One major uncertainty about alternative powertrains is the level of government support they will receive. Half of the respondents to the survey said that this segment will remain limited to 5 percent or less of the U.S. market in 2020 — without government support. (See Exhibit 4.) But close to 60 percent of respondents said that if the U.S. government continues or expands its support of alternative powertrains, they expect penetration of 10 percent or more of the U.S. market by 2020.
Either way, government subsidies for consumers who buy these cars, along with support for companies working to advance alternative powertrains, have an uncertain future, given the current fiscal environment. In the end, adoption of this automobile segment will depend not just on continued support but on the right kind of support. Truly disruptive technologies such as plug-in vehicles will require a more balanced approach to government assistance, such as infrastructure support for a national grid of charging stations.
Even with government support, adoption rates of alternative powertrain vehicles have fallen short of expectations thus far, because the inherent cost differences have proven too substantial to be recovered without a sizable and sustained increase in fuel prices. Below-expected sales volume has made it difficult for manufacturers to recoup their own investments, at least so far. Differences across geographic markets pose an additional level of complexity — given national variations in energy supply and consumption, no single powertrain technology will replace the internal combustion engine.
“A lot depends on advancement in technology,” says Mark McNabb, president and CEO of Maserati North America. “Battery technology has to be more enhanced to make a strong business case. It’s a higher cost, and the anxiety over range is an issue for plug-ins with a lot of consumers. I think success hinges on two factors: a coherent government policy, and how quickly the technology can advance. In the meantime, manufacturers are spending a lot of money working on this, and they’re spreading it around to a lot of different ideas.”
A more immediate return could come from enhanced investments to improve the fuel economy of traditional internal combustion engines. “There’s still a lot of life left in that technology,” says Scot Eisenfelder of AutoNation. “Through design changes and other incremental gains, you can generate a significant improvement in fuel economy without relying on a disruptive technology.”
This same uncertainty applies to in-vehicle connectivity and entertainment. Approximately 40 percent of manufacturers that responded to our survey expressed plans to develop their own proprietary in-vehicle technology for consumer digitization — providing advanced customized electronics and inboard access to a variety of media. This may be a potentially risky strategy, given the fact that personal technology devices have far shorter product cycles than automobiles — witness the ubiquity of GPS systems on mobile phones — and the way that a single family may have multiple drivers who share multiple cars.
The fourth and final force that will shape the industry in the coming years is an increasingly interconnected supply chain. In 2011, the Japanese tsunami and the floods in Thailand brought home the limitations of a lean global supply chain facing “black swan” events. Many of the incremental benefits from just-in-time inventory evaporated in six months, especially at manufacturers that had limited safety stocks. Among respondents to the survey, more than 80 percent said they were affected by the Japanese earthquake and tsunami (although some were helped by risk mitigation measures already in place).
Since then, both suppliers and manufacturers have taken steps to prevent similar mishaps. They assessed the damage, weighed future events and probabilities, and are working with each other to be better prepared. In the past year, 19 percent of manufacturers have built new organizational capabilities to manage risk, an implicit admission that sufficient mechanisms were not in place before the quake. For suppliers, these risks, although daunting, offer an upside opportunity. Companies that differentiate themselves by shock-proofing their end of the supply chain will have a clear competitive advantage beyond price. (See Exhibit 5.)