Auto Industry ‘Disruption’ Overrated, Analyst Argues

As recently as five years ago, analysts predicted wider acceptance of electric vehicles and designs dictated by new markets as sales growth slowed or stopped in mature markets such as those in North America and Europe. Instead, global companies have increased their influence by stepping up R&D of new technology and vehicles.

Joseph Szczesny

May 2, 2016

4 Min Read
Consumers failing to respond to EVs in big numbers in China
Consumers failing to respond to EVs in big numbers in China.

The auto industry is highly adaptive to change in the face of significant financial, political and technological challenges, according to a new analysis from a Paris-based group that has studied the industry’s structure over the past decade.

Tommaso Pardi, director-GERPISA (the French acronym that translates to the International Network of the Automobile), notes in a presentation to a recent University of Michigan conference on auto-industry globalization the basic structure of the car business has proved highly resilient despite the upheavals of the past decade.

Only five years ago, it was widely assumed by GERPISA and other analysts that the development of the car business in emerging markets would force significant changes within the global industry. “We thought it would lead to radical restructuring of the industry,” Pardi says, noting predictions at the time indicated a wider acceptance of electric vehicles and designs dictated by new markets as sales growth slowed or stopped in mature markets such as those in North America and Europe.

Instead, global companies have increased their influence by more closely controlling their networks of suppliers and tightening control over R&D of new technology and vehicles.

In China, the largest of the emerging markets, joint ventures have given large global companies such as General Motors, BMW and Volkswagen more influence to shape the local industry in a way that is more favorable to them. Instead of following the dictates of the central government, regional governments have aligned themselves with the multinational companies through JVs, he says.

The Chinese central government never has imposed overarching plans on the country’s car industry, such as the development of a strong indigenous company or support for companies that are failing or lagging behind the rapidly growing demand for new cars.

Pardi notes at the beginning of the decade the Chinese government was discussing an automotive fleet where 20% of the vehicles would be electrically powered. “That’s not going to happen. It’s not even going to be close to 15%,” he says.

“The Chinese government wanted a new version of the ‘People’s Car,’ he says. “We also thought there would be car sharing and fleets of low-speed electric vehicles.” Actual development has been much different, he says.

Motorists worldwide generally have resisted change and gravitated toward larger utility vehicles rather than smaller cars or even battery-electric vehicles, which would he particularly practical in heavily polluted cities in China, Pardi says.

Regulations, Stepped-Up R&D Biggest Influences

Tesla, often portrayed as the symbol of potential disruption in the car business, never has turned a profit during the eight years its high-performance EVs have been on the market, Pardi notes.

“This kind of challenge is not sustainable. Car makers are in a hegemonic position,” he says, contending that provides them with ample power to resist all but incremental change for the foreseeable future.

EV sales will grow slowly and production will move gradually to places such as Mexico and Eastern Europe. “Unless there is some drastic change, we’ll see more of the same,” Pardi predicts. “The core of the industry is very strong.”

Regulators, meanwhile, have emerged as some of the industry’s biggest change agents with their demands for better fuel economy and fewer pollutants from vehicles, Pardi suggests.

Regulators’ influence is reflected in the so-called Dieselgate scandal, in which Volkswagen tried to maneuver around regulations rather than meet the technical and cost challenges presented by emissions and fuel-economy standards.

Pardi, however, notes the industry’s structure and technological portfolio define how it is regulated and it also largely defines compliance with regulations.

Regulatory pressure has led to the internal-combustion engine becoming more sustainable with major improvements in fuel economy and emissions, the analyst says.

“Consolidating R&D is the key to power in this industry,” he says. “Instead of transferring R&D to regional centers, it has been concentrated at headquarters. In addition, companies such as Toyota, Volkswagen, Renault, General Motors, Fiat Chrysler and Hyundai all have very strong regional ties even as they operate as global companies.”

Also demonstrating the major global automakers’ resilience is how they have confounded analysts’ predictions the industry will be disrupted by nimble competitors able to deliver sophisticated products at relatively low cost.

A major change in the industry over the past decade, the rise of global suppliers, has reinforced the centralizing power of the global automakers, which have been able to impose their standards in areas such as manufacturing and logistics, Pardi says. Even sophisticated new suppliers of computer software and high-tech features haven’t been able to override the power of the big manufacturers that rule the industry, he says.

The cost structure of the automotive sector and the value to consumers it offers serves as hedge against the “disruptive” scenario, Pardi says.

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