What’s happening to Cars?
As this video shows, the once giant car companies who had the world’ largest market capitalisations (share price x number of shares) are now dwarfed by Tesla, the American company that has made electric cars sexy. The arrival of Tesla has caused legacy car firms a major headache but, perhaps even more disruptive is the significant change in our ‘personal transportation preferences’: uber anyone? In cities, we are moving from a model of ownership to pay per ride. That ride could be in an uber, or an e-scooter, a bike or a combination of these and public transport (and yes, there’s an app for that too).
This change in our tastes is brought about by a number of forces, one of which may be our increased environmental awareness and reluctance to get in something that emits noxious fumes. Add to this some working from home, a congestion charge, ultra low emissions zones, low traffic neighbourhood schemes and incredibly high insurance premiums for young drivers, and it’s just not worth buying a car anymore.
According to the FT:
Though the catch up spend from the pandemic may cause some increase in sales this year, the graph below suggests on overall downturn in new car sales in the UK:
So what will be the impact on Toyota, Ford, Mercedes-Benz etc of a fall in demand for the traditional gas guzzler?
Once upon a time, our demand for traditional cars was quite high: at Demand 2
The huge car firms, using techniques of mass production, were able to produce 00s of cars per day and sell them relatively cheaply. The average person was able to afford a Ford because of the firm’s exploitation of economies of scale. The more cars they produced, the lower the unit cost and hence price. The car plants and robots and assembly lines that cost the firm so much are affordable because by producing thousands of cars, the total cost is spread out over a large number of units: so the average cost per car, falls: this is P2 Q2 on the diagram below where LRAC refers to the Long Run Average Cost:
This allowed the long run supply of cars to be at S2 — thus causing the price to fall to P2 in the diagram below:
If going forward, the long run demand for cars falls back, then, as can be seen on our long run cost diagram, the average cost of the car will rise from P2 to P1 — firms need to make fewer cars. The traditional car firms need mass demand to make their business model work. A lack of demand will cause the cost of car production to rise.
The lack of demand for traditional cars is of course good for the environment. But the traditional firms will need to find new ways to stay as profitable as before. The most obvious answer is to pivot to the production of more environmentally friendly cars. If the technology allows them to also be mass produced and offered at a low price, then some car firms may remain in business — possibly with more mergers in the market too.
But the move to producing electric cars may not be sufficient if we are, in total, driving less. If there is simply not the demand for so many privately owned cars, then some firms will not survive this new age. In other words, the new normal might be at P1Q1 — higher costs, higher prices and a less profitable sector.
As in other markets, the model of pay per use, rather than ownership, seems to be the future. And profitability will come from the development of technology that helps to make the monetisation of this a smooth, consumer friendly process. The traditional car firms are facing an existential threat as the technology of the old combustion engine really is a thing of the past.