The US auto industry has been booming the last couple of years — May 2015 was the best May the US industry has ever had. Low gasoline prices, favorable interest rates and lease options, and longer lease terms have been luring droves of consumers to US showrooms. But is the party about to end? The industry is notoriously cyclical, but unprecedented shifts in consumer attitudes and technology could present industry challenges that make simple cyclicality seem like a cakewalk.
The global automotive industry is about to enter a period of lower market growth, according to a June 2015 report by AlixPartners — a consultancy that helped with the bankruptcy reorganization of GM. The report suggests over the next five years annual global light-vehicle market growth will fall from 3.1% (between 2007 and 2014) to 2.6% (between 2015 and 2021).
Much of this decline will be due to underperformance in the BRIC nations — Brazil, Russia, India, and China. Brazil’s automotive demand has fallen to 2009 levels amid high interest rates and a devalued currency. Russia’s economy is in recession. India’s car market is growing, but from a low level, and its market is largely characterized by low-cost vehicles. Automotive demand in China is still growing, but slowing down.
In the midst of this market downturn, the industry is forecast to face an enormous need for investments in new technologies. AlixPartners asserts the industry’s current earnings are insufficient to fund the needed investments, let alone when it enters a period of reduced demand.
To highlight the needed investments in technology, AlixPartners coined a new term — CASE (Connectivity, Autonomous, Sharing, and Electric). Over the next four years, the global connectivity services and hardware market is expected to double from $20 billion to $40 billion. By 2025 it is probable that all new cars will be connected, according to a report by Connected Car Forum.
Completely autonomous cars are a fairly long way off, but getting there will be a matter of incremental advancements in technology. Radar and image sensors are already enabling self-parking and lane-holding. In June, Ford announced its autonomous car program had entered the second of three planned phases and had progressed from a research effort to an advanced engineering program.
Views about mobility are shifting. Car sharing and other mobility options are gaining in popularity as younger consumers question the value proposition of car ownership. Most major car companies are dipping their toes in the water and implementing some level of mobility-based market experimentation. Germany’s Daimler has been particularly aggressive about getting in front of the mobility trend by investing in everything from car sharing to trip-planning apps.
Electric cars are still a niche in the overall industry, but electrification is gaining momentum. As concerns about pollution and climate change rise, so too will demand for electric vehicles. Electric cars currently only make up about 0.4% of total sales, but growth of 24%-31% is expected through 2025. Hybrids, fuel cells, and range extenders are expected to assist in the gradual shift toward electricity, and electric systems are forecast to account for a rising percentage of overall drivetrain parts.
While the pace and extent of these CASE trends is uncertain, what is relatively certain is that they will affect the automotive industry’s capital requirements. AlixPartners suggests there may be strength in numbers, and the industry could be ripe for further consolidation. Companies will need to have a scale capable of the capital expenditure and R&D investments needed to meet the challenges and opportunities that CASE present. This notion recently was floated by Fiat Chrysler CEO Sergio Marchionne when he proposed a merger between his company and GM. But car company mergers have an iffy track record, are difficult to execute, and even when they work well, they take years to pay off.
Industry Impact: To reach the scales necessary to fund a greatly accelerated pace and volume of technological change while adapting to shifting consumer priorities about mobility, light-vehicle manufacturers may seek mergers and partnerships with other car companies, tech firms, and mobility providers.