The Risks of Remaking the Auto Industry

Prakash Krishnaswamy analyzes the risks associated with remolding the global automobile industry.

Published: 02-Dec-2011

The auto business has reached an exciting but perilous inflection point. As it emerged from the 2008/2009 downturn, new forces, quite separate from the financial gale battering us all, were transforming the industry. Globalization, the growing role of electric vehicles, shifting demographics and shortage of qualified engineers are among a variety of factors restructuring the future of of the automobile.

As the industry enters this new phase, major players, on whom we rely for jobs, technology and innovation, are about to place megabets on game-changing business models and new technologies. But megarisks accompany megabets. Let’s look at both:

Globalization has dissolved traditional market barriers. The industry is now truly global. Chinese car manufacturing is the new juggernaut, and China is the largest automobile market in the world.

The Chinese are addressing the gaps that exist in their engineering expertise, manufacturing quality, global management know-how and supply chain. Once these gaps are closed the Chinese will enter the U.S. and European markets with cheap cars and severely disrupt the low end of the market. The low cost cars will hit U.S. and European shores in the next five years or so. Only radical new solutions can address this threat.

Likewise, the U.S., European and Japanese car companies will compete with local incumbents as they capitalize on fast growth opportunities in emerging markets like China, India, Brazil and Russia. However, these companies will need to make the right kinds of cars and learn to make money at sub 5,000 price points.

RISK: Price levels that are completely outside their whole paradigm. The lure of opportunities in the era of green technology has attracted a slew of automobile startups, but many of them will not survive in this industry.

These “micro OEMs” plan to produce alternate vehicles including electric vehicles and are pinning their hopes on unproven business models such as subscriptions, innovative but inadequately proven technology, and fragile operational infrastructures in a nascent smart grid.

The young EV companies are vulnerable to factors that are entirely beyond their control, the biggest threat being the cost of gasoline at the pump. Stable gas prices weaken the case for electric vehicles in the minds of the consumer. In addition, the internal combustion engine has had a tummy tuck and facelift. Lean and mean, it is squeezing more miles out of every drop of gasoline. In the near term at least, most consumers will be reluctant to choose EVs if there are stable fuel alternatives. That means conventional cars are still the future.

RISK: New and unknown technology and business risks of EV, batteries and infrastructure. As cars morph into computers on wheels, they will be connected to the Internet and each other.

This paradigm will spawn a whole new breed of entrepreneurs that will drive innovation. Smaller companies with modest budgets are likely to pioneer the adoption of collaborative innovation models. They will reach out to the passionate cult of automobile enthusiasts in mature markets. They will be able to harness bright ideas from the “bottom of the pyramid” in emerging markets. These potentially disruptive practices will challenge the larger car companies that have mature but inflexible product development processes. (DARPA, the Defense Advanced Research Projects Agency, recently crowd-sourced the concept development of a combat military vehicle.)

RISK: Can car companies be blind-sided by some novel, crowd-related innovation that catches them completely by surprise? Automobiles must and will incorporate more unconventional, even rare and exotic materials in the future.

Fuel economy mandates will spur the development of lighter cars with materials like aluminum, magnesium and composites. EVs and hybrid vehicles will use materials such as lithium and rare earth metals like neodymium and lanthanum.

RISK: Ensuring availability and cost stability of these materials is a geopolitical challenge. For example, 85% of magnesium is mined in China. Lithium, neodymium and lanthanum, all crucial materials used in hybrid cars, are imported primarily from China.

A new generation of young drivers, graying baby boomers and a large number of first-time drivers in emerging markets will challenge ergonomists and cultural anthropologists.

Car companies have decades of legacy experience in developing products for the baby boomer generation. The digital Gen Y and Gen Z kids however are quite unlike their analog parents. Many of them are not in awe of the raw power under the hood. Car companies will need Apple-like savvy to endear themselves to a generation that will embrace high tech car interiors that are extensions of their unique lifestyles.

Prakash “Krish” Krishnaswamy, is President of EASi, a a division of Allegis/Aerotek Group, and a supplier of specialty engineering and design services to global car makers in the U.S., Europe, China and India.

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