How likely is a car revolution?

The car industry is more likely to evolve and survive than be edged out by new technology

Despite the advent of self-driving cars such as Drive4U, by French car-parts maker Valeo and Safran, a French maker of aerospace, defence and communications systems, their place in the real world is still uncertain.
Despite the advent of self-driving cars such as Drive4U, by French car-parts maker Valeo and Safran, a French maker of aerospace, defence and communications systems, their place in the real world is still uncertain.PHOTO: REUTERS

After 30 years of intense convergence in the car industry, shifting dynamics appear to be pushing cars into an unpredictable new future. This shift has not been triggered by the abrupt, secular shocks that many predicted, but by the steady maturation of the car industry and the markets it serves.

Even as potentially disruptive technologies and business models have emerged, the industry remains wholly resistant. 

This tension between evolutionary reality and revolutionary vision is on full display in Goldman Sachs' recent report on the seven megatrends it sees dominating the future of the car.

About half of these trends reflect the industry's deep conservatism; the other half represent far more uncertain forces that hold the potential to radically transform it. 

These four points demonstrate that carmakers may not be nimble, but their ability to co-opt and adapt to new challenges should not be underestimated:

Endless powertrain advancement

The steady march towards hybrid, electric and fuel-cell vehicles will continue.

But because the most extreme drivetrain innovations are driven more by regulation than economic reality, Goldman is probably correct in assuming that petrol and diesel will still fuel 75 per cent of the global fleet 10 years from now. 

Cars on a severe diet

Vehicles will become lighter as efficiency gains in petrol and diesel-based drivetrains begin to approach the point of diminishing returns. Advances in steel, cheaper aluminium and carbon fibrereinforced plastics make weight loss an obvious route to future efficiency gains.

Shift to emerging markets

Tighter regulation and higher consumer standards for innovation have coupled with flattening demand to make developed markets more competitive.

Meanwhile, emerging markets tend to have less regulation and lower standards for automotive technology, allowing producers to make huge gains in volume in these markets using only legacy technology.

That will remain an attractive strategy, but rather than the "shift" Goldman predicts, it will likely be more of a bifurcation: Traditional car industry values will thrive in developing markets, providing a foundation from which the industry will seek to tackle falling profits and looming disruption in developed markets.

Power shift to megasuppliers

Competitive convergence in the car industry has kept prices low and pushed the burden of cost reductions onto suppliers. While this has driven consolidation, the suppliers that have survived now enjoy a larger role in research and development and, therefore, value creation.

As carmakers become final-assembly and marketing companies, their inability to make meaningful market-share gains will continue to erode their negotiating power with large suppliers.

The other three trends Goldman identifies, however, are cyphers. A huge number of questions remain about how they will be deployed and what their real impact will be:

Connected cars, shared mobility

Shared mobility has particularly made some real-world impact. But even as mobility-sharing apps such as Uber and Zipcar have begun to affect how consumers use cars, their potential to disrupt the car industry remains unmet. Until mobility apps begin to meaningfully raise the low rate at which cars are utilised, they will not reduce aggregate demand for cars or replace taxis and rental companies as the car industry's main customer.

Autonomous driving on horizon

Even Goldman says such a move is not imminent, with full autonomous-drive capability being single-handedly pushed by a non-carmaker: Google.

The technology's transformative potential is nearly endless, but so too are the social, economic and regulatory changes needed to realise it.

Just as mobility apps are displacing taxis and rentals without fundamentally eroding car demand, so too might Google's technology affect trucking, trains and other non-car businesses before coming close to transforming the market for private, human-driven cars.

New entrants afoot

Goldman argues that electric and autonomous-drive technologies have reduced the industry's notorious barriers to entry.

Tesla's success in building a desirable electric car and Google's relentless drive toward autonomous capability may give that impression, but even fans have to admit that both of these companies are a long way from realising any kind of real influence.

Though new technologies, ideas and companies are challenging the entire automotive paradigm and upsetting almost a century of stable evolution, the industry's ability to adapt should not be underestimated.

Until consumers begin demanding fundamental changes in mobility, at least a few of the world's major carmakers will survive and, possibly, even help define, the new era of automotive technology.

The "revolution" will come only for those who cannot afford to keep up and they will ultimately fall victim to the same competitive, consolidating pressures that have ruled the industry for more than 100 years. The more things change in the car industry, the more they seem to stay the same.


A version of this article appeared in the print edition of The Straits Times on June 20, 2015, with the headline 'How likely is a car revolution?'. Subscribe