A Future for the Auto Industry in a Resource-Limited World

Given that most might view the world as being on a path to catastrophe with too many people, too much pollution, and too much of our resources either being destroyed or consumed, it is startling to encounter a book that provides any kind of optimistic assessment for the future. Stefan Heck and Matt Rogers (with contributions from Paul Carroll) provide such a perspective in their book Resource Revolution: How to Capture the Biggest Business Opportunity in a Century.

The authors begin with this statement:

"We are standing at the threshold of the biggest business opportunity in a century."

They base that statement on their experience as long-time consultants to various industries in their roles in the McKinsey organization. They came to realize that new technologies and new business models could lead to enormous gains in efficiency that could balance or even diminish concerns about overuse of resources as the population continues to grow.

They illuminate the challenge ahead for the business community—and the world—in this manner.

"The key fact for business for at least the next two decades is this: More than 2.5 billion people in China, India, and other developing countries are moving out of poverty and will urbanize and move into industrial and service occupations by 2030."

"To accommodate all these people urbanizing, industrializing, and moving into the middle class, China alone will build two and a half cities the population of Chicago every year for the foreseeable future. India will build one Chicago each year….Think of the amount of concrete, iron and steel in a bridge or skyscraper; the amount of copper in a power grid and the energy required to power the cranes, bulldozers, and other machines that build it—and multiply those amounts by tens of thousands."

This increase in demand for resources comes at a time when commodity prices have already begun to climb due to supply issues. The authors point out that commodity prices were flat or decreased during two previous industrial revolutions (mechanization: 1770-1840, and urbanization: 1880-1920), but since the latter decades of the twentieth century they have begun to rise. What is needed now, to accommodate the future needs, is a third industrial revolution, a "Resource Revolution."

The authors claim that such a revolution has already begun. Their goal is to demonstrate that much more can be done to minimize resource demands across the economy. To get to a state where the world actually lives within its resources will require a revolution in which old business models are supplanted with new, more efficient ones. The business opportunity lies in succeeding in this resource-limited world.

The authors discuss several sectors of the economy and demonstrate that much more can be done to increase the efficiency of resource usage. Their discussion of the automobile industry provides an example of what they mean by a "revolution."

The resource revolution in auto manufacture will come from the inevitable transition to electric cars and the spread of advanced fabrication techniques that will minimize wastage of materials. Tesla technology is used as the example of where the industry must go.

"Tesla began with the idea that inexpensive electricity could substitute for gasoline as the primary fuel for cars. That’s a potentially important switch: At the current cost of electricity and gasoline, the cost to operate an electric car is about one-fifth as much as a gasoline powered car per mile driven. That’s the equivalent of paying—astonishingly—about 40 cents per gallon."

Electric cars also deliver efficiencies in design and maintenance.

"So, replacing an internal combustion engine with electric motors can give the manufacturer a car without engine cooling, transmission,, and most of what’s under the hood, but with better acceleration, better handling, and better safety. Electric cars also require less maintenance; in fact, with no transmission, no clutch, no spark plugs, and almost no other parts that wear out, the Tesla is the first car that doesn’t require maintenance to keep its warranty."

Tesla has an effective range of about 200 miles. Today it costs about $20,000 to provide the battery power required for that range. With current technology, Tesla is developing a midsize passenger vehicle that is expected to sell for about $35,000. The authors extrapolate advances in battery technology and suggest that what costs $20,000 now could be available for as little as $5000 by the end of the decade. This would make electric vehicles even more price-competitive

with gas-powered autos.

Numerous advances in manufacturing are possible that would diminish resource requirements. Manufacturers are beginning to factor recycling into the design of vehicles already. New techniques such as 3d printing are becoming more widely available for part manufacture. This method would essentially eliminate waste of material by only using precisely the amount needed for the design.

While much can be done to minimize the resource requirements to produce an automobile, the biggest waste is associated with the inefficient use of the vehicle. If transportation is to be provided to those additional 2.5 billion people, it can’t be done using the ownership model that is now in place. Fewer automobiles per person will have to be built, and they will have to be used more efficiently.

"….most of us own a car mainly to park it 96 percent of the time. Cars are typically the second biggest capital expenditure we make….yet they spend almost their entire lives sitting at home or in parking lots."

This traditional model of automobile usage is beginning to seem obsolete to some.

"Companies are already starting to seize the opportunities to optimize car usage. Mobile apps are making it easier to arrange car pools. Zipcar, acquired by Avis in early 2013 for $500 million, offers memberships that let people rent cars cheaply by the hour in major cities; each Zipcar is estimated to replace twenty-one cars in its subscriber base. Uber smoothes out inefficiencies in cab and limo systems by letting people summon a car and driver via a smartphone app. Going even further, RelayRides and Getaround provide marketplaces where individuals can rent their cars to others, rather than just have the cars sit idle."

Even the car manufacturers are getting into the car-sharing business.

"GM is working with RelayRides so renters can receive a code to type into their smartphones that will unlock a car via GM’s OnStar; that way, owners can simply leave the keys in the car and avoid having to arrange a meeting to hand them over. BMW and Daimler have started car-sharing programs and publicly said they are transportation companies, not car manufacturers."

One of the major difficulties associated with efficient use of automobiles arises because they are driven by humans prone to errors and irregular driving habits. This is the source of numerous accidents and inefficient use of highways. The car companies are already including features that avoid collisions and reduce accidents, but the greatest opportunity to eliminate them could come from the introduction of driverless cars.

Consider Google’s progress:

"Its car already has a license to operate in California, Florida, and Nevada (with a driver behind the wheel, ready to take over if needed). The car has driven more than 500,000 miles without causing an accident. Even if Google doesn’t try to commercialize the technology—and a $258 million investment in Uber, the car hailing app company, suggests that Google is serious—the company has created an arms race in driverless cars. Nissan has already said it will have driverless cars on the market by 2020; Tesla and Daimler have also committed, and the new Mercedes S-Class is already close to driving on its own."

Google has demonstrated that a driverless car can negotiate streets filled with human drivers. What might be gained if all the cars were driverless and all were able to communicate with each other and with traffic controls and monitors under some sort of master program? If such a system was feasible, accidents would essentially disappear; we would use our roads more efficiently; and we would need fewer traffic lanes.

"If Google is right that its car can reduce accidents by 90 percent, that would mean more than 30,000 lives would be saved in the United States every year. More than 2 million people, just in the United States, wouldn’t have to go to emergency rooms because of traffic accidents; and $260 billion would be saved, according to an American Automobile Association study. People would also gain ten additional ‘days’ per year—the time we now waste in traffic jams."

What is most striking about the authors’ view of the auto industry of the future is the amount of "creative destruction" required to bring it about. Manufacturers would produce many fewer vehicles. The authors suggest they would recast themselves as "transportation companies" and adopt an entirely new business model that would be based not on selling the vehicle, but on leasing it.

"Studies suggest that a company could offer a consumer access to car transportation for 80 percent less than he currently pays, and still make a hefty profit. Today, telecom companies make 8.5 percent net margins selling minutes, while automotive companies make about 4 percent selling cars. Why not make 15 percent selling miles?"

Fewer cars produced means fewer workers making cars. An electric car fleet requiring almost no maintenance means that the vast array of auto parts manufacturers and suppliers would shrink considerably. No accidents means no need for auto insurance as we now know it, fewer lawyers, few, if any, repair shops, and less demand for hospitals and physicians. Traffic violations would no longer exist so law enforcement people could concentrate on more serious issues. And, of course, driverless cars would eliminate the need for drivers.

This scenario provides an example of where technology can take us and how it can provide society benefits, but at the expense of jobs. While some new positions would be created by the new developments, it is hard to see anything but a continued contraction of employment opportunities. Such is the future we seem to face.