions and fuel efficiency. The new regulations will require cars to average 35.5 miles per gallon (mpg) and light trucks 30mpg across a manufacturer’s range of vehicles, to be phased in by 2016. This compares with current corporate average fuel economy (CAFE) standards that were introduced in 1985 and require a fleet average of 27.5mpg from new cars. Meanwhile, in Japan, the government has set itself a target to reduce the country’s carbon emissions by 18% by 2020 compared with 2005 levels.
Increased car ownership is unsustainable
According to research from the International Monetary Fund (IMF), car ownership really starts to accelerate when per capita income reaches over US$5,000 a year. Based on these estimates, the IMF has calculated that the number of cars on the road stands to increase from just 600m in 2005 to nearly 3bn by 2050. By 2030, according to these estimates, China will have the biggest car fleet in the world (having overtaken the USA), and by 2050 China will have as many cars on its roads as the whole world has at the moment. However, cars are already one of the main sources of greenhouse gas emissions. According to the Stern Review on the Economics of Climate Change which was published in 2006, in the year 2000 cars were responsible for 6.3% of total carbon dioxide emissions. If emissions rise as fast as total car ownership, the effects on the climate could be catastrophic.
Emerging markets to the fore
Clearly therefore, current trends are unsustainable, and there is an urgent need to develop vehicles which are either very low or zero emissions as soon as possible. At the moment, most of the political pressure for such cars is coming from environmental lobby groups and politicians who see pro-green policies as potential vote-winners. However, a number of factors may mean it is emerging markets, rather than the developed world, that will be the first to adopt such technologies.
Rising concern about air pollution in the developing world is one factor driving change. In China, for example, which is home to 16 of the 20 most polluted cities in the world, efforts to reduce factory emissions are now being eclipsed by the surge in car ownership – which are now the primary source of air pollution in Chinese cities. Since 2000, China has been implementing a progressively more stringent series of standards modelled on those applied in the EU. The Euro 3 standard is now applied to all new cars sold nationwide. The much stricter Euro 4 is already in effect in the capital, Beijing, and there are plans to extend the standard nationwide by 2010.
Car makers recognise that their traditional markets in the US, Japan, and Western Europe are set for a period of slow or even stagnant sales growth. Therefore they will increasingly try to cater for the demands of consumers and governments in the big emerging markets, like China, India and Brazil. Indeed, long gone are the days when automotive industry giants would only sell their discontinued brands to these markets.
A second factor is that emerging markets are capable of jumping straight to new technologies. For example, many developing countries never built a traditional fixed-line telephone network because of the high cost, and instead adopted the latest mobile network. One of the main obstacles for the adoption of battery-powered cars in the developed world is the costs involved in replacing hundreds of thousands of petrol stations with new battery-charging facilities. However, countries like China and India are instead well-placed to introduce a new electric car infrastructure because they don’t have to consider the costs involved in tearing down and replacing all their petrol stations.
Gareth Leather is the Economist Intelligence Unit’s chief automotive analyst
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In November the Economist Intelligence Unit wrote that the automotive industries in three out of the four BRIC markets are showing impressive signs of recovery.
The authorities in most of the BRIC countries were quick to put a raft of incentives in place in order to stimulate new vehicle sales in those countries. In Brazil, China and India these measures resulted in increasing vehicle sales in the latter part of 2009.
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