Commentary: Car-making just doesn’t quite gel with future trends
Greater urbanisation, changing consumer preferences of a millennial generation and the emergence of a subscription economy is making car ownership less attractive, says NUS Business School's Nitin Pangarkar.
SINGAPORE: When Dyson announced plans for an electric vehicle (EV) plant in Singapore about a year ago, I was sceptical. Dyson would have to overcome immense challenges to succeed in making EVs.
Dyson’s recent announcement about abandonment of the electric car project confirmed that despite the support of its founder and the commitment of substantial resources to the project, the challenges it faced in the new business were insurmountable.
While I continue to believe any new entrant in electric cars faces stiff odds, my thinking about the attractiveness of the car industry in general has evolved over the last few months.
GREATER URBANISATION AND GROWTH OF PUBLIC TRANSPORT SYSTEMS
Car-making is on the wrong side of history. It goes against three megatrends reshaping our world.
One of the most important trends today is urbanisation. More people are flocking to cities.
According to one estimate, by 2018, 58 per cent of China’s population and 33 per cent of India’s lived in cities, a marked surge compared to 30 years ago when the figure was closer to a quarter.
The infrastructure in these urban centres, especially roads, however, is cracking under the weight of expanding populations, leading to pollution, congestion and the sub-optimal use of limited land, among other issues.
While several cities in Asia have tolerated the agonising headache of traffic jams over the last couple of decades, many federal governments and city administrators are now devoting greater resources to tackle this scourge decisively through the development of accessible, affordable public transport.
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Over the last two decades, cities such as Beijing, New Delhi, Mumbai, and Singapore have witnessed the enhancement of public transport networks in the form of more extensive train lines with wider coverage and better connectivity.
New rail networks and feeder bus options are sprouting up in cities like Jakarta and Kuala Lumpur.
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At the same time, many city administrators are driving down the benefits of having a car by imposing restrictions on car ownership, curbs on when and where cars can be driven, and additional charges on usage in the form of tolls or parking charges.
Since the utility of car ownership and usage in a city is inversely related to these restrictions and how extensive the public transport network is in the particular city, these trends do not bode well for car sales.
Cars are an aspirational product whose value goes well beyond the utility they provide as means of transport.
However, even many aspirational users will recognise that at some point the additional costs – tolls, parking, depreciation, fuel, road taxes to name a few - and inconvenience simply overwhelm the value of owning a set of wheels.
MILLENNIALS DON’T SEE A NEED TO OWN A CAR
The second headwind facing the car industry includes changes in consumer attitudes and behaviours, especially that of millennials.
While past generations (of which I am a representative) attached high value to owning assets (like a home, a car, the music they listen to), millennials seem to have no qualms about renting.
This is evident in the emergence of a sharing economy with new concepts such as co-living and shared rides taking flight.
I see many young people (including my children and their friends) shunning car ownership and preferring to use ride-hailing services such as Grab.
Though the drivers of ride-hailing services (or the companies renting vehicles to them) buy cars, the numbers are going to be much lower than a scenario where a good proportion of users of the services bought their own cars, as was the case a decade or two ago.
READ: Commentary: Ride-sharing should reduce congestion, not increase it
Climate change is another key concern of millennials which might turn them away from personal transport that contributes to carbon emissions, including electric cars (which cause lower, but not zero, pollution).
A SUBSCRIPTION ECONOMY
A third important trend, which can become a headwind for car industry’s sales, is the emergence of new business models, as the world shifts towards a subscription economy, with new pay-per-use lifestyle services, even in private transport.
In June this year, Mercedes expanded its car subscription service to a third city (Atlanta) in the US.
The company also noted that car subscription service has been “an especially fruitful programme at attracting younger customers and those who have never owned a Mercedes”.
For now, car subscription prices remain high, and steady-state costs are difficult to foresee.
Still, despite their uncertain profitability, if subscription services become more popular, the volume of car sales will be significantly impacted since any car in a fleet will be shared across multiple subscribers.
HUGE SHIFTS FOR CAR MAKERS
In this world, car manufacturers such as Toyota and Hyundai face structural shifts that make their current markets less attractive for the foreseeable future.
While torrid growth in emerging markets compensated for slow growth or even decline in sales in developed countries, prominent developing countries, especially India and China, are now facing sluggish growth and other challenges, and carmakers may not be able to count on these markets for continued growth.
Looking ahead, I would venture that the global growth of car sales is going to be slow if it is there at all.
Additionally, car manufacturers have to face fresh challengers in the form of EV manufacturers such as Tesla, BYD and Nio, deal with overcapacity in the traditional car business, manage phasing out overcapacity over time, and spend resources on researching and developing new technologies such as autonomous cars.
Electric cars, a segment of the car market, will suffer from these same three megatrends. Nobody can tell who the winners in the EV race are but my guess is it will be dominated by a few players.
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Potential EV entrants are pumping in a whole lot of investments and taking on uncertainty for what will probably be a shrinking market.
Many will be shaken out. Few will have the needed acumen, distribution networks and resources. Most new entrants will face poor odds and undergo a winnowing process until there are a few survivors.
Incumbent car manufacturers, like Toyota and Hyundai, face better prospects if they make the transition to electric. Tesla has a reasonable shot, despite their financials, but it must be remembered that they started in 2003. Starting in 2019 would be a different proposition.
THE OUTLOOK FOR CAR OWNERSHIP IN SINGAPORE
One might wonder what the outlook is for car ownership in Singapore, which has been a peculiarity since the introduction of the Vehicle Quota System and Electronic Road Pricing (ERP).
Despite the high costs of car ownership and usage, there has been a strong demand for cars in Singapore because of the convenience personal transport offers and the aspirational nature of car ownership.
But going forward, Singapore will reflect the global trends in car ownership and usage as well, because of several reasons.
First, the expansion of ride-hailing services will erode the incremental convenience of owning a car.
Second, while usage costs were comparatively low in the past because ERP coverage had been sparse, a new ERP system based on GPS technology can be vast and pervasive, potentially taxing all usage of personal cars.
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Together with planned zero growth or even a decline in the car population, the costs of car ownership will rise significantly.
Third, the continued buildup of MRT networks will offer Singaporeans a cost-effective alternative to personal transport.
While some Singaporeans may continue to own cars, more may move away from car ownership.
Nitin Pangarkar is Associate Professor in the Department of Strategy and Policy at NUS Business School.