As the sector transforms itself, will the auto industry keep its soul? Article by Paul Gao, Russell Hensley, and Andreas Zielke, McKinsey & Company.
Over the past 50 years, automobiles have continued to be our “freedom machines”, a means of both transportation and personal expression. Even so, as the industry recognised, the automobile is but one element of a mobility system – an element governed by extensive regulations, constrained by a need for fuel, and dependent on a network of roadways and parking spaces. Automobiles are also a force for change. Over the past half century, their very success has generated pollution and congestion while straining the supply of global resources. The rapid surge of emerging markets has heightened these dynamics.
Even more transformative change is on the way. Global competitive intensity will rise as Chinese players expand from their vast domestic market. Governments are examining the entire automotive value chain and beyond with an eye toward addressing externalities. Technological advances – including interactive safety systems, vehicle connectivity, and, ultimately, self-driving cars – will change the game. The automobile, mechanical to its soul, will need to compete in a digital world, and that will demand new expertise and attract new competitors from outside the industry. As value chains shift and data eclipses horsepower, the industry’s basic business model could be transformed. Indeed, the very concept of cars as autonomous freedom machines may shift markedly over the next 50 years. As mobility systems gain prominence, and vehicles are programmed to drive themselves, can the soul of the car endure? This is just one of the difficult questions that confront the automotive industry as a result of the forces described in this article.
The China Factor
Fifty years of innovations in horsepower, safety, and rider amenities have helped automobile sales grow by an average annual rate of three percent since 1964. This is roughly double the rate of global population growth over the same period and makes for a planet with over one billion vehicles on its roads. For the past 20 years, though, sales in North America, Europe, and Japan have been relatively flat. Growth has come from emerging markets – much of it in China, which over the past decade has seen auto sales almost triple, from slightly less than 8.5 million cars and trucks sold in 2004 to, estimates suggest, about 25 million in 2014. IHS Automotive predicts that more than 30 million vehicles a year will be sold in China by 2020, up from nearly 22 million in 2013.
For decades, Japanese, North American, and European OEMs formed a triad that, at its height, produced an overwhelming majority of the world’s automobiles. The growth of Chinese players is changing the equation – and things are moving fast. Ten years ago, only one Chinese OEM, Shanghai Automotive Industry Corporation, made the Fortune Global 500. The 2014 list has six Chinese automakers. Given surging local demand, the Chinese may just be getting started.
Regulating From ‘Well To Wheels’
Governments have been driving automotive development for decades. Initially, they focused on safety, particularly passive safety. The process started with seat belts and padded dashboards and moved on to airbags, automotive “black boxes,” and rigorous structural standards for crash-worthiness, as well as requirements for emissions and fuel economy.
More recently, the automobile’s success has strained infrastructure and the environment, especially as urbanisation has accelerated. Brown haze, gridlock, and a shortage of parking now affect many urban areas in China, as they do in other cities around the world. Municipalities have begun to push back: Mexico City’s Hoy No Circula (“no-drive days”) programme uses the license-plate numbers of vehicles to ration the number of days when they may be used, and dozens of cities across Europe have already established low-emission zones to restrict vehicles with internal-combustion engines.
China too is acting. Influenced by its dependence on foreign oil and by urban-pollution concerns, the government has indicated that it favours electric vehicles, even though burning domestic coal to power them can leave a larger carbon footprint. In Beijing, a driver wishing to purchase a vehicle with an internal-combustion engine must first enter a lottery and can wait two years before receiving a license plate. Licenses are much easier to get for people who buy state-approved electric vehicles.
Regulation would also create new opportunities beyond traditional industry competencies. For example, some automakers are investigating potential plays across the value chain – such as developing alternative fuels or investing in wind farms to generate power for electric vehicles – to offset the emissions created by the vehicles they sell.
In any event, the automotive industry should expect to remain under regulatory scrutiny, and future emissions standards will probably require OEMs to adopt some form of electrified vehicle. Indeed, we believe that regulatory pressures, technology advances, and the preferences of many consumers make the end of the internal-combustion engine’s dominance more a matter of “when” than of “if”. The interplay of those forces will ultimately determine whether range-extended electric vehicles, battery electric vehicles, or fuel-cell electric vehicles prevail.
Digital Disruption
The car of the future will be connected – able not only to monitor, in real time, its own working parts and the safety of conditions around it but also to communicate with other vehicles and with an increasingly intelligent roadway infrastructure. These features will be must-haves for all cars, which will become less like metal boxes and more like integrators of multiple technologies, productive data centres – and, ultimately, components of a larger mobility network. As every vehicle becomes a source for receiving and transmitting bits of information over millions of iterations, safety and efficiency should improve and automakers should be in a position to capture valuable data. Electronic innovations have accounted for the overwhelming majority of advances in modern vehicles. Today’s average high-end car has roughly seven times more code than a Boeing 787.
Digital technology augurs change for the industry’s economic model. Over the past decades, automakers have poured their cost savings into mechanical, performance-oriented features, such as horsepower and gadgetry, that allow for higher returns. While it’s unlikely that regulatory and competitive pressures will abate, the shift from mechanical to solid-state systems will create new opportunities to improve the automakers’ economics. The ability to analyse real-time road data should improve the efficacy of sales and marketing. Digital design and manufacturing can raise productivity in a dramatic way: big data simulations and virtual modelling can lower development costs and speed up time to market. That should resonate with customers conditioned to the innovation clock speed of consumer electronics, such as smartphones.
Common online platforms can connect supply and demand globally to increase the efficiency of players across the supply chain. Embedded data sensors should enable more precise monitoring of the performance of vehicles and components, suggesting new opportunities for lean-manufacturing techniques to eliminate anything customers don’t value and dovetailing with the digitisation of operations to boost productivity, including the productivity of suppliers, in unexpected ways. As automobiles become more digitally enabled, expect connected services to flourish. When the demands of driving are lifted, even the interiors of vehicles may give automakers opportunities to generate revenue from the occupants’ connectivity and car time.
Autonomous Vehicles And The Soul Of The Car
Currently, human error contributes to about 90 percent of all accidents, but autonomous vehicles programmed not to crash are on the horizon. To be sure, some technological issues remain, emissions issues will linger, and regulators are sure to have a say. Furthermore, combining autonomous and non-autonomous vehicles in a single traffic mix will be a significant challenge. The most difficult time is likely to be the transition period, while both kinds of cars learn to share the road before self-driving ones predominate. The technology, though, is no longer science fiction.
The possible benefits, by contrast, read like fantasy. If we imagine cars programmed to avoid a crash – indeed, programmed never to crash – we envision radical change. Passengers, responsible only for choosing the destination, would have the freedom to do what they please in a vehicle. Disabled, elderly, and visually impaired people would enjoy much greater mobility. Throughput on roads and highways would be continually optimised, easing congestion and shortening commuting times.
Freed from safety considerations such as crumple zones, bumpers, and air bags, OEMs could significantly simplify the production of cars, which would become considerably lighter and therefore less expensive to buy and run. Automobiles could also last longer as collisions stop happening and built-in sensors facilitate the creation of parts on demand.
But what about the soul of the car: its ability to provide autonomy and a sense of self-directed freedom? Google’s prototype autonomous vehicle has no steering wheel, brake pedal, or accelerator. The vision of a connected car, in fact, challenges even the most essential concepts of personal car ownership and control. When a rider need only speak a destination, what becomes of the driving experience—indeed, why even purchase a car at all? Manufacturers may continue to refine the feel of the ride and to enhance cabin infotainment. Still, there’s probably a limit to how “special” a cabin can be or even to how special consumers would want it to be.
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