SPECIAL REPORT
CARS
April 20th 2013
Gloom
and
boom
SPECIAL REPORT
C ARS
Gloom and boom
The motor industry’s fortunes are increasingly divided, says Peter
Collins. But in the right markets and with the right technologies,
they look surprisingly bright
ACKNOWLEDGMENTS
In addition to those quoted in the
text, the author is particularly
grateful for their help with this
report to: Andrew Bergbaum,
Giacomo Mori and Jens-Ulrich Wiese
of AlixPartners; Philip Smith of
Citigroup; the sta… of the Ford
Research and Innovation Centre; Ian
Fletcher of IHS Automotive; Pete
Harrison and Tim Nuthall of the
European Climate Foundation;
Stefano Re Fiorentin of the Fiat
Research Centre; Davide Santo of
Freescale Semiconductor; John
Newman of McKinsey; and Max
Warburton of Sanford C. Bernstein.
The Economist April 20th 2013
A HUNDRED YEARS ago Henry Ford and his engineers perfected an idea
whose time had come: the moving assembly line. By putting the car on a
conveyor belt, they cut the time taken to assemble a Ford Model T from 12
hours and 30 minutes in 1913 to just one hour and 33 minutes the following year. That made the car a lot cheaper to build and opened up a mass
market for it. By 1918 its list price was down to $450, or just over 5 months’
pay for the average American worker, against the equivalent of about a
year and a half’s pay when the car was launched a decade earlier. Cars
became a personal badge of status, and in time carmaking became a
badge of national virility.
But since the 1950s the automobile has come to be seen as
dangerous, dirty and noisy. In response it has been ever more
strictly regulated, which has imposed additional costs. After the
†nancial crisis the entire industry
slumped spectacularly in many
rich countries. Two of America’s
big three carmakers, Chrysler and
General Motors, went bankrupt
and had to be bailed out by taxpayers. In Europe car sales last
year were the lowest since 1995.
The battery-driven cars that were
supposed to solve the pollution
problem have so far been an expensive ‡op. The motor industry
seems to be in dire straits.
Yet this special report sees
plenty to be optimistic about.
Sales in Japan remain stagnant
and in Europe they are unlikely to
grow much in the next few years,
but in America they are already beginning to bounce back, and in China
and other emerging markets the current boom looks likely to continue
for the foreseeable future. AlixPartners, a consultancy, forecasts that the
worldwide market for cars and other light vehicles will expand from
about 80m units a year now to 107m in 2020 (see chart 1, next page). In
China, now the world’s biggest market for cars, annual sales are expected
to rise from 19m last year to 31m in 2020 as car ownership spreads to the
country’s vast interior. So over the next seven years a Europe-sized market will grow up in China’s hinterland.
Over the past decade tens of millions of Chinese families have
gained personal mobility on an undreamt-of scale while lots of new jobs
have been created making, selling and servicing cars in China. But the
Chinese government seems less concerned about that than about its failure to create strong national champions capable of taking on the foreign
carmakers on their own turf. In future it may try harder to achieve this
aim, which could deter foreign †rms from continuing to invest in the
country. A wiser course would be to accept‹as Britain, and more recently
Russia, have already done‹that as long as the business is thriving and 1
CONTENT S
2 Markets and makers
Running harder
4 Electric cars
General Electric Motors
5 China
Voting with their wallets
6 Propulsion systems
The great powertrain race
7 Emissions
Green wheels
10 Driverless cars
Look, no hands
12 Luxury cars
Dreams on wheels
13 Demand forecasts
Distant peak car
14 Imagining the industry’s
future
The road to 2033
A list of sources is at
Economist.com/specialreports
An audio interview with
the author is at
Economist.com/audiovideo/
specialreports
1
SPE C IA L RE P OR T
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2 generating lots of well-paid work, the nationality of a car fac-
tory’s owners and the badges on the bonnets hardly matter.
As ever more consumers in China and other emerging markets have the money to buy fancier cars, makers of upmarket and
high-performance vehicles will bene†t. Mass-market carmakers
will have a harder time: too many factories are being built, especially in big emerging markets, which will lead to intense competition and price-cutting. As the biggest, most eˆcient manufacturers‹such as Volkswagen and Toyota‹pull ahead, those in the
second division may seek salvation in alliances.
Consumer heaven
As an investment, then, the motor industry has to be
treated with caution. But its engineering and environmental credentials are improving all the time. A century after becoming a
mass-market product, the car is still a long way from being a mature technology. Manufacturers and their suppliers are investing
huge sums in a variety of improved propulsion systems and in
new lightweight materials to meet regulators’ emissions targets.
The current generation of models is already vastly cleaner than
earlier ones, and emissions of carbon dioxide, nitrogen oxides,
soot and other pollutants are set to fall much further. The smog
that began to a‰ict traˆc-choked California in the 1950s and is
now obscuring the sky in Chinese cities will gradually clear. The
day may come when environmentalists stop worrying so much
about cars and turn their attention to other polluters.
Consumers will be in heaven. Improved manufacturing
systems will allow the bigger carmakers to o…er an ever wider
range of models, supplemented by a steady stream of niche products from new entrants. Fierce competition will keep prices
down even as cars are packed with ever more technology that
will make them more expensive to produce. More of them will
drive themselves, park themselves and avoid collisions automatically. That should cut down on accidents and traˆc jams, reduce the stress associated with driving and provide personal
mobility for the growing ranks of the elderly and disabled.
1
Pick your market
Light-vehicle sales
Japan and
South Korea
Units m
North
America
20
10
20
1995 2000 05
10
15*
0
10
1995 2000 05
0
Global:
20*
10
15*
Greater
China†
20*
Rest of
world
120
Western
Europe
110
100
20
1995 2000 05
10
15*
10
90
0
80
20*
70
60
Greater
China†
50
40
1995 2000 05
Source: AlixPartners
2
10
15*
20*
40
30
30
20
20
10
10
0
0
1995 2000 05
10
15*
20*
*Forecast †Includes Hong Kong and Taiwan
All the technology that will go into making cars cleaner will
also make them far more fuel-eˆcient and more economical. For
motorists with short, predictable daily drives, all-electric cars
may prove adequate and, as batteries improve, increasingly coste…ective. Others will be able to pick from a range of propulsion
systems, including hybrid, natural gas and hydrogen as well as
improved petrol or diesel engines, to suit their needs.
Manufacturers are hoping that all this technology will help
counteract a worrying trend they are beginning to observe in rich
countries: that car ownership is becoming unfashionable. In cities car-sharing and short-term hiring is becoming more popular.
Young urbanites are getting their driving licences later, but the
numbers of drivers at the other end of the age spectrum is growing, which may compensate for that loss.
Best of all, in emerging markets there is enough pent-up demand to keep the industry growing for many decades yet. But
which makers, in which countries, will reap the bene†ts? 7
Markets and makers
Running harder
Carmaking can still be highly pro†table, but
manufacturers have to work at it
FROM A CARMAKER’S point of view, the great thing about
emerging markets is that they have so many people and so
few cars. Carlos Ghosn, the boss of Renault-Nissan, a Franco-Japanese carmaking alliance, notes that whereas in western Europe
the ratio of cars to people is one to two, in China it is still only one
to 20 and in India one to 40. Even if these countries eventually
settle at, say, just half the car-ownership levels in the rich world,
the potential remains immense. A recent study of China’s motor
industry by Sanford C. Bernstein, a research †rm, found that
even though some of the biggest, most congested cities are starting to restrict vehicle ownership, the government is obsessed
with roadbuilding and in the rest of the country there is plenty of
room for more cars.
China’s new middle classes are clamouring for foreign luxury cars, which is translating into handsome pro†ts for makers
such as Germany’s BMW and Jaguar Land Rover (JLR), a Britishbased †rm now owned by India’s Tata Group. Russia will soon
overtake Germany as Europe’s biggest car market. In India foreign carmakers have found it hard to make money, says Xavier
Mosquet of the Boston Consulting Group (BCG), because the
market is relatively small and dominated by two local †rms, Maruti and Tata, along with South Korea’s Hyundai. But Ralf Speth,
the boss of JLR, is convinced that given India’s huge population
and its entrepreneurial spirit, one day it will become an attractive market. His †rm has started assembling some models in
Pune and is planning to build more there.
Plenty of other populous countries are as yet undersupplied with cars. Manufacturers are already rushing to build factories in Turkey (with a population of 74m) and Indonesia
(242m). Sub-Saharan Africa (875m, and rising fast) could be Œthe
next China, reckons Stephen Odell, Ford’s boss for the region.
JLR, having started to assemble cars in China and India, is now
looking at Brazil, and may even open an assembly line in Saudi
Arabia. Renault-Nissan is su…ering from surplus capacity in
France but is taking a controlling stake in Russia’s AvtoVAZ and
boosting its output in that country, as well as expanding its Dacia 1
The Economist April 20th 2013
SPECIAL REPORT
C ARS
2 subsidiary in Romania and increasing production in Morocco,
where it opened its second factory last year.
But governments in emerging markets are making life increasingly hard for manufacturers from rich countries that want
to cash in on this booming demand. China, for instance, has
forced foreign carmakers to form joint ventures with its domestic †rms to build vehicles there as the price of entering the
world’s biggest market. More recently other big emerging countries‹Brazil and Russia in particular‹have introduced protectionist laws to compel foreign carmakers to build locally. Sergio
Marchionne, the boss of the Fiat-Chrysler group, says his company opened a factory in Mexico in 2011 on the understanding
that there would be free trade in cars with Brazil, but now quotas
have been imposed in both directions. Likewise a few Chinese
carmakers had begun to make inroads into Brazil with cheap
models, only to see sales collapse as the government pushed up
import taxes.
Since carmaking creates large numbers of well-paid jobs, it
is no wonder that governments want to see it done locally. But
there is a risk that the increase in new capacity around the globe
will outstrip the expected growth in car sales. Bernstein’s study
of the Chinese motor industry reckons that carmakers based
there are planning to increase capacity by 12m between now and
2016, but that sales may grow by only 4m over that period.
Build, and they will come?
Assembly plants are generally pro†table if they are running at more than 75% of capacity, based on two shifts a day. China’s are now happily humming along at an average capacity utilisation of 88%. But unless factory-building is curbed, Bernstein
reckons, this may fall to a loss-making 63% by 2016. Stefano
Aversa of AlixPartners agrees that signs of excess capacity are already visible in China. He also sees it emerging in Turkey, South
America and South-East Asia. In his view, the world’s existing
factories have more than enough capacity to supply the growth
in the global market for the next ten years.
The Economist April 20th 2013
The risk of excess capacity, and thus
of †erce price competition, is emerging at
a time when carmakers are having to invest heavily in new technology. Fortunately they still have plenty of scope to
cut costs by standardising both their Œplatforms‹the underpinnings onto which
the rest of the car is assembled‹and other
components under the bonnet that drivers do not see. One reason why Volkswagen has done so well in recent years is
that it has taken such standardisation further than most. This has allowed it to o…er
a broader range of vehicles across its
many brands. For example, the MQB platform it has recently launched will be
shared by the †rm’s ‡agship VW Golf, the
pricier Audi A3, the humbler Skoda Octavia and cars of other sizes.
AlixPartners predicts that most of
the growth in car sales in the coming years
will come from such Œmegaplatforms,
each of which will underpin more than
1m cars of all sorts every year. Flexible production lines will be able to turn out cars
to †t every niche in the market, enabling
makers to o…er buyers Œmass customisation of vehicles. Cars are becoming more
like smartphones: expensive to develop
and market, and with some pricey parts,
but cheap to assemble in their millions,
with endless variations.
The carmakers with most scope for
pro†table mass customisation will be the
largest ones, the Œ10m-plus club that will
shape up in the next few years: Toyota,
GM and VW, with Renault-Nissan and
Hyundai in hot pursuit (see chart 2). Philip
Watkins, an analyst at Citigroup, argues
that thanks to the economies of scale the
largest makers enjoy, they will also be
able to o…er buyers better credit and leasing deals. This will be an increasingly important factor in emerging markets like
China: the †rst wave of buyers has tended
to pay cash, but in future many will need
to borrow, as they do in Western markets.
A few makers of expensive status
symbols for the well-o…, in particular
BMW and JLR, should be able to get by on
making cars in smaller quantities. But a
Œsqueezed middle, building moderate
volumes mostly for the mass market, may
have to club together to become more viable. Fiat-Chrysler, for instance, acknowledges that it needs to boost its annual
sales of 4.3m to something like 6m in the
short term and to strengthen its presence
in booming Asian markets. Besides building new factories of its own in Asia, the
company is entering joint ventures with
two undersized Japanese makers, Mazda
and Suzuki. But all four companies may
have been put o… seeking closer ties by
previous unsuccessful alliances: Fiat
The big end
2
World’s largest
carmaking groups
by sales*
2012, units m
Toyota†
9.79
General Motors
9.13
Volkswagen
9.10
Renault-NissanAvtoVAZ
7.53
Hyundai-Kia
6.96
Ford
5.31
Fiat-Chrysler
4.30
Honda
3.78
PeugeotCitroën
3.06
Suzuki
2.69
*Of light vehicles. Includes
Chinese joint ventures
†Includes Daihatsu
and Subaru
Source: IHS Automotive
3
SPECIAL REPORT
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component makers, universities and government agencies. Circumstances are forcing them to work together Œlike grown-ups,
Peugeot-Citroën of France, struggling for survival, has
he says.
struck a tentative deal to share platforms and engines with GM’s
But none of this will save the industry from becoming more
chronically loss-making European arm, Opel-Vauxhall. Daimler,
fragmented: the sheer choice of new models coming onto the
making good pro†ts but still smarting from the failure of its mergmarket makes that inevitable. America’s big three makers face a
er with Chrysler, is edging towards a closer relationship with the
continued loss of market share on their home turf as South KoRenault-Nissan-AvtoVAZ alliance. Ford, too, having sold most of
its premium brands‹JLR, Volvo and Aston
Martin‹now †nds itself in the uncomfortable middle, with annual sales of 5.3m. The sheer choice of new models coming onto the market
But like VW it has made good progress on will inevitably make the industry more fragmented
standardising platforms and parts; and
having rebounded from the †nancial crirea’s Hyundai and its aˆliate, Kia, expand and move upmarket
sis without a state rescue, it is doing well enough for now to be
and VW ramps up the output of a new factory in Tennessee.
able to continue on its own.
BMW is building up its British MINI brand, producing small but
Since mergers and manufacturing alliances are so hard to
expensive cars that draw customers who might otherwise have
get right, carmakers are increasingly seeking more limited co-opbought a high-spec model from one of the mass-market makers.
eration in their research e…orts to share the costs of developing
In rich countries new carmakers continue to enter the marexpensive new technologies. For instance, Ford is pooling its
ket, often starting at the top end, making luxury and high-perforwork on hydrogen fuel cells with Renault-Nissan and Daimler,
mance models, but with the potential to widen their range at a
and BMW is co-operating with Toyota in this area. Ford’s chief
later stage. Some, such as Tesla Motors (see box), are betting on
technical oˆcer, Paul Mascarenas, says carmakers are having to
replacing the internal-combustion engine with electric propul- 1
learn to work in partnership not just with their rivals but with
2 broke up with GM, Chrysler with Daimler and Mazda with Ford.
General Electric Motors
Tesla has high hopes for its high-spec electric cars
FROM THE 1960s to the 1980s it was a General
Motors plant. From then until 2010 it was
used by GM and Toyota to make cars jointly.
Now the giant carmaking factory at Fremont
in Silicon Valley is in its third incarnation, as
the manufacturing base of Tesla Motors, a
maker of electric cars set up by Elon Musk, a
founder of PayPal and of SpaceX, a rocketmaker.
Mr Musk is a man of big ideas. His
long-term aim is to help colonise Mars and
die peacefully there. His entry into carmaking, an industry that has been the graveyard
of many ambitions, is almost as bold. Mr
Musk set up Tesla to hasten what he sees as
the motor industry’s inevitable switch to
battery power. Having started with expensive sports cars, to be followed next year by
an equally upmarket sport-utility vehicle,
the plan is eventually to move to more massmarket models and become a sort of ŒGeneral
Electric Motors.
Tesla’s current car, the Model S, with
prices starting at $52,400, has won rave
reviews. Electric motors produce maximum
torque from a standing start, which can
mean great performance. Tesla has many
fans, especially among Californian techloving early adopters. They are vocal in
rebutting the carmaker’s doubters, who are
also not hard to †nd.
So far Tesla is using only a quarter of
the Fremont plant’s vast area. This year it
4
plans to make just 20,000 cars as it concentrates on moving into pro†t. Mr Musk acquired the factory for $42m, far less than it
would have cost to build, and bought lots of
second-hand equipment.
Tesla is doing a lot of things di…erently
from the mainstream carmakers. It produces
many key parts in-house, from the battery
packs to the slick touch-screen control
panels. It is setting up a network of free
fast-recharging points for its customers to
top up their batteries on the road. It is battling America’s powerful car-dealership lobby
so it can set up its own retail outlets. And it is
aiming to get its products from the drawingboard to the assembly line at the speed of
Silicon Valley tech †rms rather than the
statelier pace of Detroit’s car giants. Tesla’s
manufacturing chief, Gilbert Passin, says the
Model S moved from †rst design to production in just over two years, something he
reckons would take a traditional carmaker
†ve or six years.
Working in Tesla’s favour is its lack of
baggage of any kind. It has no internalcombustion technology to defend, and thus
no problem in reaching regulators’ ever
tighter targets for fuel eˆciency. It has no
inherited pension and health-care liabilities
and no auto workers’ union. In the past
premium car brands have typically taken
decades to establish themselves, but perhaps the Œmillennial generation, used to
seeing new smartphones rise and old ones
fall, will be more open to start-up brands,
especially ones from Silicon Valley.
Much could yet go wrong. Any serious
technical ‡aw could prove fatal to a new †rm
with no older revenue-generating models to
keep it going. Established carmakers could
decide to †ght Tesla head-on‹indeed BMW’s
new Œi range of electric and hybrid cars
seems to be aimed at similar buyers. In the
longer term other technologies, such as
biofuels, might develop faster than the
electric battery.
Whether Tesla ultimately succeeds or
fails, it o…ers some important lessons. As Mr
Passin points out, if a small company like his
can produce a new car so quickly and frugally,
surely carmaking giants can become leaner
too. Another lesson is that when surplus
factories are closed, they can sometimes
reopen. (Surplus workers too are sometimes
recycled: Qoros, China’s new carmaker, hired
a lot of skilled people from European manufacturers during the downturn.)
Another lesson is that carmaking is still
glamorous, and people with Mr Musk’s talent
and bank balance still want to get into it. If
he fails, someone else will have another go.
The Chinese †rms that have been sniˆng
around Fisker, a struggling Californian maker
of hybrid petrol-electric cars, show that
start-up carmakers with interesting technology can †nd willing †nanciers.
The Economist April 20th 2013
SPECIAL REPORT
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2 sion. Others, notably Britain’s McLaren, are taking advantage of
the advanced technology and branding they have built up
through motor-racing.
Some new entrants may possibly follow the example of
Apple, which designs and markets products but gets them assembled by others. A few established carmakers, including
BMW and Volkswagen’s Porsche sports-car division, already use
contract manufacturers to build some niche models, as did
Fisker, an American maker of hybrid-electric sports cars, which
is now in trouble. Paul Sa…o, a technology forecaster in Silicon
Valley, reckons that since cars are increasingly becoming a set of
electronic systems and software applications on wheels, someone may create an open-source operating system for cars that
others can use, in the same way that Google created its Android
system to help new entrants into the smartphone market.
Many of the high-tech parts in a car‹from infra-red sensors
to turbochargers‹are made by independent suppliers, which
would be just as happy to sell them to a new entrant as to an established manufacturer. So a big retailer, say, might decide to sell
own-label cars manufactured specially for it, as happens with
clothes and groceries. The idea is not as new as it sounds. Between 1908 and 1912 Sears Roebuck sold motors under its own
brand in its catalogue, built for it by a manufacturer in Chicago. 7
The Economist April 20th 2013
China
Voting with their
wallets
Chinese car buyers overwhelmingly prefer foreign
brands
THE BIGGEST THREAT to the world’s established carmakers in recent years was expected to come from Chinese
competitors (and from a few Indian ones with international ambitions), but so far it has not materialised. Under plans drawn up
by the government in Beijing in 1994, two or three world-class
Chinese makers should be going head-to-head with GM, Toyota
and the rest by now, but this has not happened. As China’s domestic market has boomed, the local brands have become increasingly sidelined as consumers have bought foreign ones.
Chinese car companies started o… working with foreign
joint-venture partners, which the Chinese government hoped
would be quickly pushed aside as the domestic †rms learned
how to make cars to international standards. Instead, the local
†rms have remained utterly dependent on their foreign partners
for everything from technical knowledge to marketing nous. As
a former industry minister has put it, Œwe are hooked on joint
ventures like opium.
As Bernstein’s study on the Chinese car market notes, the
streets are full of American, European, Japanese and South Korean cars, mostly made in joint-venture factories in China, with the
foreign partners raking o… handsome royalties for the use of
their brands and technology. The market share of Chinese
brands has continued to slide, from about 30% in late 2009 to less
than 26% by the end of 2012. China’s favourite car last year was
the Ford Focus. The rest of the top ten was made up of four kinds
of VW, three GMs and two Hyundais. If they were making their
own cars, China’s largest †rms would be approaching world
scale (see chart 3, next page), but mostly they are producing foreign brands under the direction of their foreign partners.
For their study, Bernstein’s analysts bought two fairly wellregarded Chinese cars‹a sedan from Geely and a Great Wall
SUV‹and took them to Europe for road-testing and a Œteardown, with specialist engineers examining their build quality.
Even though the Chinese †rms seemed to have made some progress in areas such as bodywork, overall the cars were badly put
together and not pleasant to drive. The study concluded that China is still †ve to ten years from building cars to global standards
without foreign help. A recent poll by McKinsey, a consultancy,
found that Chinese car buyers thought the same.
The Chinese makers are striving to catch up, but they are
having to spend a lot of money on advice from foreign engineers
and consultancies, sometimes o…ering salaries of up to
$500,000 a year to lure experts from abroad. At the same time
they are skimping on basic research, which means they will become increasingly reliant on foreign carmakers or foreign component makers. Two Chinese companies that bought foreign
†rms with useful technology‹SAIC, which absorbed the remnants of Britain’s Rover Group, and Geely, which bought Volvo
of Sweden‹do not seem to have much to show for their purchases yet.
Its initial plan having ‡opped, the Chinese government has
recently been pressing foreign carmakers to create new Œjointventure brands with their local partners, in the hope of weaning the local †rms o… foreign technology and styling. But neither
the foreign nor the Chinese makers seem enthusiastic about this, 1
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2 and the policy could just as easily entrench local †rms’ depen-
dence on the foreigners. Meanwhile, worsening air pollution in
Chinese cities is prompting the government to impose strict
Western-style limits on emissions. This is likely to increase the
technology gap between the foreign †rms (which have already
done lots of work on low-emission cars for their home markets)
and the local makers.
Where is China’s GM?
Some worry that the Chinese government will soon turn
nasty, forcing the foreign carmakers to hand more technology to
their Chinese partners and accept smaller royalties from the
joint ventures. But BCG’s Xavier Mosquet reckons that eventually China will accept that it is better to have a strong foreignowned industry creating well-paid jobs than to prop up uncompetitive national champions. This policy change will not be announced, he predicts, but it will be noticeable.
Even so, Western makers still expect at least a few competitive Chinese rivals to emerge one day: ŒI worry about them all
the time, says Fiat’s Mr Marchionne. And as they try desperately
to regain local market share and to export their surplus production, they could trigger price wars at the mass-market end, eating
into the foreign giants’ pro†ts.
China’s government has repeatedly talked about consolidating the 100-odd local carmakers, but many of them are
owned or subsidised by powerful city and provincial governments, which are turning a deaf ear to such suggestions. New entrants keep popping up: at the Geneva motor show in March, Qoros, a Chinese start-up, caused a stir by exhibiting good-looking
prototypes. The company is a joint venture between Chery, a
private-sector Chinese carmaker, and Idan Ofer, an Israeli shipping magnate. It is building a factory in Changshu, a city near
Shanghai, helped by the local government, which will have an
initial capacity of 150,000. Qoros is planning to raise a total of
$2.7 billion, with Mr Ofer taking a 50% equity stake.
He insists that Œthere is always space for a new brand and
says that in his shipping business he is quite used to waiting for
up to ten years to make a pro†t. But he probably knows that to
succeed in the status-conscious Chinese market, he will †rst
have to sell at least some of his cars to the discerning Europeans
who set the trends. 7
3
Not as big as they look
Chinese car production, 2012, units m
0
0.4
0.8
1.2
1.6
2.0
4.48 7
SAIC
Dongfeng
FAW
2.66
4
4
Chang’an
4
BAIC
4
GAC
5
Brilliance
3
Great Wall
5
Chery
6
Geely
6
JAC
4
BYD
Source: China Automotive Industry Yearbook,
Sanford C. Bernstein
6
3.08
Technical capability rating*
3
*Out of ten, compared
with Volkswagen
Propulsion systems
The great powertrain
race
Carmakers are hedging their bets on powering cars
TWO WORDS HAVE proved deadly for the mass-market
electric car: Œrange anxiety. Petrol or diesel cars can go for
up to 1,000km on one tank but most battery-powered ones need
recharging after 150-200km‹unless you have $72,400 to spare for
the extended-range version of Tesla’s Model S, a high-performance electric sports car that can do about 420km on one charge.
Even for cheaper, shorter-range models the batteries can add perhaps $15,000 to the cost of the car. Running it will be delightfully
cheap, almost in the category of small change, but at current
prices the extra cost of the batteries far outweighs these savings.
Moreover, the batteries’ range degrades over time. Recharging
points are few and far between, and topping up batteries is slow.
Tesla’s fast-charging stations still take half an hour to give the car
another 150 miles (240km) of range.
Political leaders such as Germany’s Angela Merkel who unwisely set grand targets for getting electric cars on their roads (she
proposed 1m by 2020) are now regretting it. Carmakers too: last
year Nissan’s Leaf electric car got less than halfway to its modest
sales target of 20,000 in America. Its factory in Tennessee can
turn out 150,000 a year.
In any case, all-electric cars are green only if the electricity to
recharge them is generated in low-carbon ways. Bernstein reckons that in nuclear-powered France the electricity to drive a battery car one kilometre causes carbon-dioxide emissions of just
8g. Yet in China and India, which generate much of their electricity from coal, those emissions are over 120g, so it would be
greener to drive a new petrol-engined car instead.
All sorts of industries are pumping money into making batteries more eˆcient and cheaper, but there are no breakthroughs
round the corner. Larry Nitz, a senior engineer at GM, says the
best use for a battery car may be as a household’s second vehicle,
for short and predictable commutes or school runs. Light delivery
vans are another potentially strong market.
Given that carmakers are facing much tighter constraints on
emissions (see box, next page), they are having to hedge their bets
on a variety of propulsion systems (Œpowertrains, in the jargon)
in the hope that some combination of these will get them to the
regulators’ targets. For the moment none looks like an outright
winner. Their favourites are still the good old petrol and diesel engines, which remain capable of further improvement. Next on
the list are various types of hybrids‹cars with an internal-combustion engine that also run on batteries at least some of the time.
The fuel cell, which turns hydrogen gas into electricity and water
(and thus has no nasty emissions) has recently made a comeback,
having previously been shelved as too costly. And the discovery
of huge new gas reserves in America and elsewhere has boosted
interest in fairly clean vehicles that run on compressed or lique†ed natural gas (CNG or LNG).
Horses for courses
So the motor industry is revisiting its earliest days, when
pioneers were trying out a variety of powertrains, including the
steam engine, various liquid fuels and indeed battery power:
among the exhibits at the Henry Ford Museum near Detroit is a
1934 map of Manhattan showing 38 recharging stations for the 1
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Green wheels
Once seen as environmental villains, cars are becoming squeaky clean
BY THE 1950s traˆc in California had become
so heavy that anti-smog demonstrators took
to the streets. China’s cities have now
reached a similar stage, minus the street
protests, and local and national governments are increasingly following American
and European regulators in imposing limits
on emissions by new cars of nitrogen oxides
(NOX), hydrocarbons and †ne soot particles.
China is also getting more concerned about
global warming and pollution, and has
started to require manufacturers steadily to
reduce the carbon dioxide (CO2) emissions of
the vehicles they make.
Cars the world over will become appreciably cleaner in the coming years. The
European Union is the strictest master.
Under its ŒEuro 6 standards, due to come
into force next year, diesel cars’ NOX emissions will have to be 84% below the limits set
when it started regulating them in 2000, and
their soot output must be 96% below the
initial limits set in 1992. Earlier this year
Beijing, in response to an episode of appalling air pollution, introduced new limits
similar to the current EU ones, which it plans
to tighten further in 2016.
The EU is also leading the way in cutting
CO2 emissions, ahead of Japan, China and
America (see chart 4). Carmakers know full
well that they will have to keep investing
heavily in low-carbon technology. Average
CO2 emissions are due to come down from
130g per km now to 95g per km in 2020, and
plans are already being drawn up for even
tougher limits in 2025, of perhaps 70g.
Bosch, a maker of sophisticated fuel-injection systems and other eˆciency-boosting devices, has argued that such strict limits
are perfectly achievable with petrol and
diesel engines, even before looking to hybrids and other low-carbon powertrains.
Yet however ambitious the limits on
new cars, most of the pollution and planetwarming gases come from older models.
Michel Gardel, a spokesman on environmental a…airs at Toyota, says that in France
80% of the pollution from diesel vehicles
comes from 20% of the country’s diesel ‡eet,
especially those made before 2000. Another
round of Œcash for clunkers subsidies for
trading in smoky old bangers would help
clear the roads, but governments in most
countries do not have any money for such
largesse just now.
Some carmakers try harder than others
to be green. At the Geneva motor show in
March Volkswagen unveiled the XL1, an
aerodynamically shaped plug-in hybrid with
CO2 emissions of just 21g per km which will go
into production, albeit in small quantities. In
a study last year by Interbrand of the world’s
Œgreenest brands, as measured by both
performance and public perception, three of
the top four were carmakers: Toyota (†rst),
Honda (third) and VW (fourth). The odd one
out was Johnson & Johnson, a medical †rm,
which came second.
Besides making their models cleaner to
run, many carmakers are also trying to
2 electric cars of those days.
Henry Ford himself backed the right horse for his horseless
carriages: the internal-combustion engine, burning petrol or diesel, which eventually all but wiped out its rivals. Conventionally
fuelled cars have been getting more eˆcient for decades: a study
by Michael Sivak of the University of Michigan found that between 1970 and 2010 the average fuel economy of America’s car
‡eet improved by 66%. Now money is being poured into making
it even better. A recent survey by KPMG found that in big emerging markets especially, the motor industry was switching its research funds back to the internal-combustion engine.
Car engines are continuing to shrink, but are now being †tted with things like turbochargers and fuel-injection systems that
used to be available only on more expensive models. This means
they cost more to make but achieve better mileage without loss of
performance. Other fuel-saving gadgets include Œstart-stop, in
which the engine cuts out during idling, and various means of
storing the energy released by braking.
Hybrid cars, like pure battery ones, have been slow to catch
on, though Toyota, the pioneer in mass-market hybrids with its
Prius model, last year sold 1.2m such cars worldwide. Sales of
The Economist April 20th 2013
4
An ever tighter squeeze
Vehicle CO2 targets, g/km
United
States
China
European
Union
Japan
250
200
150
100
50
0
2010
2015
2020
Source: International Council on Clean Transportation
reduce the environmental impact of manufacturing them. Toyota has drastically cut
the amount of rubbish its American factories
send to land†ll and Ford recently announced
plans to do likewise. Ford is also working on
replacing plastic parts and foam seat-stu…ing made from petrochemicals with alternatives made from plant materials.
Having been depicted as environmental villains since the 1950s, cars and
their makers may soon be able to move out of
the spotlight. ŒCars have cleaned up their
energy-usage act a lot, says John Leech of
KPMG, a consultancy, Œand there will be a lot
more talk and focus over the next †ve years
about houses and industryðrather than cars
not being very green.
GM’s Volt hybrid have so far been disappointing but the carmaker is sticking with it, hoping that consumers will get used to the
technology. A study by GM of Volt users’ driving patterns found
that the average driver uses battery power 82% of the time, with a
single overnight recharge, even though the battery’s range is only
about 38 miles. So GM will probably keep the Volt’s range about
the same as batteries become more eˆcient, says Mr Nitz, but will
reduce the size of the battery pack to bring the sale price of the
Volt closer to that of a petrol-only car. So it will remain a hybrid,
not evolve into an all-battery car.
Such improvements will get carmakers most, but not all, the
way to meeting the tough emissions standards likely to be in
place in the mid-2020s, so some are taking a fresh look at fuel-cell
technology. Many have produced low-volume demonstration
models, but Toyota plans to bring a mass-produced fuel-cell car to
market in 2015. Didier Leroy, the carmaker’s European boss, explains that what should make fuel-cell cars attractive to motorists
is that they can be topped up as quickly as a petrol car, and travel
almost as far between re†lls.
Their main drawbacks include cost (even higher than for
battery-powered cars) and the need to set up a network of hydro- 1
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2 gen †lling stations. In some countries, including Japan, China,
South Korea and Germany, governments are pushing for such infrastructure to be built, so the take-up of fuel-cell cars may vary
greatly between countries.
In places with lots of windmills or hydro-electric dams, hydrogen could be produced by electrolysing water when demand
for electricity is low, so fuel-cell cars could form part of a broader
renewable-energy strategy. An alternative (which VW’s Audi division is about to try) is to use hydrogen made by wind turbines
to soak up some of the CO2 spewed out by industry or coal-†red
power stations. The two gases are combined to make methane,
chemically the same as natural gas extracted from the ground, so
Audi’s Œbiomethane can simply be pumped into the regular gas
supply. When run on biomethane, the company’s new CNG cars
will have e…ective CO2 emissions of just 30g per km, less than a
third of the EU’s target for 2020.
More immediately, the abundant new supplies of cheap
natural gas coming onto the market in many countries, mostly
thanks to shale-bed Œfracking, have prompted much interest in
running cars on CNG and heavier vehicles on LNG. Fiat-Chrysler
is especially keen: all its Fiat-branded cars now have a dual-fuel
option, with engines capable of being switched between CNG
and petrol. Daniele Chiari, a senior manager at the company, says
that in Italy such cars can run for 700km on ¤22-worth ($29) of
gas, when fuel for a petrol-only car would cost perhaps ¤65. But
since there are still few places to †ll up with gas, the cars’ small
petrol tank is a useful back-up.
CNG cars cost about the same to make as diesel cars, which
means a bit more than petrol ones. They look set for rapid growth
in America too: GE and Honeywell, two industrial giants, are
working on cheap home-recharging kits so CNG-car owners can
top up from their domestic gas supply. Melissa Stark, an energy
expert at Accenture, a consultancy, says that the LNG re†lling facilities now being set up along America’s main roads to supply
lorry ‡eets could also, with a bit of extra equipment, supply CNG
for cars. Since both CNG and LNG vehicles use adapted petrol
and diesel engines, all the eˆciency improvements now being
made to those engines will also bene†t gas-powered vehicles, Ms
Stark notes.
In the same way as renewable biomethane could increasingly take the place of fossil-fuel gas, the various liquid biofuels
now being worked on could one day replace petrol and diesel.
Since the making of such biofuels involves sucking CO2 out of the
air, their net emissions will be low. Alcohol made from sugar cane
By 2050 the world’s car ‡eet is likely to be
by a broad mix of powertrains
has long helped power Brazil’s cars, but such fuel crops reduce the
land available for growing food, so hopes are resting on biofuels
produced from algae, yeast or bacteria that do not take up land.
However, says Ms Stark, it will be at least a decade before such fuels can be produced economically and in quantity.
Some think that the pure electric car will win out in the end,
despite getting o… to a poor start. Tesla’s Mr Musk argues that
even if the perfect biofuel were invented, the most eˆcient way
to use it would be to make electricity in power stations and use
that to recharge battery cars. Renault-Nissan’s Mr Ghosn thinks
that the sheer simplicity of battery-powered cars will ensure
their eventual success once batteries become smaller, cheaper
and more powerful.
But none of this is going to happen quickly, so by 2050 the
world’s car ‡eet is likely to be propelled by a broad mix of pow8
ertrains (see chart 5, next page). Countries with lots of natural gas
may have more CNG cars; others may have built enough hydrogen re†lling stations to give fuel-cell cars critical mass; and so on.
Jim Buczkowski, a senior engineer at Ford, sees this as an advantage: motorists will be able to select the Œpowertrain of choice
that best matches their needs.
Many of the most sophisticated parts needed for di…erent
kinds of advanced powertrains are not made by carmakers but
by a select band of high-tech suppliers, including Bosch and Continental of Germany and Denso and Panasonic of Japan. Such
suppliers will enjoy growing pricing power, says Philip Watkins of Citigroup, even
propelled
as suppliers of low-tech parts will continue to be squeezed by the carmakers. In
China, foreign parts-makers do not have to
share their pro†ts with their local jointventure partners in the way foreign carmakers do, and Chinese
parts-makers do not yet seem capable of matching the best Western and Japanese technology, so high-tech suppliers appear to
have a bright future.
Another way of making cars cleaner and more fuel-eˆcient
is to make them lighter. When JLR launched a new version of its
Range Rover last year, it replaced most of its steel bodywork and
frame with an aluminium shell, or monocoque, cutting the vehicle’s weight by 40%. Studies suggest that lighter materials combined with better aerodynamics could potentially double cars’
fuel eˆciency‹and make them more enjoyable to drive.
Again, di…erent manufacturers are pursuing di…erent ways
of reducing their cars’ weight. JLR is backing aluminium, BMW is
keener on carbon-†bre composites and Hyundai is working on
replacing ordinary steel with smaller quantities of advanced 1
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2 high-strength steel. According to AlixPartners, the proportion of
conventional steel in a typical car will fall from two-thirds today
to about one-†fth in the future. The rest will be replaced by new
materials, which are costly, so they are appearing †rst on premium-priced models. Carbon-†bre parts have the most potential
to cut weight, but they are harder to recycle than steel and more
time-consuming to make. McKinsey reckons that the material, although touted for decades, will be ready for the mass market only
when the time taken to Œbake parts comes down from 10-12 minutes now to 1-2 minutes.
The winners in this race for better powertrains and lighter
materials will be innovators, and indeed a study by Thomson
Reuters, an information provider, has noted a surge in car-related
patents being †led. Patents related to alternative-powered vehicles (hybrids, fuel cells and the like) almost trebled between 2006
and 2011. Toyota was the most active patent-†ler in this area. The
top ten also included Honda, GM, Daimler, Hyundai, Nissan,
three Japanese parts-makers (Denso, Panasonic and Sanyo) and
one German one (Bosch).
A patent underperformance
Perhaps oddly, the Chinese do not seem to be investing
heavily to catch up. The Bernstein study found that even the biggest local †rms were skimping on research and development. The
world’s three biggest makers‹Toyota, GM and VW‹each have
R&D budgets of $8 billion-10 billion a year, whereas the big Chinese †rms Bernstein studied are at best spending a few hundred
million dollars each.
Since both China and India are churning out vast quantities
of engineering graduates, the world’s largest carmakers had been
expected to shift much of their R&D there. But this has not hapThe Economist April 20th 2013
pened, says Mr Mosquet of BCG: the most
innovative carmakers seem to be those
that keep most fundamental research at
home, as Toyota, VW and Hyundai are doing, farming out only fairly peripheral
work to labs in emerging markets. Bernstein’s study notes that, despite all those
home-grown engineers, the Chinese carmakers are spending small fortunes hiring
European ones. The domestic sort, says
the study, mostly seem unable to do the
kind of reverse engineering that allowed
Japanese and Korean carmakers to catch
up with the West. And the best ones are
snapped up by the foreign carmakers in
China, which can o…er much higher pay.
So all this new technology is giving
the strongest of the rich world’s carmakers
a breathing-space from new competition.
But it will not come cheap, and they will
need to pass the expense on to their customers. Hans-Werner Kaas of McKinsey
says the average cost of making a car in
America looks likely to rise by about
$2,500 by 2020, which will be only partly
o…set by standardisation of platforms and
parts. A study by Cambridge Econometrics and Ricardo-AEA suggested that the
cost of di…erent powertrains will converge
somewhat, but even in 2030 fuel-cell, allelectric and plug-in hybrid cars will be a
lot more expensive to make than those
with improved internal-combustion engines. However, allowing for lower fuel
bills, by 2020 the total cost of ownership for petrol, diesel, hybrid
and battery cars (although not for fuel-cell ones) will be lower
than the total cost for petrol cars now. Meanwhile the reduction in
fuel costs, and the motor industry’s investment in the technology
to achieve it, will create more than 350,000 new jobs in the EU by
2030, the study suggested.
American consumers have got used to car prices remaining
‡at in real terms over the past decade, and in Europe price wars
are actually bringing prices down. In the words of Fiat-Chrysler’s
Mr Marchionne, that means Œthe ability to pass the technology
costs on to the consumer is incredibly limited. That is why even
the most pro†table and fast-growing carmakers are quietly telling
analysts not to be too bullish. 7
5
Spoilt for choice
Light-vehicle sales by technology type, units m
200
F O R E C A S T
H2 fuel cell
Electricity
Plug-in hybrid
Hybrid
CNG/LPG
Conventional diesel
Conventional petrol
175
150
125
100
75
50
25
0
2000
05
10
15
20
25
30
35
40
45
50
Source: International Energy Agency
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Driverless cars
Look, no hands
One day every car may come with an invisible
chau…eur
DRIVING THROUGH SILICON VALLEY on freeway 101 in
busy Friday lunchtime traˆc, Google’s Chris Urmson ‡icks
a switch on the steering wheel. A green light comes on to tell him
and your correspondent in the passenger seat that the Lexus SUV
is now driving itself. A Jeep cuts across it, brakes and exits to the
right, followed by a Toyota pickup truck that gets rather close.
Each time the Lexus backs o… smoothly, maintaining a sensible
distance, then accelerates again once the road ahead is clear.
Google †rst revealed in 2010 that it had been working on
self-driving cars. This †ts in with its work on mapping and software and might give users extra time to surf the web, boosting
Google’s pro†ts. Last year the company released a video of a
blind man sitting in the driver’s seat of one of these (albeit with a
passenger as backup), being taken to buy takeaway tacos and collect his dry cleaning. Sergey Brin, one of the internet company’s
founders, expects its autonomous driving system to be ready for
the market in †ve years. That may be optimistic, but by the 2020s
some cars that drive themselves most or all of the time could
well be in volume production. This will have big consequences.
The idea of self-driving cars as a means of reducing accidents and congestion has been around for a long time. One of
the most popular exhibits at the 1939 New York World’s Fair was
ŒFuturama, a depiction of a city with cars remotely controlled
by radio. In the 1980s and 1990s the European Commission sponsored a programme of research on automated driving, Prometheus. In the mid-2000s the Pentagon’s research agency, DARPA,
launched its Grand Challenges, o…ering prizes to driverless cars
that did best at navigating a tricky course. In the †rst of these, in
2004, none of the robot cars completed the course. In the third,
held in 2007, six cars made it. The winning team’s technical director was Mr Urmson. Its main advantage over its rivals was
that it had mapped the course in †ne detail, something that his
current employers are busy doing for the rest of the planet.
But even before such prototypes have proved themselves,
the technology is already arriving in instalments as carmakers
introduce sophisticated Œassisted driving features as options,
even on mass-market models. European buyers of the Ford Fo-
accident. Insurers have already begun to o…er discounts to motorists who agree to have more sophisticated ones that monitor
their driving all the time.
Basil Enan, the boss of CoverHound, an online insurance
broker, says that as well as giving discounts to drivers who install
black boxes, insurers are o…ering lower premiums on cars with
assisted-driving features because they reduce accidents. He
thinks that in future Œmanual driving will increasingly be penalised: ŒThe more miles you’re logging on autopilot, the less you’re
going to pay. This will give motorists an incentive to use the assisted-driving features on their cars. Carmakers, for their part,
will have an incentive to keep adding more to maintain high
scores in the widely publicised safety tests that help them sell
their models.
Safety-enhancing gadgets on cars tend to start out as optional extras, then get incorporated into Œbest practice standards
promoted by independent bodies like Euro NCAP, and eventually are made compulsory. Ubiquitous black boxes in road vehicles will provide a mass of data likely to demonstrate the e…ectiveness of automated-driving features, which will prompt calls
to make them obligatory.
Let car speak unto car
With demand for advanced in-car navigation and entertainment systems growing, vehicles are becoming ever better
connected. From next year cars sold by GM in the United States
and Canada will come with fast 4G mobile broadband. Improved connections will also make it possible for cars to send
hazard warnings to each other, to receive a constant stream of information on the traˆc and weather ahead and even to interact
with signals as they approach junctions.
In Ann Arbor, near Detroit, 2,800 cars, lorries and buses
have been †tted with devices to send and receive such alerts.
Some have just a simple beacon that informs other traˆc of their
location, speed and direction. Others have more elaborate kit
that can detect, for example, if another wired-up car, out of sight
around the next bend, has slammed on its brakes. Carmakers are
keen to support such research. Ford has provided eight sedans
for this experiment and is using them to try out various ways of
alerting drivers: sounds, warning lights, even projections onto
the windscreens using a head-up display. Jim Sayer, who is overseeing the trial, says drivers seem interested too: when his team
went to local schools and a hospital looking for volunteers to
have their cars wired up, they got far more than they needed.
In the Ann Arbor study it is human drivers who receive and
act on the alerts, but in future cars will be able to respond automatically. Governments will want to ensure that all road traˆc
gets connected up to reduce accidents,
congestion and vehicle theft. Having a
Decades of road-safety legislation will have to be
transmitting beacon on every car would
also be good for dynamic road pricing,
overturned before cars can roam the streets without a
with charges depending on the type of vequali†ed and sober driver at the controls
hicle and the time of day. Brazil’s government is already preparing legislation that
cus, a mid-sized car, can now leave it to drive itself and maintain
will require all cars to have a beacon broadcasting their make,
a safe distance in steady traˆc. The car can measure a parking
model, registration number, age, fuel and engine power.
space and steer itself into it. It reads road signs and admonishes
So it seems clear that driving will become increasingly
the driver if he breaks the speed limit. Such gadgetry also inautomated in the next †ve to ten years. But will cars get to the
creasingly makes decisions on the driver’s behalf and overrules
point where they do not need a driver at all? Some carmakers are
him in an emergency, for instance, braking to avoid a crash.
sceptical. Jürgen Leohold, VW’s research chief, says perhaps in
Other technologies are beginning to make this easier. First,
50 years, but he does not look further ahead than 20 years and
the mechanical links between the controls and the working
does not expect a fully autonomous car by then. He thinks over
parts are progressively being replaced by electronic ones. Secthat timescale there will always be situations where the computond, cars now have a rudimentary version of Œblack box data
er will have to pass the controls to a human. Mr Leech of KPMG
recorders to collect information on the moments just before an
reckons that fully autonomous cars would still crash sometimes, 1
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2 so manufacturers might be reluctant to market them for fear of
damaging their reputation. But Renault-Nissan’s boss, Carlos
Ghosn, is more optimistic: ŒI don’t see any impossible obstacle. I
think this is something you are going to see on the horizon of
2020 because the technologies are getting mature.
A number of technical obstacles remain. For driverless cars
to work, every inch of road, every junction, road sign and signal
everywhere will have to be mapped in perfect detail. But this is
being done anyway to support navigation systems for both cars
and smartphones.
Mr Urmson says that self-driving software will gain experience as it is tested, just like a human driver. The di…erence is that
everything it learns will become available to every other car
with the same software. Google’s driverless cars have already
clocked up more than 700,000km, which Mr Urmson reckons is
more than he will drive in his lifetime. Computers do not get
tired or distracted and will be far more aware of their surroundings than any human. In a tricky situation, says Mr Urmson, the
computer will do what a human would: brake hard and hope for
the best, but do so more quickly and expertly.
The technology seems likely to be ready before all the questions of regulation and liability have been sorted out. Three
American states, Nevada, California and Florida, have passed
laws governing the testing of driverless cars on public roads,
which had previously been a legal grey area. But that is just the
The Economist April 20th 2013
start. Decades of road-safety legislation will have to be overturned before cars can roam the streets without a quali†ed and
sober driver at the controls, and accidents involving driverless
cars are bound to attract some lawsuits.
A study in 2009 of the legal risks of increasingly autonomous cars by the RAND Corporation, a research body, suggested
two possible solutions: changing the liability laws to require
courts to take the bene†ts of driverless technology into account
when punishing carmakers for any failings; and limiting motorists’ ability to sue in state courts when driverless technology mandated by federal laws fails to prevent an accident. By way of a precedent, the study noted that some states already have laws
forbidding drivers from going to court over minor accidents, requiring them to claim on their insurance policies instead. Mr
Urmson notes another precedent: the 1929 Warsaw Convention
limiting airlines’ liability to passengers in the event of loss and injury, which was introduced in an e…ort to give air travel a lift. But
Dave Cole of the Centre for Automotive Research in Michigan
fears that given America’s taste for litigation, the truly driverless
car will probably emerge somewhere else †rst.
Alex Padilla, a member of California’s state Senate who promoted the law on testing driverless vehicles, is con†dent that
most people will want it (though there will always be some who
enjoy the sport of doing their own driving). It will bring huge
bene†ts. People who spend hours driving every day will get a
chunk of their life back, to work, rest or play while they are on the
road. Less congestion means less wasted fuel and fewer emissions. Volvo has already demonstrated a way of packing autonomous cars together in Œroad trains, greatly increasing the capacity
of roads while reducing traˆc jams. The aerodynamic e…ects of
road trains o…er scope for even greater environmental gains: a
1995 study by the University of Southern California showed that
they can improve fuel eˆciency by up to 30%.
Google’s stunt with the blind man points to another big advantage of the driverless car: it can provide mobility for the growing number of older and disabled people in the rich world and in
some emerging markets too. Mr Ghosn points out that a baby
born today might easily live to 100, but from the age of about 75
many people will su…er health problems a…ecting their ability to
drive. Parents, too, will welcome a car that does the school run for
them. And teenagers will no longer be put o… getting their †rst car
by tough driving tests and steep insurance rates because they will
need neither licences nor personal insurance. Business travellers
may sleep in driverless Winnebagos that hurtle down the motorways at night, delivering them to the next morning’s meeting.
Electronic guardian angels
Most important of all, the driverless car will drastically reduce the carnage of road accidents and the colossal medical costs
associated with them. A new study by the World Health Organisation shows that such accidents kill a shocking 1.24m people a
year worldwide. McKinsey’s Mr Kaas says that in China and other
countries where most motorists are fairly new to driving, safety
features are an important selling point for cars.
Cars on autopilot will also radically change the car-insurance business. Most of the cost of this is to cover liability for accidents, which will become rare, so revenues will come down a lot.
Stricter speed limits, safer cars, seat belts and the like have already
brought a steady decline in casualty rates since the 1960s, when
Ralph Nader wrote his anti-car diatribe, ŒUnsafe at Any Speed,
but now there are signs that in America Œdistracted driving‹texting, phoning and tweeting at the wheel‹is reversing the trend.
If automated driving means more people are able to use
cars, and more cars can safely be †tted onto the same roads, that
should be good for the motor industry. In time cars that have hard-1
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2 ly any accidents should also become cheaper to make, because
they will not need to be so robust. But in the shorter term the carmakers will have to add lots of expensive sensors, computing
power and software to their models, which will make it harder
to turn a pro†t. Larry Burns, a former GM executive who now
works on driverless cars and other transport issues, says the
technology looks inevitable, but it is hard to see how it will deliver value for car companies’ shareholders.
As car users do less driving and spend more time as passengers, they will also become less aware of how well a car performs, which is currently a big selling point. Stefano Aversa of
AlixPartners worries that cars will become commoditised, rather like dishwashers. Makers may have to change their marketing
to put more emphasis on styling, interior comfort and brand. Mr
Ghosn thinks they will †nd a way: ŒWhat you market in a car is
not about what you use but about what you dream. John Eddy
of Arup Associates, a big †rm of consulting engineers, says town
planners, property developers and builders need to start thinking about the e…ect of self-driving technology on demand for
roads, parking, housing and so on. So far there is little sign that
this is happening. But the driverless car is de†nitely on its way. 7
Luxury cars
Dreams on wheels
Why everyone wants to be in the top end of the market
BRITAIN’S ECONOMY MAY be heading for a triple dip, but
for posh British cars the recession has long been over. Sales
of Jaguar Land Rover (JLR) last year were 30% up on the previous
year. Over the past two years JLR has taken on 9,000 people, and
has just decided to near-double the size of the engine factory it is
building in the West Midlands.
Rolls-Royce, which sold a record 3,575 of its ultra-luxury
cars last year, is on a roll too. At the Geneva motor show it unveiled the new
Wraith, a coupé for playboys with at least
¤245,000 ($320,000) to spare who want
to leave the chau…eur at home and do the
driving themselves. Bentley, which
launched a new Flying Spur limousine at
the Geneva motor show, enjoyed sales
growth of 24% last year.
These days JLR is owned by India’s
Tata Group, Rolls-Royce by BMW and
Bentley by Volkswagen, but the cars’ appeal still relies on their quintessential Britishness. Similarly, the success of BMW,
Mercedes and Audi cars rests on their German styling and precision engineering,
both in rich countries and among the new
wealthy of the emerging world.
The contrast between the luxury
end and the mass-market part of the European car business is striking. BMW has recently been making operating pro†ts of
about ¤4,000 ($5,200) on each car it sells
whereas Opel-Vauxhall, the European
arm of GM, has been losing about ¤1,500
12
per car. And the global boom in premium-priced cars looks likely
to continue. ŒOne thing is for sure, says Rolls-Royce’s boss, Torsten Müller-Ötvös. ŒYou will see more rich people in the world.
The group of Œultra-high net worth individuals from which his
customers are drawn is expected to grow by 3-5% a year in the
years ahead. And in East Asia, where sales are growing fastest, it
is more acceptable‹expected, even‹to underline your success in
life by conspicuous consumption.
In a recent study of motor-industry executives from around
the world by KPMG, those from rich countries said customers
were scaling down to smaller, more eˆcient and greener models, whereas those from the BRIC countries reported that buyers
wanted upmarket models. Even those who could not currently
a…ord these seemed to be looking forward to the day when they
would. Tata’s super-cheap Nano has not sold well because India’s †rst-time car buyers would rather wait than drive what
they see as a poor man’s car.
The feelgood factor
A survey by McKinsey of Chinese consumers found that
after an initial burst of Œif you’ve got it, ‡aunt it, motives for buying foreign luxury brands were becoming more subtle. Some respondents saw having the right car as a visiting card with which
to impress potential business partners. Many considered a fancy
car a delightful self-indulgence rather than something to show
o… to others. Mr Müller-Ötvös sees the same trend among RollsRoyce buyers: they are less interested in exterior bling, more in
interior comforts, Œlike having the fur inside your coat.
In China the market for luxury cars in the past decade has
grown by an average of 36% a year, far outstripping the 26% annual rise in its overall car market. Even as growth slows down in
the next few years, McKinsey expects the premium-car market to
maintain a lead, expanding by an average of 12% a year to 2020,
compared with around 8% for the car market as a whole. By then
China will be the biggest market for luxury cars.
Nor is it just Chinese buyers who are keen on status symbols on wheels. JLR’s sales chief, Phil Popham, says his company
expects the global market for premium cars to increase by up to
45% over the next ten years. JLR is looking beyond the BRICs into
the MIST: populous countries such as Mexico, Indonesia, South 1
One of
RollsRoyce’s
stories is
that threequarters of
the cars the
company
has ever
produced
are still on
the road
The Economist April 20th 2013
SPECIAL REPORT
C ARS
Distant peak car
Carmakers worry that one day demand for cars will stop rising. But that is a long way o…
IN 1924 FORD ran an advertisement headlined ŒHis First Car, urging fathers to buy
their teenage sons their †rst set of wheels.
The idea caught on. For boys especially,
learning to drive became an essential part of
growing up. By the late 1970s 86% of American 18-year-olds‹of both sexes‹had a
driving licence. But then the trend went into
reverse: researchers at the University of
Michigan found that in 2010 only 61% of
18-year-old Americans had licences. Other
rich countries are going the same way.
Teenagers are showing less interest in cars as
they turn their attention to smartphones and
social networking.
This is a worry for carmakers, who are
wondering where their future customers are
going to come from. In the two decades to
2008 the number of miles driven by Americans in their 20s fell by 8%. In Britain a study
for the RAC Foundation, a transport-research
body, found a 30% drop among men in the
same age group between 1996 and 2006.
One reason for concern is that half the
world’s population now lives in towns and
cities, which have only so much space for
cars. Even in rapidly growing car markets
such as China, city governments in the more
prosperous parts of the country are beginning to restrict new car registrations and
invest heavily in public transport.
Young urban residents may also be
meeting up less often in person, thanks to
social-networking sites that let them keep in
touch digitally. So they have less need for a
car, and when they do need one they turn to
car clubs, which o…er rental by the hour in
their neighbourhood, and to car-sharing
schemes. In particular, the generation who
came of age after 2000, the so-called Œmillennials, express a preference for having
access to rather than owning cars. But some
of that may be just talk. In a survey by McKinsey, American millennials said they expected
to use car clubs in the future, but when asked
if owning a car would remain an important
status symbol, they were much more likely to
answer Œyes than older consumers.
Economic factors, too, work against
car ownership. Sheryl Connelly, Ford’s Œglobal trends and futuring manager, notes that
a few decades ago teenagers in America
often got free driving lessons at school, but
now they may have to pay up to $800 for
them before they can sit their test. The cost
of adding a young driver to the family’s
car-insurance policy too has risen sharply,
she says. In Britain the RAC Foundation study
found that fewer young men are driving
because their employers have cut back on
providing company cars.
However, studies also show a marked
rise in the proportion of elderly people with
driving licences. Baby-boomers pretty much
all learned to drive, and now that they are
beginning to retire they expect to continue
motoring. The development of assisted
driving, followed one day by fully automated
cars, will allow them to stay mobile for much
longer.
2 Korea and Turkey, whose middle classes are also expanding. Its
cars, especially its Range Rover sport-utility vehicle, have joined
the elite group of ŒVeblen goods, the sort that become more desirable as they get more expensive (named after Thorstein Veblen, a sociologist who invented the concept in 1899). The †rst incarnation of the Range Rover in the 1970s was a rugged,
utilitarian beast ideal for farmers. The latest version, with its
sleek styling, plush interiors, high-tech aluminium frame and impressive performance, caters to a di…erent kind of customer.
Prices range from £71,000 ($109,000) to well over £100,000.
The key to success in the luxury market, explains Mr
Müller-Ötvös, is that customers want to be able to tell their
friends, family and business associates some good stories about
what they have bought. For a brand as steeped in history as
Rolls-Royce, that is no problem. One of its stories is that threequarters of the cars the company has ever produced are still on
the road: ŒIt is a smart investment, he says. McLaren, a successful British maker of sports cars, is drawing on its heritage as a Formula 1 racing team. Tesla’s Model S glories in being an advanced
car made by a Silicon Valley start-up created by a tech billionaire.
This lucrative market is hard to get into. Even Mercedes reThe Economist April 20th 2013
What may be happening in rich countries is a one-o… shift in the timing of people’s driving careers, so that they start later
but then continue well into old age. This may
be no bad thing for carmakers. It has long
been an open secret in the business that cars
are advertised as being for the young but are
bought mainly by the middle-aged with the
necessary disposable income. In America the
average Mercedes buyer is in his late 50s, and
even the supposedly youth-oriented MINI
Cooper is typically bought by people in their
early 40s. The world’s biggest car markets‹
China, North America and Europe‹are all
greying.
So it is not clear that declining car
ownership among young urbanites will have
more than a marginal e…ect on overall car
sales. Besides, argues Renault-Nissan’s Mr
Ghosn, for most people Œtheir car is more
than an object. For some it is an extension
of their home, he says, and most people
would rather not share their home. For
others it is their pet, and who wants to share
their pet?
All in all, Œpeak car‹the point at
which worldwide demand for cars will stop
rising‹still seems quite a long way o…. In
the rich world some of the economic factors
that have deterred young people from taking
up driving will fade away: as cars become
increasingly self-piloting and accident rates
fall, insurance costs should decrease, and in
time there will be little or no need to take
expensive lessons.
cently failed in its attempt to revive Maybach, a pre-war ultraluxury brand. It took VW’s Audi three decades of steady improvements and skilful marketing to reach its current level of desirability. Japan’s three biggest carmakers have put a lot of e…ort
into creating premium brands of their own‹Toyota with Lexus,
Nissan with In†niti and Honda with Acura‹but have yet to catch
up with Europe’s most prestigious marques. KPMG’s Mr Leech
thinks they may do well with those Asian consumers on whom
the †ner points of German or British styling are lost, but McKinsey’s Mr Kaas is not so sure. Chinese consumers are developing
Western tastes, he says, and value the long history and brand cachet of European luxury marques.
Some of Europe’s struggling volume carmakers, such as
Peugeot and Opel, are trying to move upmarket too in order to
get back into the black. Russia’s president, Vladimir Putin, is calling for a revival of Soviet-era luxury brands such as Zil and
Chaika. China’s new carmaker, Qoros, may also be aiming to establish itself as a premium brand. Mr Kaas says they all need to
hurry up. Although brand loyalty in emerging markets is less
strong than in the West, tastes are maturing and new luxury
brands will †nd it ever harder to grab a share of the cake. 7
13
SPECIAL REPORT
C ARS
Imagining the industry’s future
The road to 2033
How might carmaking look 20 years from now?
THE PAST TWO decades have been an exciting time for the
motor industry, but not always in a good way. The battle to
achieve scale to survive in a global market produced victims as
well as winners, and some of the resulting deals were better
than others. Toyota’s absorption of Honda in 2027 went surprisingly well, though it cost a Japanese minister his job. VW’s merger with Tata Motors came as something of a surprise, but with
hindsight it made sense: it allowed the combined company to
claim the crown as the world’s biggest carmaker and take the
lead in the booming South Asian market. Fiat-Chrysler’s alliance
with Japan’s Suzuki and its Indian partner, Maruti, has proved
rather unwieldy and is still not working smoothly. Hyundai-Kia
has worked hard at pushing up its share of the market, having
mopped up some casualties among Chinese carmakers.
China now has its very own car giant, Zhongguo Tongyong
Qiche (China General Motors), the majority-owned aˆliate of
America’s GM that emerged from the messy break-up of joint
ventures between Chinese and foreign carmakers in the early
2020s. China General Motors and China People’s Car (the country’s second car company, better known as China Volkswagen)
have pleased the government by launching Chinese-branded
and Šstyled cars that are enjoying rising sales across Asia.
In the euro zone years of painful restructuring are at last
paying o…, with GM’s Peugeot-Opel division enjoying a revival.
But excess carmaking capacity almost everywhere means that
nobody is making much money. Further consolidation looks
likely, and not just among car companies. The recent takeover of
Ford by IBM follows naturally from the carmaker’s argument
that it should be seen primarily as a software and systems-integration †rm. But IBM’s plan to sell Ford’s manufacturing operations to Magna, a big components-maker, has fallen through.
By the late 2010s battery technology had got so much better
that some carmakers lost interest in internal-combustion engines, but they had to think again. The opening up of the vast
shale-gas †elds across Asia made gas a much more attractive proposition. Since gas is much cleaner to burn than petrol or diesel,
many carmakers were able to meet the 2020 targets for carbon-
14
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Future special reports
(which was never resolved)
International banking May 11th
caused a spate of crashes of cars
Myanmar May 25th
running on autopilot, leading to
Germany June 15th
a ‡urry of liability suits. Even so,
The Arab spring July 13th
city governments in China
Previous special reports and a list of
pressed ahead with their ban on
forthcoming ones can be found online:
manual driving on busy arterial
economist.com/specialreports
roads to cut congestion and accidents. Now the practice is
spreading to Western cities. The mayor of Toronto, Justin Bieber,
recently pushed through a radical plan to ban all private cars in
the city centre and replace all cabs with driverless taxis. Similar
moves in California have prompted the creation of the Steering
Wheel Club, which defends Americans’ right to drive. It is led by
a former lobbyist for the National Ri‡e Association.
Licence not to kill
Cars are now considered perfectly safe when piloting
themselves in any situation. Even so, lawmakers in most countries have been slow to repeal the laws on driving tests and licences, and in most places the rules still call for at least one sober
Œdriver sitting in a front seat. But driving tests have been simpli†ed now that there is no longer a need for manual manoeuvring
into parking bays. The Silver Riders, a pressure group formed by
octogenarian baby-boomers, is campaigning to scrap driving licences altogether so that elderly Americans can get around in their self-driving
motors no matter what physical shape
they are in. The campaign has now become generation-spanning, attracting
support from many teenagers who want
to skip driving lessons.
Ubiquitous on-board systems for
monitoring speed limits and other traˆc
restrictions on every stretch of road have
yielded some unexpected savings: highways authorities no longer have to maintain super‡uous traˆc signs. Britain’s
Royal
Automobile
Club
recently
launched a nostalgia-fuelled drive to exhibit a representative collection of them
in a new museum alongside Birmingham’s Spaghetti Junction. 7
The Economist April 20th 2013