A Lutzmann vintage car made in 1896 makes its way down Whitehall during a re-enactment of the first London to Brighton rally. This Lutzmann is believed to have taken part in the very first rally one hundred years ago. Photo: Reuters
by Tom Holland
by Tom Holland

Global car giants are the Nokia of today, rolling towards commercial extinction

  • At 140 years old, the internal combustion engine has had a good run and modern car companies are ill prepared for the next technological innovation

Think of the smartphone in your pocket. Now compare it with the mobile phone you might have carried 20, or even 30, years ago.

They are hardly comparable. They are different sizes, different shapes, and worlds apart in what they can do.

That brick from 20 years ago could make telephone calls and send short text messages – if you were lucky enough to have cellular coverage.

With today’s smartphones you can not only watch movies, you can make them. They can monitor your health and fitness, tell you where you are going, and even find you love. About the only thing they have in common with the mobiles of the 1990s is that you could use both to make telephone calls.
In 2001, this was hi-tech. Photo: Handout
Now think of the typical car on the road today, and compare it with one from 20 or 30 years ago. They look the same, and they do the same thing in the same way.

Sure, both petrol and diesel engines have become more efficient, and today’s cars have far more electric gadgetry. But these are changes of degree, not of kind.

In all important respects, the cars of today are much the same as those of the late 1990s, or even the late 1980s.

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But it’s a sure bet that given the pace of technological development and the speed that consumers’ expectations are changing, the car of 2039 will resemble those of today as little as a mobile phone from 2019 resembles one from 1999.

That’s a big problem for the global automotive industry. Quite simply, car companies have failed to move with the times, and now they are getting left behind.

Car companies have failed to move with the times. Photo: Reuters
This failure is being reflected in falling sales. In the second half of 2018, global sales of cars and pickup trucks fell 5 per cent compared with the same period the previous year, with sales down steeply in China and the European Union, and only just in positive territory in the United States.

Most industry analysts attribute this downturn in sales to one-off idiosyncratic factors, and to cyclical headwinds that will soon blow over.

In China, for example, buyers rushed to make purchases in late 2017, ahead of the expiry of generous tax breaks at the end of the year. As a result, with so many purchases brought forward, sales slumped in 2018, with sales of passenger cars falling 4 per cent – the first decline in nearly 30 years.

Similarly, in Europe car buyers rushed to take advantage of cut-price deals ahead of the introduction in late 2018 of new emission test standards. Following the cut-off, sales fell.

Concept cars have offered a glimpse of a future that might never come to pass. Photo: AP

Meanwhile in the US, rising interest rates have made buying cars on credit more expensive.

It’s true that all these factors have been at work. But to concentrate on the short-term headwinds is to play down the three major related challenges facing the global automotive industry: technology, the environment and politics.
The most immediate of these challenges is political. In the coming days, the US administration will go ahead and decide whether or not to impose punitive Section 232 tariffs on imports of cars on “national security” grounds. If it goes ahead, European and, to a lesser extent, Japanese and Korean, carmakers will be hit hard.

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They will be forced to absorb the additional cost, which means their margins will suffer, or they will pass the cost on to customers, which means their sales volumes will suffer. Either way, profits, and therefore future investment, will be hurt.

At 140 years old, the internal combustion engine has had a good run. Photo: AFP

Some of that pain could be alleviated by currency movements. But the longer-term challenges facing the car industry will be more difficult to dodge.

The most obvious of these is environmental. At 140 years old, the internal combustion engine has had a good run. But with politicians vowing to ban polluting vehicles from the streets of European cities by 2040, few would bet that cars powered by petrol and diesel have much of a future.
Retooling for this new age involves enormous risk for car companies. It means rejecting the technology that made their reputations and fortunes, and it means betting tens of billions of US dollars on untried new engineering. Worse, there is doubt about which emerging technology will prevail. In a battle that has been likened to the VHS versus Betamax video-standard struggle of the late 1970s and early 1980s, carmakers are unsure whether battery-powered or hydrogen fuel cell cars will be the ones to achieve critical momentum in future.
Are electric cars the transport of the future? Photo: Reuters
So far the betting is on battery-powered cars, encouraged in part by government policies. But governments can do more harm than good. For example, in China government subsidies and quotas for electric vehicles have led to the emergence of scores of producers turning out substandard and inefficient electric vehicles in order to extract rents from the government, rather than to produce commercially viable non-polluting cars.
Finally, there is the worry that by manufacturing cars for sale to buying customers, today’s auto companies have completely missed the bus as far as meeting consumer expectations of new technologies is concerned.

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In a nutshell, car companies are run by old-fashioned engineers who are lousy at dealing with new tech. That much shows up in the inefficient, piecemeal way they have adopted new software technologies. According to management consultancy McKinsey, the typical new car runs on 100 million lines of software code. That compares with a Boeing 787 airliner, which runs on fewer than 10 million, or the US F-35 warplane, described by one aviation analyst as “a communications platform of astounding sophistication” which runs on around 25 million.

A Boeing 787, less computationally complex than a modern production car. Photo: Andrew London
This focus on old engineering, development by accretion, and sales of physical kit to customers has served the club of global automotive giants well enough in the past. But it is not going to succeed in a future in which the users of Uber and other ride-hailing apps are increasingly questioning the very idea of individual car ownership.
Add to that the promise of self-driving technologies, and it begins to seem clear that the automotive companies of the future will not make their profits by building and selling private cars to individual buyers, but by providing personalised transport services to their subscribers. Viewed through that lens, the car giants of today look singularly ill-equipped to survive. Think Nokia.

Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 25 years