Uncertainty stalks global car industry as it prepares to go electric
Brexit, threatened US tariffs and slowing Chinese market among potential hazards
Uncertainty stalked the stands at this year’s Geneva auto show. Global automakers are planning a $300 billion (€267 billion) investment in electric vehicle technology over the next five to 10 years.
Confidence is a core trait of the car trade. First impressions from last week’s Geneva motor show suggest an industry ready to embrace the greatest revolution since the first horseless carriage hit the road. Car executives, at Europe’s most important gathering of the automotive world, showcased their latest plug-in models and wacky prototypes promising an exciting eco-friendly future, assuring everyone who would listen that they had a well-mapped route to success.
The problem is that when lacking in substance, confidence gives way to its distant cousin: bluster. Away from the spectacle of the show floor, there was one overriding sense: uncertainty.
The confident speeches from the stands seemed to fly in the face of a reality that includes tumbling car sales in China (a market that was long supposed to prop up the overextended global car industry), the spectre of a tariff war between Europe, China and the United States, and the ever-looming risk of a hard Brexit.
Brexit is the most immediate concern for the European motor industry. The UK accounts for 2.4 million new car sales annually and is a major production base for several major car brands, which have invested billions in facilities there. Faced with the spectre of a hard Brexit or even further delays to a decision, concern is giving way to frustration at the failure of politicians to take account of the timelines the auto industry works under, where investment decisions have to be made at least three years in advance of a new model being driven off the production line.
Toyota has two factories in the UK, employing about 3,000 workers at its vehicle manufacturing plant in Burnaston and its engine production facility in Deeside in north Wales. Didier Leroy, chairman of Toyota’s European operations, warned a no-deal Brexit would make it “extremely complicated” to build new models at its British plants.
In an interview with The Irish Times, Johan Van Zyl, chief executive of Toyota Motors Europe, also said: “If anything happens between the EU and the UK that will have a negative impact on the competitiveness of the UK operations, it will put the future into doubt.
“And I’m not just talking about Toyota: for the entire motor industry, if the UK becomes uncompetitive, it will not be able to compete, it’s as simple as that. Whether or not you have free-trade agreements with the whole world, if you don’t have competitiveness then these agreements will not help, you cannot compete.”
The message is similar from BMW Group, which employs about 8,000 people directly in the UK, with an additional 14,000 in its 147-strong retailer network. The company’s Oxford plant, which produces 60 per cent of the 378,000 Minis it builds every year, operates on a just-in-time delivery system, with 150 trucks delivering parts each day to the plant. Pieter Nota, chief marketing officer and member of the board at the German premium car giant, said: “What we really need and what we want is an end to this period of uncertainty. We would call out to officials and politicians to end this current uncertainty because it’s bad for business.”
Brexit headaches for car makers are compounded by falling sales in China, the world’s largest car market, where passenger vehicle sales fell 4 per cent to 23 million last year, the first annual decline in almost three decades. China accounts for 30 per cent of global car sales, and foreign brands make up two-thirds of the market.
Then there is the threat from US president Donald Trump of a 25 per cent tariff on European-produced cars. The US currently imposes a 2.5 per cent tariff on imported passenger cars from the European Union. The EU imposes a 10 per cent tariff on imported US cars. Auto analysts Evercore ISI estimates the threatened new import tariff rate would see a €6.25 billion combined hit to the earnings before interest and tax of Germany’s big three car firms hit each year.
It’s against this backdrop that the auto industry has to make the leap from more than a century of combustion engines to electric battery power.
Global automakers are planning a $300 billion (€267 billion) investment in electric vehicle technology over the next five to 10 years, according to figures compiled by Reuters last month.
Understandably these costs are driving the car giants to form alliances and joint ventures. “The R&D investments needed to go into electrification are enormous. So it’s sensible to share it,” says Toyota Europe boss Van Zyl.
The timeline for the move to electric is increasingly being set by government policies adopted to cut carbon dioxide emissions. And the new limits being set by authorities have become far more stringent since the dieselgate scandal, where Volkswagen admitted to fitting cheat devices to its cars to deceive US emission tests. More than anything, this has damaged the motor industry’s reputation as a trusted partner in tackling harmful emissions.
In turn, it has led authorities, such as those at EU level, to demand greater transparency and a faster transition to zero emissions. One example of this is the new stricter emissions testing regime, known as WLTP, where cars are more stringently tested to ensure the official figures reflect real-life driving conditions.
Consumers will be better informed as a result, but it will also mean many new cars sold next year will come in at a higher official emissions figure.
In countries such as Ireland where the tax regime is based on official emissions figures, it means either price hikes or changes in the rates. Papers prepared for the Department of Finance before the last budget, released under Freedom of Information, indicate the Government is actively preparing to overhaul the tax regime to prevent major price rises on the back of the new WLTP ratings on cars. Proposals being considered include increasing the emissions limits for each tax band for new cars measured under the WLTP system.
According to Alan Nolan, director general of the Society of the Irish Motor Industry: “The EU made clear when introducing the new regime that it was not meant to push up prices for consumers. The Government also needs to take account of the fact that, if you increase the tax on new cars, you slow down the replacement of the older smokier cars with the cleaner ones, which is the exact opposite of what you want to do. You also slow down sales, which damages the overall tax take.”
The new testing regime is just a small step in the EU’s move to force car companies to clean up their acts. With several countries announcing outright bans on anything but fully electric cars from 2030, the EU has said that CO2 emissions from new cars will have to decrease 37.5 per cent by 2030 compared with 2021 levels and by 31 per cent for vans.
Under current rules, the average new car must not emit more than 95g/km by 2021. Given that average emissions in 2017 were 118.5g/km, in order to meet the CO2 emissions targets, that are calculated over the entire fleet, it will mean carmakers will have to sell a lot more electric vehicles to stay within the rules. Volkswagen chief executive Herbert Diess estimates the target would translate into a share for electric vehicles of more than 40 per cent of its expected total vehicle sales in 2030.
Why would someone who can make a 40 per cent return in the software industry invest in an industry where you do well to earn an 8 per cent return?" - Toyota's Johan Van Zyl
Toyota has focused its efforts on expanding sales of hybrid models – petrol engines supported by battery-powered electric motors. Addressing the new targets Didier Leroy said: “On the technical side the solutions may exist, but we need to do it in the appropriate way and a way that’s affordable to customers, and to ensure we can transfer the jobs to another type of technology.
“The move to electric needs to be convenient, affordable and realistic for the world.”
He argues that the price of electric cars – even with incentives – currently puts many of them out of reach of many buyers, while the infrastructure is simply not in place in most parts of Europe, never mind the developing world.
“It doesn’t mean there is no solution: it is about making it affordable to the customer. There are plenty of cases in the world where politicians suddenly decided something and realised a little bit later that the customer is not ready for the change.”
If customers aren’t quite ready for the change to electric, it remains to be seen how they will feel about a far greater revolution that’s supposedly on the way: autonomous, or self-driving, cars.
The coming of the “robot car” has been heralded for the past decade. Billions have already been invested, and the software basis for the systems behind autonomous driving – not to mention the massive social and environmental impact this innovation would have – has lured many of the tech giants and multiple start-ups into the automotive arena.
Despite this, and promises that we will be able to snooze in the driver’s seat while our car criss-crosses the country, carmakers are being increasingly more cautious about handing over control to the microchips.
Carlos Tavares, the head of PSA Groupe and its multitude of carmaking brands – Peugeot, Citroën, DS, Opel and Vauxhall – recently said that fully autonomous cars may never make a mass-market breakthrough, because the technology will be too expensive for retail buyers.
His sentiments seem to echo those of Ford, which has apparently taken a step back from committing to full vehicle autonomy.
The sheer difficulty of developing those robotic driving systems was seemingly underlined last month by Apple. The American tech giant had been working on a much-publicised-and-or-rumoured autonomous car project codenamed Titan. It had been touted as a major disruptor into the automotive world. Apple has confirmed that, far from pressing ahead, it is planning to lay off 190 people associated with the project.
While Apple hasn’t entirely abandoned the idea, it looks now more likely that it will “do an IBM” and instead of designing a car, will create plug-and-play autonomous and automated driving tech systems to be used by existing car companies.
Fears that the tech giants, such as Apple, were preparing to launch their own vehicles seem to have dissipated for now.
“Why would someone who can make a 40 per cent return in the software industry invest in an industry where you do well to earn an 8 per cent return?” asks Toyota’s Van Zyl. However, he still regards the tech giants as rivals in today’s motoring market. And that’s because the role of the car giants is changing.
“Customers want to take their digital lives into the vehicles. In China, more than 60 per cent of customers say that, if a competitor brand offers better connectivity capabilities, they would switch brand,” says BMW’s marketing boss Pieter Nota. That’s why, he says, BMW has focused so much investment in connectivity and software systems.
Asked to describe BMW in 20 years’ time, Nota is clear: “It will be a tech company, it will be a software company, along with hardware – still offering physical products like cars – but also mobility services.”
That’s unlikely to be an easy transition for many. Even within the tech industry there are many case studies of IT hardware brands, once household names, that failed to make the transition to the software sector.
Longer term, only companies with a certain financial strength like ourselves, having invested in technology in the past, will be able to be competitive in the future"
“Longer term, only companies with a certain financial strength like ourselves, having invested in technology in the past, will be able to be competitive in the future,” says Nota. Some would suggest that even financial strength is no guarantee.
Faced with the current global economic turmoil, a forced race to electric power and the costly ambitions to create self-driving vehicles, all the while trying to reinvent themselves as software and service providers, it’s hardly surprising that behind the bluster and confident predictions, the current crop of car giants are shrouded in uncertainty.