SINCE the 1990s, the automotive industry has been bracing itself for a major correction.
Saddled with costly overproduction – where actual deliveries to customers lag behind the number of cars rolling off production lines by several months or more – the industry started looking for ways out of their jam.
Consolidation, in the form of mergers and acquisitions, went on overdrive. Notable examples include marriages between Daimler and Chrysler, and BMW and Rover – both of which ended on the rocks.
Others fared better, such as Volkswagen Group’s acquisition of brands like Bentley, Lamborghini, Scania and Porsche.
The Renault-Nissan merger has also fared reasonably well, although recent developments suggest cracks are forming.
Meanwhile, the American manufacturers resorted to cheap financing (sometimes, free financing) to keep the home market – once the world’s largest, but now overtaken by China – chugging along.
But this strategy has a limited runway, since it essentially encourages consumers to buy future cars. In other words, people bought cars earlier than planned.
It is not difficult to see the folly of such a strategy, but if you were a CEO with an average career longevity of three to five years, you will not be thinking about long-term outcomes.
So, just as the US real estate sector collapsed under the sub-prime crisis, the American auto industry is likewise heading for a car wreck. News agency Bloomberg reported recently that more Americans than ever are at least three months behind on their car loans.
The number of loans at least 90 days late exceeded seven million at the end of last year (2018), the highest total in the two decades the Federal Reserve Bank of New York has kept track.
The news gets worse. Various studies point to fewer and fewer younger people wanting to own cars. The smartphone generation is able to get anything they desire from the phone – from food delivery to massages to rides.
Against this bleak backdrop, carmakers are trying to transform themselves into mobility companies to prepare for the day when car ownership is no longer in vogue.
Toyota Motor, Volkswagen, Ford, General Motors, Daimler and BMW are just some of the manufacturers which are making the detour, or forming ventures which will tap into the new phenomenon.
For instance, Daimler and BMW are merging their ridehailing and car-sharing units.
But the two companies which have put most money where their mouth is are Toyota and Hyundai. Both have invested heavily in ride-hailing firm Grab.
Clearly, the thinking is that ride-hailing firms need sizeable fleets to run their operation. And because their cars clock far longer distances than privately-owned vehicles, they will need to be replaced earlier.
Some companies may own the vehicles directly (like what Uber did in Singapore), while others work with car rental partners who will buy and own the vehicles.
Either way, ride-hailing leads to more cars – something the automakers are counting on. This however, is shorttermism at work.
With cities getting increasingly congested, the air getting more polluted, and with more and more people moving to cities, anti-car sentiments will simmer and eventually boil over.
It will only be a matter of time when countries adopt Singapore’s vehicle quota system. A number of Chinese cities have already done so.
If congestion gets really bad, the car population control will become extremely strident.
A more long-term solution would be to make ride-sharing more attractive.
Ride-sharing means car-pooling, an ageold practice which leads to better use of resources. Ride-sharing will also pave the way for more sustainable car population growth – something which is the direct opposite of what Uber did in Singapore between 2013 and 2018.
Through wholly-owned Lion City Rentals, Uber bought close to 20,000 cars, driving up certificate of entitlement (COE) prices in the process.
When it packed up and left Singapore in March 2018, it began dumping those cars (many of which remained unhired). This lead to COE prices plummeting. Imagine if this happened to a larger market.
Ride-sharing does not require new or additional cars. It makes use of a city’s existing fleet, pairing people who want rides with people who own cars.
If cities adopt Singapore’s strict guidelines on ride-sharing (such as driver and passengers have to be going the same way, with restrictions on number of trips and fares), then the scheme will not lead to more congestion.
Ride-sharing helps a car owner defray running costs. As such, it might allow an owner to upgrade to a better car. Or it might allow people who previously could not afford a car to own one.
This will benefit car manufacturers because it fuels car sales and demand for more premium cars (which command better profits).
But the growth will be organic and gradual. Unlike the irresponsible behaviour ridehailing firms have demonstrated.
Car-sharing meanwhile, will lead to outcomes which are more akin to ride-hailing than ride-sharing. If the shared cars are underused, they take up valuable parking space.
If they are overused, they contribute more to congestion than privately-owned cars.
Car manufacturers, like cities, will do well to distinguish between the three.
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If congestion gets really bad, car population control will become extremely strident.
PHOTO SPH LIBRARY