Navigant Research Blog

The Automotive Industry and Brexit

— July 1, 2016

Electric VehicleThe referendum on the United Kingdom’s membership in the European Union (EU) had been a long time coming. In 1975, the country voted to join what was then the Common Market. Despite multiple treaty changes and political promises, no referendum was offered until June 23, 2016, when the majority (52%) of voters chose to leave the EU.

The EU was established as a customs union to set tariffs on goods coming from outside the EU, with member states not allowed to negotiate their own trade deals. Every deal made by the EU is binding on all members. The EU is a tariff-free trading area among the member states.

Because of the need to wait for a new prime minister and extensive treaty negotiations, the Brexit process is expected to take 2 years or more. The biggest unknown facing business is the nature of trade after the exit. Will there still be free trade between EU countries and the United Kingdom, or will tariffs be introduced? If tariffs, at what rate? If no new deal is made, the World Trade Organization (WTO) rules mean the United Kingdom and EU would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world. Other possibilities include membership of the European Free Trade Association and/or the European Economic Area, or even a unilateral free trade policy (e.g., Hong Kong). All of the options must be considered by the U.K. Government, so a quick decision is unlikely.

The Automotive Impact

A free trade deal for goods between the EU and the United Kingdom would allow OEMs and suppliers to continue business pretty much as usual. European manufacturers are likely to lobby hard for such an arrangement, both to continue selling U.K.-built vehicles in the EU and to retain access to the lucrative U.K. market for vehicles assembled on the continent. Car buyers in the United Kingdom may benefit from lowering or eliminating tariffs from countries outside the EU, putting downward pressure on pricing.

In a scenario where WTO tariffs are imposed between the United Kingdom and the EU, new free trade deals could cause changes in business processes across Europe. The United Kingdom has the potential to become a European hub for international trade, building cars mainly for local sales and export to non-EU countries. If that happens, in the longer term there will be a need for suppliers to invest in parts manufacture in the United Kingdom. No longer restrained by EU state aid rules, the U.K. government would be able to offer additional support to companies that wish to open new facilities. Factories within the EU could then focus on producing vehicles for the internal market.

An Industry in Flux

It is, however, important to recognize that this new European trading issue comes at a time when the industry is facing major changes due to other factors such as stricter emissions regulations, greater powertrain electrification, autonomous driving, wireless connectivity, and the growth of carsharing and ride hailing. The Navigant Research white paper Transportation Outlook: 2025-2050 offers more insight on these changes. The United Kingdom could become a test bed for new technology before it is rolled out globally.

While industry waits for the U.K. Government’s detailed trade negotiations with the EU, automotive companies can take advantage of the short-term business-as-usual to analyze their engineering and business processes and value chains so that they are prepared for any outcome. There is potential for increased efficiency and profitability in the long term for those companies that adapt best to embrace the future of clean mobility on demand. Brexit may turn out to be a catalyst for positive change.

 

Interest in Electric Trucks Is on the Rise

— May 31, 2016

Electric TruckElectric vehicles (EVs) have been making steady progress in technology and popularity since the Nissan LEAF was introduced in 2010, bringing all-electric drive to the high-volume production car market. Ford debuted the all-electric Ford Focus Electric in 2011, Tesla made another step toward becoming a volume manufacturer in 2012 when it launched the Model S, and a year later, BMW introduced the i3. These are just some of the highlights, and now pretty much every major manufacturer has all-electric vehicles in their product portfolio either now or planned for the near future.

Batteries and Charging

Hybrid technology is also continuing to grow in popularity, and in some regions of the world, plug-in hybrids are selling well. Lithium ion batteries have become the preferred onboard energy storage option, and demand for the batteries from automotive producers is driving investment in new production facilities and bringing unit cost per kilowatt-hour down.

Another sign of progress supporting the growth in popularity of EVs is the development of fast charging and wireless charging. This is particularly important for fleet operators with vehicles in use all day and not parked during work hours; consumer vehicles can often be recharged slowly while not in use.

A recent Navigant Research report, Transportation Forecast: Medium and Heavy Duty Vehicles, identifies which vehicle types are more likely to adopt a variety of alternative powertrains. For the first time, this report looks at the differences between buses and trucks and between medium and heavy duty vehicles. Trucks are a significant contributor to global emissions, and governments in many countries are beginning to look at tightening legislation and setting more stringent targets.

New Options for Fleet Managers

Hybrid and electric drives offer OEMs and fleet managers options to lower their emissions and run cleaner vehicles. Systems have now been tested for many years and there is a lot of data available on reliability and long-term costs, but it is also clear from these tests that the suitability of any powertrain is highly dependent on the work duty cycle and must be optimized for a particular purpose. The longevity of commercial vehicles means that sales growth of these alternative powertrains will remain slow in the short term.

More government incentives to encourage fleet renewal and subsidize the necessary infrastructure would help to accelerate the rollout of cleaner powertrains for commercial vehicles. Lower prices for conventional fuels have had a negative effect in recent years. However, future increases in oil prices are expected to produce more incentive to electrify where it makes sense. Fleet managers would be well-advised to begin planning for the introduction of new technology now.

 

Will Cities of the Future Be Car-Free?

— May 5, 2016

Bangkok SkylineCity plans to eliminate cars have regularly garnered media coverage over the last few years. Some examples describe initiatives and plans in London, Madrid, and Brussels. Most major cities already have limited areas where cars are not allowed, but a detailed examination of the proposals reveals that there is a wide variety of approaches and nothing close to a uniform policy.

Some cities want to eliminate the use of diesel cars. Some want to restrict private vehicles on certain days or during business hours. Some want to control when commercial vehicles can be driven within city boundaries. Some cities implement congestion charges but allow electric vehicles in for free. Few have tackled the question of how to deal with plugin hybrid vehicles that can drive just for short periods on electricity.

While currently there is much soul searching about the car and whether it has a future in the cities of tomorrow, there is a need to define the goals and benefits of restriction or elimination of certain vehicles and also decide what is going to replace them. If the goal is cleaner air, strong legislation on emissions will do the job, but all vehicles must be included. Eliminating private cars but continuing with large numbers of trucks and buses running on diesel will have a limited effect on air quality. If the main problem is congestion, encouraging people to choose electric vehicles is unlikely to deliver a solution.

City Transportation Needs

Vehicles are needed in cities to move people and goods. Garbage must be collected and disposed, and stores must be restocked. Public transport offers efficient point-to-point movement of large groups of people at busy times, but for much of the day large city buses contribute to congestion and poor air quality without actually moving many people around. Established subway systems are almost all electrically powered and don’t affect air quality or make congestion worse, but building them is very expensive. Trams, though they use electric power, do influence congestion because they operate on city streets.

The challenge is to provide a clean transportation system that meets the needs of the people who wish to travel in a cost-effective way with maximum efficiency. Low cost and easy access are what most people want. The system must cater for people who are prepared to pay a little extra for comfort or privacy to convince them that they no longer need to own private vehicles. It must be able to collect and drop people off within a short walk of where they are or want to be. The ideal system will interface with longer range point-to-point transport by providing first- and last-mile service on demand.

The Autonomous Fleet Option

As a large range of companies continue with self-driving vehicle testing, from established OEMs and Tier One suppliers as well as new market entrants such as Google and Tesla, consideration is being given to the potential for these vehicles to operate in a shared fleet rather than being owned by individuals. The biggest challenge for autonomous driving technology is interacting with existing traffic and drivers. If a fleet was given exclusive access to certain roads, the implementation would be easier and the benefits could be properly assessed.

Implementations of autonomous fleets are already under consideration. In California, the city of Beverly Hills wants to be one of the first to do this. The city council believes it can afford to fund the investment in vehicles and fiber optic infrastructure to add another layer of security. In Europe, a new agreement to standardize traffic laws is laying the groundwork for an autonomous fleet in Amsterdam in 2019. More details are available in Navigant Research’s recent study on Autonomous Vehicles.

 

Key Automotive Trends Are Driving Acquisitions

— May 2, 2016

DashboardAs a new Navigant Research white paper on transportation is published, it is interesting to note that the trends identified are already influencing merger and acquisition (M&A) decisions in the automotive world today. Transportation Outlook: 2025 to 2050 takes a long-term view of how the automotive vehicle market may change over the next 35 years. As with all long-term forecasts, there are many unknowns that could influence the end results, but it is a useful exercise to think about where current trends could lead.

The study identifies four major trends in automotive technology today and extrapolates into the future to speculate about how the global marketplace might change. The four technologies are:

  • Connectivity
  • Autonomous driving
  • Car and ridesharing
  • Electric drive

It is interesting to observe some recent M&A activity that acknowledges the significance of these technology developments for the future. Although they have evolved independently, the key to long-term success is integration.

Recent M&A Announcements

While one aspect of acquisitions is always economic and looking for efficiency improvements from shared overheads and broadening of product offerings, some are more about strategic factors that consider long-term goals.

NXP and Freescale: This merger was announced in March 2015 and completed by December. NXP wanted to increase the proportion of its automotive business and was attracted by Freescale’s growing business supplying OEMs with processors for powertrain and safety systems, particularly advanced driver assistance systems (ADAS).

Intel and Altera: Completed in December 2015, Altera expanded the Intel product line into field-programmable gate array technology, which makes it easier to customize processors and upgrade them while in service. While generally useful for the Internet of Things, one possible application may be for secure chips to control safety and autonomous driving systems. Updating software remotely is a topic covered in more detail in a recent blog from my colleague Sam Abuelsamid.

Intel and Yogitech: Acquired in April 2016, Yogitech specializes in fault-tolerant integrated circuits. With concerns about hacking and interference growing as more cars become connected by wireless communications, safety is an important factor for automotive OEMs.

General Motors (GM), Lyft, and Sidecar: In January 2016, GM acquired the employees and technology of Sidecar, a ridesharing service that shut down in December 2015. At around the same time, GM made a major investment in Lyft, the largest U.S. competitor to Uber. The automaker does not want to get left behind in the on-demand mobility stakes. For more detail, see another blog from my colleague Sam Abuelsamid.

General Motors and Cruise Automation: In March 2016, GM announced it was buying Cruise Automation (founded in 2013) to accelerate development of autonomous driving functionality for its vehicles.

Harman and TowerSec: Once known mainly for audio and infotainment systems, Harman is expanding its product line into connected and autonomous vehicles. TowerSec provides important extra safety via cyber security capability.

ZF Friedrichshafen and TRW: When ZF Friedrichshafen AG acquired TRW Automotive Holdings Corp. in May 2015, it added key expertise in radar and camera sensors to its offerings, among other things. TRW is now a new division within ZF called Active & Passive Safety Technology. The Tier One supplier can now offer complete ADAS capability from sensors to activation of steering and brakes.

Also in 2015, Audi, BMW, and Daimler got together to acquire HERE from Nokia. This was covered in a Navigant Research blog at the time by Lisa Jerram.

This is a quick overview of recent activity in the automotive world; there will surely be more to look forward to in the near future.

 

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