Cost conscious consumers are driving car manufacturers to focus on smaller engines and also the use of technology to create cleaner, more efficient vehicles, according to KPMG International's 2014 Global Automotive Executive Survey.
The downsizing of engines, driven by consumer cutbacks, is one of several significant influences shaping the global automotive sector. Automakers are undergoing changes on many other fronts: fuel efficiency being the number one priority for cash-strapped consumers, the rise in popularity of hybrid cars in the e-vehicle race, the continued emphasis of mobility solutions and technology as critical to original equipment manufacturer (OEM) survival in the automotive value chain, and the increasing power of Brazil, Russia, India and China (BRIC). These issues are explored in-depth in KPMG's 15th annual auto survey, Strategies for a Fast-Evolving Market.
Continuing consumer concern with fuel efficiency and pollution is urging automakers to focus on plug-in hybrid engines for the near future, said John Leech, KPMG's UK Head of Automotive. Since the development of e-vehicle technology takes time, in parallel, automakers are also maintaining a strong grasp on downsizing the internal combustion engine, which is expected to deliver substantial improvement in fuel efficiency during this decade.
Ninety-two percent of respondents say that fuel efficiency for cost reasons is the primary factor in vehicle purchasing decisions, as consumers vote with their wallets in the face of fast-increasing prices at the petrol pump; the same consensus as the KPMG 2013 global auto survey. Enhanced vehicle lifespan has risen in importance for the third consecutive year, with 70 percent of respondents citing this factor as influential.
Environmental concerns such as reducing CO2 emissions are still important to the consumer, but slipped from second place in the KPMG 2012 global auto survey to fifth this year.
Consumer preferences for alternative fuel technologies have taken a lower priority in the quest to economise. Fewer than half of respondents feel that this factor is critical to buyers. Furthermore, more than seven out of ten say state-subsidies for e-car sales are key to further expansion.
Plug-in vehicles are expected to attract the greatest demand of any e-vehicle, for North American, (western) European and Japanese and the BRIC markets. Fuel cell vehicles are also experiencing a rise in popularity with 69 percent of respondents considering this technology as critical to future growth by the end of the next decade.
Despite this confidence, the majority of investment from automakers will continue to be in downsizing the internal combustion engine, which could slow advances in e-vehicles, according to the survey.
Seventy-six percent of respondents say that combustion engine downsizing and optimisation is a key issue, compared to just 59 percent for battery-powered technologies.
UK, North American, (western) European and Japanese OEM's are twice as likely to invest in internal combustion engine downsizing, whereas BRIC countries are more focused on the various forms of e-mobility, like plug-in hybrids and pure battery electrified vehicles.
Mr. Leech continued: This a quite a turnaround in direction and a sign that some of the newer electric technologies are taking longer than expected to emerge. This will benefit the UK in the short-term (which is the second largest manufacturer of combustion engine cars in Europe) and, in particular, UK suppliers of turbochargers and direct injection petrol-engine components.
Technology driving change amongst automakers
As automakers consider ways to grow organically, technology leadership could be critical to the survival of a company.
"The demand for self-driving is leading automakers to become mobility solutions providers, said Mr. Leech.
"There is a strong correlation between technological leadership and the ability to remain independent and we can see this from the importance that automakers are placing on technological advances to enhance their mobility solutions. This year we will see the launch of traffic-jam assist features and head-up displays in some cars which, together with self-parking and cruise control, signal the start of a gradual creep of the car taking over certain aspects of driving."
With more software technology intrinsic to today's vehicles, the self-driving car becomes a real possibility for the marketplace during the next decade. However, only 14 percent of respondents feel that self-driving cars represent one of the key industry trends, although these figures differ widely by country. In the BRIC countries, the expectations for self-driving cars are higher (23 percent) than in the North American, (western) European and Japanese markets (11 percent).
"The focus on innovation by the British government will help the UK to play a role in the development of self-driving cars, said Mr. Leech following the announcement of a review of the regulation and legislation surrounding the testing of self-driving cars at the 2013 Autumn Statement. Plans to review the regulation and legislation that applies to the testing of driverless cars in the UK by global car manufacturers will help promote the UK as a good place to develop driverless car technology."
The rapid growth and increasing congestion of urban areas, coupled with changing consumer thinking on car ownership in cities, is giving rise to a keen interest in new solutions to owning transport such as car-sharing. In the UK, Daimler's Car-2-Go point-to-point car-sharing was successfully launched in parts of London and Birmingham in 2013, joining a number of other initiatives.
Many of the major automotive brands are moving into this space, and almost half of survey respondents feel that mobility solutions can deliver a profit within the next 5 years.
Respondents from the UK, North American, (western) European and Japanese countries are the most optimistic of the potential for mobility solutions, with almost half forecasting that up to a quarter of city inhabitants will use these services by 2029 - huge increase on the survey results from 2013.
"The growing trend of the self-driving car can have a further positive impact on the development of mobility solutions, noted Mr. Leech. The ability to order a car to arrive when you want it, and go where you want to go may make it unnecessary to actually own the car. This could greatly contribute to the rise of mobility solution models, perhaps eliminating the need to own a second family car."
Online sales to grow, but dealerships divided on future
The future of automotive dealerships is divided, according to respondents. Just over half of the respondents (53 percent) believe that the traditional models of automotive dealerships will not work for the future market (down from 61 percent in 2013), with online retailing and multi-brand providers set to rise significantly.
The importance of the online model for retail automotive sales is growing according to KPMG's research. Interestingly however, only 60 percent of dealers surveyed feel that the online route will thrive, suggesting a reluctance to acknowledge a shift to online sales.
"Used car sales in the UK have moved quickly on-line but new car sales lag behind. I believe that is changing albeit slowly and the dealership of the future will need to blend online and traditional sales channels. That could mean a change from traditional dealerships in every town towards a mix of fewer but larger flagship dealerships, new car sales outlets in shopping centres and workshops in every town," said Mr. Leech.
A significant majority of respondents see emerging markets as a major growth engine for the auto industry: 85 percent say that growth in the BRICs and other potentially high-growth markets is the biggest single industry trend until 2025.
"As the BRIC countries take up a greater share of the global market, auto executives face tough choices on how to expand and who to partner with, and how to respond to growing competition, said Mr. Leech. However, with these challenges comes massive opportunity for both manufacturers and dealers to tap into incredible long-term potential offered by the emerging markets. Our UK premium automotive manufacturers such as JaguarLandRover, Bentley and Rolls-Royce stand to benefit substantially from this trend.
"In this year's survey, respondents are increasingly optimistic about BRIC manufacturers increasing export volumes, with 44 percent confident that China will exceed 2 million vehicles within 2 years. Those that predict India will export 1 million cars within 2 years have also increased to 38 percent. Meanwhile, China is expected to account for one third of global new car sales by 2020, underlining its huge importance as a consumer market.
The greatest growth potential for BRIC OEMs is considered to be in South East Asia according to the survey, whereas Western Europe and North America continue to be largely off-limits for BRIC manufacturers. Since KPMG's 2013 auto survey, a greater proportion of respondents feel that BRIC auto companies have good growth opportunities in Africa and Middle East.
Nevertheless, that outlook may not materialise as quickly as some respondents predict. While survey respondents are optimistic, this scenario may not play out in some BRIC countries where the quality levels of domestic cars are not on a par with the standards of Western counterparts. To export into more mature markets, brand perceptions and distribution networks would have to improve significantly and that can take years if not decades, noted Mr. Leech.
Sales are expected to surge in BRIC countries, as 7 out of the 10 top OEMs expected to grow in the next 5 years will come from BRIC countries. For example, 66 percent of respondents predict that Russian automaker, Avtovaz, will be among the top three OEMs to gain market share, moving up from 21st place in the 2013 KPMG auto survey.
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About the 15th Global Automotive Executive Survey
Strategies for a Fast-Evolving Market 200 senior executives including automaker, suppliers, dealers, financial service providers, rental companies and mobility service providers from 28 countries in July and August 2013. Forty one percent of the respondents are based across Europe, Middle East and Africa, 35 percent in the Asia Pacific region and 25 percent in the Americas. All of the participants represent companies with annual revenues greater than US$100 million, and 39 percent work for organisations with revenues of over US$10 billion.
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have more than 155,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.