Shifting Gears

Change is coming to the global car industry. Karl Benz patented the first motor car 132 years ago and, since then, the fundamentals of the industry that makes them have changed little. Cars are still overwhelmingly powered by internal combustion engines and sold to private owners—individuals or corporations—for their exclusive use, and stand idle when not required. The car industry has been subject to the effects of war, recession and oil crises—just like other sectors of the global economy—but it has largely made its own weather. The fortunes of individual carmakers and national car industries have waxed and waned, but consumer behaviour has mostly been led by what the industry has given us. The rise of the Japanese car industry in the 1970s, for example, though helped by the oil crisis, was largely down to the fact that it made better, more efficient, more reliable cars than the British or the Americans. Until now, the car industry has largely avoided the external digital disruption that has affected so many others, from the media sector to mobile. But change is coming, and it is likely to arrive in three waves that together will upturn every century-old industry certainty.    The three changes First comes the rise of the electric vehicle. Between a third and a half of the material cost of an EV is the battery. Most carmakers will have to buy these battery units, rather than making their own. This alone will profoundly alter the structure of car-makers’ businesses, and the uneven rate at which existing carmakers are developing affordable, practical EVs will allow new entrants to gain a foothold. Despite the problems it has faced of late, Tesla is the first carmaker of substantial volume to be established in the US since Jeep in the Second World War, and there is a long list of new Chinese EV makers with credible plans to export to Europe and the US. Second comes the self-driving car. Nobody really knows when and to what extent they can be introduced. We may never be able to engineer full, “brain off” autonomy, in which vast fleets of on-demand driverless cars shuttle us from home to office and back as we doze. But even the partial adoption of autonomy will create huge new sources of value, such as the artificial intelligence systems which will co-ordinate autonomous cars, or the data which is captured about us as we travel. Unsurprisingly, the big tech companies want to capture that value. Google’s Waymo project is the most advanced of various attempts to create operating systems for self-driving cars. Privately, many car industry executives expect to surrender the brains of their cars to Google. The third big change will be the shift from personal to shared ownership, or use, of cars. This is already happening. In cities, Uber and the other ride-hailing apps are encouraging a shift from owning a car to simply summoning one when needed. (One investor described Uber as an autonomous car “with a meat-based control algorithm”—you summon it by app, look at your phone while aboard, and it disappears when you’re done with it.) On-demand cars could become a compelling alternative to owning a car. As with autonomy, shared use will never be universal: if you live in a rural area you’ll still need a car outside your door which you drive yourself. Even so, any increase in shared use creates problems for car manufacturers. Fewer cars will be needed, because more of them will be operating more of the time. Our loyalty to brands may be undermined. After all, you don’t care who made your Uber—or your bus, train or plane—so long as it’s clean, safe and reliable, and you won’t care if the autonomous car you summon was made in the UK, Germany or China. Together, these shifts pose an existential threat to the carmakers, and will probably finish some of them off. They cause as much angst in Detroit and Munich and Tokyo as they do in the West Midlands. The particular risk to the UK is that its car plants are owned by companies headquartered in those cities. If the global industry retrenches, then decisions about which plants to close will be made there, and subject to pressure from their state actors and unions. The British government has no such levers. “That’s always the issue with the UK car industry,” says David Bailey, a professor at Aston Business School. “When conditions change, these companies look to shift out. The UK is a very easy place to close production facilities down. It’s easy to lay off people, so in the past the UK’s been first for capacity reductions. That’s a big issue.” “The UK motor industry is actually incredibly fragile,” agrees Max Warburton of US investment house Sanford Bernstein, probably the best-connected and most insightful of the financial analysts covering the car industry. “It’s a miracle really, the success of the auto industry in the UK in recent years. Brexit definitely threatens it. But it has long depended on the ‘kindness of strangers.’” Rebuilding Britain’s car industry The British car industry has remade itself before. Its implosion in the 1970s was the result of poor management and industrial unrest, but mainly its terrible cars. In 1972 the UK made a record 1.9m cars: by 1980 that figure had halved. In 1994, mass car manufacturing finally passed out of British control when what remained of the once state-owned British Leyland—by then renamed the Rover Group—was sold to BMW. But the reinvention of the British car industry had already begun, and all of it was propped up by others. Attracted by Britain’s membership of the European Economic Community and the Thatcher government’s labour reforms and come-hither smile, three Japanese carmakers—Nissan, Honda and Toyota—established plants in the UK. In 2017, those factories made a total of 800,000 cars. In the early-2000s, five famous but ailing British marques were finally given cars worthy of their image by their mostly German new owners. As a result, Rolls-Royce, Bentley and Aston Martin now enjoy sales an order of magnitude greater than during their 1970s slump. But the greatest makeover was Land Rover’s. Under BMW and then Ford’s ownership, it created some impressive new vehicles before Ford sold off its European brands. Tata bought the Jaguar Land Rover group for just over £1bn, and within a few years its acquisition was returning its purchase price in profit every year after an extraordinary bull run, fuelled by more great products and a global boom in the sale of SUVs, especially in China. Last year the group made over half a million cars in the UK, 80 per cent of which were Land Rovers, making it the UK’s biggest carmaker. In total, the British car industry made 1.7m cars in 2016, not far short of 1972’s slightly freakish record figure. Figures from the Society of Motor Manufacturers and Traders showed that, in 2017, the industry turned over £82bn, employed 856,000 people, and had export earnings of £44bn of cars (for more figures on the motor industry, see p10). But that success is fragile: Brexit, uncertainty over the future of diesel and a slowing of demand in China are all giving manufacturers pause for thought. But of these, uncertainty over Brexit is the immediate challenge: this year’s production is likely to be down around 100,000 on the 2016 figure, and Warburton says that investment has “stopped dead.” The global carmakers won’t commit to building new models in their UK plants until the uncertainty is resolved with an arrangement that guarantees that they won’t face tariffs and supply-chain delays. These decisions are being made now, and if a UK plant misses out it will be five to seven years before it can bid to build that model’s replacement, assuming it’s still open. So even before electrification, autonomy and shared use hit, the British car industry faces deep challenges. Those three great uncertainties mean it’s impossible to predict what will happen to mass-manufacturing. But the Australian car industry offers a sobering precedent. Having once built half a million cars each year, the sector withered in a year when Ford, GM and Toyota all closed their plants in the 12 months to October 2017. “Unless the European car industry—and the British car industry is a part of that—transforms itself and goes electric, the danger is it’s going to get wiped out, and we’ll see electric car production go to China for the mass market,” says Bailey. “Some premium production might remain in the UK, but I think there’s real danger the European industry could be wiped out if it doesn’t adapt quickly enough.” The best hope is to develop specialism in the new surge industries, such as AI, data gathering and electrical engineering, which will power the next generation of cars. These areas will be less affected by the tariff and customs issues that would come from an untidy Brexit. And in these areas, the current slowdown in investment may not be a disadvantage. “We’re probably at peak hype at the moment,” says Warburton. “Electrification and autonomy will take longer to impact than the headlines suggest. It’s not that the UK is missing out on huge investments on electrification because of Brexit: the industry isn’t spending lots of money anywhere on next-generation electrified products. Let’s be optimistic. We might have clarity on Brexit in time for that next generation and before you have to spend really big money.”   The case for optimism The optimist may see some good omens already. The industrial strategy White Paper published a year ago identified four priorities. Three of those—Brexit, skills, and digitalisation, including the establishment of an “Office of AI”—speak directly to the needs of a next-generation car industry. In 2013, the government and industry committed £1bn over 10 years to the Advanced Propulsion Centre, based at Warwick University, which invests in research and start-up companies that are developing new types of engine system. Greg Clark, the Business Secretary, seems to have the respect of the industry, and the government can probably take some of the credit for encouraging Panasonic’s interest in building a large-scale battery plant in Wales. The Chinese firm BYD is also showing signs of interest. The government would be wise to dust off the same red carpet it unrolled for the Japanese carmakers in the 1980s. It can do little to moderate the decline in conventional manufacturing, but government does have levers it can pull to attract new companies and investment into the UK, especially when it comes to new battery technology and all the systems that go with it. Bailey puts the tipping point for electric vehicles in the mid-2020s, and for autonomous vehicles, a decade later. That means that industrial and skills strategies begun now will be critical. Reilly Brennan is a founding partner at Trucks, a seed-stage venture capital fund specialising in transportation start-ups, and he lectures in transport and entrepreneurship at Stanford. “We don’t see a lot of startups from the UK,” he says. “Frankly I wish we saw more, because the few that I’ve met have been very high quality. But having a healthy supply of engineering talent is one of the best ways to have a durable part of this future. The UK is already known for that, so that’s what I would double down on.” “The number one problem is hiring,” said Reilly. “Data and computer scientists and electrical engineers were less associated with the automobile business in the past, but are hugely important now. But if you go into a school and ask if they have anything related to data science, they probably won’t have heard of it. There are upstream decisions that your government can make now to influence that future. There’s usually a great disconnect between our education systems and how the world is moving. Fixing that would be really valuable.” That future may already be arriving. Earlier this year Jaguar launched the iPace (below), an all-electric luxury car, beating its German rivals in getting a Tesla rival to market. Dyson has 400 engineers on a former airbase in the West Country working on another electric vehicle. Both are designed and engineered in the UK, but will be built overseas, though it’s hoped that Jaguar will eventually “reshore” its electric vehicle production, and perhaps make that its speciality. This future—of battery powered cars and eventually of autonomous cars designed and engineered in the UK, and powered by British-made batteries—is achievable. To make it happen, we need the right action taken now.   Ben Oliver is an award-winning writer and journalist