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US and Germany Auto Market Both Set For Major Sustainability Changes

September 11, 2018

Both the US and German auto markets have been slower than other countries to adapt to electric vehicle (EV) technology, partially because of their larger size as countries, both in terms of population and geographic area. At the same time, these deeply inter-linked markets are going through substantial innovation both individually and in tandem.

With large combustion engine SUVs still the best-selling vehicles in the US, OEMs are struggling to find an approach that takes advantage of cutting edge thinking on sustainable mobility development, while at the same time keeping Wall Street happy. Conscious that the sustainable winds of change are blowing stronger, Ford has recently announced an $11bn investment program in electric vehicles by 2022, which more than doubles its previous commitment. General Motors has already seen growing, albeit small, interest in its electric vehicle (EV) offering, the Chevy Bolt, and has announced similar intentions to increase its electric and hybrid fleet. But while sustainable mobility momentum is picking up at company level, taking into account the geographical make-up and demographics of the US is key to catering for consumer needs and preference.

Similarly, in Germany, car manufacturing giants such as BMW and Volkswagen have built their reputations on their expertise in combustion engine technology and manufacturing excellence built up over the past 80 to 100 years. Accounting for 20% of total German industry revenue and employing approximately 800,000 people, there is little political will to meddle with an industry that is an integral part of the country’s social fabric.

However, with the political and regulatory landscape moving firmly in the direction of car electrification, the industry is having to seriously examine its future. For example, a Federal Administrative Court ruling in February 2018 giving cities the right to ban diesel cars, together with a fall in diesel car sales and the lingering emissions scandal, are creating the perfect storm forcing the automotive industry to explore alternatives.

Leveraging R&D Investment in Germany

The automotive industry is by far the biggest investor and employer in the R&D arena in Germany, employing over 110,000 people., and has been one of the main reasons for the country’s reputation for reliability, safety and manufacturing excellence. According to German’s automotive industry association, VDA, the industry accounts for more than one third of total global R&D spending in the automotive sector, putting it ahead of Japanese and American companies. Moving forward, it will be critical to leverage this investment for development of sustainable automotive technologies.

Elon Musk’s Tesla has spent millions of dollars developing and testing EV batteries. But investing money into new technology doesn’t always equate to a mass-market ready product as quickly and effectively as anticipated. German auto-makers are still on a learning curve. Learning from pioneers such as Tesla and honing production capability, while learning from pioneers can help achieve a better and more revenue-certain product as is one late-mover advantage that Volkswagen and Daimler are currently exploiting in the EV sector.

An Urban Versus Rural Strategy in the US

Despite a decrease in engine cylinder size over the past 10 years, the market for larger vehicles such as SUV/Crossovers has never been stronger. This is not surprising based on the sheer size of the US, where 97% of land is rural.

While Ford‘s F150 pick-up truck is America‘s best-selling vehicle, smaller cars are gaining popularity in more densely populated cities, particularly on the coasts. This gives a potential market for EVs from younger city-based consumers who use cars to commute to work and prefer to fly for longer trans-America journeys. With fully 80% of America’s 327 million population living in urban areas it makes sense for OEMs to have a specific urban-focused sustainable mobility strategy. This also opens the door for building partnerships that give access to shared mobility options such as ride-hailing and car sharing which have more traction in densely populated areas. Meanwhile, in rural areas hybrid vehicles offer an interim solution to current consumer reluctance for EVs.

Are We There Yet?

For EVs to match their combustion engine counterparts, significant investment in infrastructure and continued development in longer life battery technology is required. OEMs that can achieve this will be in a better position to convince the public that EVs are both a viable and reliable alternative.

In both the US and Germany, charging station infrastructure is key to gaining consumer traction. The complexity of changing established infrastructure to propel EV popularity has been slower than hoped, resulting in bottle necks as governments struggle to accommodate consumer charging needs.

Germany’s recent move to convert 12,000 distribution boxes into charging stations is a great example of how to leverage existing infrastructure to create more EV charging points without infrastructure displacement.

The Challenge of Second Guessing Innovation

While advances in technology, particularly in the area of automated driving, are disrupting OEMs, it’s equally as hard to envisage what the end game is for those in the US supply chain. As a result, some players are hedging their bets and investing heavily in technology to cope with life without combustion engines or traditional car materials. While it’s a gamble to invest in expertise and capabilities 5-10 years before the landscape becomes readable, companies that delay plans to acquire the right skills and expertise could potentially fall too far behind the curve.

In Germany, despite the fact that Volkswagen has recently pledged 34 billion euros towards the development of battery-powered and autonomous vehicle technology, and has partnered with Silicon Valley start-up, Aurora, to bring self-driving taxis, cars and trucks to the road, it and other German OEMs are still working to improve traditional engine powertrain development.

The ultimate winners and losers in the global automotive industry will not only be decided by national considerations, but also what happens worldwide. As players in the industry jockey for position, an increase in investment and research into sustainable mobility solutions, collaboration and acquisitions will become the strategic norm.

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