Mobility is essential in today’s world. Imagine how less exciting life would be if we were not able to simply catch the train to meet friends for dinner or hop into the car to spend some time outdoors over the weekend. Imagine how constricting life would be if excessive commuting limited our work options, not to mention our income, or if supermarkets didn’t offer the variety of fresh food we have got used to. Mobility is a key determinant of economic growth. It is one of the artery systems of our society, creating wealth and adding to the quality of life by providing people access to goods and services, jobs and markets, family and friends.
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However, today’s mobility is a dead end. Congestion, pollution and dire public finances are becoming ever more pressing issues. Growing traffic volumes are choking roads and highways, increasing congestion costs by the year. Many of us probably can confirm from personal experience that the issue is an everyday phenomenon across the world’s urban metropolitan areas. Pollution is a similarly pressing and similarly difficult to grasp issue. A growing body of scientific studies delivers mounting evidence of urban air pollution’s detrimental effects on public health. Filthy air accounts for more than three million premature deaths per year globally. Although we have become accustomed to pictures showing Beijing’s or Shanghai’s skyline dissolving in haze, urban air pollution is not solely an Asian or developing-world problem. At Julius Baer, we believe that we are in the midst of a transition where new technologies satisfy our growing energy needs without further depleting fossil resources. Therefore, we have identified four trends and two scenarios which are set to shape the future of mobility in the foreseeable future and beyond.
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Trend 1: The rising Asian middle class is buying cars
How we commute, if we drive a car, use public transport or ride a bike varies within cities, countries and continents. A look at the statistics reveals that people in North America and Europe primarily rely on cars and roads (90% and 80% of passenger mileage respectively). Asia reveals different mobility habits compared to the western world. Trains, buses and bikes account for the majority of commutes in Asia. On the other hand, Chinese growth was the past decade’s main narrative of the automotive industry. The rising middle class has brought a deep pool of first-time buyers and this trend is set to dominate car markets into the foreseeable future. This scenario is unlikely to happen in India where cities are already choking from traffic today. In sum, the densely populated Asian megacities set limits on car ownership.
Trend 2: Downsizing and hybridisation
Engine technology has evolved considerably over the past decade. Among other things, combustion engines have become smaller. This so-called ‘downsizing’ improves the engine’s thermal efficiency and cuts fuel consumption. However, combustion engines remain far inferior in terms of energy efficiency compared to electric engines. Car manufacturers are combining combustion and electric engines (hybrids) to reap the benefits of both worlds: long mileage and the convenient refuelling of fossil fuels, as well as low emissions and high performance of electric engines.
Although catching lots of headlines, plug-in vehicles remain a niche market. Plug-in is the term increasingly used to describe any car that primarily uses a battery for driving and includes both purely electric and plug-in hybrid technology. According to EV Volumes – the Electric Vehicle World Sales Database – worldwide plug-in sales grew by 50% in 2016, 10 times faster than the overall market, but plug-ins still only capture a market share of below 1%. On the other hand, battery technology is evolving faster than expected and auto makers are introducing ever more electric cars to their line-up. For example, leading German car manufacturers recently pledged that 15-25% of their fleet sales will be electric by 2025. The electric car’s addressable market niche should expand beyond homeowners going forward.
Trend 3: Autonomous driving and connectivity
The question is not if cars will drive autonomously but when. There is a strong trend towards more technology and software content in cars. Techies are displacing engineers. Estimates suggest that 20% of cars today are connected to mobile networks, and the penetration should rise to a full 100% over the coming decade. Connectivity enables several services such as remote diagnostics or roadside assistance - services drivers are willing to pay for. Unsurprisingly, Silicon Valley exponents see the vision turning to reality by the end of the decade. Scientists and researchers tend to be more cautious and see self-driving cars 15 to 20 years away.
Trend 4: The sharing economy
Last but not least, the sharing economy, also known as the shift from owning to using, is deeply rooted in the young and urban generation. Thanks to digitisation and the convenience of smart phones, platforms have spread on the Internet to exchange goods and services. Worldwide there have been an estimated six billion subscribers to car sharing services last year according to the Boston Consulting Group, mostly in Europe and North America, creating USD 0.7 billion of sales. Ride-hailing services such as Uber have disrupted the taxi business. According to McKinsey, about 170 million people use ride-hailing services in China alone and the market leader Didi hosts about 20 million rides a day. The trends are similar: in North American, European and Asian cities, young people are turning away from car ownership because ride-hailing services offer a cheaper and more convenient alternative. The lack of parking, congestion, hassle and cost to obtain license plates are the obvious reasons.
Scenarios for 2030 and beyond These trends are set to shape the future of mobility into the foreseeable future. To assess market impact and understand the related business risks and opportunities, we took the following assumptions on the key determinants, alongside population growth:
- Plateauing western world car ownership: Urbanisation, an ageing society and the younger generation’s preference to use rather than own should weigh on car ownership rates and lengthen the average fleet age.
- Growing developing world car ownership: Rising incomes translate into rising car ownership rates, but dense city structures and urbanisation suggest that developing markets are unlikely to catch up on western world levels. The case in point is China.
- Rising plug-in market share: The momentum of electric mobility has grown past the tipping point. Declining costs and the manufacturers’ product offensive should translate into rising market shares for plug-ins.
Evolutionary scenario: car sales continue to rise
Along these assumptions, our evolutionary scenario for 2030 and beyond sees car sales continue to expand into the foreseeable future, but at slower growth rates. Car sales in China will plateau over the coming years, while other emerging markets such as India or Indonesia will not provide a similar growth boost. The rising market share of plug-ins and the increased use of hybrid technology lowers the fleet average fuel use. In sum, this scenario brings changes to relative regional market sizes and to the technology content of the cars.
Revolutionary scenario: the end of the combustion engine
However, some trends could together augment their impact and develop a market disruptive force. The inconveniences and high costs of owning a car, short driving distances and comparably easier mapping make cities the breeding ground of this vision. The vision of on-demand mobility could develop a strong momentum of its own, which would translate into lower car ownership rates, lengthened average fleet age and an even faster pick up of electric mobility. The consequences of such a revolutionary scenario would be significant and entail far-reaching consequences. Ultimately, it would lead to a debate about peak car and peak oil:
- Peak car: Global car sales peak around 2030 as car ownership drops and mobility becomes a service.
- The age of electric mobility: Electric cars take over and a broader electric mobility ecosystem develops. On-demand mobility breeds a new era of logistics based on autonomous electric delivery vehicles.
- Peak oil: The combustion engine is slowly displaced and global road fuel consumption drops. Peaking oil demand contributes to falling global carbon emissions and mitigates regional air pollution issues.
The future of mobility impact goes far beyond the auto makers
The main wild cards which, in the end, will determine which scenario will materialise are technological promises, consumer acceptance and regulatory guidelines. Today’s car market provides a living for various industries and thousands of companies. The scenarios outlined trigger large shifts of value pools across the broader auto business. Owning a car entails various “operating” costs including fuel, insurances, taxes and other items such as maintenance and repair expenses. These costs reveal that the future mobility impact goes far beyond the auto makers and bears positive or negative implications for a wide range of businesses within the car’s entire ecosystem. Some examples, including their impact and potential implications:
- Engine technology (auto suppliers): To comply with tightening fuel efficiency regulations, engine technology is becoming more complex and costlier. Auto makers purchase many components such as hybrid and exhaust gas systems from auto suppliers. This value pool is set to expand into the foreseeable future and would reach a maximum extent in an evolutionary rather than a revolutionary future mobility scenario.
- Electronics (auto suppliers): Autonomous driving, electric power trains and in-car entertainment requires more electronics such as semiconductors. Electronics content multiplies with electric cars. Tech content is the most promising growth niche for both scenarios.
- Batteries (materials): Electric mobility needs batteries, which fuels demand for functional metals such as lithium or cobalt.
- Utilities: Electric cars consume electricity, but the impact on utilities tends to be overestimated. Electric cars are energy efficient and a full charge is far cheaper than a full tank.
- Auto makers: Car sales growth continues in the near term but is plateauing globally, peaking western world sales and the loss of content per car to auto suppliers will bring headwind in the longer-term. Future mobility holds more threats than opportunities for auto makers.
- Auto retailers: The revolutionary scenario likely bears nightmares for western world retailers, as car sales drop and electric cars need less maintenance. Today, car maintenance adds up to an estimated USD 1,500 per year.
- Energy: Households spend an estimated USD 1,250 per year on fuel per car. Road fuel use continues to grow in the near term but could plateau or peak after 2030 depending on the applied scenario.
- Insurance: Autonomous driving is proven to reduce crash rates, which should shrink the value pool of car insurance premiums in the longer term. Insurance coverage costs an estimated USD 1,000 per year per car.
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