Schumpeter and the creative destruction of the car industry

The European economy is in a downward spiral following the pandemic, and the once thriving automotive industry is feeling the heat. Car companies are subjecting themselves to the Schumpeterian process of creative destruction in order to reinvent themselves. Electric cars and car software are the favorites of product strategists.

With stagnation and economic deterioration in Europe, the car industry is under immense pressure that could lead to profound changes and its demise

Eurozone market reports dampen hopes of a sustained recovery in European auto strength

The drama is palpable as Europe's once great car industry is forced to face the harsh reality that its days are numbered. The pressure is on and the stakes could not be higher. Will they be able to adapt to the changing times, or will they collapse under the weight of their own outdated technology?

At a hearing at the European Parliament in Brussels on March 21, 2023, Luca de Meo, President and CEO of Renault Group, said: "Europe and its car industry are at a turning point. The challenges are enormous, as is the pressure on the automotive industry."

Luca de Meo, CEO Renault Group and President of ACEA, the European manufacturers' association. 

Car prices have risen due to the chip shortage, but production volumes have not. The EU7 legislation increases the price of every car with a combustion engine. In addition, the strain on government funds from inflation, rising debt costs and military spending makes previous incentives for electric vehicles unsustainable. While the US and China continue to support electric vehicle manufacturers.

A devastating chip shortage has driven up prices while production levels have been constrained, clouding the industry's future. And as if that wasn't enough, EU7 legislation has now dealt a devastating blow, pushing the price of any combustion engine car to new heights. At the same time, inflation, rising debt costs and military spending have stretched EU governments' resources to the limit, forcing them to abandon previous incentives for electric vehicles. As the US and China press ahead with their unwavering support for electric vehicle manufacturers, the future of the European automotive industry hangs in the balance, with everything at stake and everything to lose.

This will also have an impact on the much-discussed profitability of electric vehicles. The industry and regulators must now summon their courage and ingenuity to rise to this massive challenge or risk being engulfed by the fires they have caused.

Take cover people, because this pressure cooker is going to explode!

Or is that just an exaggeration, because there is still hope?

Our industry assumes that software, autonomous driving, mobility services and the like will create an additional revenue pool of 1.5 to 3 trillion euros worldwide, on top of the existing 3 trillion euros in revenue from the sale of cars, trucks, commercial vehicles and related spare parts and services.

This expansion is the result of products and services that barely exist but are in demand. We therefore logically assume that demand for cars will not decline and will remain stable. A lower car ownership rate in Western urban centers is expected to be compensated by emerging markets such as India and Indonesia, which benefit from the widespread acceptance of cars worldwide.

Is incremental business through NEW MOBILITY a pipe dream?

Let's take a look at some trends:

• The global automotive industry is facing a severe shortage of microchips, which has led to lower production volumes in 2021 and 2022 compared to 2019. However, experts predict that future production levels will stagnate despite the recovery of the chip supply chain. This is partly due to the switch to electric vehicles, which require fewer chips than conventional combustion engine vehicles.
• In major western cities such as Berlin, car ownership per family has fallen to below 40% due to various factors such as increasing traffic congestion, rising fuel prices and the availability of alternative transportation options. Berliners, for example, have switched to public transport, bicycles and electric scooters as these modes of transportation are more sustainable, affordable and convenient.
• Indeed, car ownership in emerging markets correlates with household income, and typically households earning more than USD 12,500 per year own a car. As the nominal income of a country's population grows above this level, there is a general trend towards mass adoption of automobiles. However, it is worth noting that this trend may vary depending on cultural, environmental and political factors. For example, some emerging economies may prioritize public transportation or alternative mobility solutions over car ownership to reduce traffic congestion and carbon emissions.
• The shift to electric vehicles (EVs) is expected to accelerate in the coming years due to increasing environmental concerns, government regulations and falling battery costs. It is estimated that electric vehicles will account for over 50% of global new car sales by 2030.
• The emergence of Mobility-as-a-Service (MaaS) platforms such as ride-hailing, car sharing and subscription models is changing the way people access transportation. These platforms offer a flexible and cost-effective alternative to car ownership, especially in urban areas.
• Autonomous vehicles (AVs) are expected to become a reality in the next decade, with major automotive and technology companies investing heavily in this technology. autonomous vehicles have the potential to reduce accidents, improve traffic flow and improve access to mobility for people with disabilities.

These findings give us confidence that we will NOT be able to maintain the same level of sales and production for cars while offering new mobility services. The most visible challenge in the industry is the repowering of cars with electric motors and batteries.

Contrary to popular belief, there is no additional demand for mobility in the northern hemisphere markets.

Schumpeter says: Pie in the sky. New products and services will replace old ones.

According to a 2017 study, there are opportunities to reduce overall traffic in the Lisbon metropolitan region by 55%. Lisbon has 2.8 million inhabitants (about the population of Texas) and a land area of about 3,000 km2 (about the area of Beijing, China). This proposed reduction requires the use of shared vehicles and the optimization of the network of vehicle loading and routing. Research in Helsinki showed that if 4% of the cars currently on the roads were shared, they could cover all the car trips in the Helsinki metropolitan area (because Helsinki has excellent public transport).

In urban areas, where most people live, car sharing can reduce traffic, parking space and the number of vehicles by at least 50%.

In today's world, this is a utopian ideal. However, with the advent of fully autonomous driving, this vision is becoming a reality. No one knows when AD-enabled cars will reach a tipping point, but they will eventually reduce the demand for cars.

However, the pandemic was a setback for carpooling. Suddenly, privacy took precedence over transportation costs or time spent behind the wheel. All car-sharing companies suffered significant losses. However, this business is making a comeback.

One could argue that autonomous driving can be charged as a premium to generate a new revenue stream as drivers gain time and are willing to pay an additional price for this premium. And this is likely to remain the case for a while. However, if the cost of additional sensors and infrastructure expenditure is negligible, all that remains is the software and data processing. Overall, this will lower prices and sales for manufacturers.

"Creative destruction" is the rock star that smashes old technology to make way for new

OEMs will have to base their cash flows on fleet operations rather than the number of vehicles. However, the goal is not to develop as many electric vehicles as possible.

In this respect, Tesla's Full-Self Driving (FSD) is a pioneer: more than 80% of the Tesla fleet is equipped with hardware 3 that can operate the FSD. Similarly, Tesla controls FSD distribution to its drivers through over-the-air update capabilities. Tesla could sell FSD to all owners of these vehicles at no additional cost.

Welcome to the new world of the automotive business.

Producing fewer cars, making them last longer and using them all the time has a greater positive impact on the environment than simply switching to electric vehicles. This is because electric vehicles continue to emit CO2. Over a normal lifetime (150,000 km), the mid-size electric vehicle emits 18.5 to 31.0 tons of CO2 equivalent, while the mid-size combustion engine car emits 45.3 to 68.9 tons of CO2 equivalent.

We can achieve our fleet emission targets if we only switch to electric powertrains without reducing the total annual number of cars, but we would lose total car emissions.

To effectively deliver future products and services, the automotive industry needs to acquire new skills and master new talents. The main phases of this change will be completed within this decade, and we will see that the organizations that succeed will be the ones that embrace this change faster. Other companies will rise to the challenge.

Old business must die so that new businesses can emerge.

What we are seeing here is that the auto industry is "ceaselessly revolutionizing the economic structure from within, ceaselessly destroying the old and ceaselessly creating a new. This process of creative destruction is the essential fact of capitalism," writes economist Joseph Schumpeter as a general principle.