Henry Ford wouldn’t recognize the industry he helped create.
On the floor of this year’s Detroit auto show, talk isn’t of labor costs or manufacturing efficiency, of brand positioning or near-term financial survival. It’s who can meet tough federal fuel economy rules, and who’ll be first to market with a car that drives itself — something even a consummate dreamer like ol’ Henry probably wouldn’t have bothered to contemplate.
“If not us, who,” says Bill Ford Jr., executive chairman of Ford Motor Co. “My great-grandfather changed the way the world moved with the Model T. The opportunity we have in front of us is very different than what my great-grandfather faced. No one company can do it alone.”
That’s why the big business mash-up of mid-decade is underway, the free-for-all of automotive and Silicon Valley players looking for smart partnerships that will stake competitive advantage without unnecessarily incinerating capital needed to finance their core business.
The assumption, given the auto industry’s comparatively low profit margins, high capital costs and small earnings multiples (especially in Detroit), is that Silicon Valley indisputably holds the upper hand. Its biggest players have the cash, the speed, the culture and the cred, the thinking goes, to push the lowly auto business into the 21st century.
The biggest thing the tech gods don’t have is what long-time industry watcher David Cole calls the automotive “real estate,” especially hardware priced for the masses. It’s the cars and trucks, the SUVs and crossovers, that technology commands but does not yet design, produce or shape into packages customers want to buy.
Without the metal, rubber and knack for integrating the technology into the real estate and then building it efficiently, there is no self-driving car — unless, of course, the likes of Apple Inc. acquires or buys a stake in, say, Fiat Chrysler Automobiles NV in the kind of audacious deal FCA CEO Sergio Marchionne would love.
The “real benefactor” of the technological transformation sweeping the auto industry will be the companies that own the “real estate these things are embedded in — like a car,” says Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor. “That may be the high ground in what’s going on. That’s a really big deal.
“You cannot bet the future on the basis of what we have now. We’re in the middle of a big, tough, interesting period ... and everyone is not going to be a winner coming out of it.”
Everyone seldom is. A Detroit-based industry just seven years removed from its existential reckoning now faces new challenges from government regulations and nimble, aggressive tech players that are likely to make quadrennial contract talks with the United Auto Workers look enjoyable, chiefly because the stakes are so high.
Let’s be clear: The likes of GM and Ford are not embracing the autonomous/electrified/zero-emission space because of some epiphany forcing them to embrace a world their industry historically disdained. They’re doing it to seize competitive advantage and hedge their bets; to develop new business to offset lost sales and save their companies from the twin threats of government regulation and well-capitalized challengers from Silicon Valley.
They’re doing it because a federal regulatory regime stiffened while the industry was preoccupied with its survival and beholden to the U.S. Treasury. There’s no guarantee the Obama-era fuel-economy targets will survive the next administration intact, but it’s highly unlikely they would be reversed substantially.
“It isn’t a question of do I want it or don’t I want it,” says Carlos Ghosn, chairman of the Renault-Nissan Alliance. “It’s happening. This is not going to be an easy shift, but I do not see how we can escape it.”
They probably can’t, even with oil prices plunging and expected to stay low. Shifting priorities in urban areas, coupled with ride-sharing software that can make anyone with a car into a taxi, means more people are likely to own fewer cars.
Tough federal fuel-economy targets, wrested from the industry during the darker days of 2009 and 2010, make it likely that most automakers will be unable to meet targets nine years from now of 54.5 mpg without boosts from sales of electric and hybrid vehicles.
The “2025 numbers are very high numbers,” says Marchionne, technically doable but not at all guaranteed to be commercially viable. An inconvenient truth, rendered in today’s environment of low fuel prices and hot sales, is that electrics and hybrids account for 2.5 percent of the market, hardly a sign of robust consumer demand.
Detroit ignores that segment and the tech-sector threat at its peril. Even if traditionalists are right and consumers cling to their gas engines, at least for the near term, the industry risks ceding the market for electrics and non-traditional mobility to tech players large and small looking to extend their reach into an auto space perceived to be ripe for the taking.
More, the simple truth is that the largest, fastest-growing auto market in the world — China — is demanding cleaner and smarter next-generation technologies to combat its urban scourges of pollution and traffic congestion. Those who can offer solutions can bid for the business; those who can’t lose.
GM’s Chevrolet Bolt electric car, unveiled this month in Las Vegas and at the Detroit show, will be a prominent test case of a critical proposition: Will American buyers plump for an electric compact that promises more range (200 miles per charge) at a lower price ($30,000 after federal incentives)?
If they don’t, a thorough rethink will be necessary — an exercise even ol’ Henry would recognize.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.