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Economics, technology and the Government – key factors in the auto sector

In a recent report published by PWC on the auto sector, three key areas were listed that auto executives would have to consider in their strategic planning. Whilst all those involved in the sector, and especially in multinational activity, will have always studied foreseeable macroeconomic trends in their business models, the two growing areas that have grown exponentially over the last decade are the interjection of technology in cars and stricter government regulations.

The global auto sector has come a long way since the global depression of 2008. By some estimates, while global profits for the industry are expected to reach US$85 billion by 2020, the key challenge will be identifying how these will be spread by region and car segment.

ECONOMICS

Investment in the auto sector is both long term and capital intensive. The current challenge has been to deal with the unpredictability, unexpected and rapid changes in the various economic and political landscapes.

Sales in the US auto sector have peaked near historic levels buoyed by low interest rates and a drop in unemployment rates. While the US is now well on course to raise interest rates, affecting the auto loan market, auto executives would have, pre-Trump, planned to view their US investments cautiously and look at expanding production in Mexico which has seen domestic usage surge as well as emerge as an opportunistic origin for exports. The protectionist policies that the unexpected Trump administration intend to put into place, especially with regards to auto production for US bound exports, will have forced car makers to reverse some of these plans (for example, Trump’s threat to impose a border tax on Toyota for all US bound Mexican made vehicles).

Europe continues to struggle with sustained meaningful economic growth, with moderate increase in auto sales. The biggest alarm will have come from the Brexit decision and the implications for British based Non-British auto manufacturers who face an unsure few years with regards to a possible new customs relationship with the EU. Immigration policies post Brexit could also have a significant impression in the smaller EU countries.

Changes in the automotive environment have been most volatile in the once lauded BRIC (Brazil, Russia, India and China) grouping. While China is the world’s largest auto market, the growth of sales has slipped in view of slowing economic growth and the imposition of car ownership restrictions in some of the major cities. The country is still expected to be a 30 million-car market within the next 3-4 years.

The Brazilian and Russian economies are still recovering from the commodity shocks of 2015 and 2016 which have affected their auto sector while according to PWC, the Middle East and Africa markets could see production increase to 3 million units of locally built or assembled by 2021. They have targeted Iran, South Africa, Egypt and Nigeria as key markets to deliver.

TECHNOLOGY

Technology giants, such as Google and Apple, have become increasing involved in the auto sector, as software plays a greater role in the networking, traffic, driving, entertainment and navigation systems in cars.

Recent studies have shown that over 50 percent of new car buyers said they would switch to a different brand if the one they were considering didn’t offer the technology and features they wanted. Almost 50 percent of car buyers stated they would refrain from buying a vehicle if the technology was difficult to use, even if the car was their preferred choice. The marriage of technology and auto manufacturing also brings together very differing business styles. While the auto sector takes a long term view with product development, technology firms are quick to try and abandon products that do not work. As customers take technology more into consideration in their car purchases, the whole ethos of product design and placement will continue to modify itself at a pace not experienced before.

While a lot of news coverage has been given to driverless cars, a full implementation seems to be a long way away but till then great strides will continue to be made in allowing technology to ‘remove’ the human element which technology developers push as the inherent cause of driving fatalities.

GOVERNMENT REGULATIONS

Car manufacturers such as BMW, Mazda, and Fiat Chrysler are trying to meet stricter fuel economy requirements using a combination of improved aerodynamics, modified turbo engines, and lighter manufacturing materials. By 2025, European and American producers will have to ensure an average fuel consumption of 60 miles per gallon.

Current examples of radical shifts in manufacturing techniques to arrive at these standards have seen Ford successfully employ aluminum, instead of steel, in order to improve fuel efficiency and Honda use a system of Continuous Variable Transmission (CVT) with less success.

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