Mike Smitka, Torino Italy, November 23, 2016 reposted from the Autos and Economics blog
In 2030 I expect that Toyota, VW and GM will remain the top 3 global automotive producers (though not necessarily in that order). The flip side is that neither vehicle electrification nor autonomy nor Mobility 2.0 businesses will prove disruptive.
…Disruptive Technologies? Not in Automotive!…
Each of these purported threats have their own challenges as technologies and businesses. That is for other blog posts. All three however have a common feature: new technologies roll out slowly, and in the auto industry they roll out very slowly. Even with rapid commercialization, in 2030 only 1 in 10 vehicles on the road will be BEVs (battery electric vehicles).
New technology adoption and diffusion follows a logistics process: slow early on, then accelerating, and slow again towards peak. That is true in theory: few are willing to chance adopting a technology when no one they know has done so. Similarly, towards the peak those who have yet to adopt a technology have refrained not because (or not only because) they are obstinate but due to idiosyncratic circumstances. This is a robust empirical finding, dating back to Zvi Griliches’ classic 1957 study of hybrid corn. Commercial hybrids were first developed in 1923. While half of Iowa farmers used such seeds by 1938, farmers in regions where corn was less widely planted continued to sow non-hybrid cultivars until the 1960s.
Automotive technologies are no different. Initial costs of a new technology will be high, while performance will still have room to improve. Historically many technologies appeared first as an option on luxury cars. If the uptake was good, one or more firms might make it a standard feature. As the volume rose, suppliers would reduce the price point, and OEMs would migrate it to high-volume products.
| Feasible BEV Rollout Scenario | |||
|
Year |
Global new vehicle output |
BEV share |
BEV share vehicles on road |
|
2020 |
100 |
1% |
0% |
|
2021 |
103 |
1% |
0% |
|
2022 |
106 |
2% |
0% |
|
2023 |
109 |
2% |
1% |
|
2024 |
113 |
3% |
1% |
|
2025 |
116 |
5% |
1% |
|
2030 |
134 |
41% |
11% |
|
2035 |
156 |
77% |
35% |
|
2040 |
181 |
81% |
55% |
This process is thus constrained by the commercialization process, by the standard “learning curve” and economies of scale effects, and by the time needed for the supply chain to add new capacity. It is also constrained by the new model development process, because it is highly unusual for a feature to be introduced in the middle of a model year. So the use of new technologies can only expand as models are redesigned, which for standard sedans is done a rolling 4-year cycle. That puts a limit on the pace of adoption. Furthermore, it may only be possible to introduce a radical technology with a new platform; those are developed on a rolling 6-10 year cycle. Drivetrains are also redesigned less often. And heavy trucks may not be fundamentally redesigned for as much as 20-30 years. (One major brand uses an H-frame first introduced in the 1960s, before the advent of the steel and aluminum alloys that are widespread in the passenger car market.)
[The bulk of the engineering for a standard passenger vehicle model takes place over roughly a 12-month period, with a smaller advance team working on model specifications at the front end of the process, and at the tail end a smaller team seeing the design through to SOP (the start of production). The full process thus spans 18-24s months. The rolling development cycle is thus due to staffing constraints in the development process, and the desire of the marketing and dealership end to have a steady stream of new models, but not a flood of them.]
In the past, even rapid rollouts of technology in the automotive space, such as when there is a “hard” regulatory deadline, has required over a decade. The fastest example of which I’m aware is the replacement of carburetors by technically superior fuel injectors, the latter necessary to meet emissions requirements. They had been used intermittently in racing from the 1950s, and began to appear on low-volume luxury cars in Europe in the 1970s. However, they were complex and costly mechanical contraptions. That changed with the introduction of microprocessor engine control units (ECUs), which also made fuel injectors much more effective. The first Motorola ECU was launched in 1980, and by 1990 GM had converted the last of its engines to the new technology. At the firm level, the rollout was over one decade, but for the industry as a whole it followed a logistics curve. Pulling off this fast introduction required huge investment. To facilitate the fast pace and not be hostage to Motorola, GM invested in its own semiconductor manufacturing operation; for a time it was the fourth largest chip maker in the world.
…15 years from now BEVs will still account for less than half of production. That’s hardly disruptive!…
So what does it look like if you combine industry specifics with a logistics curve? First, by 2020 global production will be 100 million vehicles, and slowly increasing. Globally there will be perhaps 1 billion vehicles in operation, with 8% scrapped in a given year (at which rate the average vehicle on the road will be 11.5 years old). Finally, because large vehicles are unlikely to be BEVs, it’s sensible to assume diffusion peaks at 80% of the market. You can read the numbers for yourself.
This is an excerpt from one section of a paper on new vehicle technologies that I presented at the “Toronto-Torino Conference” organized by the Munk School of Global Affairs at the University of Toronto, Collegio Carlo Alberto, and Politecnico di Torino. Along with wonderful food and wine, the conference also included a tour of the Torino assembly plant of Maserati.
27 Comments
I don’t know much about the auto industry, but I think that it would be strange if BEV vehicles account for a little less than 50% of automotive production but only 1% of actual cars on the road. Is it not possible for there to be a massive increase in demand due to extraneous circumstances, such as the price of oil, or simple tastes and preferences, if a large proportion of the population suddenly decided that they wanted to be more environmentally conscious?
Certainly demand shocks are possible, but then there has to be the capability of the supply side to make vehicles, and to roll out charging infrastructure, and generate sufficient grid capacity in the relevant geographies.
I don’t think I ever realized just how slow it took for technological innovations to be developed and implemented particularly in the automotive industry. I feel like every year I see car commercials about the newest features however switching from current gas engines to battery power is no small feat. I also wonder if current leaders (Tesla/Ford Prius) will continue to lead the field or if large investments by larger companies will allow them to overtake a company such as Tesla, similar to how Bud Light was able to outsell Miller Light after a decade of heavy marketing.
Tesla is insignificant in the auto industry. Elon Musk is very good at PR, but not so good at earning a profit or making cars.
But the new features you see advertised aren’t available instantly on every car from every manufacturer. Typically a new thing will start as an option on a couple vehicles, and if uptake is good be made a standard feature and marketed more heavily. But on a 4-6 year development cycle, and with 1-2 years to figure out how well something is doing, an industry-wide rollout takes time.
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On a similar note to Matt, I was unaware that such technology had the gradual curve in concern to implementation described above. Tesla is a company that comes to mind in regard to a corporation that has advertised and publicized BEV’s heavily. To the average consumer, the amount of advertising done concerning BEV’s would suggest that the heyday of the electric car is right around the corner, and that this mode of transportation is not the way of the future but the way of tomorrow and for some the present. I am curious as to how large companies are going to approach the production of BEV’s, as far as which portion of their facilities they will dedicate to the production of such vehicles in accordance with how large they expect the market share to be.
As per above, Tesla didn’t quite hit 80,000 cars in 2016. A single standard assembly plant of Ford or Honda will turn out 240,000. Even in the BEV area, Tesla is not the leader. So perception ≠ reality!
With the potential benefit of using BEV’s being so great, my biggest question after reading the article is what needs to be done in order to facilitate the production and sale of these cars? I find it interesting how the predicted share of BEVs on the road dramatically increases starting in 2030, and it would be helpful to know the causes behind this jump. Perhaps, as older gas powered vehicles die out, the thought is that consumers will be more likely to switch to electric vehicles. Still, the table predicts that BEVs will only comprise 55% of all vehicles on the road in 2040, so I wonder what is limiting this share from being even larger. What can the government, firms, and people do to increase the usage of BEVs in our society?
1. The benefits vary – in parts of China BEVs are MORE polluting than regular cars, because the electric power plants are dirtier than a standard gasoline engine.
2. Over time production costs fall and technologies improve. There’s also a market-side effect as consumers become more comfortable with a new technology.
3. Gasoline engines continue to improve, too. That slows the rollout of BEVs: they have to be able to beat regular engines by a much bigger margin than today, so have to improve faster than ICEs.
I found this article interesting because I did not realize how long it will take for BEVs to make a disruption in the auto industry. I was surprised due to the recent push for “going green” in our economy. Although I do not know much about the automobile industry, I can see how since many consumers see automobiles as a long term investments, there would be a long delay until the BEVs have a large portion of the market share. I feel like this would impact the decision making of the automobile companies. If BEVs are more expensive to produce and are not a majority of the market share, the only reason automobile companies are producing these products is to stay ahead of their competitors, just like the Busch and Miller example in class.
Yes, consumers today have “range anxiety.” Even that subset of people with an EV either have an alternate “drive” or ready access to rental cars for longer trips. I could potentially use a BEV almost all the time. That “almost” is the barrier, psychological if not practical. But the cost penalty of a BEV remains.
What the author is saying makes sense in theory and he does use numbers to back up his claim. I don’t wholly disagree with him, but I do think there are some important factors that I believe he is overlooking. His theory and analysis is based on new technologies whose only purpose was really to increase efficiency (in the form of economic benefit.) However, in this case with BEVs, I think he is almost completely overlooking the environmental benefit these will have. I think this factor alone will cause people to buy the product, even if it is a little more expensive at the outset. I don’t think the numbers will be up so much as to shatter the author’s claims, but I do think that it will jumpstart things a little bit more than “few are willing to chance adopting a technology when no one they know has done so.”
1. “the author” phrasing is strange. You know the name of the poster!
2. How many people are willing to spend $5000 extra on a car to be “green,” especially if they can’t use that car on long trips? In addition (see a reply above) in some geographic locations BEVs are not environmentally friendly.
After seeing and hearing so much about Tesla and other manufacturers making strides in BEVs and autonomous vehicles, I haven’t thought about the length of time it takes for people to buy new cars with a different technology. I assumed that by 2030, much more people would be driving BEVs. However, what if this new generation of millennials buys into the idea of BEVs and much more people are driving them by 2030 than expected?
Even if latent demand develops, there has to be (i) physical capacity to produce those vehicles and (ii) no price penalty for buying them. It’s one thing to spend 50¢ extra on something to be green, it’s another to spend $5000 extra. Not many people have that much money to burn.
It’s interesting to think that we could still be so far from popular use of BEV’s. With the constant flow of fresh models and new technology in ever-sleeker commercials, we kind of get the idea that the auto industry is perched on the edge of popularized self-driving cars. Apparently not! Only about a tenth of vehicles will even be electric battery operated within the next 13 years. At that pace of adoption, I wonder if environmental regulation will pressure some of these fossil-fueled models off the market even before the advent of popular electric car use. The only thing in the news that seems to change even close to as rapidly as new technologies is predictions that our planet is in trouble. Perhaps by 2030 it will not even be feasible to wait another ten years for half of the world to adopt electric battery cars.
I’ve not commented on this above, but will the current political configuration in the US make pro-environment policies that raise costs to consumers likely?
There are exceptions: Norway provides very large subsidies to purchasers of BEVs, AND they are a small market so single models of firms such as Renault (their ZOE model) and Nissan (the Leaf) can meet demand. Norway is an exception in part because virtually all their electric power is hydroelectric, with close to zero marginal cost. So with a pure BEVs vehicle “park” they wouldn’t need any gasoline, except for tourists driving in from other countries, of which there are very few given the country’s location [look at a map].
From an economic standpoint the author is right in how long it takes for new technology to be fully implemented. In the future it is expected that BEV’s will take up the majority in the production market it will still not have a big effect on individuals buying them. A car is a long term investment and therefore the individual will have to fully commit to buy one. However, with increased access to information and date proving that climate change is real and not a myth, I believe that there will be an increase in BEV consumers. More and more individuals will be willing to make a long term investment in order to help reduce our effect on the planet. In order to sell more BEV’s there need to be increased awareness on the negative effect that gas fueled cars has on the environment.
In your first job, while your salary is low, will you spend $5000 extra on a car in the name of global warming?
Similar to alot of comments already, I was surprised to see the pace at how slowly automobile technology adapts. And of course as a millennial, I am a huge fan of Elon musk and what vision he has for the world. I think he will accomplish great things, and it seems as if Tesla is his major company that can potentially be disruptive. A recent news just came out that BMW plans to install charging stations that are more powerful than Tesla’s (Seeking Alpha). Competition comes through this crowd out model as well, as well as the threat of slow adaption. Maybe sometimes, with a grain of salt, one should put the data in hindsight and focus solely on the capabilities of one man?
As per a comment above, Tesla is insignificant in overall sales, bleeds cash, and has proven unable to meet any sales, production or new product introduction deadlines.
If Tesla had not raised a lot of money early on through stock sales, the company would have been long gone. I just looked at a list: about 8-10 similar companies have already exited.
Elon Musk may be very persuasive, but he can’t walk the talk.
While something most people tend not to think about regularly, the fact that automotive technological changes take so long for full scale introduction really is not that surprising when you look at similar industries and how they compare. For example, if you look at the post-Cold War US military aerospace industry, you can see that introducing a brand new airframe (such as the JSF program) and its associated technologies can take up to 20 or so years to go from development to introduction. Beginning in 1996, it Lockheed Martin’s F-35 Lightning II model 19 years to go from Pentagon drawing boards to active USMC VTOL squadrons (then another year for the USAF and an additional 2 for the USN). Even programs such as Boeing’s F/A-18E Super Hornet (essentially a modernization/revamp of an existing airframe) take years to develop, and even longer before they can be properly introduced.
Good!! Extend the model to see how it fits elsewhere!
I’ve also looked at the residential construction industry in the US. One example: it took 30-plus years for drywall to displace plaster. Later this term we’ll look at the example of the xerox machine, and perhaps one-two other technologies.
How about bottles vs cans in the beer industry? The latter are less expensive and provide higher quality beer than glass. How long did that shift require? Or the original shift from getting a growler at a local pub to buying bottled / canned beer? That would make a great paper topic.
I think what the analysis from the article fails to take into account are the non-financial factors that will becoming increasingly prevalent in the purchase of an automobile. The millennial generation is very conscientious of the effects their actions have on the environment so as they begin to constitute a larger share of worldwide car purchasers, they will be willing to pay a higher price for BEVs. Furthermore, we may begin to see governments subsidize BEVs to remove the financial disincentive in buying them. Thus, even people who are not concerned about climate change will be able to afford BEVs and we will see much higher production and adoption rates than predicted by the article.
As per above, will you be willing to spend 15% extra of your first-year after-tax-and-rent income to be “green”? Will Trump make the US an environmental byword (in a positive sense)?
All but one of the comments above focused narrowly on the auto industry and BEVs. What of the wider implications? How long does it take new technologies to diffuse? Cell phones, laptop computers, fleece clothing for winter, microwave ovens, xerox machines, bottled beer, POS [point-of-sale] barcode scanning, containerized ocean shipping, drywall, and so on.
Another example might be standardized 2×4 stud construction (I worked on tearing out and replacing the walls of a house about 4 miles from campus where the 2x4s were actually 2″ by 4″ and they were on 12″ spacing with diagonal bracing). How much more costly was the old system relative to a modern house with “modern” 2x4s (which are not in fact 2×4 and hence cost much less), spaced at 18″ with no bracing for load-bearing walls? [Then there was post-and-beam “timber frame” construction where almost nothing was standard.]
Or …. why is diffusion slow? What might be done to speed diffusion?
Or …. what are the exceptions? What makes them different? How about industries with an 9 month product cycle, such as cell phones? How rapidly did bluetooth-WiFi phones diffuse?
Jack rightly pointed out that the slow adoption of new technology is not only observable in the automobile industry, but also in other industries, as major new innovations can take several decades to diffuse. The article mentions the S-shaped logistic function, which was derived by Griliches in his seminal study of the economic determinants of the diffusion of hybrid corn in 1957.
The decision to adopt a new technology is like an investment and is dependent on predictions about its profitability, particularly its future profit streams and the irreversibility of sunk costs. The slow initial pace that characterizes logistic diffusion patterns can be attributed to the cost hurdles that come with the adoption of a new technology. These include not only the price of the new technology, but also investments in complementary assets, such as infrastructure and capital equipment. Often times the successful implementation of a new technology also requires employees to be trained, as users have to adopt new technical skills. For example, the diffusion of electricity in factories took three decades, since it required the complete redesign of factory layout and infrastructure. When operation needs to be shut down for installation, firms will incur costs from lost output. Coupled with the fact that demand is often uncertain, firms are likely to be unsure about whether or not they can recoup the costs of adopting new technology, and if so, the time it will take. As such, firms wants to be assured that there will be income in the future to pay for the investment and reduce the risk inherent in taking on sunk costs. Firms therefore choose to adopt new technologies when the net present value of adoption is almost certainly positive.
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