Reading time: 8 minutes
The European economy has been on a downward spiral after the pandemic, and the once-thriving automotive industry is feeling the heat. Car companies are turning to the Schumpeterian process of creative destruction to reinvent themselves. Electric and software-driven cars are the new darlings
With the stagnation and economic deterioration in Europe, the automotive industry is facing immense pressure that could lead to its downfall.
The Eurozone market reports are lowering hopes of a sustained recovery in European car markets (source: Bloomberg).
The drama is palpable as the once-great automotive industry of Europe is forced to face the harsh reality that their days are numbered. The pressure is on, and the stakes couldn’t be higher. Will they be able to adapt to the changing times, or will they crumble under the weight of their own obsolete technology?
Speaking at a hearing in the European Parliament in Brussels on March 21st, 2023, ACEA President and CEO of Renault Group, Luca de Meo stated: “Europe and its auto industry are at a turning point. The challenges are huge, as is the pressure on the auto industry.”
Car prices rose due to chip shortage, but production volume did not. EU7 legislation increases the price of each ICE car. Furthermore, the strain on government funds caused by inflation, rising debt costs, and military spending makes earlier EV incentives unsustainable. While the US and China continue to support EV makers.
A devastating chip shortage has driven prices skyrocketing, while manufacturing levels have been constraint, casting a cloud over the industry’s future. And if that wasn’t enough, the EU7 legislation has now dealt a crushing blow, pushing up the prices of every ICE car to new heights. At the same time, inflation, rising debt costs, and military spending have strained EU governments funds to the breaking point, forcing them to abandon earlier EV incentives. While the US and China forge ahead with their unwavering support for EV makers, the future of the European automotive industry hangs in the balance, with everything to play for and everything to lose
This will also have an impact on the much-debated profitability of EVs. The industry and regulators must now find their courage and resourcefulness to face this massive challenge, or risk being devoured by the fires they have created.
Buckle up, folks, because this pressure cooker is about to blow!
Or is this just hyperbole since there is still hope?
Our industry believes that through software, autonomous driving, mobility services, and the like, an additional €1.5 to 3 trillion revenue pool will arise globally, in addition to the already-present €3 trillion revenue pool from selling 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. As a result, we logically believe that demand for automobiles will not decline and remain stable. A lower automobile ownership rate in Western urban centers is expected to be compensated by emerging economies such as India and Indonesia, which are tapping into the world’s widespread adoption of cars.
Is incremental business generated by NEW MOBILITY a pipe dream?
Let us examine some trends:
- The global automotive industry has been facing a severe microchip shortage, which has resulted in lower production volumes in 2021 and 2022 compared to 2019. However, experts predict that the future production levels will remain flat despite the recovery of the chip supply chain. This is partly due to the shift towards electric vehicles, which require fewer chips than traditional internal combustion engine vehicles.
- In key Western cities such as Berlin, car ownership per family has fallen below 40% due to various factors such as increasing traffic congestion, rising fuel prices, and the availability of alternative transportation options. Berliners, for instance, have been shifting to public transportation, bicycles, and electric scooters as these modes of transportation are more sustainable, affordable, and convenient.
- Car ownership in emerging nations is indeed correlated with household income, and typically, households earning more than $12,500 per year own a car. As the nominal income of a country’s population grows over this level, there is a general trend of mass adoption of automobiles. However, it is worth noting that this trend may vary depending on cultural, environmental, and policy factors. For instance, some emerging nations may prioritize public transportation or alternative mobility solutions over car ownership to reduce traffic congestion and carbon emissions.
- The shift towards electric vehicles (EVs) is expected to accelerate in the coming years due to increasing environmental concerns, government regulations, and declining battery costs. By 2030, it is estimated that EVs will account for over 50% of new car sales globally.
- The rise of mobility-as-a-service (MaaS) platforms such as ride-hailing, car-sharing, and subscription models are transforming 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 tech companies investing heavily in this technology. AVs have the potential to reduce accidents, improve traffic flow, and enhance mobility access for people with disabilities.
These insights give us confidence that we will NOT be able to sustain the same sales and manufacturing levels for cars while also providing new mobility services. The most visible challenge in the industry is repowering cars with electric motors and batteries.
Contrary to general belief, there is no additional mobility demand in the Northern Hemisphere markets.
Schumpeter says: Pie in the sky. New products and services will replace old ones.
According to 2017 research, there are ways to lower the total traffic of the Lisbon metropolitan region by 55%. Lisbon has a population of 2.8 million (about the population of Texas) and a land area of around 3,000 km2 (about the area of Beijing, China). This proposed reduction necessitates the use of shared vehicles and network optimization of vehicle loading and routing. Research in Helsinki found that if 4% of current cars on the road were shared, they could cover the totality of all car travels in Helsinki’s metropolitan region (because Helsinki has outstanding good public transport).
In urban regions, where most people reside, 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 completely autonomous driving, this vision will become a reality. Nobody knows when AD-capable automobiles will reach a tipping point, but they will eventually reduce car demand.
The pandemic, however, was a setback for carpooling. Suddenly, privacy took precedence over transportation costs or time spent behind the wheel. All car-sharing firms suffered significant losses. However, this business is reviving.
One may argue that Autonomous Driving can be priced as an extra, generating a new revenue stream, because drivers will gain time and are prepared to pay an additional price for this premium. And this will likely be the case for a while. However, once the cost of additional sensors and infrastructure expenditures is negligible, the only thing left is software and data processing. Overall, this will lower prices and revenue for manufacturers.
“Creative destruction” is the rockstar that smashes old tech to make way for the new
OEMs will have to base their financial flows on fleet operations rather than vehicle numbers. However, the goal is not to create as many EVs as possible.
Tesla’s Full-Self Driving (FSD) is a trailblazer in this regard: more than 80% of the Tesla fleet is equipped with Hardware 3, which can operate the FSD. Similarly, Tesla controls the distribution of the FSD to its drivers via Over-The-Air update capabilities. Tesla could sell the FSD at almost 0% additional cost to all owner of these cars.
Welcome to the new automotive business world.
In this regard, Tesla’s Full-Self Driving (FSD) is a trailblazer: more than 80% of the Tesla fleet is equipped with Hardware 3, which can operate the FSD. Similarly, Tesla controls the FSD distribution to its drivers through Over-The-Air update capabilities. Tesla could sell the FSD at absolutely no additional cost to all owners of these vehicles.
Welcome to the new world of automotive business.
Producing fewer automobiles, making them survive longer, and constantly utilizing them has a higher positive impact on the environment than simply switching to EV. Because EVs continue to emit CO2. Over a normal lifetime (150,000 km), the mid-sized EV emits 18.5-31.0 tons of CO2 equivalents, while the mid-sized ICE car emits 45.3-68.9 tons of CO2 equivalents.
We may reach our fleet emissions objectives if we just transition to electric drive trains without cutting the overall yearly number of automobiles, but we would lose on total emissions created by the cars.
To effectively provide future products and services, the automobile sector must acquire new skills and master new talents. The primary phases of this shift will be done within this decade, and we will witness that the organizations who prosper will be those who embrace this shift faster. Other companies will yield to this challenge.
Old business must die for new businesses to arise.
What we observe here is that the automotive industry “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism”, writes economist Joseph Schumpeter, as a general principle.
Do not regard the €2 trillion (approximately €253 more invested per person on the earth) in NEW MOBILITY as incremental. To be safe, presume that this NEW MOBILITY revenue will be taken from a person’s existing mobility cost.
Join the new era of mobility by investing in your future today. Don’t wait for the industry to pass you by. By choosing to invest in new automotive skill development, you’ll be positioning yourself for success in an ever-evolving industry. With €2 trillion being invested in NEW MOBILITY, now is the perfect time to take action and ensure that you’re equipped with the knowledge and expertise necessary to succeed. So don’t delay, invest in yourself and your future today.
So, what are you waiting for? Put your foot on the gas and invest in your future today. Who knows, you might even discover a passion for something you never knew existed. And if that’s not worth the investment, I don’t know what it is.
