The challenging future for Automotive Manufacturers

Automotive manufacturers are being challenged as never before to produce and deliver products that are more considerate to the environment. No more so is this apparent than in Europe, where ever stricter emissions regulations are challenging all manufacturers. However, the challenge is not for Europe alone and more regions are demanding less-polluting vehicles. Project that forward 10 or 15 years and the current way to design, manufacture and sell vehicles will change significantly.

The global impact of Covid-19 has seen a shift in customer demand. During the pandemic demand dropped significantly, as did production capability – see chart adjacent by Automotive Management. Car financing debt is still a big worry for many consumers and regulators alike in some countries; in the UK 90% of all car (new and used) purchases are financed to the tune of £37 bn. “The UK car business has ‘exactly the same problems’ as the mortgage market 10 years ago” – Morgan Stanley.

What follows now is a return to increasing demand, though we still have a considerable way to go, but also a shift in the types of cars being bought. Sales of EVs generally are up compared with others, with Europe still leading the way both in terms of regulation and demand for EVs.

In 2009, shortly after the last global recession, a report commissioned by the G20 countries recorded a 20% reduction in car sales with North America, and Japan seeing the biggest reduction in absolute production numbers. Clearly the automotive industry is fragile in its exposure to major events affecting income/affordability and the confidence of the market. What will be the next big challenge to the automotive industry? And what will play out between now and 2030?

Changes to working practices and social habits will impact motor vehicle use and ownership, in many places irrevocably. This represents an opportunity for manufacturers to adjust some of their development plans and align themselves better with the future need of greener motoring. It also allows the buying customer to review their purchasing choices (mode and model) based on a change of use (see more on Changing Demand, later). Finally, it allows local, regional, and national governments to bring in new regulations and push further in using fiscal measures to change demand. For example, different tax dependent on the weight of the car, or size of engine and, for many countries, different vehicle licencing based on emissions.

In London the Congestion Charge has been extended and the price increased, and bus lane times extended considerably. Singapore has now limited the number of cars 2017 and forecasts are the total number allowed will decrease. Geo-fencing, as technology costs reduce, implementation and management becomes easier, will likely increase significantly in major cities. Already some cities have differential parking charges, fines, parking permits depending on the type (emissions, weight etc.) of the vehicle. Geo-fencing and other initiatives are being used to pay for ‘green’ initiatives, and offset revenue loss, e.g. Sao Paulo, Beijing, Shanghai, Mexico City; Paris; London; etc.

Initiatives to curb the number of cars or restrict and target specific polluters, with national regulations are all influencing consumer demand. A study by the bank Benchmark Co. showed the biggest total in new drivers across North America was Millennials, outpacing any other age category. Not surprising perhaps but Millennials in 2020 represent the largest group in the workforce worldwide. Whilst it may be wrong to bracket an entire generation into simple categories it is generally held that the environment is a key component of Millennial thinking. This is the future of the most significant buying persona.

In October 2020 a worldwide study of advanced economies, fully 70%+ of people consider driving a car the safest form of transport (74% Germany through to 85% Italy). Public Transport 6%-14%, Ride Hailing 2%-12%. 

The impact of Covid-19 was not so much on demand for vehicles rather how demand is changing the type of vehicle demanded. Congestion works to favour public transport, but as the commute becomes less-common roads become less busy, cycle lanes increase, and public transport has more space. 2022 will see a shift in the way we all travel, how much of a shift is yet to be determined.

Since before 2020 we started to see an increase in car sharing. Today this is mostly through commercially runs schemes. Regional and local governments are setting aside dedicated car-club/car-sharing-only parking spaces to better facilitate this. Are we therefore at a crossroads? Demand for individual car use increasing but people travelling less. This creates a challenger for motor manufacturers and will play out over the next 10-15 years. Something some manufacturers are already exploring.

The average vehicle today sits idle for 99% of its usable life. A change in the current model of ownership is needed alongside a change in the nature of the modern motor vehicle. The car manufacturers that do well in the next 10-15 years are those that learn quickly to adapt to these challenges. Adapt through drivetrain technology, design, technology, user experience, ownership models, cost of ownership, platform, and technology flexibility but, perhaps most importantly of all net total environmental impact.

A key element of the success of Uber is put down to “the map not the App”. Finding a local cab firm or hailing a taxi may take just as long but the uncertainty makes using a phone application a better customer experience. That it uses a map rather than a clock is showing progress not counting down time. This same approach is now being used by public transport to show expected train, bus, metro arrivals. What is missing from public transport however is the availability of capacity – the comfort factor – for public transport. Start-ups, such at TUBR, are trying to change that.

For some manufacturers buying carbon credits offers a short-term solution to meeting EU emissions demands. Fiat Chrysler is doing this with Tesla, Ford with Renault. Other manufacturers, e.g. Daimler and VW have used the 2020 lockdown to drive forward in ambitious plans to meet the new regulations. Other manufacturers are taking a different course. At Nissan, for example, the new 400Z will not come to Europe. By our estimations making the 400Z Euro 6d compliant would add significantly to the price of each vehicle.

PHEV and HEVs still lead the way for most buyers in Europe, and some other territories. EV sales are growing at a faster rate than HEVs and PHEVs. Range Anxiety, however, seems is still an issue. However, as battery technology and the changing infrastructure to support it evolves, this will be less of an issue and we expect to see EVs overtake both PHEV and HEV. See adjacent chart (Germany only) from electrive.

Manufacturers are recognising this shift as the technology trickles down to cheaper models. A Tesla Model 3 may cost €44,000 in Europe but the new Dacia is £18k and the Fiat 500EV £22k.

The overall conclusion is that the focus is on the end-user to make change and users are buying for either environmental, financial (running cost) or neighbour-affect. To serve the customer we are also seeing an emergence of applications to help locate chargers, charge off-peak and even forecast power demand so as not to ‘overcharge’.

Manufacturers are beginning to demonstrate an interest in the total life impact of an EV. Battery plants in different geographic regions attract positive press. It also attracts government support and financial incentives. However, the main driver for localisation of battery plants is trade and tariffs as much as logistics. Despite commitments by G20 over ten years ago towards tariff-free trade, 2018-20 has seen tariffs as the main weapon of choice in local economy support for some of the world’s largest economies. Where they go, others follow. This may slow but is unlikely to turn around any time soon.

Should manufacturers invest in local battery plants themselves? Or rely on regional independent manufacturers to supply their needs to specification? Or perhaps form battery alliances for the manufacture/production of batteries? Currently all avenues are being pursued by a variety of manufacturers. In parallel significant investment is going into alternative power sources, e.g. hydro-electric and into alternative battery technology. The next ten years will see the most dynamic shift in automotive manufacturing since Henry Ford in 1913.

So, what next for the automotive industry and its progress towards a greener capability? Three changes are needed:

i) producing ‘better’ vehicles;
ii) reducing the total cost of an electric vehicle, access to more buyers;
iii) moving from a emissions focus to a emissions and energy focus.

Total Lifecycle Emissions

The Circular Cars Initiative estimates that 18% of a vehicle’s life-cycle emissions were related to material production (not including end-of-life emissions). Until recently the consumer had no consideration for the total lifetime environmental impact, however. Ironically, it was the EV that first came in for criticism in this way when the EV industry is began to receive a small amount of criticism for its wider environmental impact.

Mid-2020 Volkswagen launched the ID.3 with a claim to be ‘balance sheet carbon neutral’. It is not fully there yet with the challenge of recycling still to be addressed but it represents a significant move forward for the industry. Accepting that the battery represents a major challenge, almost one quarter of the production process is still represented by steel and aluminium.

Accepting then that investment in improving battery technology is a significant part of every major motor manufacturer; the next, and therefore must start now, challenge is to significantly reduce the environmental footprint of the production process. For that it requires a focus on steel an aluminium.

In the short-term, part of the increase in total emissions will be the production of EVs and Hybrid vehicles (see chart adjacent). The environmental cost of moving away from petrol/diesel significantly impacts the total emissions. Payback is only achieved, in this example, at around 110,000 km. An average car life is expected to be 200,00 km according to the Car Care Council but expected life and actual distance travelled at disposal are not the same.

The challenge to EVs is made even more complex with the need to dispose of lithium iron batteries. According to Circular, based on the 1 million electric cars sold in 2017, 250,000 tonnes or half a million cubic metres of unprocessed battery pack waste will result when these vehicles reach the end of their lives.

Motor manufacturers that reduce their cost of materials and environmental cost of the basic car design will generate significant gains against laggard competitors. As the environmental impact of running a car reduces the percentage of emissions moves in the direction of manufacturing and, by 2030 McKinsey forecast manufacturing will account for one third of the environmental impact of a car’s life.

Addressing the challenge of total environmental impact whilst reducing wight will more than double the advantage gains. Achieving this by 2030 is the biggest challenge for motor manufacturers today and will deliver the greatest gains as a result.

In addition to changing materials, increasing recycling, use of bio-based materials and carbon sinks would significantly impact material wastage. Use of recycled materials at the start. Use of non-petroleum-based and natural materials will significantly reduce the environmental footprint at the start and improve recycling capability. This puts them at the forefront of tomorrow’s technology but is available today. How manufacturers take on the challenge now will determine the shape of the manufacturer’s balance sheet in 2030 and beyond.

Portfolio Management

The Nissan Leaf was introduced over ten years ago and won European Car of the Year soon after. Global sales currently sit at around 500,000 (half a million cars) and was only recently passed by the Tesla Model 3 as the best-selling electric car of all time. What this shows is the value of the Tesla brand as well as their desire to make e-cars a mainstream product to appeal to a mass market. Good though the Leaf is, it lacked the general and wide appeal the Tesla range offers. However, where Nissan led now everyone is following! Nissan too are embracing e-cars in a way they have not before with the Ariya perhaps the first of many. The Leaf still holds the title as the vehicle with the smallest environmental footprint so, even here, others must work hard to catch up.

Whilst Product Portfolio Management (PPM) has long been understood by manufacturers the focus previously has been on ‘the size of the box’. A range of larger family vehicles, more recently SUVs, smaller commuter vehicles, luxury sedans, sports, and a range of general mid-size offerings. This can be seen in any major general car retailer showroom today.

The push by more environmentally aware consumers is challenging the sports car sector more than any other. Businesswire forecasts global electric/hybrid performance car market is projected to grow at a compound annual growth rate of 18.7% between 2019 and 2025. This may be good news for cars like the Lotus Evora but sales figures so far from Lotus suggest otherwise. Whilst the Ferrari SF90 Stradale is equipped with three electric motors how long before it becomes cool to drive off in a completely silent car?

Sports cars represent a small part of the overall portfolio for a major manufacturer. However, the ‘halo effect’ of having a high-profile brand adds significantly to the marketing performance of other vehicles.

Halo models appear in most consumer goods such as mobile phones and watches, yet they all serve the same purpose and operate the same as a basic model for the most part. What too separates standard products from halo products is the cycle rate. The BMW 3 series averages eight years between model generations between 1975 and today. Lamborghini, by comparison, three years between model generations. To further compound this the cycle time for models is getting shorter. As a result, a solution that allows for more flexible design and model changes through significant facelifts will manage better the cost of development whilst adding the halo affect required.

Traditional automotive design (EV, hybrid or fuel) requires a complete chassis and body design every time. This is costly in terms of time and finance. Manufacturers have addressed this by developing platforms on which to build multiple models. In 1993 VAG sold vehicles built on 16 platforms, by 1999, with a wider range of vehicles it operated only four main platforms. However, this approach does not serve well niche models, such as a halo car, and still restricts more regular updates.

Driving for pleasure is a major interest for many consumers, and it is likely to become more sought after and valued the more commoditised and sanitised personal transportation becomes. As incomes increase generally and disposable income becomes more discretionary the demand for sports cars may increase. For general automotive manufacturers however, this represents a headache. How to manufacture smaller production run vehicles that deliver the performance and emotional engagement required, that are EV potentially, and that can see regular facelifts while being more affordable. Retaining the uniqueness by more regular updates and upgrades is critical for emotional purchases as we see with mobile phones, watches etc.

Building the sports car of the future requires a radically new approach to design and manufacturing. One that will lower the environmental footprint, lower the overall weight, improve all aspects of the performance and driveability, and allow for regular updates and facelifts that are demanded by the consumer. Standard design and production techniques need to evolve.

We have seen recently with Mazda how portfolio management is driving the future shape of their product range. The launch of the Mazda MX30 SUV would, traditionally, be pitched as a hybrid SUV with a good range. However, the vehicle comes with a 150 mile (243 km) urban range only. First reactions would suggest this to be a shortfall in design. However, the average European commute is between 40 km a day and for most countries over 90% of daily journeys are less than 100 km. Therefore, the MX-30 provides an opportunity to charge your car every other day or every three days, depending on your daily commute. In designing the car this way Mazda are suggesting other EVs are over-engineered (‘over-powered’) for most users and if a longer drive is needed then daily car hire or public transport (e.g. inter-city trains) would be the choice. Other manufacturers have considered this approach but most have jettisoned the idea.

Both the Honda-e and the Mazda MX-30 were very quick to come to market, a reflection of the changing dynamics of the industry. The Honda-e first saw light in 2017 for example. It remains to be seen whether Mazda and Honda have identified a need in the market that allows them to provide a quality product suited to the needs of the user whilst keeping weight down and whether others will follow or revisit the idea. However, the ponderous development process of design too is under threat. New cars, new models, more facelifts are needed and needed more quickly. Having the technology that allows greater flexibility and greater adaptability is required to sustain the demands of the rapidly changing consumer.

With the Renault ZOE now attracting significant sales we are seeing competition for lower priced EVs. As the competitive landscape continues this can only be a good thing as consumer choice will encourage price competition.  Aligned to this is a survey in September 2020 that estimates between 50% (18-34) and 37% (55-70) may buy a new vehicle or an additional vehicle rather than rely more on vehicle sharing and public transport. Accepted this is likely to reduce as it has a Covid-19 influence. This suggests more demand for vehicles able to manage a commute or ‘short run’.

Mazda, Honda and Renault have demonstrated different thinking. Other manufacturers need to identify future needs and trends. Concept models for urban mobility may be a step too far for current demands but designs such as the Nissan Townpod in 2010 demonstrate practicality as well as creative design. Manufacturers need to be brave in adopting new ideas and quicker. It is ten years since the Townpod. The next ten years will take us beyond 2030.

Manufacturers need to change the way they produce cars based on all these changing needs. The companies that embrace alternative production techniques, alternative design approaches, using new materials, better recycling from the start are those that will appeal better over the next ten years.

Distribution

Access to finance has provided a boom for car ownership. In the USA, PRN is forecasting that car finance will reach $2.33 bn by 2027. But it is not all good news. As car ownership expands and access becomes easier so too does the demand for newer vehicles, shorter ownership terms and, as a result, a fall in the residual value of cars. Although recent chip shortages, production shutdowns and a change have all provided an uplift in pre-owned car values recently.

Manufacturers are keen to incentivise the sale of new vehicles – they have no vested interest in a pre-owned car they have already sold the first time. These incentives can often mean it is cheaper monthly for an owner to buy a new car than a three/four-year-old used vehicle, thus driving down the residual values. Some suggest that a car finance bubble has emerged in some markets. In the UK the Financial Conduct Authority has raised concerns about the amount of borrowing across 6.5 million cars and some of the tactics used to sell car finance. Once established it can often be the case the ‘balloon payment’ at the end of the initial hire period does not match up to the value of the vehicle.

The move more towards EVs also requires the owner to understand the process of battery ownership. Add this to the move towards private transport as a service (ride share, taxi, carpool/club, car hire) and the challenge for the retailers is to keep pace with a more complex model to fewer buyers. For example, September 2020 saw the worst UK car sales figures for more than 20 years. Inchcape made a loss of £188 m in the first half of 2020 and Pendragon announced 1,800 job losses in the UK. Other countries have faired the same or worse.

With car retailers struggling to be profitable now is the opportunity for the manufacturers to change the model to ensure the brand is better presented to the end user and a stronger tie between manufacturer and consumer. Moving to a car-ownership-as-a-service (CaaS) model will negate the complexities of battery life and ensure assets can be recycled to new owners wanting second-hand cars whilst ensuring the manufacturer retains title and, therefore, inherits the recycling opportunity.

Sales for new cars are moving more online. The 2019 pandemic saw an acceleration of this (see chart by McKinsey). This will further challenge the finances of the retailers and for most western countries the regulations on ‘remote selling’ compared to on premise selling of finance make this more problematic for the retailer. Moving from sales to CaaS will resolve this and give the manufacturer direct customer access.

Direct sales models have been tried before but never really taken off. The process was complex for the buyer and it was still to buy a vehicle. Similarly, the move away from dedicated showrooms has been tried and never been wholly successful. However, shopping centre showrooms are becoming more popular and evidence suggests they are being well received by buyers and sales figures tend to support the model in its infancy. The dynamic that will change all this, aside from technology in the buyer’s hand, is the move away from ownership to rental or shared ownership.

Lynk & Co reported sales of over 120,000 in 2018 and 143,000 in the 12 months to September 2020. This through around 220+ dealerships in China only selling only three models, on a common platform. Customers could opt for a subscriptions service and short-term (monthly) rentals. The service also provides other lifestyle benefits.

BMW, Audi, Volvo, Lincoln, Porsche and Mercedes Benz are trialling subscription models in the USA currently and Cadillac has been offering a OEM subscription service since 2019.

The approach by Lynk & Co is new and already profitable. The changing dynamic of car needs and the changing requirements of a motor car, point to more of this kind of approach. The buying public too are turning away from the traditional process where they can or, at the very least, have a preference to do more remotely or online than at a dealership:

Based on a report by McKinsey the buyer only prefers the dealership when it comes to looking at the vehicle, undertaking a test drive and handover. Handovers can be done at the customer’s choice of location – home or work – and test drives too arranged at a convenient location or where the prospective buyer has a better knowledge of the roads.

Putting together the general attitude of the buyer, backed by the manufacturers it should be easy to disintermediate the dealerships. It may also give the manufacturer more control over model pricing for new and used vehicles and ensure consistent brand messaging.

Better Vehicles

“There are no such thing as bad cars, just bad car companies” – Ian Callum (JLR)

Better EVs is not just about the quality of the finish, rather overall performance – range for the most part. Improved battery technology is coming but some way off, for example nano-diamond batteries are at least three years away from prototype production, and even then, it will not be able to scale to the size needed for cars at first.

Supercapacitors are being explored to work alongside batteries. Unlike batteries that provide a steady discharge, a supercapacitor is much more explosive in their delivery. This may provide additional solution benefits but will not resolve the need for more efficient batteries. Despite the significant investment in battery technology however, the cell density of lithium-iron batteries is increasing at a steady rate and not as quickly as is needed. See chart adjacent from the Economist.

Adding more batteries increases weight and impacts performance. Adding more batteries also dramatically increases the environmental impact, at a time when batteries are supposed to be part of the solution rather than a growing part of another problem. Thus, the overall weight of the vehicle needs to be engineered to at least compensate for the net weight associated with electrification.

Improving vehicle performance has been a focus of power over weight and improving the ability of the vehicle to transfer the power to the road. A typical modern-day family vehicle will outperform all but the best sports cars of the generation before. In doing so cars have become stiffer, heavier, and less efficient (when taking into consideration gains in powertrain performance).

The Alpine A110 demonstrated how light weight vehicle design can be achieved and a smaller displacement engine can deliver an enjoyable drive. The Gordon Murray Automotive T50 weighs only 980 kg. By comparison the Porsche 911 current kerb-weight is 1785 kg.  The ever-expanding waistline of newer models must be stopped, and new technology added that improves the weight not just improves the customer in-cabin experience. Weight is also a multiplying factor. Bigger, heavier cars need stronger crumple zones, bigger brakes, and bigger engines. In the case of the future of automotive design less really will be more; and companies that achieve manufacturing a car with less will benefit more too. Less weight, less environmental impact.

Weight reduction is achieved in two ways that combine to deliver a third weight advantage. Vehicle design using modern approaches can deliver the structural performance needed but in modern and innovative ways. Taking the vehicle envelope as a whole and using new techniques allows for a lower weight design. Using lightweight materials that offer the same, or better, structural needs of a car can also reduce weight. Multiple composite materials can deliver significant weight savings and increased structural integrity.

Combining increased rigidity in the vehicle structure and reducing weight creates less demand on the powertrain. In the case of EVs this means less batteries to deliver the same range/performance – and reduced charging times. For traditional power trains this means smaller displacement engines to deliver the same performance.

The new TVR Griffith weighs 315 kg less than the comparable AMG GT. How is this possible? How can two comparative cars in terms of size and performance vary in weight by around a third of a tonne? The approach is not to use lighter traditional panels or less glass (as Porsche have done) rather it is to take a ground-up approach to designing and building a car.

Colin Chapman was a great believer in “simplify and add lightness”. Cars have traditional got bigger and heavier (1974 VW Golf = 780 kg. 2020 VW Golf = 1293 kg). In some small part regulations such as crash structures and safety devices have had an impact but, whatever the reason, we believe we have now reached a turning point in automotive design where less weight has become a key design component and new approaches are needed to deliver this.

Historically major change in any industry happens when there is a significant external impact. For the automotive industry we need to look back to 1973 and the oil crisis. According to NPR “fuel efficiency climbed from 13.5 miles per gallon to 27 miles per gallon”. Production by companies such as Chevrolet crashed from 2.5 million vehicles in 1973 to 823,000 in 1975 whilst in the USA, Honda trebled sales of its efficient small car, the Honda Civic. Failure to adapt has long-lasting results. In 2020 failure to adapt to the push for lighter, more efficient, greener vehicles and the next wave to push for greener production will challenge manufacturers. This time, perhaps, manufacturers are prepared. However, perhaps not all yet have an answer.

Conclusion

The typical weight of a Tesla battery pack is 500 kg. The VR38DETT Nissan engine for the Nissan GT-R weights 276 kg and Mercedes OM654 four-cylinder workhorse weighs only 168 kg. Weight distribution helps with EV car design, which is a positive, but it does not address the overall impact of the weight of batteries. Accepted there are other weight advantages (e.g. less fuel) but at two or three-fold, or more, there is a need to make dramatic weight savings when designing an EV.

New battery technologies will go some way to reducing the overall weight, but this is some way off and will require considerable additional development. Whilst this is a positive step it should not be the only approach to improving total performance through weight reduction.

Using better battery technology allied to greater weight efficiencies will significantly reduce the overall environmental impact of EVs. Lightness of design for the total product is critical in future automotive design rather than simply moving from one type of power source to another.

Changing materials will improve the possibility of greater recycling. But this will not be achieved where the manufacturer loses title to the product and the user (customer) has no commercial incentive to recycle. Ownership models, or perhaps contribution on return of used products, will change the focus on recycling and place it back with the manufacturer or retailer and provide the closed-loop solution required

Using natural materials and recycled materials will further improve the environmental impact and should be a key element in the future of automotive design. Moving to a net carbon neutral not a purely a balance-sheet carbon neutral is the current challenge. This will only be achieved if all the elements listed here are adopted and combine together to build a truly green automotive future.

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