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WBCSD background - Economist article on industry challenges: #2

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  • eric.britton@ecoplan.org
    From The Economist, Sep 2nd 2004 RIPE FOR REVOLUTION New kinds of cars are about to produce a new kind of car industry AMERICANS are queuing up to add a Prius,
    Message 1 of 1 , Sep 8, 2004
      From The Economist, Sep 2nd 2004


      New kinds of cars are about to produce a new kind of car industry

      AMERICANS are queuing up to add a Prius, a new petrol-electric hybrid
      car, to the trio of gas-guzzlers parked in the average suburban
      driveway. There is no doubt about it: this car is cool. It is not only
      fashionable in the usual way--the favourite model of Hollywood movie
      stars--but also in a new and startling manner. The Prius serves not
      only as a green credential for its owner, but also as an exciting
      high-tech gizmo. Yet for anyone watching the fortunes of the car
      industry closely, the Prius represents something else as well--the
      quiet revolution that is about to engulf the car industry itself.

      Leading that revolution is Toyota, manufacturer of the Prius. It is no
      accident that Toyota, Japan's biggest car firm, is now pioneering the
      industry's move into new kinds of environmentally friendly vehicles
      with a cleverly marketed and commercially viable product. Toyota is a
      relentless competitor which has overtaken Ford in terms of sales and is
      now tailgating the industry's leader, General Motors (GM). The
      widespread use of all-electric, non-polluting vehicles, using hydrogen
      fuel-cell systems (like GM's concept car above), is probably still 20
      years away. The Prius, with its little electric motor performing as a
      supplement to its petrol engine, is just a small step in that
      direction. But it is significant, because it represents two things that
      promise to transform the entire car industry--new technology and new
      production methods.

      The car business is ripe for revolution. As our survey of the industry
      in this issue describes, it has chronic problems. Once it epitomised
      20th-century capitalism, but today it looks poorly equipped to thrive
      in the 21st century, or even to survive in its present form. Many of
      the world's biggest car firms are destroying wealth rather than
      creating it. About half of the industry is regularly incapable of
      earning a decent return on its invested capital. Although it still
      accounts for about a tenth of economic activity in rich countries, it
      has been virtually shut out of stockmarkets for the past 20 years,
      accounting for a mere 1% of total market capitalisation.

      Only the support of governments and the patience of founding families
      keep many companies going. Even this has often not made car making
      profitable. For years companies such as General Motors and Ford have
      relied on their finance arms to stay afloat. Laden with gold-plated
      pension and health schemes from an earlier, more profitable age,
      Detroit sometimes seems like a Swedish-style welfare state paid for by
      a consumer-finance business specialising in cars. This is
      unsustainable. Long-term liabilities are being met by repeated
      financing via the corporate bond market, the only part of the capital
      markets that most car companies can tap.

      But there are plenty of ideas knocking around for how the industry
      might transform its fortunes. Ambitious mergers are no longer regarded
      as the answer, especially after the disastrous acquisition of Chrysler
      by Daimler-Benz in 1998. Instead, the focus is on ways to adapt the
      mass production system invented by Henry Ford to the realities of
      today's markets. All car firms have learned from Toyota how to use
      just-in-time, lean production to make cars much more efficiently. A
      continuous flow of parts arrives from the other side of the world
      (increasingly from China) just when they are needed. But, oddly, the
      finished cars then sit in parking lots for up to 90 days before they
      are sold, usually at a discount because they are not the colour or do
      not have the optional extras that the buyer wants. The whole industry
      is straining to find ways of making cars to order rather than producing
      them for inventory.

      The industry is also trying to respond to changing tastes. As consumers
      become more choosy, the market is fragmenting into a bewildering array
      of niches. As a result, car manufacturers are struggling to make their
      assembly lines flexible enough to produce, say, roadsters in the
      morning and pick-ups in the afternoon. But as the market fragments,
      flexibility alone may not be enough. Smaller production runs, smaller
      factories and new ways of assembling cars are likely to be needed as
      well. Henry Ford could one day be history, to borrow one of his own
      famous put-downs. Economies of scale alone used to dictate the
      industry's shape, but changing markets could be more conducive to
      smaller, less capital-intensive companies.

      Such changes are already lowering the barriers to entry to new
      entrants. Some parts suppliers have taken over the role of final
      assembly of niche models for big car firms, and others are doing more
      of the development work on new cars. The virtual car company could be
      in sight: perhaps one day some firms will own only technology, design
      and a brand, while a contract-manufacturing industry, born of today's
      suppliers, springs up, a path already taken by the consumer electronics
      and computer industries.

      Also pushing the car industry in this direction is the fact that cars
      themselves are evolving into something akin to consumer electronics
      products, and this trend is likely to accelerate. Cars are already
      lighter than they were, and they contain growing numbers of chips and
      other electronic gear. Luxury models have features such as adaptive
      cruise control that keeps drivers from hitting the car in front.
      Electronic controls and little electric motors could soon be providing
      steering and braking as well, much as they do in aircraft. As
      electronics replaces clutches, steering boxes and other mechanical
      features, cars will become still lighter.

      Those firms slow to innovate will surely exhaust even the patience of
      protective governments and founding families, and so fade away. Those
      that are successful at coping with the big technological, marketing and
      financial changes beginning to sweep the car industry, as Toyota has so
      far shown itself to be, should survive. But for the next few decades
      they, too, will have to scramble to adapt. And the car industry's
      privileged status as the pre-eminent example of the power of mass
      production looks finished. The industry of the future will look more
      like other consumer products businesses--crowded, fast-moving and a
      slave to the whims of customers.

      See this article with graphics and related items at

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