DRIVING FORCE
Silicon Valley interlopers are directing the pace of change in automaking.
All booms end, but every boom ends differently.
The current slowdown in the global auto industry after a seven-year boom is no mere downturn in sales. One of the defining industries of the past century is undergoing a wrenching reinvention.
Automakers are now in a race to perfect the electric vehicles (EVs) and autonomous, or driverless, vehicles (AVs) that will be commonplace on roads within a decade.
That requires radical change and speed in new-product development, which are not auto industry strengths.
But the pace of change in automaking is now directed by Silicon Valley interlopers including EV pioneer Tesla Inc.; Google Inc. sister company Waymo, the technological leader in AVs; and Apple Inc. with its secretive AV project.
Tesla’s vehicle output is less than 3.0 per cent that of Ford Motor Co. And the 15-year-old Tesla, founded by tech guru Elon Musk, has never turned an annual profit.
But investors see more long-term potential in Tesla than in some of the incumbent automakers.
The industry was stunned in April when Tesla’s stock-market value eclipsed that of the 113-year-old Ford and of General Motors Co. as well.
“I’ve never seen a time in the industry where technology and outside competitors are converging to drive real change,” William Clay (Bill) Ford Jr., executive chairman of Ford, told Bloomberg this week.
All three elements of the transformation — radical new products, speed in decision-making, and hightech prowess — converged at Ford this week with the abrupt retirement of CEO Mark Fields, a 28-year veteran of the company.
Ford profits were solid during Fields’s stewardship. But his threeyear CEO tenure was cut short by the stock market’s embrace of EVs, AVs and other futuristic products. Ford shares lost about 35 per cent of their value during Fields’s tenure.
Bill Ford said this week that the stock market sensed “drift” at Ford that does indeed trail in EVs. The company was late in matching GM’s long-range electric car, the Chevrolet Bolt. And only recently did Ford publicly commit $4.5 billion (U.S.) to an electric-vehicle program.
Bill Ford’s replacement for Fields is an industry outsider, Bill Hackett, whose unorthodox resume for leading an automaker includes turnaround CEO at office-furniture maker Steelcase Inc. and heading the athletics department at the University of Michigan.
Last year, Ford asked Hackett to run its new Smart Mobility innovation workshop. Mobility has little to show for itself so far. But Hackett made a tech convert of Bill Ford during their tours together of Silicon Valley startups.
To strengthen its prowess in mobile connectivity, Ford in March hired about 400 engineers from BlackBerry, based in Waterloo, Ont. At that time, Ford also announced a $500-million (Canadian) investment in a new Ottawa R&D centre to develop applications enabling its vehicles to boast the most thorough Internet connectivity in the industry.
Hackett’s more immediate concern is an industry-wide downturn in revenues at precisely the time the automakers need to spend heavily on winning the race to the get the industry’s best EVs and AVs onto the market.
To be relevant in 21st-century automaking, each of the industry’s largest traditional firms are investing unprecedented sums in expanded R&D budgets, retrofitted factories, proficiency in automation and artificial intelligence and acquisitions of firms with specialized expertise not available in-house.
The economy is not co-operating with that goal of getting to market fastest with the most appealing and industry-transforming products.
April marked the fourth consecutive month of declining North American sales, a first since the early Great Recession year of 2009. In April, average U.S. sales of the five biggest automakers by volume fell 6.3 per cent. Some experts forecast a troubling 13-per-cent drop in industry unit sales by 2019, from the peak year 2016.
A legacy of the seven-year boom is a market glutted with late-model used vehicles, which is cutting into the industry’s leasing revenues. And the easy credit of the boom years is ending, as interest rates on car loans rise and lenders are tightening loan standards for the first time in six years.
The slowdown is saddling automakers with overcapacity. GM, Ford and Fiat Chrysler Automobiles NV have each announced layoffs. “We are very focused on acting like we are in a downturn,” Chuck Stevens, GM’s chief financial officer, said in a conference call earlier this month.
The Canadian vehicle sector appears to be in for a “soft landing.” Industry volume is forecast to run at about 1.9 million units per year for several years. U.S. buyer reliance on subprime auto loans is more pronounced than in Canada, where tightened loan standards are less of a factor.
Many potential vehicle buyers are waiting on the sidelines for the latest new-and-improved EVs, or holding off until EVs come down in price.
There’s also no central co-ordinating authority to build a recharging infrastructure for EVs. Tens of thousands of conventional filling stations need to be retrofitted. And house- hold devices for recharging EVs must be installed. There’s not yet an agreed-upon safety standard for those devices.
Investors betting heavily on the leaders in EVs and AVs assume that a recharging infrastructure will just spring to life. They may be in for a long wait, as thousands of jurisdictions worldwide get around to developing permit regimes.
As long as the recharging infrastructure doesn’t exist, the market will be limited to intrepid first adopters, and perhaps fleet operators, who aren’t put off by the current scarcity of recharging sources.
For all that, the revolution in automaking promises to be an epic in the annals of industry, given the vast size of the vehicle sector and its voracious appetite for technological breakthroughs.
In the supply chain, which makes up most of the industry’s employment and revenues, upstart firms will emerge to devise safer and longer-life batteries for EVs; hypersophisticated navigational systems for AVs; ultra-lightweight components to increase fuel efficiency; and advanced electronics to enable connectivity between vehicles, and between vehicles and other Internet-connected devices.
As always with automakers, culture issues are paramount. At Ford, Fields encouraged a separation in the ranks between employees working on futuristic projects and those nurturing existing products.
Bill Ford ultimately saw that dichotomy as divisive, saying this week he didn’t want the firm’s 200,000 employees feeling that they worked in either “cool” or uncool parts of the firm.
But that division prevails in most enterprises, at least those determined to shape their own future while keeping the elements of current prosperity in good repair.
As futuristic ventures absorb ever more managerial attention and capital in global automaking, maintaining that balance will be one of the toughest challenges at Ford and its peers. dolive@thestar.ca