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by EOS Intelligence EOS Intelligence No Comments

The Future of Urban Mobility Is “Up, in the Air”

Traffic congestion is a major problem in most metropolitan areas globally. Ever-rising number of vehicles exceed the road infrastructure capacities, prompting the need to look for possibilities of transportation beyond roads. Electric Vertical Take-Off and Landing (eVTOL) vehicles – more commonly known as air taxis, unmanned aerial vehicles (UAVs), or autonomous air vehicles (AAVs) – are considered as a genuine solution to the problem. While they are still in nascent stage of development, we look at the opportunities that may arise in the Urban Air Mobility (UAM) market.

Electric Vertical Take-Off and Landing, or eVTOLs, for a layman, can simply be defined as electric-powered vehicles that have vertical take-off or landing capabilities similar to a helicopter, minimizing the space required to become air-borne.

While the concept dates back to the early 2010s, development in the eVTOL space has gathered pace since 2016, when Uber released its Uber Elevate white paper envisaging its plans to present a working test prototype by 2020, and commercially launch an air taxi service in 2023.

Future of Urban Mobility is Up in the Air by EOS Intelligence

State of eVTOL development

Uber’s announcement acted as a stimulus for eVTOL manufacturers to fast-track the development and testing of their aerial commuter vehicles. Several leading eVTOL manufacturers have conducted unmanned and manned testing of their prototypes in controlled air spaces across major cities across the world, with a view to ensure the operability and safety of these air taxis for commercial deployment.

In 2016, Germany-based Volocopter became the first manufacturer to get a permit to fly its eVTOL prototype in Germany. In 2017, the company conducted a successful public demonstration of its air taxi – making an unmanned flight near Jumeirah Beach Park in Dubai, with an aim to launch a commercial pilot air taxi program in Dubai in early 2020s. Since then, the company has completed similar tests in the USA in 2018 and Singapore in 2019.

Chinese company EHang has stolen a march on its competitors, becoming the first company to successfully commercialize passenger-grade autonomous aerial vehicles. As of December 2019, the company had delivered 38 two-seater passenger-grade air taxi (EHang 216) to private customers globally.

Uber has also entered in partnerships with several eVTOL manufacturers (mostly companies owned or backed by aircraft manufactures), engineering firms, real estate companies, and research organizations, over the past four years, including Joby Aviation, Aurora Flight Sciences (a Boeing subsidiary), Embraer, Bell, Pipistrel, Karem Aircraft, Jaunt Air Mobility, and Hyundai.

Other key manufacturers such as Lilium, Opener, Kitty Hawk, and Airbus have also conducted multiple flight tests globally since 2017.

Future of Urban Mobility is Up in the Air by EOS Intelligence

Companies have also taken initiatives to develop other critical components of the air taxi business. Uber entered into a partnership with NASA in 2017 to develop unmanned air traffic and airspace management systems, which could help Uber smoothly drive its air taxi operations.

Companies are also partnering with real estate companies to develop dedicated infrastructure which could act as nodes for any air taxi network, as well as with power solutions providers to deploy vehicle charging solutions at these nodes.

Capital investments

Various analyst firms believe that eVTOLs present a high growth opportunity. Deloitte, for example, forecasts the eVTOL market to be valued at US$3.4 billion in 2025, and grow to US$17.7 billion by 2040 – a CAGR of 11.6%. German consulting firm Horvath & Partners estimates the number of air taxis could exceed 23,000 by year 2035.

Investors are banking on this growth potential, which is evident from the amount of investments flowing into eVTOL development companies.

In January 2020, US-based Joby Aviation raised US$590 million in Series C funding led by Toyota (which invested US$394 million), making it the most funded eVTOL start-up globally. Volocopter also raised U$55 million in September 2019 in series of funding led by China-based Geely group. Lilium, which is backed by Tencent, is also looking to raise more than U$400 million for its eVTOL business through venture capital.

EOS Perspective

…on opportunities in UAM Space

Uber’s air taxi vision has created opportunities for multiple stakeholders across the air taxi value chain. Several aircraft and automotive companies are participating to develop commercially practical and viable eVTOL vehicles, while real estate companies are delving into design infrastructure solutions for vehicle landing and take-off.

Innovators are teaming up to develop new-age solutions which would be able to manage air space and aerial traffic, while also ensuring the safety of the commuters (both in the air and on the land).

There will be opportunities for analytics companies – whether it is related to determining the service prices (pricing analytics) or creating innovating customer solutions (such as loyalty programs). Once eVTOLs are commercially deployed, after-market ancillary and repair solutions are also expected to gain demand.

Additionally, the social impact of these air taxis – which will help generate employment opportunities for both technical and non-technical personnel – cannot be underestimated.

…on Uber’s plans to commercialize air taxis

Uber’s plans to commercially launch an air taxi service by 2023 might perhaps be a bit too optimistic. However, given the state of the development of eVTOLs and the level of support it is generating from governments in its key target markets (including the USA, Australia, and Japan), the goal may be achievable – more likely by 2025.

However, the initial deployment, which is expected to comprise only 40-50 eVTOLs, is likely to be limited to the affluent section of the potential customers, due to limited access and high costs of such service.

Such services may be able to reach mass consumers only once the eVTOLs have a widespread deployment, which is unlikely to happen before 2030.

An extensive deployment and increased mileage (either in the form of distance covered or number of flights) is likely to help achieve operational efficiencies, eventually leading to lower pricing of air taxi services, making them more affordable for mass consumers. Uber plans to bring the pricing of its air taxi services at levels similar to that of its UberX service in the long run.

Whether Uber is able to achieve its target or not, the urban air mobility market shows significant potential and attracts considerable interest. Given the current level of development in eVTOL space and partnerships to build related infrastructure, there is a definite sense of optimism – the future of urban mobility is definitely “up, in the air”.

by EOS Intelligence EOS Intelligence No Comments

Global Economy Bound to Suffer from Coronavirus Fever

Global economy has slowed down in response to coronavirus. Factories in China and many parts of Europe have been forced to halt production temporarily as some of the largest manufacturing hubs in the world battle with the virus. While the heaviest impact of the virus has been (so far) observed in China, global economy too is impacted as most industries’ global supply chains are highly dependent on China for small components and cheaper production rates.

China is considered to be the manufacturing and exporting hub of the world. Lower labor costs and advanced production capabilities make manufacturing in China attractive to international businesses. World Bank estimated China’s GDP in 2018 to be US$13.6 trillion, making it the second largest economy after the USA (US$20.58 trillion). Since 1952, China’s economy has grown 450 fold as compared with the growth rate of the USA economy. International trade and investment have been the primary reason for the economic growth of the country. This shows China’s strong position in the world and indicates that any disturbances in the country’s businesses could have a global effect.

On New Years’ Eve 2019, an outbreak of a virus known as coronavirus (COVID-19) was reported in Wuhan, China to the WHO. Coronavirus is known to cause respiratory illness that ranges from cough and cold to critical infections. As the virus spreads fast and has a relatively high mortality rate, the Chinese government responded by quarantining Wuhan city and its nearby areas on January 23, 2020. However, this did not contain the situation. In January 2020, WHO designated coronavirus a “public health emergency of international concern” (PHEIC), indicating that measures need to be taken to contain the outbreak. On March 11, 2020, WHO called coronavirus a pandemic with the outbreak spreading across about 164 countries, infecting more than 190,000 people and claiming 7,800+ lives (as of March 18, 2020).

Coronavirus threatening businesses in China and beyond

Businesses globally (and especially in China) are feeling the impact of coronavirus. Workers are stuck in their homes due to the outbreak. Factories and work places remain dormant or are running slower than usual. Also, the effects of coronavirus are spreading across the globe. Initially, all factory shutdowns happened in China, however, the ripple effects of the outbreak can now be seen in other parts of the world as well, especially Italy.

Automotive industry

Global automobile manufacturers, such as General Motors, Volkswagen, Toyota, Daimler, Renault, Honda, Hyundai, and Ford Motors, who have invested heavily in China (for instance, Ford Motor joined ventured with China’s state-owned Chongqing Changan Automobile Company, Ltd., one of China’s biggest auto manufacturers) have shut down their factories and production units in the country. According to a London-based global information provider IHS Markit, Chinese auto industry is likely to lose approximately 1.7 million units of production till March 2020, since Wuhan and the rest of Hubei province, where the outbreak originated, account for 9% of total Chinese auto production. While the factories are reopening slowly (at least outside the Wuhan city) and production is expected to ramp up again, it all depends on how well the outbreak is contained. If the situation drags on for few months, the auto manufacturers might face significant losses which in turn may result in limited supply and price hikes.

American, European, and Japanese automobile manufacturers, among others, are heavily dependent on components supplied from China. Low production of car parts and components in China are resulting in supply shortages for the automakers globally. UN estimates that China shipped close to US$35 billion worth of auto parts in 2018. Also, according to the US Commerce Department’s International Trade Administration, about US$20 billion of Chinese parts were exported to the USA alone in 2018. A large percentage of parts are used in assembly lines that are used to build cars while remaining are supplied to retail stores. Supply chain is crucial in a connected global economy.

Coronavirus outbreak poses a risk to the global automotive supply chain.

South Korea’s Hyundai held off operations at its Ulsan complex in Korea due to lack of parts that were supposed to be imported from China. The plant manufactures 1.4 million vehicles annually and the shutdown has cost approximately US$500 million within just five days of shutting down. However, Hyundai is not the only such case. Nissan’s plant in Kyushu, Japan adjusted its production due to shortage of Chinese parts. French automaker Renault also suspended its production at a plant in Busan, South Korea due to similar reasons. Fiat Chrysler predicts the company’s European plant could be at risk of shutting down due to lack of supply of Chinese parts.

However, very recently, automobile factories in China have started reopening as the virus is slowly getting contained in the region. While Volkswagen has slowly started producing in all its locations in China, Nissan has managed to restart three of its five plants in the country.

That being said, auto factories are facing shutdowns across the world as coronavirus becomes a pandemic. Ford Chrysler has temporarily shut down four of its plants in Italy as the country becomes the second largest affected nation after China.

Automobile supply chains are highly integrated and complex, and require significant investments as well as a long term commitment from automobile manufacturers. A sudden shift in suppliers is not easy. The virus is spreading uncontrollably across Europe now and if France and Germany are forced to follow Italy’s footsteps of shutting down factories to contain its spread, this will spell doom for the auto sector as the two countries are home to some of the biggest automobile manufacturers in the world.

Technology industry

China is the largest manufacturer of phones, television sets, and computers. Much of the consumer technologies from smartphones to LED televisions are manufactured in China. One of the important sectors in the technology industry is smartphones.

The outbreak of coronavirus is bad news for the technology sector, especially at the verge of the 5G technology roll-out. Consumers were eagerly waiting for smartphone launches supporting 5G but with the outbreak, the demand for smartphones has seen a decline. According to the China Academy of Information and Communications Technology, overall smartphone shipments in China fell 37% year over year in January 2020.

Foxconn, which is a China-based manufacturing partner of Apple, has iPhone assembling plants in Zhengzhou and Shenzhen. These plants, which make up a large part for the Apple’s global iPhone assembly line, are currently facing a shortage of workers that will ultimately affect the production levels of iPhone in these factories. According to Reuters, only 10% of workers resumed work after the Lunar New Year holiday in China. As per TrendForce, a Taiwanese technology forecasting firm, Apple’s iPhone production is expected to drop by 10% in the first quarter of 2020.

Moreover, Apple closed down all its retail stores and corporate offices in the first week of February 2020 in China in response to the outbreak. On March 13, 2020, it reopened all of its stores in China as the outbreak seems to be under control. However, while Apple seems to recover from the outbreak in China, it is equally affected by store shutdowns in other parts of the world (especially Europe). On March 11, Apple announced that all stores in Italy will be closed until further notice. Italy has been hit by the virus hard after China. The Italian government imposed a nationwide lockdown on the first week of March 2020.

On the other hand other multinational smartphone giants such as LG, Sony Mobile, Oppo, Motorola, Nokia, and many others have delayed their smartphone launches in the first quarter of 2020 due to the outbreak.

The coronavirus outbreak is more likely to be a disaster for smartphone manufacturers relying on China.

Other sectors such as LCD panels for TVs, laptops, and computer monitors are mostly manufactured in China. According to IHS Markit, there are five LCD factories located in the city of Wuhan and the capacity at these factories is likely to be affected due to the quarantine placed by the Chinese government. This is likely to force Chinese manufacturers to raise prices to deal with the shortage.

According to Upload VR, an American virtual reality-focused technology and media company, Facebook has stopped taking new orders for the standalone VR headset and also said the coronavirus will impact production of its Oculus Quest headset.

Shipping industry

In addition to these sectors, the new coronavirus has also hit shipping industry hard. All shipping segments from container lines to oil tanks have been affected by trade restrictions and factory shutdowns in China and other countries. Shipyards have been deserted and vessels are idle awaiting services since the outbreak.

According to a February 2020 survey conducted by Shanghai International Shipping Institute, a Beijing based think-tank, capacity utilization at major Chinese ports has been 20%-50% lower than normal and one-third of the storage facilities were more than 90% full since goods are not moving out. Terminal operations have also been slow since the outbreak in China. The outbreak is costing container shipping lines US$350 million per week, as per Sea-Intelligence, a Danish maritime data specialist.

According to Sea-Intelligence, by February 2020, 21 sailings between China and America and 10 sailings in the Asia-Europe trade loop had been cancelled since the outbreak. In terms of containers, these cancellations encompass 198,500 containers for the China-America route and 151,500 boxes for the Asia-Europe route.

Moreover, shutting down of factories in China has resulted in a manufacturing slowdown, which in turn is expected to impact the Asian shipping markets. European and American trade is also getting affected as the virus spreads to those continents. US retailers depend heavily on imports from China but the outbreak has caused the shipping volumes to diminish over the first quarter.

The USA is already in the middle of a trade war with China that has put a dent in the imports from China. National Retail Federation (world’s largest retail trade association) and Hackett Associates (US based consultancy and research firm) projects imported container volumes at US seaports is likely to be down by 9.5% in March 2020 from 2019. The outbreak is heavily impacting the supply chains globally and if factory shutdowns continue the impact is more likely to be grave.


Read our other Perspectives on US-China tensions: Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry and Decoding the USA-China 5G War


Other businesses

In addition to the auto, technology, and shipping industries, other sectors are also feeling the heat from the outbreak. Under Armour, an American sports clothing and accessories manufacturer, estimated that its revenues are likely to decline by US$50-60 million in 2020 owing to the outbreak.

Disney’s theme parks in California, Shanghai, Tokyo, and Hong Kong have been shut down due to the outbreak and this is expected to reduce its operating income by more than US$175 million by second quarter 2020.

Further, IMAX, a Canadian film company, has postponed the release of five films in January 2020, due to the outbreak.

Several fast food chains have been temporarily shut down across China and Italy, however, most of them have opened or are in the process of reopening in China as the outbreak is slowly coming under control there. While the global fast food and retail players have limited exposure in China, they are suffering huge losses in Europe, especially Italy. The restaurant sector is severely impacted there, where all restaurants, fast food chains, and bars have been shut down temporarily till April 3 in an attempt to contain the outbreak.

Another significantly affected industry is the American semiconductor industry as it is heavily connected to the Chinese market. Intel’s (a US-based semiconductor company) Chinese customers account for approximately US$20 billion in revenue in 2019. Another American multinational semiconductor and telecommunications equipment company, Qualcomm draws approximately 47% of its revenue from China sales annually. The outbreak is making its way through various industries and global manufacturers could now see how much they have become dependent on China. Although the virus seems to be getting under control as days pass, the businesses are not yet fully operational. Losses could ramp up if the virus is not contained soon.

Global Economy Bound to Suffer from Coronavirus Fever by EOS Intelligence

 

Housebound consumers dealing with coronavirus

Since the virus outbreak, people across many countries are increasingly housebound. Road traffic in China, Italy, Iran, and other severely affected countries has been minimized and public places have been isolated. People are scared to go out and mostly remain at home. This has led local businesses such as shopping malls, restaurants, cinemas, and department stores to witness a considerable slowdown, while in some countries being forced to shut down.

TV viewing and mobile internet consumption on various apps have increased after the outbreak. According to QuestMobile, a research and consultancy firm, daily time spent with mobile internet rose from 6.1 hours in early January 2020 to 6.8 hours during Lunar New Year (February 2020).

While retail outlets and other businesses are slower, people have turned to ordering products online. JD.com, a Chinese online retailer, reported that its online grocery sales grew 215% (year on year) to 15,000 tons between late January and early February 2020. Further, DingTalk, a communication platform developed by Alibaba in 2014, was recorded as the most downloaded app in China in early February 2020.

EOS Perspective

International businesses depend heavily on Chinese factories to make their products, from auto parts to computer and smartphone accessories. The country has emerged as an important part in the global supply chain, manufacturing components required by companies globally. The coronavirus outbreak has shaken the Chinese economy and global supply chains, which in turn has hurt the global economy, the extent of which is to be seen in the months to come. Oxford Economics, a global forecasting and analysis firm, projected China’s economic growth to slip down to 5.6% in 2020 from 6.1% in 2019, which might in turn reduce the global economic growth by 0.2% to an annual rate of 2.3%.

A similar kind of outbreak was seen in China in late 2002 and 2003, with SARS (Severe Acute Respiratory Syndrome) virus. China was just coming out of recession in 2003 and joined the World Trade Organization, attaining entrance to global markets with its low cost labor and production of cheaper goods. The Chinese market was at its infancy at that time. As per 2004 estimates by economists Jong-Wha Lee and Warwick J. McKibbin, SARS had cost the global economy a total of about US$40 billion. After SARS, China suffered several months of economic retrenchment.

The impact of coronavirus on Chinese as well as global economy seems to be much higher than the impact of SARS, since COVID-19 has spread globally, while China has also grown to be the hub for manufacturing parts for almost every industry since the SARS outbreak. In 2003, China accounted for only 4% of the global GDP, whereas in 2020, its share in the global GDP is close to 17%.

Currently, the key challenge for businesses would be to deal with and recover from the outbreak. On the one hand, they need to protect their workers safety and abide by their respective governments’ regulations, and on other hand they need to safeguard their operations under a strained supply chain and shrunken demand.

In the current landscape, many businesses in China have reopened operations but the outbreak is rapidly spreading to other parts of the world (especially Europe and the USA), where it is impacting several business as well as everyday lives. The best thing for manufacturing companies in this scenario is to re-evaluate their inventory levels vs revised demand levels (which may differ from industry to industry), and consider a short-term re-strategizing of their global supply chains to ensure that raw materials/components or their alternates are available and accessible – bearing in mind their existing production capability with less workers and customer needs during this pandemic period.

With the rapid spread of the virus, it seems that the outbreak is likely to cause considerable damage to the global economy (both in terms of production levels as well as psychological reaction on stock markets), at least in the short term, i.e. next 6 months. However, many experts believe that the situation should soon start coming under control at a global level. For instance, some experts at Goldman Sachs, one of the world’s largest financial services companies, believe that while this pandemic will bring the lowest growth rate of the global GDP in the last 30 years (expected at 2% in 2020), it does not pose any systematic risks to the world’s financial system (as was the case during the 2008 economic crisis).

Having said that, it is difficult to estimate what real impact the coronavirus will have on the global economy yet, and if opinions such as Goldman Sachs’ are just a way to downplay the situation to keep the investors calm. It is more likely to depend on how long the virus continues to spread and linger and how effectively do governments around the world are able to contain it.

by EOS Intelligence EOS Intelligence No Comments

Commentary: India’s Automobile Sector Breakdown Causing Economic Distress

Over the past few months, a lot has been said about the shrinking automobile sales in the Indian market. Touted as one of the key drivers of India’s economic growth, the automobile industry is facing the worst slowdown in two decades as production and sales numbers continue to drop month after month sending the sector in a slump. While the government has made efforts to improve the situation, it will take more than just policies and measures to flip the status quo and bring the industry back on the growth path.

Indian automotive industry witnessed a period of growth during the first term of Modi government – we wrote about it in our article Commentary: Indian Automotive Sector – Reeling under the Budget in February 2018. However, over the past year, the auto sector is in shambles and far from recovery. The sector that contributes 49% of the manufacturing GDP in the country (and more than 7% to the country’s total GDP) has shown decline in growth in the past 18 months as the numbers continue to fall each month. The slowdown is so severe that it has affected all aspects of the business leading to piled up inventory, stalled production lines, decelerating dealership sales, delayed business investments, and job loss.

Quintessential factors that triggered the slowdown

There are various reasons that have plagued the auto industry in the recent months. One of the key factors is the inability of NBFCs (Non-Bank Financial Companies) to lend money. NBFCs, which largely depend on public funds (mainly in the form of bank borrowings, debentures, and commercial paper), have been facing liquidity crunch in the recent past as both public sector and private sector banks have discontinued lending money. This had a double effect on the auto sales – firstly low liquidity has restricted NBFCs ability to finance vehicles, thus having an adverse impact on sales, and secondly, the limited availability of funds bulleted the cost of financing vehicles thereby making them relatively more expensive, further worsening the sales scenario.

In October 2018, the Supreme Court of India announced that no BS-IV cars shall be sold in India with effect from April 1, 2020 (all automobiles should be equipped with BS-VI compliant engines, with an aim to help in reducing pollution in terms of fumes and particulate matter). Owing to this, consumers have delayed their plans to purchase vehicles expecting automobile companies to offer huge discounts in the early months of 2020. And to clear out their existing stock of BS-IV vehicles, it is highly likely that the companies will offer massive concessions before the deadline hits. Delay in purchase of vehicles on consumers’ end has contributed to the overall low sales.

Additional factors that add to the downfall include changes in auto insurance policy (implemented in September 2018) under which buyers have to purchase a three-year and five-year insurance cover for car and two-wheeler, respectively (as against annual renewals), inclusion of additional safety features (including airbags, seat-belt reminders, and audio alarm systems) in all vehicles manufactured after July 1, 2019 adding to the manufacturing cost for the OEMs, and stiff competition from growing organized pre-owned vehicle market which has doubled in size in less than a decade (the share of the organized channel of the pre-owned car market has increased to 18% in 2019 from 10% in 2010). Customers have been passive on buying new vehicles as the total cost of ownership goes up due to an increase in fuel prices, higher interest rates, competition from used cars segment, and a hike in vehicle insurance costs.

Government initiatives to help the auto sector recover

To boost demand for automobiles and offer some respite to the businesses operating in the space, the government announced a number of measures and policies. These include lifting the ban on purchase of vehicles by government departments (the ban was introduced in October 2014), which is hoped to result in loosening of stocked-up inventory and getting sales for automakers, component manufacturers, and dealers. Government also announced additional 15% depreciation on new vehicles for commercial fleet service providers acquired till March 2020 with the aim to clear the high inventory build-up at dealerships.

Other than lifting the ban and price reductions, the government also announced that all BS-IV engine-equipped vehicles purchased until March 2020 will remain operational for the entire period of registration. This will have a two-fold effect – firstly, automakers will be able to push out their stock without having to upgrade existing models and make them BS-VI-complaint (since no more BS-IV-complaint vehicles will be registered post March 2020 and manufacturers will have to upgrade to BS-VI from BS-IV emission standard on the old stocks) thus clearing old inventory, and secondly, consumers can expect much higher discounts. This is expected to provide enough movement within the auto sector, both in terms of sales and revenue generation.

Government has also taken steps to stabilize the NBFC crisis where a separate budget of US$ 14 billion (INR 100,000 crore) has been announced to refinance selected NBFCs. While it is clear that these limited funds will not last long, currently, any step taken to recover from the situation is welcomed.

Though considered temporary, the relief measures offered by the government have gained traction in the industry and players believe that these provisions will have a positive impact on the buyers’ sentiment, even if for a short period of time.

Implications of the auto industry crisis

The slowdown is expected to have a negative impact across all aspects of auto business, especially in the short term. Drop in sales has led manufacturers to decrease production (and even stop production for a certain period of time), cut down overall costs, and reduce headcounts thus weighing down the overall automotive sector.

The months leading to reduced sales did not only impact the production capacities but also resulted in the loss of more than 350,000 jobs. In the coming months, many more risk losing their jobs owing to plant shutdowns, dealership closures, and small component manufacturers going bankrupt.

The cost of vehicle ownership has also increased. Automobiles attracts the highest GST slab of 28%, and this, coupled with the varying road and registration charges imposed by state governments, makes the upfront cost of the vehicle exorbitant for a large segment of consumers (especially the working middle class for whom a two-wheeler or a small segment car is a basic necessity rather than a nice-to-have convenience) making it almost impossible for them to but it.

Given that the automobile sector works in conjunction with other industries, the current slump in auto sales will pull down ancillary industries including parts and components, engines, battery, brakes and suspension, and tire, among others. Considering the fact that the sector contributes nearly half to the country’s manufacturing GDP, if the issue at hand is not addressed immediately, it will further add to the ongoing economic crisis within the country worsening the situation altogether.

EOS Perspective

Policies announced by the Modi government to revive the tumbling automobile sector only seem to mitigate the negative sentiments circling about the future of the industry. However, at this stage, what the industry really needs is a stimulus package in the form of tax incentives or liquidity boost to immediately change things on the ground level.

There is an urgent need of a remedial course of action on the government’s part to stop the vehicle sales from dropping further. As an immediate relief to boost sales and invigorate the auto sector, the government should implement a GST cut on vehicles. This would kick-start vehicle demand almost instantaneously that would work in favor of the automobile industry – manufacturers (to resume halt production), dealers (to clear inventory), and parts makers (to resume small parts and component manufacturing), help resuscitate lost jobs, and contribute, to a small extent, to strengthen country’s slow economic growth.

However, with the government turning a blind eye to industry needs (lowering the GST slab), there is only so much the business owners can do. Under this current scenario, unless the government takes some drastic measures that ensure validation in backing automakers, auto ancillary businesses, and dealers, the sector is unlikely to recover soon. Provisional policies and short-term measures can offer momentary relief but not the survival kick the auto industry is in dire need of.

by EOS Intelligence EOS Intelligence No Comments

Blockchain: A Potential Disruptor in Car Rental and Leasing Industry

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Blockchain, with its ability to offer significantly more transparent and decentralized way of conducting operations, has the potential to come to the forefront of technologies which are disrupting the way most industries work today. While the application of blockchain is still currently focused largely on cryptocurrencies, the technology is slowly finding its way to a range of industries, including the car rental and leasing industry.

Car rental and leasing sectors are growing worldwide, driven by rising technological advancements in transportation and increased need for ease of mobility. A shift in demand from car ownership to car sharing (not to be confused with ride-sharing services such as Uber or Lyft) is driving the growth in car rental and leasing industries.

The process of renting a car is highly centralized, where the car rental company being the main point of contact for the driver to rent cars. Car rental companies need to maintain a fleet of cars, as well as car stations and staff to efficiently run their operations, which makes up for bulk of their operating costs. Car rental companies cover these costs from (high) rental rates charged to their customers.

In the peer-to-peer (P2P) care rental (or car sharing) model, there is no need to maintain any infrastructure or staff required to perform the task of renting, a fact that reduces the overhead costs. Lower costs offered by P2P car rental have resulted in the model gaining prominence. P2P car sharing has significant potential, highlighted by recent investments in car sharing services such as Turo and Getaround. In July 2019, US-based Turo raised US$250 million from IAC, an internet media company, taking its overall valuation to US$1 billion. Getaround, a US-based car sharing company established in 2011, raised US$300 million funding from SoftBank in 2018.

However, the P2P car sharing model is inherently prone to fraud and other illicit activities, causing lack of user trust, which in turn acts as a barrier to scaling of rental business, despite the growing demand for car sharing.

The issue can be aided by the emergence of blockchain, which is acting as the market disruptor. The use of a distributed ledger for car rental and leasing is likely to revolutionize the industry, especially P2P car sharing.

Blockchain to enable peer-to-peer car rental gain further prominence

There is a shift in paradigm from car ownership to car sharing, via car rental or leasing. The fact that vehicles are under-utilized and parked (and inactive) most of the time, while the vehicle owners incur ongoing fixed costs such insurance, tax, maintenance, and parking, is further driving this shift.

Emergence of use of blockchain in car rental offers a safe (from frauds) and reliable car-sharing platform, a fact that is likely to further promote P2P car sharing. Inherent unalterable properties of the blockchain offer a secure platform for both car owners (to list their cars) and the customers.

The concept of blockchain in car rental industry works similarly to any other blockchain transaction. Service providers (or car owners) and end clients registered on the blockchain can sign digital smart contracts which execute contract terms based on pre-agreed rules in place, similar to a regular rental model.

The smart contract also contains the necessary information, such as details of the renter (driving license proof, insurance, and credit card details) and data such as car registration number, rate, mileage, length of rental, and credentials of the car owner. All financial transactions (rental payment) can be done either through a card, or using associated cryptocurrencies and tokens purchased to get registered on the blockchain.

 

Blockchain - A Potential Disruptor in Car Rental and Leasing Industry - EOS Intelligence

The process is fully decentralized and digital without any intermediary required which is the key advantage of car rentals being executed over blockchain. Transparency of transactions made over a distributed ledger also adds to the credibility, thus lowering the risk of any fraudulent activity to a great extent.

Lower fee offered due to elimination of intermediaries is another major advantage of using the blockchain technology in car rental industry. For example, HireGo, a UK-based blockchain-based car rental start-up, claims to offer transaction fee up to 35% lower compared with traditional car rental charges under the existing B2C model. Moreover, use of smart contracts has made the system direct and reliable, as information on the contract is unalterable.

Blockchain technology is designed to encourage a sharing economy platform so that businesses such as P2P car rentals and leasing can become integrated and cost-effective, through collaboration among participants in a common, transparent, and “trustless” (or distributed trust) environment, which are the primary attributes of blockchain.

Blockchain in car leasing to improve visibility

When it comes to leasing, blockchain has even more potential. Tracking a car right from the OEM, transfer of ownership, tracking of repairs, mileage, fuel, and maintenance over a single distributed ledger can help bring visibility across the leasing journey. This in turn can help customers avert mileage fraud, while also eliminating any disputes at the end of the lease term.

With all necessary and unnecessary repairs being visible to all parties involved, calculation of charges and violation penalties is likely to become much easier.

The use of a distributed ledger also eliminates the need of undertaking time-consuming paperwork at each node (or stakeholder) of the leasing value chain, thereby improving the overall efficiency of the process, while also cutting costs, making it much more cost-effective to lease a vehicle.

Similarly to its function in car rentals, a distributed ledger also eliminates high costs charged by car leasing companies, resulting in increased popularity P2P leasing of vehicles through smart contracts. Blockchain can also be used as an open maintenance log, as well as for the provision of other value added services such as insurance and toll payments.

Blockchain - A Potential Disruptor in Car Rental and Leasing Industry - EOS Intelligence

Transparency across the lease to help minimize customer disputes

The benefits of blockchain are most prominent at the end of the lease term, when a customer returns a leased vehicle. The use of an open distributed ledger eliminates any disputes that may occur between the service provider and end client, with regards to end-of-lease charges. Transparency across the lease lifecycle, including open logs of vehicle usage, mileage, fuel, maintenance, tire changes, and insurance, make it easier to calculate any end-of-lease charges, based on the pre-defined terms of the smart contract. These charges can also be automatically paid in the form of cryptocurrencies or tokens, as per the provisions in the smart contract.

Blockchain entries can also help leasing companies estimate the approximate value of the vehicle at the end of the lease term, making it easier to decide whether to remarket (re-lease) or dispose of the vehicle, as well as reducing the overall time and resources required in the remarketing process.

Newer blockchain-based platforms expected to drive growth

The global automotive blockchain market is likely to witness growth of 31.1% CAGR between 2020 and 2030, with Asia witnessing the fastest growth. Majority of this growth is attributed to proliferation of car rental and leasing in countries such as India and China, where people are seeking easier means of mobility and are making cautious effort of reducing traffic in metro cities.

Several companies in the region started investing in building platforms using blockchain. In 2017, Mumbai-based Drivezy, an Indian car sharing company, successfully developed a car rental and leasing platform using blockchain, in which users can rent cars and make payments using cryptocurrencies and tokens. In 2018, the company raised US$20 million in a Series B funding through an initial coin offering (ICO). Such investment is encouraging further start-ups looking to utilize blockchain for car rental and leasing.

Darenta ICO, a Russian car rental start-up, developed a platform for existing car owners to rent out their cars using a digital solution that employs geolocation, smart contracts, and other blockchain technology. Launched in 2018, the company has already expanded its presence in 20 countries, and plans to enter the USA and Canada, followed by other European and Asian markets (including China) by 2020.

Several major companies have also invested in developing other technology platforms using blockchain technology, which could have applications in the rental and leasing businesses. In 2017, Ernst and Young, for example, launched a blockchain-based platform called “Tesseract” to support an integrated and autonomous mobility. Through this platform companies and individuals can share cars, while payment and insurance are handled through blockchain. In 2017, Renault also launched a prototype blockchain platform to track information about a car’s maintenance history, including repair shops and dealerships at one place, through a digital maintenance log prototype.


Explore our other Perspectives on blockchain


Lack of acceptance of cryptocurrencies likely to pose challenges

While blockchain has plenty of benefits, broad scale deployment of the technology faces certain challenges as well – one of the most crucial ones being recognition of cryptocurrencies in key emerging markets in Asia, including India and China. Most blockchain-based solutions are looking at ICO to generate funds, issuing their own cryptocurrencies (mostly based on Ethereum tokens), which also act as a mode of transactions and payments for the service. Lack of regulation of cryptocurrencies is currently limiting the adoption of blockchain technology in the rental and leasing space.

Also, for the blockchain technology broad scale implementation, there is a need for high performance computers (or supercomputers) along with highly skilled workforce to handle the blockchain. Such challenges can cause delay in widespread adoption of blockchain technology for car rentals and leasing system at a larger scale.

EOS Perspective

Currently, blockchain is considered synonymous to cryptocurrencies such as bitcoin, which is still very unstable and is commonly seen as an investment rather than a mode of transaction. Such a perception is likely to continue to prevail in the short term. Once the paradigm shifts from cryptocurrencies being looked at as a mere investment tool, to being considered as a mode of transaction or a trustless platform, which utilizes inherent properties of blockchain, the overall acceptance of blockchain is also expected to increase. This shift is also likely to bring more stability in cryptocurrency prices, which in turn is also expected to generate a more positive regulatory outlook in favor of cryptocurrency and blockchain technology.

Once blockchain gains prominence, we are likely to witness a lot more start-ups promoting peer-to-peer car sharing (rental or leasing), driving a change in the way people look at their cars. Idle vehicles will increasingly be considered as assets which can generate a source of additional income via car sharing model, resulting in better overall utilization of cars.

ICOs are likely to remain the most common mechanism to generate funds. While the technology has several potential uses, which are expected to disrupt the car rental and leasing market in the near future, the state of blockchain acceptance currently remains highly speculative, primarily due to its close association with cryptocurrencies.

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China Accelerates on the Fuel Cell Technology Front

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For the past decade, China has been on the forefront of the New Energy Vehicles (NEVs) revolution. Although most of its focus has been on battery-powered electric vehicles (BEVs), the government has recently also begun to put its financial might behind hydrogen fuel cells for vehicles. Unlike battery-powered vehicles that need regular and long-periods of charging (therefore are more suitable for personal-use vehicles), hydrogen fueled vehicles do not need frequent refueling and their refueling is quick. This makes them ideal for long-distance buses, taxis, and long-haul transport. However, the existing infrastructure to support fuel cell-powered cars is limited. Thus, despite having inherent benefits over electric vehicles (especially in case of commercial vehicles), fuel cell vehicles fight an uphill battle to build a market for themselves in China, owing to the challenges in acceptability, infrastructure availability, and sheer economies of scale.

Over the last decade, the Chinese government heavily backed the production and sale of electric vehicles through substantial subsidies, investment in infrastructure, and favorable policies. This resulted in the sector picking up rapidly and reaching 1.2 million vehicles sold in 2018. However, the government has begun to reduce the subsidies provided to the sector and the focus is slowly shifting to fuel cell vehicles.

How do fuel cell vehicles work?

Fuel cell vehicles use hydrogen gas to power their electric motor. Fuel cells are considered somewhat a crossover between battery and conventional engines in their working. Similar to conventional engines, fuel cells generate power by using fuel (i.e. pressurized hydrogen gas) from a fuel tank.

However, unlike traditional internal-combustion engines, a fuel cell does not burn the hydrogen, but instead it is chemically fused with oxygen from the air to make water. This process, which is in turn similar to what happens in a battery, creates electricity, which is used to power the electric motor.

Thus, while fuel cell vehicles are electric vehicles (since they are solely powered by electricity), they are similar to conventional vehicles with regards to their range, refueling process, and needs. This makes them ideal for long-haul commercial vehicles.

Chinese government bets big on fuel cell vehicles

Under China’s 13th Five-Year Plan, the government has laid out a Fuel Cell Technology Roadmap, in which it aims to operate over 1,000 hydrogen refueling stations by 2030, with at least 50% of all hydrogen production to be obtained from renewable resources. In addition, it has set a target for the sale of 1 million fuel cell vehicles by 2030.

To achieve these ambitious targets, the Chinese government plans to roll-out a program similar to its 2009 program – Ten Cities, Thousand Vehicles, which promoted the development and sale of battery electric vehicles and hybrid vehicles. It currently plans to promote fuel cell vehicles in Beijing, Shanghai, and Chengdu. Considering the vast success garnered by this program, it is likely that the government will also be successful in achieving similar targets for fuel cells.

Moreover, while the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks. However, for the buses to receive subsidy, they are required to drive a minimum of 200,000 km in a year.

While the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks.

Moreover, the government also provides subsidy for the development of hydrogen refueling stations. A funding of US$0.62 million is available for hydrogen refueling stations having a minimum of 200kg capacity.

In addition to these national subsidies, state-wise subsidies are also available for several regions such as Guangdong, Wuhan, Hainan, Shandong, Tianjin, Henan, Foshan, and Dalian. Local subsidies differ from region to region and are given as a ratio of the national subsidy. For instance, it equals 1:1 in Wuhan, while it is 1:0.3 in Henan province. On the other hand, local or state subsidies are cancelled for BEVs (except buses).

Apart from subsidies given to fuel cell infrastructure and vehicle manufacturers, the price of hydrogen is also heavily subsidized, making it cheaper than diesel in many cases.

China’s fuel cell vehicle market picks up steam

The government’s backing and subsidies have stirred interest of several international players towards China’s fuel cell vehicle market. Considering its success and dominance of the BEV market, these players are placing their bets on China achieving similar volumes and success in the fuel cell sphere.

Chinese companies have also begun to invest heavily in fuel cell technology companies globally. In May, 2018, Weichai Power, a Chinese leading automobile and equipment manufacturer, purchased a 20% stake in UK-based solid oxide fuel cell producer, Ceres Power. Similarly, in August 2018, Weichai Power entered into a strategic partnership with Canada-based fuel cell and clean energy solutions provider, Ballard Power Systems. As part of the strategic partnership, the company purchased 19.9% stake in Ballard Power Systems for US$163.3 million. In addition, they entered into a JV to support China’s Fuel Cell Electric Vehicle market, in which Ballard holds 49% ownership. Through this partnership, Weichai aims to build and supply about 2,000 fuel cell modules for commercial vehicles (that use Ballard’s technology) by 2021.

China Accelerates on the Fuel Cell Technology Front - EOS Intelligence

Global leader in industrial gases, Air Liquide, has also partnered with companies in China to be a part of the fuel cell movement. In November 2018, the company entered into an agreement with Sichuan Houpu Excellent Hydrogen Energy Technology, a wholly-owned affiliate of Chengdu Huaqi Houpu Holding (HOUPU), to develop, manufacture, and commercialize hydrogen stations for fuel cell vehicles in China. In January 2019, the company also partnered with Yankuang Group, a Chinese state-owned energy company, to develop hydrogen energy infrastructure in China’s Shandong province to support fuel cell vehicles in that region.

Another global player, Nuvera Fuel Cells (US-based fuel cell power solutions provider) has also engaged with local companies to foster growth in China’s fuel cell vehicle market. In August 2018, the company entered into an agreement with Zhejiang Runfeng Hydrogen Engine Ltd. (ZHRE), a subsidiary of Zhejiang Runfeng Energy Group based in Hangzhou. Under the agreement, Nuvera will provide a product license to ZHRE to manufacture the company’s 45kW fuel cell engines for sale in China. While the fuel cells will be initially manufactured in Massachusetts, it is expected that they will be locally manufactured by 2020.

In December 2018, the company signed another agreement with the government of Fuyang, a district in Hangzhou (in Zhejiang province), to start manufacturing fuel cell stacks locally in 2019. The agreement also includes an investment by Nuvera to establish a production facility in Fuyang region. These fuel cell stacks will be used to power zero-emissions heavy duty vehicles (such as delivery vans and transit buses), which comprise 10% of on-road vehicle fleet, but account for 50% fuel consumption.

In addition to the fuel cell energy producers, global car manufactures have also shifted their attention to fuel cell vehicles market in China. In October 2018, Korean car manufacturer, Hyundai, entered into a MoU with Beijing-Tsinghua Industrial R&D Institute (BTIRDI) to jointly establish a ‘Hydrogen Energy Fund’. The fund aims to raise US$100 million from leading venture capital firms across the globe to spur investments in the hydrogen-powered vehicle value chain. This agreement will help the Korean automobile manufacturer identify and act upon new hydrogen-related business opportunities in China and will eventually help pave the way for Hyundai Motors to make a foray into the Chinese fuel cell vehicle market in the future.

A bumpy road ahead for fuel cell vehicles

While the industry players are working along with the government to meet the ambitious targets set by the latter, fuel cell vehicles must overcome several challenges for them to be a realistic alternative to conventional and electric vehicles.

Currently, the infrastructure for fuel cell vehicles is by far insufficient. More so, it is extremely costly to develop, costing about US$2 million to build a refueling station with a capacity of about 1,000 kg/day. While the government is investing heavily in developing hydrogen refueling stations (for instance, China Energy, China’s largest power company, has been building one of China’s largest hydrogen refueling stations in Rugao City, Jiangsu Province), it requires long term partnerships and investments from private and global players to meet its own targets. Until an adequate number of refueling stations is constructed, especially on highway routes (facilitating truck and bus transportation), fuel cell vehicles will remain in a sphere of concept rather than commercial and mass use.

Another challenge faced by the industry is that hydrogen, the main fuel, is also considered to be highly hazardous, and storing and transporting it is currently difficult. Moreover, it is difficult to convince customers to purchase hydrogen-powered vehicles because of this perceived notion of hydrogen being unsafe. In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

A lot of new technologies are also being explored to further make transporting and storing hydrogen safer. A German company, Hydrogenious Technologies, has developed a carrier oil that can carry hydrogen in a safe manner. This oil is non-toxic and non-explosive and thus makes transporting, storing, and refueling hydrogen safe. Moreover, using hydrogen mixed with this carrier oil to refuel fuel cell cars follows a similar refueling process as that of a conventional car, with one cubic meter of the oil carrying about 57kg hydrogen, which in turn is expected to give a car a driving range of 5,700km. However, the carrier oil is still in its nascent stage of development and would take time and resources to gain commercial applicability.

However, one of the largest challenges that fuel cell vehicles face is direct competition from battery electric vehicles. BEVs have a 10-year head start over fuel cell vehicles whether it comes to government support, technological development, infrastructure, or acceptability. Moreover, BEVs are cheaper both in terms of cars price and cost of running, which is an important factor for consumers. In addition, BEV players are constantly working towards reducing charging time and increasing driving range. Since both are green technologies, it is likely that the consumer prefers the one which has now proven to be a successful alternative to conventional vehicles in terms of pricing and supporting infrastructure. Although higher subsidies for fuel cell vehicles may help bridge the gap, it is yet to be seen if fuel cell cars will be able to give stiff competition to their green counterparts.

EOS Perspective

There is no doubt that the Chinese government intends to throw its weight behind the fuel cell technology for automobiles. In 2018 alone, the central and local governments spent a total of US$12.4 billion in supporting fuel cell vehicles. This has helped attract the attention of several local and international companies that want a share of this growing market.

It also helps that hydrogen as a fuel has several benefits when compared with battery power, the key advantages being short refueling time and long driving range. Moreover, some consider hydrogen to be a cleaner fuel when compared with battery power as the electricity required to create hydrogen (which is created by pumping electricity into water to split it into hydrogen and oxygen) can be derived from renewable sources from China’s northern region, which are currently going to waste.

Despite these inherent benefits, it will be difficult for fuel cell vehicles to catch up with battery-powered vehicles as the latter have significantly advanced over the past decade (leaving fuel cell vehicles behind).

Moreover, China’s model of promoting green energy is yet to pass its ultimate test, i.e., to sustain and flourish without government support. Since the government has now begun to phase out its support to BEVs, it is to be seen if the large group of domestic electric vehicle makers can survive in the long run or the market will face significant consolidation along with slower growth. Thus it becomes extremely critical for the Chinese government and companies in this sector to understand the feasibility of the market post the subsidy phase. Fuel cell vehicle market should take advantage of learning from the experience of battery powered vehicles sector, which was the pioneer of alternatives to conventional combustion vehicles.

by EOS Intelligence EOS Intelligence No Comments

Commentary: The Suzuki-Toyota Partnership – Are Such Partnerships Here to Stay?

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In February 2017, Suzuki and Toyota signed a memorandum of understanding (MoU) for business partnership. The two Japanese carmakers drafted framework for collaboration on future technology development, joint manufacturing, and market development projects. Both companies agreed to share their R&D, product portfolio, infrastructure, and dealer networks in India.

The collaboration includes mutual supply of passenger vehicles between the two companies for the Indian market. Maruti Suzuki (Suzuki’s Indian subsidiary) will supply Toyota with between 30,000 and 50,000 units of Baleno and Vitara models, while Toyota will provide Suzuki with 10,000 units of Corolla annually. These vehicles will be marketed nationally through their respective sales networks. In addition, Toyota and Denso Corporation (owned by Toyota) will offer technology transfer to Suzuki for developing a compact and highly efficient powertrain. Toyota’s Indian arm, Toyota Kirloskar Motor (TKM) will manufacture models developed by Suzuki for sale in India, Africa, and other emerging markets via their global sales networks. Further, in November 2017, both companies announced plans to co-develop and introduce electric cars (EV) in India by 2020. For this, they are setting up a lithium ion battery plant in the Indian state of Gujarat.

What does it mean for both OEMs?

By tapping into Toyota’s under-utilized manufacturing capacity in India, Maruti Suzuki will get access to the much needed extra production bandwidth. The OEM has so far relied heavily on Fiat for its diesel engines. With the new collaboration, it will have access to Toyota’s superior diesel engines that will help Suzuki to improve its brand perception in the Indian market. The partnership will also provide Maruti Suzuki with a chance to take a stab at the executive sedan space by offering Toyota’s Corolla via its sales network. Lastly, Suzuki will leverage Toyota’s technology and EV expertise, an area where the OEM is relatively weak and definitely needs improvements.

The partnership will give Toyota access to Suzuki’s expertise in India. It will hopefully help it to penetrate the low-priced compact cars market, a segment it has failed to crack so far. The OEM relies mainly on diesel car sales in India. However, the new partnership will help Toyota to fill the current product gaps, broaden their portfolio with petrol cars from Suzuki, and achieve higher sales in India.

What does it mean for Indian automotive industry and customers?

At present, both carmakers have started sharing a few of their models with each other. However, there is a potential for more models in pipeline, followed by joint product development and manufacturing platform sharing (shared engineering and production efforts for different vehicle models). This is likely to lead to the introduction of new cars in various market segments. The co-developed cars are promised to have Toyota’s technological sophistication as well as Suzuki’s affordable ticket price, providing customers with broader and better options. In addition, the partnership can be expected to make both carmakers compete with each other for performance improvement, this will result in enhanced products and services for customers.

From an industry perspective, the joint manufacturing will result in creating more local jobs. Volume production will mean that both OEMs will also look to source components locally for cost savings. This will provide some boost to domestic components industry and government’s Make in India initiative. Suzuki’s size, scale, market knowledge, as well as unrivalled supply chain in India, along with Toyota’s global expertise and technology know-how, make this tandem a great fit in the context of kick-starting, promoting, and meeting the Indian government’s ambitious 2030 EV targets. In the EV space, the partnership will contribute to manufacturing more efficient cars and aid in development of the automotive and ancillary industries.

Are such partnerships here to stay?

Since growth opportunities in developed automotive markets are confined, global carmakers have set their eyes on emerging markets as these are projected to represent around 60% of the total global auto sales by 2021. India is on a fast track towards becoming the world’s third-largest auto market thanks to the rapidly growing passenger car market. According to IHS Markit estimates, annual new car sales are expected to reach 5.1 million in 2020, an increase of about 30% from 2016-2017 figures. Therefore, it looks like a logical move for global OEMs, such as Toyota, to look at all possible collaboration avenues to capture the growth opportunities in these markets.

The global automotive industry is constantly evolving triggered by rapidly rising new technologies, changing customer preferences, and multiplying sustainability policies. Carmakers globally are faced with massive costs to develop new technologies for highly energy-efficient cars. To remain competitive in such rapidly changing industry, OEMs need to increasingly look for strategic collaborations that will enable them to work together and leverage their shared expertise to optimize cost as well as performance. As a result, increasing number of alliances are seen where carmakers collaborate by sharing platforms and joint manufacturing for cost savings in R&D, manufacturing, and components procurement. This is especially true in emerging markets where growth opportunities are ample, but own set of challenges exists, and such alliances are increasingly becoming catalysts for growth. Recent examples include five MoUs signed between Mahindra and Ford to jointly develop new products in India and other emerging markets, or a similar alliance between China’s Geely Group and Daimler.

While the coming together of two Japanese OEMs with two different working cultures may pose its own challenges, both carmakers need this collaboration to succeed for their own reasons. For Toyota, the reason is to increase its presence in a country that is soon to become the world’s third-largest auto market. Suzuki’s reason is the much needed technical know-how to enter the EV space. While the success of this partnership at present remains uncertain and it will be interesting to see how this partnership pans out in the next few years, one thing that is certain is the fact that one can expect more such collaborations in the near future, as carmakers will look for partners to better penetrate new markets, develop new products to grow, at the same time optimize their R&D, manufacturing, and procurement costs.

by EOS Intelligence EOS Intelligence No Comments

Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry

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The whole world has its eyes on China and the USA as both nations are threatening to impose massive tariffs on each other in a ‘tit for tat’ trade skirmish. According to the Trump administration, the proposed tariffs are intended to punish China for pursuing its protectionist policies, currency manipulations, and alleged intellectual property (IP) theft. Fears of a possible full-scale trade war between the world’s two largest economies have caused global stock exchanges to plunge and cautioned investors as well as governments across the globe. There is no doubt that a trade war would not only hurt both economies, but it would also impact the overall global economy. As the proposed tariffs would pertain, amongst others, to vehicles and auto components, we are taking a look at potential implications this trade war might have on automotive industry in both countries.

Since his presidential campaign, president Trump has criticized China for pursuing protectionist policies, currency manipulations, and IP theft. In order to punish China for its current trade policies, and to reduce USA’s huge trade deficit with China, Trump proposed tariffs on approximately US$50 billion worth of Chinese goods coming into the country. Of these, approximately US$34 billion worth of Chinese goods including vehicles and auto parts will be subject to new tariffs starting from July 6, 2018, while the remaining US$16 billion are still under review.

The total automotive trade between the USA and China stood at US$33.9 billion in 2017. At present, in the USA, a 2.5% import tax is levied on imported vehicles and components. The current government proposes to raise this to 25% for vehicles and parts coming from China. China charges around 25% tax on vehicle imports from overseas, and now have threatened to add an additional 25% for vehicles built in the USA. Although these are just proposals for now, if they do get implemented, they will have implications on the entire automotive ecosystem in both countries, including carmakers, dealers, and auto parts manufacturers, and suppliers.

American companies won’t remain unaffected

A trade war with China will make domestic-made cars more expensive at home and less competitive in China. As a significant portion of the auto components and parts used by the US carmakers is sourced from China, increased tariffs will lead to increased production costs. Experts fear that OEMs will pass the increased costs onto the consumer. As a result, domestic auto sales are expected to witness a dip. Further, automakers based in the USA will become less competitive in China and may not be able to retain their current market share any longer.

Tesla is one of the companies that will feel the heat of higher tariffs. Chinese market accounted for approximately 17% of Tesla’s revenue in 2017. The company is already struggling to cope with the existing 25% import duties amid stiff competition from local rivals, such as BYD, NIO, and Byton, who have cheaper alternatives. American OEMs, such as Ford, GM, etc., fear that vehicles made by their subsidiaries in China and exported to the USA could end up being hit by the proposed tariffs.

Besides USA, German automakers such as BMW and Daimler will also be highly exposed since they are the largest vehicle exporters from the USA to China. Potential implications of the Sino-US trade war on companies mentioned above could lead to several job losses at US manufacturing plants. According to a report by Peterson Institute for International Economics, the trade war could result in loss of around 195,000 jobs over the next three years. Additionally, it will also impact other industry players such as auto component OEMs and suppliers, dealers, as well as local retailers.

Trade war could also hamper and limit US companies’ access to the Chinese automotive market, which is currently the largest market globally both in terms of production as well as sales. China is also the best-performing market in the world for electric vehicles (EVs) from sales, infrastructure, and government support perspective. With trade war in place, US companies could lose out to EU and other Asian counterparts on various market opportunities in China.

With trade war in place, US companies could lose out to EU and other Asian counterparts on various market opportunities in China.

Besides automakers, trade war will also have serious implications on auto parts manufacturers and suppliers as well. For example key tier-1 suppliers such as Lear, Delphi Automotive, Adient etc., rely heavily on China for their revenue. On the other side, there are many suppliers that rely on China for sourcing. China is also the largest trading partner for USA in tires. Exports in 2017 reached nearly US$2 billion, an increase of 28.2% as compared to previous year. If the proposed tariffs become reality, all these players will face business challenges on sales as well as supply-chain fronts.

Chinese companies will also face some implications

For the Chinese automotive industry, the trade war will impact mainly imported cars produced in the USA and domestic cars that use components from the USA. Since most cars sold in China are manufactured locally, the impact on Chinese auto OEMs will not be as significant as felt by their US counterparts. However, China is a major exporter of auto spare parts and components to the USA. In 2017, China exported auto parts worth US$17.4 billion to the USA. Thus, the trade war will heavily impact Chinese car parts manufacturers and exporters that rely on US business. On the EV front, new tariffs will raise the prices for parts and components imported from the USA. This in turn, will dampen the adoption of EVs due to higher initial costs and impact domestic EV sales.

Trade war is likely to hinder auto investments in China up to some extent as many companies might re-think their production and supply-chain strategies and put China investments on hold. For example, Ford has kept its plan to export Focus compact to the USA from China on hold due to the ongoing rift. Trade war will therefore impact local production as automakers serving USA market might scale down production in China. This might result in layoffs at local manufacturing units. In addition, trade skirmish with the USA will also create more obstacles for Chinese companies, such as Geely and GAC Motor, looking for market expansion in the USA.

Trade war will therefore impact local production as automakers serving USA market might scale down production in China.

 

EOS Perspective

In May 2018, president Xi announced to lower tariffs on imported cars to 15% effective from July 1, and ease ownership restrictions in automotive joint-ventures. This had somewhat cooled down the ongoing tension between the two nations. At this stage, many experts believed that the current situation will be resolved between the two nations via negotiations. However, despite three rounds of negotiations, both sides have failed to reach an agreement yet.

In the recent chain of events, Trump has threatened to slap extra tariffs on additional Chinese products worth US$400 billion. He also plans to restrict Chinese investments in American technology companies and technology exports from USA to China. This has opened up another front in the ongoing battle. In response, Beijing has warned to retaliate with levies on additional list of American products.

As of now, the potential effects of a full-blown trade war on the auto industry are not clear as they are still proposals. However, if tariffs were imposed, OEMs based in the USA would feel the strongest impact as they export around 280,000 vehicles to China each year.

In addition, considering that automakers today are more globalized than ever and depend on globally-integrated supply-chain networks to optimize their bottom line, a broader impact of the trade war would impact the supply-chains of many global OEMs. The business losses suffered by them will eventually pour down to auto parts suppliers, dealers, retailers, and local auto businesses, who will all feel the heat with varying degrees. It will be interesting to see how things progress and finalize over the next few days. For now, industry stakeholders are sweating over the looming trade war between the two powerhouses.

by EOS Intelligence EOS Intelligence No Comments

Africa’s Struggling Auto Market Set for Modest Recovery in 2018

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After a challenging 2016, most African economies experienced modest recovery in 2017, aided by a recovery of oil and commodity prices. The 2016 economic downturn and a decline in oil prices in Africa impacted some of the largest economies in both Sub-Saharan Africa and North Africa, including Algeria, Angola, Nigeria and South Africa. A recovery in oil prices to US$65-70 per barrel, from as low as US$30 in 2016-2017, has resulted in these economies rebounding after a period of low economic growth, and recession in the case of Nigeria. The World Bank expects economic recovery to continue over the next couple of years, and predicts African GDP to grow by 3.2% and 3.8% in 2018 and 2019, respectively. While economic conditions continue to ease, a negative sentiment has set in the African consumer markets, which has changed the outlook of the automotive industry significantly across the continent.

The article was published as part of Automotive World’s Special report on Africa.
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