What is the state of the auto industry as we go into the 2020s?

The auto industry is very cyclical and we’re in the middle of a downturn cycle in terms of sales. The cycles are always affected by many things, but there also seems always to be some built-in boom and bust periods in the industry’s history. The global financial crisis was a huge and unusual and certainly unprecedented dent in sales—a 40 or 50% drop for most major automakers. And then there was a period, an unusually long period, surprising to many, of years that sales were way up. Basically, to compensate for the fact people were postponing their purchase decisions during the Great Recession. Automobiles are durable goods that last a long time, so you can keep a car on the road a little longer if for some reason it’s not a good time to buy. Also, when economies get stronger, people might upgrade earlier than they need to. There’s been new safety tech with a lot of new driver-assist features. When they feel more confident economically, people buy cars partly to get access to that new technology, either for the specific functionality or just because it’s exciting, or reassuring, to have cars with the latest features. So, sales grew dramatically in the U.S. from 2010 (low of 10.4 million) to 2016 (high of 17.4 million). 2017 to 2018 was relatively flat, but 2019 is down somewhat to just under 17 million. Bear in mind that there are only two other years in U.S. history with sales higher than 2019–2000 and 2001. How much of the 2019 drop is because of tariffs and trade tensions, how much is the slowing of the Chinese economy—because China has been one of the high-growth bright spots in auto sales for many years—is a little hard to say. We’re certainly seeing profit announcements from automakers reporting losses and drops in sales. It’s not a complete surprise or a sign that the state of the overall industry is dismal. But it’s definitely a down period in that regard. The other big thing to say is that the challenges the traditional auto industry faces are pretty huge. Some are exciting, too, but [it’s a balancing act] to keep the legacy business going, which is still about 100 million cars sold per year worldwide, while also investing in all these new technologies and new products and services—electric, yes, but also connected, and autonomous, and mobility services, so they’re not left entirely to tech startups. A lot of companies want a piece of that action in the new mobility future. That’s a challenge. It requires different capital allocation priorities, investment priorities, and strategies.

What kind of investment priorities?

GM has famously been helping generate some additional capital by shrinking, for example, selling Opel two years ago to PSA (Peugeot group, now in the process of merging with Fiat-Chrysler), getting out of India, out of Australia. Ford is eliminating many of its sedans to focus on its more profitable trucks and SUVs. Not every company is doing exactly the same thing, but everybody is struggling to find enough money to invest in the new things while not underinvesting in keeping fresh products and features and technology. That’s all a big challenge. Every year people try to guess what will happen with electric, which is the technology that has been the ‘next big thing’ for at least a decade. We do see a continuation of the underlying technical advances, i.e., longer range and lower priced batteries, more models, more push from regulatory regimes, outside the U.S. at least—the U.S. has been trying to relax fuel efficiency and emissions standards. Certainly, in the EU, standards are getting tighter and tighter. You have a German auto industry that, for a lot of reasons, is ready to go big into electric. Volkswagen is still trying to make people forget Dieselgate, some of the other German companies have been a bit implicated in that same kind of cheating vis-à-vis emissions, and in general the German government wants the industry to stay strong and is encouraging them to move toward green products. So, you’re going to see a lot of new electric cars rolling out. Also, from China, where the government has put a big push on China being a leader in electric vehicles. Chinese automakers haven’t been any kind of export leader in traditional vehicles. There are hardly any made-in-China vehicles sold outside of China. There’s a lot sold inside of China, a huge market, but the government wants to make China the leading electric vehicle market in the world. It’s already the biggest in EV sales and, more importantly, in the forward investing into charging infrastructure.

It seems Tesla is doing well despite not being profitable yet. And they just opened a new plant in China.

Tesla is in the middle of an amazing zoom up in their stock price, which is looking a bit bubble-like to many people, but it’s certainly a redemption and bragging rights moment for Elon Musk, after a period of facing a lot of skepticism. They’re meeting production targets for the Model 3, allowing much more reliable growth in that product line in the U.S. They’ve opened this China plant, are working on a plant for Berlin, there’s a rumor of a plant in Texas, so suddenly there’s a sense of Tesla being able to scale up in a way they haven’t done before. And really, there haven’t been any other electric vehicles that have done as well. Contending vehicles haven’t sold as well or had nearly the buzz; there’s still a huge number of people excited to get a Tesla. Purchases of other electric vehicles feel a bit more dutiful, perhaps for environmental reasons, the excitement factor hasn’t been there for too many other products. That could change. We’ll see lots of new models from BMW, Mercedes, Audi at the high end—plus there are brand-new companies offering high-performance EV roadsters, some from China. Despite this, I don’t make predictions about dramatic tipping points for electric any more. I think it will be a gradual steady increase, but the slope may go up in the coming year. Certainly, auto shows are showing a lot of vehicles that are greener, either all-electric or hybrids or internal combustion engines with new designs for better efficiency and lower emissions. There’s lots of creative engineering going on with traditional internal combustion engines in this era, too, which for people who are interested in the technology side of this phenomenon is called the last gasp or last burst, when an incumbent tech threatened with extinction suddenly has a flurry of innovation keeping it going much longer. We seem to be in that era for internal combustion engines, which of course are nowhere near about to disappear. [Of] one hundred million cars a year, 2% are electric. That leaves 98 million.

Did the electric Ford Mustang catch you by surprise?

Yes, but I was pleased to see it. I have felt for a while that the design and marketing of electric vehicles has been underplaying the potential to show people they can be exciting and fun to drive. They have this amazing responsive acceleration, there’s no problem with torque steer. The move to electric has been happening in the car racing world—there’s an e-Formula 1 circuit now. And remember, all Formula 1 cars are now hybrids—duel drive train, electric and ICE—for precisely those performance reasons. We’re going to see electric pickups pretty soon, which is an even more dramatic statement of intention, right? To really make electric be across all product lines. GM is going to revive the Hummer name for an electric pickup that they’ll build in a plant in Detroit they were going to close; after the labor settlement with the UAW, GM agreed they’d be investing there. The startup Rivian will launch its first product, an electric pickup, soon; they took over a closed assembly plant in Illinois. Tesla announced an electric pickup, too; who knows how far off that is. Pretty much all the auto shows are showing this wide range of vehicles that are evidence of the electric future to come, despite the uncertainty about when it will really arrive.

Is there any country that is the dominant force in the auto industry?

For quite a while now, the answer has been—and probably still is—China. China has been the world’s biggest auto market for a while. This big push they’re putting on for electric is really striking because the government is both pushing and helping their domestic manufacturers release lots of electric vehicles. Their approach to subsidies is interesting. They were plentiful for EVs in past years, then the government backed off the subsidies this year because they don’t want this industry to survive only because it is subsidized. But sales did drop—or at least the rate of sales growth dropped. I think they’re likely to introduce subsidies again to reverse that trend. Again, the more significant policy move is the forward-investing in the charging infrastructure, which to me is the only credible way to break through the chicken and egg problem, i.e., of not having enough electric vehicles to build infrastructure and not having enough charging availability to buy one. Meanwhile, China continues to be a critical location in the global supply chain of automotive components; they continue to increase the sophistication of what they can make. The coronavirus scare is causing a lot of assembly and component plants to be shut down, so employees can be sent home. If that goes on long enough, it’s a major threat to virtually all the world automakers, because literally all of them get a portion of their components from China. There’s been some stockpiling of inventory, but that only covers a couple of weeks.

Electronics, too?

Absolutely, there’s a lot of electronics in a car by now and China, Taiwan, South Korea, and Japan all have important pieces of that supply chain. On the supply chain for electric vehicles, China will have an outsized presence, too, because they’ll require that all the foreign firms engaged in joint ventures there must produce some electric vehicles too. These foreign automakers will also have to source batteries from a Chinese battery maker, which most of them do not do now. The controls the government has put in place when allowing Western automakers to come in and invest are the same ways they’re also going to push the development of the supply chain for electric vehicles. The EU is alarmed enough they’ve set up an EU-wide project to make sure the electric drive supply chain of the future will at least partly be European. This is nothing that the U.S. has done. There are no U.S. battery makers and not so many U.S. makers of any of the other parts that go into electric drive chains. It’s not the kind of thing we tend to do in terms of government policy. And, of course, our automakers are international so they’re already participating in those other supply chains already. I think the EU is another important actor these days. Because at a time the U.S. is stepping back in its environmental requirements—they’re weakening the Obama-era standards and there’s the whole battle over whether California can continue to set tougher standards than the federal ones—the EU is continuing to push a pretty aggressive set of increasing demands on fuel economy and emissions. In 2020 or 2021, there begin to be some big fines, financial fees, charged to companies that don’t meet the fleet average. Remember that most of the companies left in the auto industry are truly global. They’re going to be selling cars one way or another in Europe and China, i.e., in places that have these tougher requirements. They may have some U.S.-only models that are different in terms of fuel economy and emissions, but this can’t be the core of their product strategy. At this point, China will force the world to keep moving faster toward electric and the EU will keep forcing the world to move toward more strict fuel economy and emissions standards. And the U.S. federal government, with its recent contrarian moves, will slow some of those trends, but not actually be able to reverse them.

The executive scandal at Nissan, has that fundamentally changed how they’re doing business?

It has been really awful for the financial and competitive fortunes of both Nissan and Renault, particularly Nissan. It’s a little early to see exactly what happens with the alliance. I think the predictions that the alliance will fall apart are exaggerated or off the mark, because Renault and Nissan and now Mitsubishi as the third partner get so much out of having those alliance arrangements, that scale, that ability to deal with this difficult transition from conventional vehicles to the new set of technologies and mobility services. I also don’t anticipate a full merger between Renault and Nissan; this is what produced huge resistance from Nissan when they felt Carlos Ghosn was pursuing it. Right now, the three firms still develop vehicles separately and sell from their own dealerships, but there is a decent amount of platform sharing, components sharing, technology sharing, plus global purchasing to take advantage of combined scale. It’s not a good time for Renault or Mitsubishi or Nissan to try and go it alone. That will keep them together even though there’s a bunch of governance stuff they haven’t worked out yet. Also, it’s not obvious how any of these firms would find other partnerships to generate these advantages, or larger firms to acquire them, given the current competitive landscape.

Anything you want to add?