Road ahead twisty for au­tomak­ers

Re­port notes shift to elec­tric, driver­less tech, used-car glut

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - RUSS MITCHELL

A trans­for­ma­tion of the au­to­mo­bile in­dus­try will gen­er­ate bil­lions to tril­lions of dol­lars for com­pa­nies and in­vestors. But for tra­di­tional au­tomak­ers, the road ahead will be bumpy, risky and ex­pen­sive.

That’s the as­sess­ment of con­sult­ing firm AlixPart­ners, which re­leased an ex­ten­sive re­port this month that uses mar­ket re­search and con­sumer sur­veys to lay out some of the ma­jor chal­lenges fac­ing au­tomak­ers — with some in­ter­est­ing find­ings about Tesla.

The re­port in­cludes a near-term in­dus­try out­look with a darker forecast for U.S. auto sales than most other prog­nos­ti­ca­tors have put forth.

Record-high ve­hi­cle sales in 2016 will dive 13 per­cent from 2017 through 2019, the firm pre­dicted — to 15.2 mil­lion ve­hi­cles from 17.5 mil­lion — in what the firm calls a cycli­cal down­turn made worse by a “used car time bomb” as hun­dreds of thou­sands of ve­hi­cles come off lease all at once.

“That in­creased used car sup­ply re­duces used car prices and pulls sales from new to used,” said Mark Wake­field, who heads the au­to­mo­tive prac­tice at AlixPart­ners. About a third of ve­hi­cles are leased, not sold, with a typ­i­cal lease pe­riod of three years.

The down­turn is ill-timed, the re­port said, be­cause im­pend­ing in­dus­try up­heaval is forc­ing ma­jor new cap­i­tal com­mit­ments, un­fa­mil­iar new part­ner­ships and fun-

● da­men­tal shifts in strat­egy for a fu­ture of driver­less elec­tri­fied cars that may be shared and not owned — all this while try­ing to run a tra­di­tional in­ter­nal com­bus­tion car busi­ness as the world changes.

“They’re mov­ing to­ward some­thing that doesn’t con­nect with 99.9 per­cent of the busi­ness that’s gen­er­at­ing good cash flow now,” Wake­field said.

De­cid­ing what to in­vest in while main­tain­ing enough flex­i­bil­ity to shift with un­pre­dictable turns in tech­nol­ogy and the mar­ket­place will be a real trick, he said.

For ex­am­ple, Wake­field said, “the flat­ten­ing out of car shar­ing is a great ex­am­ple of just how un­cer­tain the world is.”

A few years ago, car-shar­ing com­pa­nies such as Zip­car, Car2go, En­ter­prise CarShare and oth­ers, which let users rent cars hours at a time, looked set to take off, with great ex­pan­sion plans and high brand aware­ness. But that busi­ness peaked in 2014, the re­port said, and brand aware­ness is fad­ing fast. A 2013 sur­vey by the firm in 10 ma­jor cities showed just

4 per­cent of re­spon­dents had never heard of any of the listed car-shar­ing com­pa­nies; in this year’s sur­vey, 21 per­cent had never heard of Zip­car, Car2go or any of the oth­ers.

The rea­son: Uber and Lyft. “[Car shar­ing] got side­lined as ride shar­ing be­came a thing,” he said. “Five years ago it looked like the next great thing. Now it doesn’t look so crit­i­cal.”

Elec­tric cars in­ject even more un­cer­tainty. Sales are grow­ing, but the base is tiny in the U.S. De­spite rich fed­eral and state in­cen­tives, they still rep­re­sent less than 1 per­cent of the na­tion’s au­to­mo­bile mar­ket.

Yet they’re tak­ing off fast in China and Europe. Last year, the re­port said, about 350,000 plug-in cars were sold in China, up 84 per­cent from the pre­vi­ous year and al­most twice as many as in the U.S. And while for­eign au­tomak­ers ac­count for the ma­jor­ity of to­tal auto sales in China, the re­port said 96 per­cent of those elec­tric cars are made by Chi­nese com­pa­nies.

“The Chi­nese gov­ern­ment is say­ing ‘This is our chance to leapfrog the in­dus­try and take a com­mand­ing po­si­tion in a grow­ing space,’” Wake­field said.

That ap­plies to the lithi­u­mion bat­ter­ies that power elec­tric cars as well. China’s bat­tery man­u­fac­tur­ing ca­pac­ity is grow­ing twice as fast as any other coun­try’s, the re­port said, never mind Tesla’s $5 bil­lion Ne­vada “Gi­gafac­tory” bat­tery plant.

In the mean­time, the in­dus­try faces the prospect of driver­less cars. Every ma­jor auto com­pany has al­ready made sig­nif­i­cant in­vest­ments in the field, such as Ford’s $1 bil­lion pur­chase of Argo AI and GM’s ac­qui­si­tion of Cruise Au­to­ma­tion, which are aimed at try­ing to avoid get­ting rolled over by the likes of Google, Ap­ple and China’s Baidu.

The fi­nan­cial risk should ease in com­ing years, es­pe­cially as an ex­pen­sive laser-based ob­ject-sens­ing tech­nol­ogy comes down in price. Ac­cord­ing to the re­port, driver­less sys­tem costs are pre­dicted to de­cline 78 per­cent by 2025, to $3,250 from $15,000.

But tra­di­tional au­tomak­ers face a ma­jor pub­lic re­la­tions chal­lenge on driver­less tech­nol­ogy. Sil­i­con Val­ley dwarfs tra­di­tional au­tomak­ers in con­sumer aware­ness of driver­less tech­nol­ogy, sur­vey statis­tics show. About 55 per­cent

of re­spon­dents rec­og­nize Tesla and 20 per­cent Google as com­pa­nies de­vel­op­ing the tech­nol­ogy, but tra­di­tional au­tomak­ers to­gether reg­is­tered 12 per­cent. Mean­while, 41 per­cent said they’d trust Sil­i­con Val­ley au­ton­o­mous-ve­hi­cle pro­gram­mers the most, while just 17 per­cent picked Detroit au­tomak­ers.

Aware­ness of Tesla more than dou­bled af­ter a 2016 crash in which a driver us­ing the com­pany’s Au­topi­lot sys­tem was killed af­ter his Tesla Model S failed to “see” a big rig and drove be­neath the trailer. But “it didn’t move the nee­dle on trust,” Wake­field said. On sur­veys be­fore and af­ter the crash, the Sil­i­con Val­ley trust num­ber re­mained at 41 per­cent.

And what­ever the prospects for Tesla’s new Model 3, the com­pany re­mains far ahead in what’s known as over-the-air soft­ware up­dates that fix soft­ware prob­lems on the cars and add new fea­tures when­ever they’re ready, with­out a trip to the dealer.

Tesla launched the over­the-air sys­tem in 2012 and, ac­cord­ing to the re­port, “no other au­tomaker has moved to match the sys­tem.”

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