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Next to the housing sector and finance, the automotive industry is hit hardest by the current global recession. Now even Toyota - the world’s largest and next to Porsche, the world’s most profitable car maker until last year - seeks a loan from a Japanese state-owned bank, though Toyota executives are maintaining that it were no “bailout”. While this crisis may be life-threatening for some car makers - most notably GM and Chrysler - others like Toyota, BMW, Mitsubishi Motors and Daimler are certainly much better off and basically need to sit the crisis out, waiting to see what will happen. However, business will never again be as usual for the auto industry.

The auto markets in most industrialized nations are saturated (the number of cars per household is higher than ever!) and people can simply reduce the pace with which they’re replacing their old cars. That’s exactly what’s happening now. The average age of cars is increasing in the United States, in Europe and in Japan. Partly because of the improved quality of the vehicles and the increased durability of parts, but mainly because of last year’s record gas prices and the economic uncertainty these days. Nobody who worries about keeping his job would buy a car on credit. Consequently, car sales dropped by double digits and major car makers are generating sky-high losses.

Unlike in previous downturns, this time it won’t be sufficient to look for ways of how to bridge today’s demand gap. The auto industry is about to change significantly. Certainly, car sales will recover. It’s not a question of if but when. Toyota’s next president Akio Toyoda  has already said that if Americans continued to replace their cars at the same pace they’re doing now, they would have to drive their cars for 25 years which is very unlikely. Nevertheless, car makers will be forced to turn to other sources of revenue.

The cars we’ll be driving in 10 years will be smaller, more efficient with fewer or zero CO2 emissions, yet with an attractive design. I predict that at least half of the cars that’ll go on sale in 10 years will be hybrids or all-electric cars. Thus, car makers will be required to make sizable investments even though they can’t expect to earn much money with the newly-developed cars anytime soon. They won’t be able to pass on all the extra costs to consumers in the beginning. In order to speed up the electrification of personal transportation, governments are likely to create incentives such as tax reductions to encourage car companies to make the bold steps necessary and develop new concepts and introduce them to the market on a grand scale. The more affordable the first electric cars are, the more will be sold and the sooner production costs will come down.

The shift away from combustion engines is just one aspect of the fundamental changes going on in the auto industry. Another important factor is that our habits are changing rapidly. While younger people are generally more willing to use alternatives like public transport, bikes, etc., middle-class people (not to mention those folks who simply can’t afford purchasing a new fully-equipped car) are realizing that owning a car is not always necessary in metropolitan areas. Especially in big cities like Tokyo - from where I’ll be reporting in June!!! - cars are pretty unhandy and expensive. Furthermore, the enormous traffic congestion is annoying and translates into a loss of time and money. In urban areas, we’ll see many smart, small vehicles (e.g. the Toyota IQ - I recommend you to watch the embedded commercial) and an increasing number of them will be electric. Plug-in electric cars with  limited driving range are perfectly suitable for the daily commute or for tours around suburbia. For the occasional road trip, a rental car will probably be the perfect solution while those having a second car don’t have to worry about this anyway.

Inevitably, car makers’ earnings from selling cars will decrease steadily. To address this, auto companies will offer flexible, intelligent personal mobility services like car sharing and uncomplicated car rental services. Daimler (producing trucks and Mercedes-Benz luxury vehicles) is testing “car2go” which allows subscribers to spontaneously rent the microcar “Smart” for €0.19 a minute. Customers can drive the car as long as they like and leave it wherever they want in the region where the pilot project is carried out. Once the system is established, certain spots like train stations will probably have reserved parking spots. Subscribers will also be able to reserve a car online.

If we’re honest, it’s true for most of us that our cars spend most of their lifetime parked. This is even true for commuters. On the day, their cars are sitting most of the time in the parking lot in front of the office building or in traffic jams. At night, they’re being left in garages or shadowy sidestreets. What an enormous waste of money!!

As you can see, the auto industry is on the verge of a comprehensive transition. Consolidation, efficiency, an increased awareness for sustainablity and the environment, rising energy prices and our changing habits are all factors contributing to this development. While we’re about to see the electrification of the car in industrialized countries, car makers will have to meet other requirements in developing countries. But more on this tomorrow. The bottom line is that all car makers will have to adapt their business model to maintain their profitability and respond to the challenges of the 21st century.

Continue reading:

Auto Industry in Transition II

Auto industry in transition III

This entry was posted on Sunday, March 8th, 2009 at 3:38 PM and is filed under Electric Cars & Auto Industry. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.