The Fuse

Auto Industry Booming, Making Strides in Technology, But Headwinds Loom

by Matt Piotrowski | January 21, 2016

It’s now a good time to be in the auto business. Technological advancements are moving at a rapid pace and are set to continue at a fast clip, vehicle sales are at an all-time high, and low fuel costs for consumers are set to persist for the foreseeable future. The expected changes in the coming decade should bring a lot more choices for consumers, and also provide opportunities to diversify the transportation fleet in order to cut the country’s reliance on oil. But the industry will face steep headwinds, including an eventual rebound in the oil price, higher interest rates, higher vehicle prices, and stagnant consumer income.

“Vehicle sales have also been boosted by the tremendous innovation taking place in the auto industry right now—and I think that’s a story that deserves more attention.”

“Vehicle sales have also been boosted by the tremendous innovation taking place in the auto industry right now—and I think that’s a story that deserves more attention,” said Senator Lisa Murkowski (R-Alaska), the Chairman of Senate Committee on Energy and Natural Resources, on Thursday at a hearing on the status of innovative technology in the auto industry. “We’ve seen dozens of alternative fuel models emerge, from electric vehicles like the Tesla Model S, to the fuel cell-powered Toyota Mirai, to a Ford F-150 that can run on compressed natural gas and propane. At the same time, we have seen exciting developments in everything from safety technologies to self-driving cars, which may offer their own energy and environmental benefits.”

But it’s hard to say how long the favorable conditions will persist, with a rebound in oil prices a possible future threat. “The oil market can be volatile, and we need to remember this,” said Maria Cantwell (D-Washington), the ranking member of the committee, who added that increasing fuel efficiency is one of the biggest steps to cushion consumers against any price spikes. More than 90 percent of the country’s vehicles run on petroleum products, and some 70 percent of the country’s oil demand is in the transportation sector.

Fuel efficiency standards are now under scrutiny. In 2017, there will be the mid-term review of the mandate for vehicle models for years 2022-25. The current standards are getting pushback from some automakers that want to delay implementation, now that consumers are switching back to bigger, less-efficient vehicles. Cantwell pointed out that average fuel economy for new vehicles dropped year-on-year in 2015, the first annual decline since 2008. Low oil prices are likely the main culprit for last year’s dip.

Despite the decline last year, the gains in fuel efficiency and overall consumer choice have risen sharply over the years.

Mitch Bainwol, President and CEO of the Alliance of Automobile Manufacturers, noted that in 2015, there were almost 500 models that consumers could choose from that had fuel economy of 30 miles per gallon (mpg)—up 600 percent from 2006. At the same time, the number of models with 40 mpg is also making major gains. There were some 76 models with this level of fuel efficiency available to consumers in 2015, up nearly 1,000 percent from 2006.

Bainwol pointed out a couple of big hurdles for the auto industry, including rising car prices, household income remaining flat, and rising interest rates.

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“As interest rates rise, higher financing costs, along with increasing compliance obligations, could make it more difficult for some families to replace their old car with a new one. And that of course is a problem on lots of levels,” Bainwold told the Committee. One consequence of these factors is less demand for new cars, which ultimately negatively impacts the industry. Another adverse effect is that it slows the process of turning over the vehicle fleet, replacing older cars with more fuel efficient and safer vehicles.

“The question is not whether our industry will continue to introduce and integrate these sophisticated vehicle innovations, but how quickly and deeply they penetrate the overall vehicle fleet due to consumer acceptance and purchases,” Bainwol said.

He urged the industry and government to work together to get the most out of new technological advances, with both sides understanding that many consumers may not be able to afford new vehicles.

Bullish on autonomous vehicles

At the hearing, another witness, Xavier Mosquet of the Boston Consulting Group, noted his excitement for autonomous vehicles, pointing out their promise to reduce accidents by 90 percent, limit congestion, and slice dependence on oil demand.

Demand for autonomous features and vehicles is “very high.” Drivers are even willing to pay up to get new technology.

Mosquet highlighted that consumers want autonomy, saying that demand for autonomous features and vehicles is “very high,” citing that 55 percent of the drivers in the U.S. are likely to consider buying a partially autonomous vehicle, and 44 percent a fully autonomous one. Drivers are even willing to pay up to get the new technology, he added. This shows “the high value that customers place in the promise for increased safety, the convenience, and also the customer view that it could reduce their insurance and fuel expenses.”

Mosquet said that action had to be taken now in order to deal with the numerous challenges for the penetration of autonomous vehicles. “There will be a significant impact not only on safety, but also on fuel efficiency, and now there is a challenge to get to this as soon as possible,” Mosquet said. “The biggest issue is that the costs are higher than the consumers are able and willing to pay.”

In response to Mosquet and the other witnesses, Senator Murkowski asked what, if anything, is there for Congress to do to help the industry, noting that she is skeptical of taking action given that she believes the government shouldn’t be picking “winners and losers.”

Low gasoline prices have moved consumers “away from stated social objectives of electrification and moving consumers into smaller cars instead of trucks.”

Both Bainwold and Mosquet noted that they are in favor of the critical minerals bill, which puts together policy to create a steady supply of rare earths and other materials that are of importance to economic and national security, and could help push down the costs of vehicle production.

Bainwol also said any legislation should be “technology neutral,” or in other words, regulations shouldn’t favor one form of technology over another.

Bainwol summed up the issues now in front of regulators, policy makers, the auto industry, and consumers in a nutshell when he said: Low gasoline prices have moved consumers “away from stated social objectives of electrification and moving consumers into smaller cars instead of trucks… Consumers will respond to what is rational for them and they are not into optimizing policy. They’re into maximizing their pocketbooks.”

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