UPSC Mains 2019: Shifting gears to roll out electric vehicles

automotive industry

 

Topic: Shifting gears to roll out electric vehicles

Topic in Syllabus: Infrastructure – Energy

electric vehicles

Context:

The global automotive industry is on the verge of a big disruption. Digitization, increasing automation, and new and emerging technologies would revolutionize the way people move. The Indian automotive industry has begun to feel the ripple effects of this global disruption.

 

Present status of Global automotive industry:

  • With growing concerns towards sustainable development and mitigating climate change, there is a need to shift from the current unsustainable approach to a more sustainable effort.
  • Urban passenger mobility has undergone significant changes over the past few decades due to rapid industrialization and the boom of the IT sector.
  • Travel patterns have become increasingly complex and difficult to predict and manage. This has put increasing pressure on bigger cities and their transport and infrastructure.

 

Facts:

  • Global sales of passenger cars are forecast to hit 78.6 million vehicles in 2017.
  • Along with China, the United States is counted among the largest automobile markets worldwide, both in terms of production and sales.
  • About 6.9 million passenger cars were sold to U.S. customers in 2016, and around four million cars were produced here in the same year.
  • The United States became a key automotive market in the early 1900s, when Ford introduced assembly line car production to mass-manufacture its Model T.
  • Today, the Ford Motor Company still ranks among the leading manufacturers of passenger cars, its most popular passenger car model currently being the Ford Focus, which was also one of 2016’s bestselling light vehicles worldwide.
  • In terms of revenue, Toyota, Volkswagen, and Daimler topped the list of major automobile makers in 2016, while the automotive supplier industry was dominated by Bosch, Continental, Denso and Magna.

 

Key findings:

Overall, the global automotive industry is in better shape than it was five years ago, especially in the US, where profits and sales have recovered following the recent economic crisis, and in China, where growth remains strong. This progress will likely continue. By 2020, global profits for automotive OEMs are expected to rise by almost 50 percent. The new profits will come mainly from growth in emerging markets and, to a lesser extent, the US. Europe, Japan, and South Korea will be stagnant in terms of profit growth.

 

There are four key challenges that OEMs need to address to get a piece of future profitability. The analysis of this report projects to 2020, but these challenges will shape the industry until at least 2025.

  • Complexity and cost pressure: There will be more platform sharing and more modular systems. At the same time, regulatory pressures will tighten, and prices in established markets are likely to be flat.
  • Diverging markets: OEMs need to adapt to changing regional and segment patterns of supply and demand with respect to their production and supply base footprints, supply chains, and product portfolios; and the emerging Chinese aftersales market offers new growth opportunities.
  • Digital demands: Consumers want more connectivity, are focused on active safety and ease of use, and are increasingly using digital sources in making their purchase decisions.
  • Shifting industry landscape: Suppliers will add more value in alternative powertrain technologies and in innovative solutions for active safety and infotainment; Europe needs to restructure and adjust its capacity to better match demand; and competition is emerging from China.

 

What are the future challenges and opportunities?

Apart from sales volume growth, four challenges will shape the near and medium-term future. The industry response to these challenges could raise profitability by EUR 2 billion in a base case scenario. These challenges will matter much more for established markets than for emerging ones.

  • Complexity and cost pressure: The increase in regulations with respect to environmental and safety standards will raise costs but also increase complexity, as they need to be managed apart from domestic markets. The growing number of derivatives serving different vehicle segments and markets based on a single platform also raises complexity. At the same time, OEMs will have to develop alternative powertrain technologies for lower-emission vehicles without knowing what will end up being the prevailing technology of the future. This will require significant investment. Given all these pressures, plus flat net price development due to less budget available for new features, it will be more difficult for OEMs to differentiate themselves with new features while extracting economic value from these forces.
  • Diverging markets: Emerging markets’ share of global sales will rise from 50 percent in 2012 to 60 percent by 2020, while their share of global profits is also set to rise by 10 percentage points. However, the location of current production and supply bases is not sufficiently aligned to future sales. Moreover, there is potential for “portfolio mismatch,” as smaller vehicle classes are growing more strongly than others, particularly in fast-growing emerging markets. Finally, OEMs need to prepare for the Chinese aftersales market, which will grow an estimated 20 percent per year.
  • Digital demands: When it comes to buying a car, research shows that digital channels are already the primary information source for customers. For many, the next step could be online purchasing. This might be an opportunity for OEMs, but it also means the potential threat of competition from online retailers and puts pressure on the existing dealership structure. The growing role of digital also applies to the driving experience. Consumers want to combine mobility with communication. This could be an opportunity for OEMs, but only if they can figure out how to make money from this desire.
  • Shifting industry landscape: As OEMs seek to develop alternative powertrain technologies, suppliers will likely provide more of the value-added content per car. In addition, OEMs need to ensure that their suppliers’ production footprints – especially in emerging markets – match future market demands and their own production plans. OEMs in Europe have one unique challenge: managing the restructuring that is clearly required. And everyone will have to deal with emerging Chinese players entering new segments and markets.

 

Challenges in India:

  • According to McKinsey & Co, four technology-driven trends -electrification, shared mobility, connectivity and autonomous drivingnare leading the automotive industry to this disruption.
  • These trends will shift markets and revenue pools, change mobility behaviour and build new avenues for competition and cooperation.
  • This would bring a shift in consumer behaviour and their buying pattern, although it would be interesting to watch how this trend changes geographically and across continents. Globally, revenue pools from conventional sources such as one-time vehicle sales and aftermarket sales could continue to grow at their current pace.
  • How prepared are we in India to look at sustainability as a larger issue and adopt newer and alternative sources of technology, namely, electrified vehicles?
  • The automotive market in India is going through a rapid metamorphosis, offering many choices to consumers beyond just internal combustion engine (petrol/diesel).

 

Way forward:

  • Electrification of vehicles a sustainable solution to counter the growing levels of vehicle pollution in metros is of particular importance to India today.
  • By 2030, electrification could lead to electrified vehicles holding a substantial share (up to 50 per cent of new vehicle sales in a breakthrough scenario) of the global automobile sector, according to McKinsey & Co.
  • While global EV sales remain low, examples from other countries indicate that various factors a mix of push and pull could determine the pace of EV penetration in India.
  • If India sees a similar momentum, it will significantly impact manufacturers across the automotive value chain. This would mean that the customer would be “spoilt for choices in technologies”.
  • Now the demand is shifting more based on convenience and sophistication, not to forget the awareness and inclination towards safety.
  • If we have to address the challenges our country is facing – the increasing fuel import costs and pollution — this can be managed with hybrids. We will have to work on it to see the challenges and find solutions to resolve them.

 

Sample Question:

Q) What challenges will India face in mainstreaming electric vehicles and how these challenges can be overcome? Examine. (200 Words)