The automotive industry is slowly recovering after a terrible year but problems remain. Green cars might be the salvation, creating more opportunities for advanced manufacturers. The problem though is finding consumers. Governments, keen to reduce emissions, will need to assist.
Certainly, all the electric cars were out on display at this year’s Paris motor show. Standout players included Renault, the Peugot 3008 Hybrid4 scheduled to hit the market next year, the Citroen Survolt, the Opel GTC Paris, BMW 6-series concept, Mercedes Benz CLS, Nissan Duke, Nissan Townpod and Fiat Twinair 500. As Mark Vaughn wrote in automweek.com: “Big manufacturers showed models with production possibilities while wacky little companies you’ve never heard of promised to revolutionise transportation with EVs as eclectic and diverse as human imagination.”
While the automakers were wowing each other, and the motor press, with their technology, the big unknown remains. Will consumers take to the new models at those prices? Are they prepared to sacrifice power for efficiency?
In December last year, the boss of Fiat, Sergio Marchionne, predicted that the economic crisis would force the world’s car industry to change its broken business model and move away from its endemic overcapacity. He forecast massive consolidation, predicting that by the end of 2010, there would only be six high-volume carmakers left in the world. As it turned out, he was too pessimistic.
What he wasn’t expecting was the way Governments around the world bankrolled the ailing automotive industry with generous subsidies. General Motors (supported with over $50 billion of taxpayers’ money) shed some brands and factories and has since filed an initial share offering that will mark the return of what was once the world’s largest automaker to public markets a year after it was bailed out by the government. Similarly, GM’s perennially lossmaking former European arm, Opel/Vauxhall was given a €4.5 billion ($6.5 billion) sweetener from the German government and dispatched into the arms of Magna, a Canadian auto-parts company, and Russia’s Sberbank.
The fundamental problem in the automotive industry is its chronic over capacity and green cars might be the answer. It is not surprising to see governments now lavishing the development of green cars with subsidies. It’s being done to save the automotive industry from itself.
The overcapacity is connected to the growing demand smaller and more fuel-efficient cars. There are several reasons for this. The first is fuel costs. With International Energy Agency chief economist Faith Birol warning that the output of conventional oil will peak in 2020 if demand continues and with demand from China and India turning global energy markets on their heads and expected account for 70 per cent of new oil demand between now and 2030, one can bet that fuel prices will only be heading one way. The second is demography. Around the world, we have an ageing population. According to the Australian Bureau of Statistics, the proportion of people aged 85 years and over is projected to increase from 1.6 per cent in 2007 to between as much as 7.3 per cent. At the same time, there will be a reduction in the number of 15-64 year olds will decline from 67 per cent to about 58 per cent.
But fertility rates are low everywhere. Even China, which is about one-fifth of the world’s population, is likely by 2020 to become the first country that got old before it got rich. This creates a problem for automakers: older people tend not to buy large, powerful cars. And finally, demand for smaller cars is growing with governments around the world trying to meet their carbon-reduction targets, tightening emissions standards and penalising vehicles with big engines.
But automakers have tended to have a problem with small cars. Put simply, they have been less profitable. Many carmakers have lost money on their small cars and to survive, they have plugged the gap with profits from larger models. With the mix shifting towards smaller models, carmakers have needed to devote more research spending to developing greener vehicles. This in turn has hit profits.
The challenge for automakers is to get smaller while finding a way to make profits building small green cars. This can only be done with government assistance, and governments have shown they are only to keen to keep the industry going.
But then for many, it’s critical for capturing markets. For example, Toyota, desperate to recoup its market share, has just announced plans to introduce more hybrids, plug-in hybrids, electric cars and fuel-cell vehicles to boost sales in America.
According to Deloitte, almost US$44 billion ($A45.2 billion) in economic stimulus funds and other incentives are being directed at the development of alternative fuel and advance technology vehicles. The analysis reveals that economic stimulus packages and other government programs have now been unleashed in at least 13 markets worldwide. Deloitte says the United States is leading in terms of economic stimulus and other government incentives with an estimate of US$27.4 billion directed towards alternative fuel technologies. Deloitte analysis reveals that over the last 18 months, programs in least 16 countries and regions have encouraged consumers to replace old vehicles with new ones with scrappage bonus or ‘cash-for-clunkers’ type incentives. These include: Austria, Australia, Central and Eastern Europe, China, France, Germany, Ireland, Italy, Japan, Mexico, Netherlands, Portugal, South Korea, Southeast Asia, Spain, United Kingdom, and the United States.’
Countries like the United States, Australia, China, and France are channeling investments towards R&D efforts. The United States Advanced Technology Vehicles Manufacturing Loan Program totaling US$25 billion, for example, offers grants and loans to support the local development of advanced technology vehicles and associated components.
There is a similar level of support in Australia. In December 2008, the Rudd government unveiled its expanded $1.3 billion Green Car Innovation Fund designed to provide Australian car companies with government funding to design and sell environmentally friendly built cars. The Innovation Fund has the government matching industry investment in green cars on a dollar to three-dollar basis over a ten-year period that started from 2009.
Deloitte Automotive partner, Damon Cantwell said: “In Australia, from a vehicle manufacturer viewpoint, the focus on changing the model mix produced locally will need to continue, as we are predicting alternatively-powered vehicles representing one third of new car sales in developed markets by 2020.
“From a component manufacturer perspective, the regional appetite for technology and design services will also present significant opportunities for progressive Australian companies over the medium term.”
Deutsche Bank last year calculated that global sales of electric, hybrid, and other alternative fuel and advance technology vehicles stood at one million. According to global marketing service information firm, JD Power and Associates, sales of hybrid-electric vehicles could reach about 1.3 percent of an estimated 67 million light vehicle sales.
Still, there are questions about whether automakers are prepared to go down this route. As part of the May budget, the Labor Government said it would reduce Green Car Innovation Fund spending by $200 million over three years from 2011 to 2014. That would cut it from $1.3 billion over the full 10 years from 2009 to 2019, to about $1.1 billion. This change came after fewer than expected applications for green funding.
It has been reported that Holden had applied for about $149 million in green-car funding, mainly for development of the local Cruze with its efficient 1.4-litre turbocharged engine and made at Holden’s Elizabeth plant in South Australia. It had also been reported that Ford was the second biggest applicant, with about $100 million in grants, mainly to engineer the imported 2.0-litre turbocharged EcoBoost four-cylinder engine into the rear-drive Falcon for launch in 2011, along with a turbo-diesel Territory and a liquid-injected LPG six-cylinder engine for Falcon.
Toyota received about $35 million for the Camry Hybrid that went into local production at Altona in Victoria late last year before a local launch in mid-February. But the customers were not coming. The hybrid Camry has attracted less than 3000 customers in Australia after five months on sale, including just a handful of private buyers – well down on the Japanese brand’s original forecast of a 40 per cent private buyer take-up. The hybrid Camry, which had been hailed as a new era in Australian manufacturing, was expected to attract 10,000 buyers in 2010.
Toyota’s aggressive marketing campaign failed to stimulate consumer demand. The Australian reported business fleets had bought just 506 hybrid Camrys while tax and rental operations accounted for another 333. Toyota had expected 3000 private buyers for the car which cost $36,990. There were only 657.
According to the analysis, the biggest buyers were governments, mostly state governments, which had 755. The Victorian government had committed itself to buying 2000 hybrid Camrys before the price was announced.
Sales of the Toyota Prius were also down 16% at the end of June.
And therein is the problem with green cars. Is the consumer demand sufficient to offset the costs and generate money for automotive companies? The technology behind the Hybrid Camry and Prius has failed to grab consumers, despite vehicle demand this year rebounding 17%. Many would be care buyers have instead turned to diesels.
Similarly, a survey by global market research firm Synovate last year which questioned more than 13,500 people across 18 markets, including the United States, found that six out of 10 people said they would prefer to buy a green car. But the results were patchy when you drill down into the detail. People were asked which they would prefer to buy: a “dream” or a green car. By far, the country with the most enthusiasm for green cars was Germany with 58% choosing a green car. But in the United States, 35% said they would buy a dream car and only 23% chose green, while in South Africa, over half of all respondents said they would sooner buy a dream car.
Add to that a University of Minnesota study which showed that the prime motivator for people buying a Toyota Prius was that it “makes a statement about me.” According to the study, it had more to do with self image and saving the planet.
At the same time, however, there are people who would buy a green car to save the environment. These pieces of data suggest the jury is still out on whether environmentally friendly will take the market by storm as some have predicted.
Certainly, much of it seems to come down to price. Consumer research by Roy Morgan shows that most potential buyers baulk at the starting price. Before there can be a groundswell towards embracing green cars, there would have to be an escalation in fuel prices.
For advanced manufacturers, it’s an opportunity to develop technologies that would make the cars more accessible and see widespread adoption, to produce them faster and at lower cost. This is why the Advanced Manufacturing Co-operative Research Centre has targeted renewable energy projects as a key priority.
Creating cars of the future is the major challenge for advanced manufacturing. It will be the key to revitalizing the automotive sector, opening a new market and producing vehicles that are in demand and profitable.
