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Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe

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As of 2023, 5,279 electric heavy-duty trucks (HDTs) were on the roads in Europe, representing merely 1.5% of total HDTs in the region. Despite being in its early stages, the adoption of electric HDTs is expected to accelerate due to a combination of factors, including increasing regulatory support and advancements in charging infrastructure. As these factors converge, the electrification of HDTs is set to gain momentum, contributing to the decarbonization of the transportation sector and the achievement of EU climate goals.

Ambitious EU regulations toward a zero-emission future promote electric HDTs adoption

The EU aims to reduce CO2 emissions from heavy-duty vehicles by 45% in 2030, 65% in 2035, and 90% by 2040 compared to 2019 levels. The European Automobile Manufacturers’ Association (ACEA) suggested that more than 400,000 zero-emission trucks will have to be on the roads by 2030 to achieve a 45% CO2 reduction. There is a considerable gap to fill, considering only a few thousand electric HDTs were on the roads in 2023.

Additionally, to combat high pollution levels, specifically in urban areas, several European cities have implemented low-emission zones (LEZs) that restrict the entry of high-emission vehicles such as diesel trucks. As of June 2022, there were over 320 LEZs, about 40% more than in 2019. The number is set to increase to 507 by 2025. Obligations towards these regulations compel the European trucking industry to switch to electric HDTs.

Decreasing the cost gap between diesel and electric HDTs is likely to boost the adoption

The commercial vehicle market is price-sensitive, and hence, economic viability is essential for a smooth transition of HDTs from diesel to electric.

According to a study published in November 2023 by the International Council on Clean Transportation (ICCT), an independent environmental research organization, long-haul HDTs with an average daily travel range of 500 km powered by diesel were found to be cheaper. They had about a 5% lower total cost of ownership (TCO) compared to electric HDTs in 2023. However, the TCO difference between electric and diesel HDTs with an average daily travel range of 1,000 km was 10%. The TCO encompasses direct and indirect expenses, including acquisition, fuel or energy, maintenance and repairs, insurance, depreciation, financing, taxation, and operating costs.

ICCT estimated that for long-haul HDTs (both 500 km and 1,000 km range), electric battery-powered HDTs will reach parity with diesel between 2025 and 2026. Comparable long-term economic performance with diesel HDTs makes a favorable case for switching to electric HDTs.

However, the high retail price of electric HDTs remains a challenge, especially for small and medium fleet operators. ICCT indicated that in 2023, the retail price of a diesel HDT (500 km range) was EUR 152,000, while the cost of an electric HDT was more than double, EUR 354,000. The difference was even higher for HDT (1,000 km range), where the electric model was available for EUR 457,000, about 260% more expensive than the diesel model.

Acknowledging high upfront costs as one of the key barriers to the uptake of electric HDTs, as of 2022, 16 European countries, including the UK, were offering purchase incentives to the buyer to purchase zero-emission trucks such as electric HDTs to cover the price differential. Austria, France, Germany, Spain, Ireland, the Netherlands, Malta, and Denmark offered financial aid bridging 60% to 80% of the retail price gap, making a lucrative proposition for fleet operators to switch to electric HDTs.

In the countries not offering adequate financial support to cover the upfront costs, the adoption is likely to be moderate till the retail price of electric HDTs comes down. According to Goldman Sachs, battery pack prices are expected to fall by an average of 11% per year from 2023 to 2030, and about half of this price decline will be driven by the reduction in lithium, nickel, and cobalt prices. In the wake of rising demand for electric vehicles, the supply of these raw materials has been increasing, pushing the costs down. According to CME Group, a US-based financial services company, cobalt prices have dropped by more than 50%, from US$40 in 2022 to US$16.5 per pound in 2023, while lithium hydroxide prices have dropped nearly 75%, from US$85 to US$23 per kg during the same period.

Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe by EOS Intelligence

Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe by EOS Intelligence

Declining raw material costs will significantly lower production costs for electric HDTs, as battery packs account for a significant portion of the total production cost. As per BCG analysis, battery costs accounted for 64% of the total electric HDT production cost in Europe in 2022. This reduction will enable manufacturers to offer electric HDTs at more competitive prices.

At the same time, experts predict there might be a lithium supply deficit by the 2030s. This is likely to lead to pressure for increased production, as Benchmark Mineral Intelligence estimates a 300,000 tLCE deficit by 2030. Such a deficit can be expected to drive the raw material price up, negatively impacting the lithium-ion battery prices.

Read our related Perspective:
 Lithium Discovery in Iran: A Geopolitical Tool to Enhance Economic Prospects?

Robust charging infrastructure is necessary for the adoption of electric HDTs

The widespread adoption of electric HDTs hinges on the availability of adequate charging infrastructure, and the industry stakeholders have already been investing in this direction.

In July 2022, Daimler Truck, the TRATON Group, and the Volvo Group formed a joint venture company, Milence, with an initial funding of US$542 (EUR 500) million, aiming to set up 1,700 high-performance public charging points in Europe by 2027. At the end of 2023, Milence opened its first charging hub in the Netherlands. In January 2023, the British oil giant BP opened public charging stations for electric HDTs on the 600 km long Rhine-Alpine corridor in Germany, one of the busiest road freight routes in the region. The company installed 300 kW charging stations, enabling electric HDTs to add up to 200 km range in 45 minutes of charging time.

However, establishing a well-planned charging infrastructure and ensuring accessibility across the region requires more coordinated efforts. In 2023, the EU Council and the European Parliament passed a new regulation for deploying alternative fuels infrastructure (AFIR). This regulation mandates the installation of fast charging stations with 350 kW output for heavy-duty vehicles. The stations are required to be installed every 60 km along the Trans-European Transport Network (TEN-T) system of highways. The TEN-T system is the EU’s primary transport corridor, accommodating 88% of long-haul HDT operations, according to 2018 data. The target is to deploy charging infrastructure for heavy-duty vehicles at least 15% of the length of the TEN-T road network by 2025, 50% by 2027, and 100% by 2030.

Foreign players are in good position to enter Europe’s electric HDT market

Non-EU manufacturers offering cheaper trucks, e.g., from the USA and China, are in a good position to address the increasing demand for electric HDTs in the EU. A study published by BCG in September 2023 indicated that the US and Chinese manufacturers could take over 11% of the European electric HDT market by 2035.

EU imposes a 22% import duty on diesel HDTs, while electric HDTs are subject to only 10%. Manufacturers from outside of the EU who are capable of producing battery packs at a lower cost can leverage the cost advantage and find it profitable to export electric HDTs to the EU despite paying import duties.

According to Bloomberg New Energy Finance, China produced heavy-duty vehicle batteries at a 54% lower cost than the rest of the world in 2022. A crucial factor contributing to this cost advantage is China’s significant control over the supply of lithium, a critical component in electric vehicle batteries. Additionally, China has strategically directed investments into cobalt mining ventures, notably in nations such as the Democratic Republic of the Congo. China oversees the processing of approximately 60-70% of both lithium and cobalt globally, underscoring its significant role in the processing of these critical materials by 2023, according to International Energy Agency (IEA) analysis in 2023. By securing access to raw materials such as lithium and cobalt, Chinese battery manufacturers are able to effectively manage costs, mitigate supply chain risks, and ultimately reduce the production cost of their battery packs. Even after adding a 10% import duty, China can potentially offer electric HDTs to the EU market at a more attractive price than EU manufacturers.

Similarly, the USA offers generous tax credits for producing clean energy components through the Advanced Manufacturing Production Credit (AMPC), making battery costs more competitive in the USA than in the EU.

Foreign manufacturers that may not have the cost advantage might potentially look at partnerships and collaborations to grab a piece of Europe’s booming electric HDT market. For instance, in March 2024, Hyundai, a South Korean automotive manufacturer, and Iveco, an Italian transport vehicle manufacturer, signed a Letter of Intent reinforcing their commitment to collaborate on developing and introducing electric HDT solutions for European markets. By partnering with Iveco Group, Hyundai aims to leverage Iveco’s existing market presence, local expertise, and production capabilities to develop and introduce competitive solutions for the European commercial heavy-duty vehicle market.

EOS Perspective

While still at the starting line, the adoption of electric HDTs is expected to sprint off in the EU, given the continuous efforts to achieve climate goals. Regulations pushing for zero-emission transport, increasing investment in charging infrastructure, and the shrinking difference between the TCO of diesel vs. electric HDTs will contribute to the widescale adoption of electric HDTs in the EU.

Amidst all the hype around electric HDT, hydrogen-powered HDT is also gaining some attention as a zero-emission alternative. Hydrogen HDTs have higher load-carrying capacity and can be refueled within minutes adding over 1,000 km range, making them suitable for long-haul transport of heavy loads. Leading truck manufacturers, such as Daimler Truck, Volvo Group, and Iveco, have come together to support a research project called H2Accelerate Trucks, aiming to deploy 150 hydrogen HDTs with a 1,000 km range and carrying capacities of up to 44 tones across the EU. As a part of this project, the first hydrogen HDT is likely to hit the roads in 2029.

However, hydrogen-fuel technology is still developing, and the hydrogen fuel cell HDT is far away from achieving cost parity with its diesel and electric counterparts. ICCT report indicates that hydrogen fuel cell HDT will achieve TCO parity with diesel HDT in 2035, but it is not expected to achieve TCO parity with electric HDT even by 2040. Underdeveloped technology and higher upfront costs associated with hydrogen fuel cell HDTs play a significant role in hindering their journey toward achieving TCO parity with electric counterparts. According to ICCT, hydrogen-powered HDTs are projected to have an average TCO of US$1.23 (EUR 1.14) per kilometer in 2035, compared to just US$0.99 (EUR 0.92) per kilometer for battery-electric HDTs. This disparity persists into 2040, with hydrogen-powered HDTs still trailing behind at US$1.15 (EUR 1.06) per kilometer, while battery-electric HDTs maintain a lower TCO of US$0.98 (EUR 0.91) per kilometer. This discrepancy poses implications for adoption, potentially hindering the widespread uptake of hydrogen-powered vehicles until significant advancements and cost reductions are achieved in the hydrogen sector.

In 2023, the CEO of MAN, Europe’s second-largest truck manufacturer, suggested that hydrogen HDTs will play a small role in the EU’s zero-emission commercial transport future. Considering the economic performance of hydrogen HDT, this opinion is likely to turn out to be correct. This suggests that electric HDT is the way forward.

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage

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The transition to Electric Vehicles (EVs) is picking pace with concentrated efforts to achieve the net-zero carbon scenario by 2050. The International Energy Agency (IEA) estimated that global EV sales reached 6.6 million units in 2021, nearly doubling from the previous year. IEA projects that the number of EVs in use (across all road transport modes excluding two/three-wheelers) is expected to increase from 18 million vehicles in 2021 to 200 million vehicles by 2030, recording an average annual growth of over 30%. This scenario will result in a sixfold increase in the demand for lithium, a key material used in the manufacturing of EV batteries, by 2030. With increasing EV demand, the industry looks to navigate through the lithium supply disruptions.

Lithium supply shortages are not going away soon

The global EV market is already struggling with lithium supply constraints. Both lithium carbonate (Li2CO3) and lithium hydroxide (LiOH) are used for the production of EV batteries, but traditionally, lithium hydroxide is obtained from the processing of lithium carbonate, so the industry is more watchful of lithium carbonate production. BloombergNEF, a commodity market research provider, indicated that the production of lithium carbonate equivalent (LCE) was estimated to reach around 673,000 tons in 2022, while the demand was projected to exceed 676,000 tons LCE. In January 2023, a leading lithium producer, Albemarle, indicated that the global demand for LCE would expand to 1.8 million metric tons (MMt) (~1.98 million tons) by 2025 and 3.7 MMt (~4 million tons) by 2030. Meanwhile, the supply of LCE is expected to reach 2.9 MMt (~3.2 million tons) by 2030, creating a huge deficit.

There is a need to scale up lithium mining and processing. IEA indicates that about 50 new average-sized mines need to be built to fulfill the rising lithium demand. Lithium as a resource is not scarce; as per the US Geological Survey estimates, the global lithium reserves stand at about 22 million tons, enough to sustain the demand for EVs far in the future.

However, mining and refining the metal is time-consuming and does not keep up with the surging demand. According to IEA analysis, between 2010 and 2019, the lithium mines that started production took an average of 16.5 years to develop. Thus, lithium production is not likely to shoot up drastically in a short period of time.

Considering the challenges of increasing lithium production output, industry stakeholders across the EV value chain are racing to prepare for anticipated supply chain disruptions.

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage by EOS Intelligence

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage by EOS Intelligence

Automakers resort to vertical integration to tackle supply chain disruptions

At the COP26 climate meeting in November 2021, governments of 30 countries pledged to phase out the sales of petrol and diesel vehicles by 2040. Six automakers – Ford, General Motors, Mercedes-Benz, Jaguar Land Rover, Quantum Motors (a Bolivia-based automaker), and Volvo – joined the governments in this pledge. While Volkswagen and Honda did not officially sign the agreement, both companies announced that they are aiming to become 100% EV companies by 2040. Other leading automakers have also indicated EVs to be a significant part of their future product portfolio. Such commitment shows that EVs are indeed going to be the future of the automotive industry.

Automakers have resorted to vertical integration to gain better control over the EV supply chain – from batteries to raw materials supply, including lithium, to keep up with the market demand.

Building own battery manufacturing capabilities

Till now, China has dominated the global battery market. The country produced three-fourths of the global lithium-ion batteries in 2020. At the forefront, automakers are looking to reduce their reliance on China for the supply of EV batteries. Moreover, many automakers have invested in building their own EV battery manufacturing capabilities.

While the USA contributed merely 8% to global EV battery production in 2020, it has now become the next hot destination for battery manufacturing. This is mainly because of the government’s vision to develop an indigenous EV battery supply chain to support their target of 50% of vehicle sales being electric by 2030. As per the Inflation Reduction Act passed in August 2022, the government would offer up to US$7,500 in tax credit for a new EV purchase.

However, half of this tax credit amount is linked to the condition that at least 50% of EV batteries must be manufactured or assembled in the USA, Canada, or Mexico. Taking effect at the beginning of 2023, the threshold will increase to 100% by 2029. To be eligible for the other half of the tax credit, at least 40% of the battery minerals must be sourced from the USA or the countries that have free trade agreements with the USA. The threshold will increase to 80% by 2027. In October 2022, the Biden Administration committed more than US$3 billion in investment to strengthen domestic battery production capabilities. While some automakers had already been planning EV battery production in the USA, after the recent announcements, the USA has the potential to become the next EV battery manufacturing hub.

BloombergNEF indicated that between 2009 and 2022, 882 battery manufacturing projects (with a total investment of US$108 billion) were started or announced in the USA, of which about 25% were rolled out in 2022.

In September 2021, Ford signed a joint venture deal with Korean battery manufacturer SK Innovation (BlueOvalSK) to build three battery manufacturing plants in the USA, investing a total of US$11.4 billion. Once operational, the combined output of the three factories will be 129 GWh, enough to power 1 million EVs.

In August 2022, Honda announced an investment of US$4.4 billion to build an EV battery plant in Ohio in partnership with Korean battery manufacturer LG Energy Solutions.

As of January 2023, GM, in partnership with LG Energy Solutions, announced the build of four new battery factories in the USA that are expected to have a total annual capacity of 140GWh.

Toyota, Hyundai, Stellantis, and BMW are a few other automakers who also announced plans to establish EV battery production facilities in the USA during 2022.

Automakers are also expanding battery manufacturing capabilities in the regions closer to their EV production base. For instance, Volkswagen is aiming to have six battery cell production plants operating in Europe by 2030 for a total of 240GWh a year.

In August 2022, Toyota announced plans to invest a total of US$5.6 billion to build EV battery plants in the USA as well as Japan, which will add 40 GWh to its global annual EV battery capacity.

Focusing on securing long-term lithium supply

While vertically integrating the battery manufacturing process, automakers are also directly contacting lithium miners to lock in the lithium supply to meet their EV production agenda.

Being foresightful, Toyota realized early on the need to invest in lithium supply and thus acquired a 15% share in an Australian lithium mining company Orocobre (rebranded as Allkem after its merger with Galaxy Resources in 2021) through its trading arm Toyota Tsusho in 2018. As a part of this agreement, Toyota invested a total of about US$187 million for the expansion of the Olaroz Lithium Facility in Argentina and became an exclusive sales agent for the lithium produced at this facility. In August 2022, a Toyota-Panasonic JV manufacturing EV batteries struck a deal with Ioneer (operating lithium mine in Nevada, USA), securing a supply of 4,000 tons of LCE annually for five years starting in 2025.

Since the beginning of 2022, Ford secured lithium supply from various parts of the world through deals with multiple mining companies. This included deals with Australia-based mining company Ioneer, working on the Rhyolite Ridge project in Nevada, USA, US-based Compass Minerals, working on extraction of LCE from Great Salt Lake in Utah, USA, Australia-based Lake Resources, operating a mining facility in Argentina, and Australia-based Liontown Resources operating Kathleen Valley project in Western Australia.

GM is also among the leading automakers that jumped on the bandwagon. In July 2021, the company announced a strategic investment to support a lithium mining company, Controlled Thermal Resources, to develop a lithium production site in California, USA (Hell’s Kitchen project). The first phase of production is planned to begin in 2024 with an estimated lithium hydroxide production of 20,000 tons per annum, and under the agreement, GM would have the first rights on this. In July 2022, GM announced a strategic partnership with Livent, a lithium mining and processing company. As part of this agreement, Livent would supply battery-grade lithium hydroxide to GM over a period of six years beginning in 2025. The automaker continues to invest in this direction; in January 2023, GM announced a US$650 million investment in the lithium producer Lithium Americas, developing one of the largest lithium mines in the USA, which is expected to begin operations in 2026. As a part of the deal, GM will get exclusive access to the first phase of lithium output, and the right to first offer on the production in the second phase.

Other automakers also invested heavily in partnerships with mining companies to secure a long-term supply of lithium in 2022. The partnership between Dutch automaker Stellantis and Australia-based Controlled Thermal Resources, Mercedes-Benz and Canada-based Rock Tech Lithium, and Chinese automaker Nio and Australia-based Greenwing Resources are a few other examples.

There are also frontrunners who are directly taking charge of the lithium mining and refining process. In June 2022, the Chinese EV giant BYD announced plans to purchase six lithium mines in Africa. If all deals fall in place as planned, BYD will have enough lithium to manufacture more than 27 million EVs. American Tesla recently indicated that it might consider buying a mining company. In August 2022, while applying for a tax break, Tesla confirmed its plan to build a lithium refinery plant in the USA.

This vertical integration is nothing new in this sector. In the early days of the auto industry, automakers owned much of the supply chain. For instance, Ford had its own mines and steel mill at one point. Do we see automakers going back to their roots?

Battery makers are also looking for alternatives

Some of the battery makers, especially the Chinese EV battery giants, are going upstream and expanding into lithium mining. For instance, in September 2021, Chinese battery maker Contemporary Amperex Technology (CATL) agreed to buy Canada’s Millennial Lithium for approximately US$297.3 million. Another Chinese battery maker, Sunwoda, announced in July 2022 that the company plans to buy the Laguna Caro lithium mining project in Argentina through one of its subsidiaries.

However, being aware that the lithium shortage is not going to be resolved overnight, battery makers are ramping up R&D to develop alternatives. In 2021, CATL introduced first-generation sodium-ion batteries having a high energy density of 160 watt-hours per kilogram (Wh/kg). This still does not match up to lithium-ion batteries that have an energy density of about 250 Wh/kg and thus allow longer driving range. Since sodium-ion batteries and lithium-ion batteries have similar working principles, CATL introduced an AB battery system that integrates both types of batteries. The company plans to set up the supply chain for sodium-ion batteries in 2023.

Zinc-air batteries, which are composed of a porous air cathode and a zinc metal anode, have been identified as another potential alternative to lithium-ion batteries. Zinc-air batteries have been proven to be suitable for use in stationary energy storage, mainly energy grids, but it is yet to be seen if they could be as effective in EVs. The application of zinc-air batteries in EVs – either standalone or in combination with lithium-ion batteries – is under development and far from market commercialization. A World Bank report released in 2020 indicated that mass deployment of zinc-air batteries is unlikely to happen before 2030.

EOS Perspective

Despite all the measures, the anticipated lithium shortages will be a setback for the transition to EV. One of the major factors will be the escalating costs of lithium, which will, in turn, impact the affordability of EVs.

Lithium prices have skyrocketed in the past two years on account of exploding EV demand and lithium supply constraints. The price per ton of LCE increased from US$5,000 in July 2020 to US$70,000 in July 2022.

One key reason driving the adoption of EVs has been the cost of EVs becoming comparable to the cost of conventional internal combustion engine vehicles because of the continually decreasing lithium battery prices. By the end of 2021, the average price of a lithium-ion EV battery had plunged to US$132 per kilowatt-hour (kWh), compared to US$1,200/kWh in 2010.

Experts project that EVs will become a mass market product when the cost of the lithium-ion battery reaches the milestone of US$100/kWh. Being so near to the milestone, the price of lithium-ion batteries is likely to take a reverse trend due to the lithium supply deficit and increase for the first time in more than a decade. As per BloombergNEF estimates, the average price of the lithium-ion battery rose to US$135/kWh in 2022. Another research firm, Benchmark Mineral Intelligence, estimated that the cost of lithium-ion batteries increased by 10% in 2022. This would have a direct impact on the cost of EVs, as batteries account for more than one-third of the cost of EV production.

Read our related Perspective:
 Chip Shortage Puts a Brake on Automotive Production

Automakers are still healing from the chip shortage. They are now faced with lithium supply constraints that are not expected to ease down for a few years. There is also a looming threat of a shortage of other minerals such as graphite, nickel, cobalt, etc., which are also critical for the production of EV components. While the world is determined and excited about the EV revolution, the transition is going to be challenging.

Automotive Industry Gearing towards Digital Transformation with AI by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Automotive Industry Gearing towards Digital Transformation with AI

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Artificial intelligence (AI) has become an integral part of almost every industry, and the automotive sector is no exception. From self-driving cars to predictive maintenance, AI is evolving as a major disruptor in the auto industry, slowly transforming how automobiles are designed, manufactured, and sold. This digital swing is driven mainly by increased competition, consumer preferences for smart mobility, and the benefits of AI. However, AI adoption in the automotive industry is not mainstream yet, with the technology deployed only at the pilot level and in selective business segments. As the world gears toward an era of digital transformation and automation, AI is expected to be part of various business processes in the automotive industry in the coming years.

Artificial intelligence in the auto industry is typically associated with autonomous and self-driving cars. However, the technology has increasingly found its way into other applications over the last few years. Leading auto OEMs are showing an interest in deploying AI-driven innovations across the value chain, investing in tech start-ups, partnering with software providers, and building new business entities.

For instance, a venture capital fund owned by Japanese automaker Toyota, Toyota AI Ventures (rebranded as Toyota Ventures now), with US$200 million in assets under management, invested in almost 35 early-age startups that focus on AI, autonomy, mobility, and robotics between 2017 and 2020. Similarly, in 2022, South Korean automotive manufacturer Hyundai invested US$424 million to build an AI research center in the USA to advance research in AI and robotics. In the same year, CARIAD, a software division of the Germany-based Volkswagen Group, acquired Paragon Semvox GmbH, a Germany-based company that develops AI-based voice control and smart assistance systems, for US$42 million.

Changing consumer preferences, competitive pressures, and various advantages of AI are driving this transformation. According to a 2019 Capgemini research study, nearly 25% of auto manufacturers in the USA implemented AI solutions at scale, followed by the UK (14%) and Germany (12%) by the end of 2019.

There are numerous applications of AI in the automotive industry. Some of the more common and innovative uses of AI include virtual simulation models, inventory management, quality control of parts and finished goods, automated driver assistance systems (ADAS), predictive maintenance, and personalized vehicles, to name a few.

Automotive Industry Gearing towards Digital Transformation with AI by EOS Intelligence

AI-based virtual simulation models used for effective R&D processes

Due to changing customer preferences, increasing regulations concerning safety and fuel emissions, and technological disruption, OEMs are finding it more expensive to make cars nowadays. A 2020 report by PricewaterhouseCoopers says that conceptualization and product development account for 77% of the cost and 65% of the time spent in a typical automotive manufacturing process.

To make R&D cost-effective and more efficient, some auto manufacturers and tier-I suppliers are turning to AI. AI enables the simulation of digital prototypes, eliminating a lot of physical prototypes, thus reducing the costs and time for product development. One interesting concept that is emerging and catching attention in this area is the “digital twin”. The concept employs a virtual model mimicking an entire process or environment and its physical behavior. There are numerous uses of digital twins – in vehicle design and development, factory and supply chain simulations, autonomous driving simulations, etc. In vehicle design and development, digital twins make simulations easier, validate each step of the development in order to predict outcomes, improve performance, and identify possible failures before the product enters the production line.

For instance, in 2019, Continental, a Germany-based automotive parts manufacturing company, entered into a collaboration with a Germany-based start-up, Automotive Artificial Intelligence (AAI), to develop a modular virtual simulation program for its Automated Driver Assistance System (ADAS) application and also invested an undisclosed amount in the company. The virtual simulation program could generate phenomenal vehicle test data of 5,000 miles per hour compared to 6,500 miles of physical test driving per month, reducing both time and costs.

Many leading automotive companies are also looking to utilize this innovative concept in streamlining the entire manufacturing operations. For example, in early 2023, Mercedes-Benz announced that the company is partnering with Nvidia Technologies, a US-based technology company specializing in AI-based hardware and software, to build a digital twin of one of its automotive plants in Germany. Mercedes-Benz is hoping that the digital twin can help them monitor the entire plant and make quick changes in their production processes without interruptions.

General Motors, Volkswagen, and Hyundai use AI for smart manufacturing

Automation processes and industrial robots have been in automotive manufacturing for a long time. However, these systems can perform only programmed routine and repetitive tasks and cannot act on complex real-life scenarios.

The use of AI in automotive manufacturing makes these production processes smarter and more efficient. Some of the applications of AI in manufacturing include forecasting component failures, predicting demand for components and managing inventory, using collaborative robots for heavy material handling, etc.

For instance, General Motors, a US-based automotive manufacturing company, has been using AI-based design strategies since 2018 to manufacture lightweight vehicles. In 2019, the company also deployed an AI-based image classification tool in its robots to detect equipment failures on pilot-level experimentation.

Similarly, a Germany-based luxury car manufacturer, Audi, has been using AI to monitor the quality of spot welds since 2021 and is also planning to use AI in its wheel design process starting in 2023. In 2021, Audi’s parent company, Volkswagen, also invested about US$1 billion to bring technologies such as cloud-based industrial software, intelligent robotics, and AI into its factory operations. With this, the company aims to drive a 30% increase in manufacturing performance in its plants in the USA and Mexico by 2025.

In another instance, South Korean automotive manufacturer Hyundai uses AI to improve the well-being of its employees. In 2018, the company developed wearable robots for its workers, who spend most of their time in assembly lines. These robots can sense the type of work of employees, adjust their motions, and boost load support and mobility, preventing work-related musculoskeletal disorders. Thus, AI is transforming every facet of automobile manufacturing, from designing to improving the well-being of employees.

Companies provide more ADAS features amidst increasing competition

Automated Driver Assistance System (ADAS) is one of the powerful applications of AI in the automotive industry. ADAS are intelligent systems that aim to make driving safer and more efficient. ADAS primarily uses cameras and Lidar (Light Detection and Ranging) sensors to generate a high-resolution 360-degree view of the car and assists the driver or enables cars to take autonomous actions. Demand for ADAS is growing globally due to consumers’ rising preference for luxury, better safety, and comfort. It is estimated that by 2025, ADAS will become a default feature of nearly every new vehicle sold worldwide. ADAS is classified into 6 levels:

Level 0 No automation
Level 1 Driver assistance: the vehicle has at least a single automation system
Level 2 Partial driving automation: the vehicle has more than one automated system; the driver has to be on alert at all times
Level 3 Conditional driving automation: the vehicle has multiple driver assistance functions that control most driving tasks; the driver has to be present to take over if anything goes wrong
Level 4 High driving automation: the vehicle can make decisions itself in most circumstances; the driver has the option to manually control the car
Level 5 Full driving automation: the vehicle can do everything on its own without the presence of a driver

At present, cars from level 0 to level 2 are on the market. To meet the growing competitive edge, several auto manufacturers are adding more automation features to the level 2 type. Companies have also been making significant strides toward developing autonomous vehicles. For instance, auto manufacturers such as Mercedes, BMW, and Hyundai are testing level 3 autonomous vehicles, and Toyota and Honda are testing and trialing level 4 vehicles. This indicates that the future of mobility will be highly automated relying upon technologies such as AI.

Volkswagen and Porsche use AI in automotive marketing and sales

There are various applications of AI in marketing and sales operations – in sales forecasting and planning, personalized marketing, AI-assisted virtual assistants, etc. According to a May 2022 Boston Consulting Group (BCG) report, auto OEMs can gain faster returns with lower investments by deploying AI in their marketing and sales operations.

Some automotive companies have already started to deploy AI in sales and marketing. For instance, since 2019, Volkswagen has been leveraging AI to create precise market forecasts based on certain variables and uses the data for its sales planning. Similarly, in 2021, a Germany-based luxury car manufacturer, Porsche, launched an AI tool that suggests various vehicle options and their prices based on the customer’s preferences.

Automakers integrate AI-assisted voice assistants into cars

Cars nowadays are not only perceived as a means of transportation, but consumers also expect sophisticated features, convenience, comfort, and an enriching experience during their journey. AI enhances every aspect of the cockpit and deploys personalized infotainment systems that learn from user preferences and habits over time. Many automakers are integrating AI-based voice assistants to help drivers navigate through traffic, change the temperature, make calls, play their favorite music, and more.

For instance, in 2018, Mercedes-Benz introduced the Mercedes Benz User Experience (MBUX) voice-assisted infotainment system, which gets activated with the keyword “Hey Mercedes”. Amazon, Apple, and Google are also planning to get carmakers to integrate their technologies into in-car infotainment systems. It is expected that 90% of new vehicles sold globally will have voice assistants by 2028.

Integration and technological challenges hamper the adoption of AI

The adoption of AI in the automotive industry is still at a nascent stage. Several OEM manufacturers in the automotive industry are leveraging various AI solutions only at the pilot level, and scaling up is slow due to the various challenges associated with AI.

At the technology level, the creation of AI algorithms remains the main challenge, requiring extensive training of neural networks that rely on large data sets. Organizations lack the skills and expertise in AI-related tools to successfully build and test AI models, which is time-consuming and expensive. AI technology also uses a variety of high-priced advanced sensors and microprocessors, thus hindering the technology from being economically feasible.

Moreover, AI acts more or less like a black box, and it remains difficult to determine how AI models make decisions. This obscurity remains a big problem, especially for autonomous vehicles.

At the organizational level, integration challenges make it difficult to implement the technology with existing infrastructure, tools, and systems. Lack of knowledge of selecting and investing in the right AI application and lack of information on potential economic returns are other biggest organizational hurdles.

EOS Perspective

The applications of AI in the automotive industry are broad, and many are yet to be envisioned. There has been an upswing in the number of automotive AI patents since 2015, with an average of 3,700 patents granted every year. It is evident that many disrupting high-value automotive applications of AI are likely to be deployed in the coming decade. Automotive organizations are bolstering their AI skills and capabilities by investing in AI-led start-ups. These companies together already invested about US$11.2 billion in these startups from 2014 to 2019.

There is also an increase in the hiring pattern of AI-related roles in the industry. Many automotive industry leaders are optimistic that AI technology can bring significant economic and operational benefits to their businesses. AI can turn out to be a powerful steering wheel to drive growth in the industry. The future of many industries will be digital, and so will be for the automotive sector. Hence, for automotive businesses that are yet to make strides toward this digital transformation, it is better to get into this trend before it gets too late to keep up with the competition.

by EOS Intelligence EOS Intelligence No Comments

Chip Shortage Puts a Brake on Automotive Production

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The world is currently witnessing a semiconductor shortage and one of the worst-hit sectors is the automotive industry. A new vehicle uses an average of 1000-1500 microchips, making semiconductors an integral part of automobile manufacturing. Thus, the current shortage has resulted in a slowdown (and in some cases a halt) in production by several car manufacturers, especially of high-feature vehicles that require more chips. This has had a severe impact on auto manufacturers’ revenues in 2021, expecting to cost them close to US$200 billion this year. With no sight of recovery in the near future, the automobile sector must get creative with its supply chains and make some long-term changes in order to sustain production.

The automobile sector globally has been hit by the shortage of semiconductor chips, which are a key component in automobile manufacturing and are used for numerous features, such as fuel-pressure sensors, digital speedometers, and navigation displays.

The shortage stems from the increased demand for chips in the consumer electronics segment (such as laptops, phones, TV sets), which witnessed a spike in demand and sales during the early onset of the COVID-19 pandemic. This was coupled with a subdued demand for chips from the automobile segment during the same time as the environment was less favorable for new vehicle purchase.

Although the demand for automobiles quickly recovered in the second half of 2020, auto manufacturers had already withheld large chip orders due to sales uncertainty, and hence they could not secure a steady supply of chips to fulfill the recovered demand, as most foundries had already adjusted their production and increased their focus on catering to alternative industries.

Moreover, the nature of order contracts largely differs between the automobile and the consumer electronics sectors. The auto sector follows primarily the just-in-time manufacturing principle with focus on short-term orders and purchase commitments for chips. On the other hand, other sectors such as consumer electronics work with long-term orders, which in turn bind the suppliers that have switched production from auto sector chips to other chips. Furthermore, semiconductor players are happier with long-term binding contacts as such contracts provide them with more stability and facilitate better planning of their own supply chain.

The shortage was further aggravated by a storm in Texas in February 2021 that halted production in two of the world’s largest semiconductor factories and a subsequent fire in one of the largest semiconductor factories in Tokyo in March 2021.

Chip Shortage Puts a Brake on Auto Production by EOS Intelligence

Chip Shortage Puts a Brake on Auto Production by EOS Intelligence

Given these factors, the supply has tightened, forcing several automotive companies to curtail their production levels, which in turn has significantly affected their revenue. To give just a few examples, General Motors saw a 30% dip in sales in 2021 while Ford expected its 2021 earnings to be affected to the tune of US$2.5 billion.

Moreover, there is no short-term sight of respite. On an average, the lead time for chip production is anywhere between four to six months, with setting up new production lines or switching foundries taking even longer (six to twelve months). Further, switching to a new manufacturer may even take longer than 12 months in case new design or licensing requirements need to be met.

To counter this problem in the short run, auto manufacturers are reducing the number of features they offer and are focusing on fewer high-feature models. For instance, Japan-based Nissan is now omitting the navigation system in several of its models. Similarly, Renault has stopped adding a large digital screen behind the steering wheel, while BMW announced that it will remove touchscreen functionality from the Central Information Display in several models. However, these are short-term measures and not ideal for premium car segment as they may impact brand reputation.

Thus, given the circumstances, auto companies have to be innovative with their supply chains to solve this problem in the long run. They also need to ensure that they do not land in a similar situation in the future.

Traditionally, most auto manufacturers deal with only one key supplier (known as tier 1 supplier), who in turn sources all parts from specific component suppliers, including semiconductors from foundries. While this was convenient for the auto manufacturers, this resulted in lack of transparency across the supply chain. Moreover, this meant that the manufacturers did not have direct relations with foundries to ensure smooth supply.

However, in the face of the unfolding shortage, several leading players, such as BMW, Mercedes, and Volkswagen, started building strategic relations with chip manufacturers to get better and direct access to supply lines for semiconductors. In December 2021, BMW signed an agreement with German-based Inova Semiconductors and US-based GlobalFoundries to lock in a steady chip supply for their cars. Similarly, Ford also entered into a strategic collaboration with GlobalFoundries to purchase directly from the chipmaker. Furthermore, in November 2021, General Motors entered into an agreement with Foxconn Technology Group to co-develop chips that can be used in its vehicles.

Additionally, the auto sector is also moving away from the widely followed just-in-time model that facilitated lean inventory and pushed up profits. Companies are now keener to secure long-term non-disrupted supply of chips and are willing to enter into long-term contracts ranging 2 to 3 years.

Apart from this, car manufacturers are also looking at altering designs to limit the number of chips needed. Currently, most chips needed by the auto sector are large and outdated compared with those used for smart phones and other gadgets. Most foundries are now producing new generation microchips for these devices and do not want to switch back to old chips used in cars as investing in old technology is much less lucrative for them.

For this reason, auto manufacturers are considering revamping their chip designs, however, this comes with its own set of limitations. Automobiles need to undergo a host of certifications and safety testing to ensure road readiness. Any changes in designs regarding features such as cruise control, navigation, etc., would require the vehicles to get re-certified and clear safety testing again across all geographic markets, which has significant cost and lead time attached to it. Moreover, a complete overhaul in the chip board would require large amount of investment as it would impact the overall mechanical design of the vehicle.

However, several companies have already started working on this. In late 2021, General Motors announced that it is working with chip suppliers, Qualcomm, STM, TSMC, Renesas, NXP, Infineon, and ON Semi to develop a new set of microcontrollers that will consolidate many functions handled by individual chips and reduce the number of chips required by 95% for all future vehicles.

In the long run, it is expected that several auto companies will work on updating their chips as foundries refuse to downgrade the chips they produce. Moreover, while it will be costly and cumbersome in the beginning, it will be beneficial in the long run as companies will be less dependent on a number of chips, and instead work with a single chip overseeing multiple functions.

EOS Perspective

Chip shortage has significantly crippled the automotive sector stalling production in an unprecedented manner. It has also cost auto companies billions of dollars, while creating an inconvenience for users as car prices have risen significantly and customers have to wait for months, if not more, for their new cars.

But this shortage has also been a learning opportunity for the automobile sector, which is now working on restructuring its supply chain to reduce reliance on one key supplier. The industry is also placing more emphasis on supply chain visibility to ensure that a similar shortage does not occur in the future. This will mean a real-time insight not just into the key suppliers, but also further into their vendors, i.e. individual part suppliers. This is likely to bring the use of technologies such as IoT and AI to automotive supply chain monitoring in a more prominent manner.

The chip shortage is also likely to result in vehicle design upgradation by several leading manufacturers, so that the new upgraded chips can be used. This upgradation in design to incorporate new chips has been long due, however, auto manufacturers were stalling it because of costs and cumbersome re-certification processes.

The current pressures resulting from the semiconductor and chip shortage, are likely to bring a deep overhaul in the automotive sector, with companies and suppliers willing to invest in supply chain and design-based creative solutions, striving to gain a long-term competitive edge amid the new and challenging environment.

by EOS Intelligence EOS Intelligence No Comments

Morocco’s Auto Industry Is in Full Gear

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Over the past few years, Morocco has established itself as a leading manufacturing hub for automobiles in Africa, surpassing South Africa as the biggest exporter of passenger cars on the continent. The North African country is well-placed geographically as well as economically (thanks to the African Continent Free Trade Agreement) to export cars to European markets, especially France, Spain, Germany, and Italy. While the market continues to grow and gain importance among auto manufacturers, it is to be seen if it can disrupt Asian auto manufacturing hubs in the future.

With the capacity to produce over 700,000 vehicles per year and employing about 220,000 people in the sector, Morocco has gained mass appeal as a leading automotive manufacturing hub in the African region. Several international auto manufacturers, such as Renault, Peugeot, and Volkswagen have set up units in Morocco and have been growing their exports from the market. The Moroccan government signed 25 separate trade agreements with several auto and auto parts manufacturers across the EU and the USA and this is estimated to drive the Moroccan automobile market to be worth US$22 billion by 2026. Moreover, the government has stated that it wants to reach a production capacity of 1 million vehicles by 2025.

Investments

Several companies have established presence in Morocco as a cost-effective gateway to the European markets, the largest of them in terms of production numbers being Renault. Renault was the first global auto manufacturer to enter Morocco in 2012 and has plants in Tangier and Somaca (Casablanca). The plants have a respective capacity of about 400,000 vehicles and 85,000 vehicles annually. The automaker has already exported more than 1 million vehicles from its Morocco plants and has further signed agreements with the Moroccan government to expand auto production in the country.

French automaker Peugeot (Group PSA) is another major automobile manufacturer in this country. In 2019, Peugeot opened a US$600 million plant in Kenitra, north of Rabat, which produces the Peugeot 208 at a capacity of 200,000 vehicles annually.

Other carmakers operating in Morocco include Volkswagen, which shut down its plant in Algeria in 2019 and moved it to Morocco. In a similar move, in 2021, Korean automobile giant, Hyundai, decided to suspend its production in Algeria and move it to Morocco, cementing Morocco’s position as the go-to manufacturing hub for automobiles in North Africa.

In addition to the presence of several leading car manufacturers, the country also houses a large number of parts manufacturers and has successfully leveraged backward integration. An American player, Lear, operates 11 production sites here for the production of automotive seating and electrical systems. Similarly, Chinese aluminum automotive parts manufacturer, Citic Dicastal, set up two plants in the Kentira region for the production of six million aluminum rims annually that it aims to supply to the Peugeot plant. In addition, auto part companies such as France-based Valeo, US-based Varroc Lighting Systems, and Japan-based Yazaki and Sumitomo also established presence in Morocco.

Morocco’s Auto Industry Is in Full Gear by EOS Intelligence

Apart from large international parts manufacturers, the country also houses several local players that support and provide parts to the automobile giants. The government has been promoting partnering with local suppliers to provide a boost to the domestic industry. In 2021, Morocco’s leading automobile manufacturer, Renault, entered into a strategic agreement with the government to increase local sourcing to US$2.9 billion by 2025 (from 2023 forecast of US$1.7 billion) and increase local integration to 80%, up from 2023 forecast of 65%.

While Morocco continues to cement its place as a leading auto manufacturing hub in Africa, it is simultaneously aiming to position itself as a preferred hub for EV and EV component production. In 2017, the government signed a deal with a Chinese electric automobile manufacturer, BYD Auto, to build a new plant in the Tangier region. The plant will be spread over 50-hectare and will employ about 2,500 personnel. However, its opening is facing delays and no date of completion has been announced yet.

In October 2021, a leading EV manufacturer, Tesla, deployed its first two supercharger stations in Morocco, marking its first foray into the African continent. While the EV giant has not announced its formal entry to the market yet, usually deploying supercharging stations and service centers has been its first step in entering a market.

In addition to this, in 2021, STMicroelectronics, an EV chip producer announced that it was set to open a new Tesla-dedicated EV chip production line at its facility in Bouskoura, Morocco, following a win of a contract with Tesla. Following this, STMicroelectronics also signed a strategic cooperation agreement with Renault to supply electric and hybrid vehicle advanced semiconductors for Renault’s Dacia Spring EVs range, starting 2026. While currently the Dacia Spring EV model is produced in China, chip production in Morocco raises prospects of the current electric model or any future models to be manufactured in Morocco, especially for the European market. This places Morocco in a strategic position to also become a leader in EV manufacturing in the African subcontinent.

Government initiative

While Morocco has a strong geographic advantage, given its proximity to several European countries that makes it an ideal export market, political stability is another factor contributing to the sectors growth. The Moroccan government offers a single window outlet at its Ministry of Industry and Trade, which makes it much easier for international players to do business as compared with other countries that are more bureaucratic and complex in their dealings. Moreover, the government is known to be consistent with their policies, which is critical for auto manufacturers looking to make long term investments.

The government has made tremendous efforts and investments in developing Morocco into a global auto manufacturing hub. Morocco has about 60 free trade agreements with Europe, the USA, Turkey, and the UAE, a fact that facilitates easy trade and exports.

In addition, the Moroccan government provides several tax benefits to companies setting up manufacturing units in the country. It offers zero tax for the first five years and 15% tax for the subsequent years. Moreover, it provides full exemption on value added tax and a 15-year exemption on business and occupation tax.

Apart from fiscal benefits, it has also constantly invested in infrastructure to ensure smooth operations with regards to both manufacturing and transportation. In 2015, the government allocated US$7.8 billion towards development of infrastructure including roads, airports, etc.

Moreover, in 2018, the government inaugurated the US$4 billion Al-Boraq high-speed rail line linking the two key auto manufacturing hubs, Casablanca and Tangier. The Al-Boraq line is also linked to the Tanger Med port, which is a key port for all exports to Europe. The Tanger Med port has also become the largest port in the Mediterranean region post its phase II development in 2019. The port now has a capacity of 9 million twenty-foot equivalent units, surpassing Spain’s Algeciras and Valencia ports in capacity. The development and expansion of the rail link and the ports have facilitated smooth export from Moroccan manufacturing plants to European markets.

Furthermore, the government also facilitates staff training through the creation of the Automotive Industry Training Institutes (Instituts de Formation aux Métiers de l’Industrie Automobile (IFMIA)). The training support centers address recruiting and competency development needs of companies operating in the sector. While three of the centers are managed by the Moroccan Automotive Industry and Trade Association (AMICA) at Casablanca, Kenitra, and Tangiers, the fourth center is run by Renault and is located at Renault’s Mellousa plant. The Moroccan government provided about US$10 million for the construction of the Renault training center, which has more than 5,000 students (about 4,200 of them work for Renault). This way the government provides comprehensive and all-encompassing support to the sector, which in turn is expected to permeate to the development of the local vendors and suppliers as well.

Other than this, Morocco enjoys the obvious advantage of low cost labor (although this is something common to the entire African region). The cost of labor in Morocco is about US$1.5 per hour, which is about one-fourth of that in Spain and much lower than many East European nations. Since companies such as Renault produce their entry level cars in Morocco, labor constitutes a high portion of the overall costs.

EOS Perspective

With strong political support, advantageous geographical location, and low labor costs, Morocco seems to have all the right ingredients for a booming auto industry. The sector has been witnessing exponential growth over the past few years and has already overtaken South Africa as the largest automobile manufacturer in Africa.

While the industry currently caters to the manufacturing of low cost models, it is also slowly creating a niche space for itself in the EV market, which is considered the future of the automobile sector. Moreover, the sector is creating an entire automobile ecosystem by encouraging and promoting backward integration, especially through the participation of local auto part suppliers and vendors.

There is clearly no contention that the North Africa is the leader in the automobile space in the region, however, it is still a long way before the region is a serious competitor in the global auto export market to countries such as China, India, Korea, or Mexico, which are global leaders. A lot will depend on how it manages to develop competencies beyond cheap labor and supportive policies, especially with regards to attracting premium and luxury models. While it has the potential, it will be difficult to displace leading hubs that are already competent in the space.

by EOS Intelligence EOS Intelligence No Comments

Commentary: India’s Automobile Sector Breakdown Causing Economic Distress

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Over the past few months, a lot has been said about the shrinking automobile sales in the Indian market. Touted as one of the key drivers of India’s economic growth, the automobile industry is facing the worst slowdown in two decades as production and sales numbers continue to drop month after month sending the sector in a slump. While the government has made efforts to improve the situation, it will take more than just policies and measures to flip the status quo and bring the industry back on the growth path.

Indian automotive industry witnessed a period of growth during the first term of Modi government – we wrote about it in our article Commentary: Indian Automotive Sector – Reeling under the Budget in February 2018. However, over the past year, the auto sector is in shambles and far from recovery. The sector that contributes 49% of the manufacturing GDP in the country (and more than 7% to the country’s total GDP) has shown decline in growth in the past 18 months as the numbers continue to fall each month. The slowdown is so severe that it has affected all aspects of the business leading to piled up inventory, stalled production lines, decelerating dealership sales, delayed business investments, and job loss.

Quintessential factors that triggered the slowdown

There are various reasons that have plagued the auto industry in the recent months. One of the key factors is the inability of NBFCs (Non-Bank Financial Companies) to lend money. NBFCs, which largely depend on public funds (mainly in the form of bank borrowings, debentures, and commercial paper), have been facing liquidity crunch in the recent past as both public sector and private sector banks have discontinued lending money. This had a double effect on the auto sales – firstly low liquidity has restricted NBFCs ability to finance vehicles, thus having an adverse impact on sales, and secondly, the limited availability of funds bulleted the cost of financing vehicles thereby making them relatively more expensive, further worsening the sales scenario.

In October 2018, the Supreme Court of India announced that no BS-IV cars shall be sold in India with effect from April 1, 2020 (all automobiles should be equipped with BS-VI compliant engines, with an aim to help in reducing pollution in terms of fumes and particulate matter). Owing to this, consumers have delayed their plans to purchase vehicles expecting automobile companies to offer huge discounts in the early months of 2020. And to clear out their existing stock of BS-IV vehicles, it is highly likely that the companies will offer massive concessions before the deadline hits. Delay in purchase of vehicles on consumers’ end has contributed to the overall low sales.

Additional factors that add to the downfall include changes in auto insurance policy (implemented in September 2018) under which buyers have to purchase a three-year and five-year insurance cover for car and two-wheeler, respectively (as against annual renewals), inclusion of additional safety features (including airbags, seat-belt reminders, and audio alarm systems) in all vehicles manufactured after July 1, 2019 adding to the manufacturing cost for the OEMs, and stiff competition from growing organized pre-owned vehicle market which has doubled in size in less than a decade (the share of the organized channel of the pre-owned car market has increased to 18% in 2019 from 10% in 2010). Customers have been passive on buying new vehicles as the total cost of ownership goes up due to an increase in fuel prices, higher interest rates, competition from used cars segment, and a hike in vehicle insurance costs.

Government initiatives to help the auto sector recover

To boost demand for automobiles and offer some respite to the businesses operating in the space, the government announced a number of measures and policies. These include lifting the ban on purchase of vehicles by government departments (the ban was introduced in October 2014), which is hoped to result in loosening of stocked-up inventory and getting sales for automakers, component manufacturers, and dealers. Government also announced additional 15% depreciation on new vehicles for commercial fleet service providers acquired till March 2020 with the aim to clear the high inventory build-up at dealerships.

Other than lifting the ban and price reductions, the government also announced that all BS-IV engine-equipped vehicles purchased until March 2020 will remain operational for the entire period of registration. This will have a two-fold effect – firstly, automakers will be able to push out their stock without having to upgrade existing models and make them BS-VI-complaint (since no more BS-IV-complaint vehicles will be registered post March 2020 and manufacturers will have to upgrade to BS-VI from BS-IV emission standard on the old stocks) thus clearing old inventory, and secondly, consumers can expect much higher discounts. This is expected to provide enough movement within the auto sector, both in terms of sales and revenue generation.

Government has also taken steps to stabilize the NBFC crisis where a separate budget of US$ 14 billion (INR 100,000 crore) has been announced to refinance selected NBFCs. While it is clear that these limited funds will not last long, currently, any step taken to recover from the situation is welcomed.

Though considered temporary, the relief measures offered by the government have gained traction in the industry and players believe that these provisions will have a positive impact on the buyers’ sentiment, even if for a short period of time.

Implications of the auto industry crisis

The slowdown is expected to have a negative impact across all aspects of auto business, especially in the short term. Drop in sales has led manufacturers to decrease production (and even stop production for a certain period of time), cut down overall costs, and reduce headcounts thus weighing down the overall automotive sector.

The months leading to reduced sales did not only impact the production capacities but also resulted in the loss of more than 350,000 jobs. In the coming months, many more risk losing their jobs owing to plant shutdowns, dealership closures, and small component manufacturers going bankrupt.

The cost of vehicle ownership has also increased. Automobiles attracts the highest GST slab of 28%, and this, coupled with the varying road and registration charges imposed by state governments, makes the upfront cost of the vehicle exorbitant for a large segment of consumers (especially the working middle class for whom a two-wheeler or a small segment car is a basic necessity rather than a nice-to-have convenience) making it almost impossible for them to but it.

Given that the automobile sector works in conjunction with other industries, the current slump in auto sales will pull down ancillary industries including parts and components, engines, battery, brakes and suspension, and tire, among others. Considering the fact that the sector contributes nearly half to the country’s manufacturing GDP, if the issue at hand is not addressed immediately, it will further add to the ongoing economic crisis within the country worsening the situation altogether.

EOS Perspective

Policies announced by the Modi government to revive the tumbling automobile sector only seem to mitigate the negative sentiments circling about the future of the industry. However, at this stage, what the industry really needs is a stimulus package in the form of tax incentives or liquidity boost to immediately change things on the ground level.

There is an urgent need of a remedial course of action on the government’s part to stop the vehicle sales from dropping further. As an immediate relief to boost sales and invigorate the auto sector, the government should implement a GST cut on vehicles. This would kick-start vehicle demand almost instantaneously that would work in favor of the automobile industry – manufacturers (to resume halt production), dealers (to clear inventory), and parts makers (to resume small parts and component manufacturing), help resuscitate lost jobs, and contribute, to a small extent, to strengthen country’s slow economic growth.

However, with the government turning a blind eye to industry needs (lowering the GST slab), there is only so much the business owners can do. Under this current scenario, unless the government takes some drastic measures that ensure validation in backing automakers, auto ancillary businesses, and dealers, the sector is unlikely to recover soon. Provisional policies and short-term measures can offer momentary relief but not the survival kick the auto industry is in dire need of.

by EOS Intelligence EOS Intelligence No Comments

Blockchain: A Potential Disruptor in Car Rental and Leasing Industry

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Blockchain, with its ability to offer significantly more transparent and decentralized way of conducting operations, has the potential to come to the forefront of technologies which are disrupting the way most industries work today. While the application of blockchain is still currently focused largely on cryptocurrencies, the technology is slowly finding its way to a range of industries, including the car rental and leasing industry.

Car rental and leasing sectors are growing worldwide, driven by rising technological advancements in transportation and increased need for ease of mobility. A shift in demand from car ownership to car sharing (not to be confused with ride-sharing services such as Uber or Lyft) is driving the growth in car rental and leasing industries.

The process of renting a car is highly centralized, where the car rental company being the main point of contact for the driver to rent cars. Car rental companies need to maintain a fleet of cars, as well as car stations and staff to efficiently run their operations, which makes up for bulk of their operating costs. Car rental companies cover these costs from (high) rental rates charged to their customers.

In the peer-to-peer (P2P) care rental (or car sharing) model, there is no need to maintain any infrastructure or staff required to perform the task of renting, a fact that reduces the overhead costs. Lower costs offered by P2P car rental have resulted in the model gaining prominence. P2P car sharing has significant potential, highlighted by recent investments in car sharing services such as Turo and Getaround. In July 2019, US-based Turo raised US$250 million from IAC, an internet media company, taking its overall valuation to US$1 billion. Getaround, a US-based car sharing company established in 2011, raised US$300 million funding from SoftBank in 2018.

However, the P2P car sharing model is inherently prone to fraud and other illicit activities, causing lack of user trust, which in turn acts as a barrier to scaling of rental business, despite the growing demand for car sharing.

The issue can be aided by the emergence of blockchain, which is acting as the market disruptor. The use of a distributed ledger for car rental and leasing is likely to revolutionize the industry, especially P2P car sharing.

Blockchain to enable peer-to-peer car rental gain further prominence

There is a shift in paradigm from car ownership to car sharing, via car rental or leasing. The fact that vehicles are under-utilized and parked (and inactive) most of the time, while the vehicle owners incur ongoing fixed costs such insurance, tax, maintenance, and parking, is further driving this shift.

Emergence of use of blockchain in car rental offers a safe (from frauds) and reliable car-sharing platform, a fact that is likely to further promote P2P car sharing. Inherent unalterable properties of the blockchain offer a secure platform for both car owners (to list their cars) and the customers.

The concept of blockchain in car rental industry works similarly to any other blockchain transaction. Service providers (or car owners) and end clients registered on the blockchain can sign digital smart contracts which execute contract terms based on pre-agreed rules in place, similar to a regular rental model.

The smart contract also contains the necessary information, such as details of the renter (driving license proof, insurance, and credit card details) and data such as car registration number, rate, mileage, length of rental, and credentials of the car owner. All financial transactions (rental payment) can be done either through a card, or using associated cryptocurrencies and tokens purchased to get registered on the blockchain.

 

Blockchain - A Potential Disruptor in Car Rental and Leasing Industry - EOS Intelligence

The process is fully decentralized and digital without any intermediary required which is the key advantage of car rentals being executed over blockchain. Transparency of transactions made over a distributed ledger also adds to the credibility, thus lowering the risk of any fraudulent activity to a great extent.

Lower fee offered due to elimination of intermediaries is another major advantage of using the blockchain technology in car rental industry. For example, HireGo, a UK-based blockchain-based car rental start-up, claims to offer transaction fee up to 35% lower compared with traditional car rental charges under the existing B2C model. Moreover, use of smart contracts has made the system direct and reliable, as information on the contract is unalterable.

Blockchain technology is designed to encourage a sharing economy platform so that businesses such as P2P car rentals and leasing can become integrated and cost-effective, through collaboration among participants in a common, transparent, and “trustless” (or distributed trust) environment, which are the primary attributes of blockchain.

Blockchain in car leasing to improve visibility

When it comes to leasing, blockchain has even more potential. Tracking a car right from the OEM, transfer of ownership, tracking of repairs, mileage, fuel, and maintenance over a single distributed ledger can help bring visibility across the leasing journey. This in turn can help customers avert mileage fraud, while also eliminating any disputes at the end of the lease term.

With all necessary and unnecessary repairs being visible to all parties involved, calculation of charges and violation penalties is likely to become much easier.

The use of a distributed ledger also eliminates the need of undertaking time-consuming paperwork at each node (or stakeholder) of the leasing value chain, thereby improving the overall efficiency of the process, while also cutting costs, making it much more cost-effective to lease a vehicle.

Similarly to its function in car rentals, a distributed ledger also eliminates high costs charged by car leasing companies, resulting in increased popularity P2P leasing of vehicles through smart contracts. Blockchain can also be used as an open maintenance log, as well as for the provision of other value added services such as insurance and toll payments.

Blockchain - A Potential Disruptor in Car Rental and Leasing Industry - EOS Intelligence

Transparency across the lease to help minimize customer disputes

The benefits of blockchain are most prominent at the end of the lease term, when a customer returns a leased vehicle. The use of an open distributed ledger eliminates any disputes that may occur between the service provider and end client, with regards to end-of-lease charges. Transparency across the lease lifecycle, including open logs of vehicle usage, mileage, fuel, maintenance, tire changes, and insurance, make it easier to calculate any end-of-lease charges, based on the pre-defined terms of the smart contract. These charges can also be automatically paid in the form of cryptocurrencies or tokens, as per the provisions in the smart contract.

Blockchain entries can also help leasing companies estimate the approximate value of the vehicle at the end of the lease term, making it easier to decide whether to remarket (re-lease) or dispose of the vehicle, as well as reducing the overall time and resources required in the remarketing process.

Newer blockchain-based platforms expected to drive growth

The global automotive blockchain market is likely to witness growth of 31.1% CAGR between 2020 and 2030, with Asia witnessing the fastest growth. Majority of this growth is attributed to proliferation of car rental and leasing in countries such as India and China, where people are seeking easier means of mobility and are making cautious effort of reducing traffic in metro cities.

Several companies in the region started investing in building platforms using blockchain. In 2017, Mumbai-based Drivezy, an Indian car sharing company, successfully developed a car rental and leasing platform using blockchain, in which users can rent cars and make payments using cryptocurrencies and tokens. In 2018, the company raised US$20 million in a Series B funding through an initial coin offering (ICO). Such investment is encouraging further start-ups looking to utilize blockchain for car rental and leasing.

Darenta ICO, a Russian car rental start-up, developed a platform for existing car owners to rent out their cars using a digital solution that employs geolocation, smart contracts, and other blockchain technology. Launched in 2018, the company has already expanded its presence in 20 countries, and plans to enter the USA and Canada, followed by other European and Asian markets (including China) by 2020.

Several major companies have also invested in developing other technology platforms using blockchain technology, which could have applications in the rental and leasing businesses. In 2017, Ernst and Young, for example, launched a blockchain-based platform called “Tesseract” to support an integrated and autonomous mobility. Through this platform companies and individuals can share cars, while payment and insurance are handled through blockchain. In 2017, Renault also launched a prototype blockchain platform to track information about a car’s maintenance history, including repair shops and dealerships at one place, through a digital maintenance log prototype.

Explore our other Perspectives on blockchain

Lack of acceptance of cryptocurrencies likely to pose challenges

While blockchain has plenty of benefits, broad scale deployment of the technology faces certain challenges as well – one of the most crucial ones being recognition of cryptocurrencies in key emerging markets in Asia, including India and China. Most blockchain-based solutions are looking at ICO to generate funds, issuing their own cryptocurrencies (mostly based on Ethereum tokens), which also act as a mode of transactions and payments for the service. Lack of regulation of cryptocurrencies is currently limiting the adoption of blockchain technology in the rental and leasing space.

Also, for the blockchain technology broad scale implementation, there is a need for high performance computers (or supercomputers) along with highly skilled workforce to handle the blockchain. Such challenges can cause delay in widespread adoption of blockchain technology for car rentals and leasing system at a larger scale.

EOS Perspective

Currently, blockchain is considered synonymous to cryptocurrencies such as bitcoin, which is still very unstable and is commonly seen as an investment rather than a mode of transaction. Such a perception is likely to continue to prevail in the short term. Once the paradigm shifts from cryptocurrencies being looked at as a mere investment tool, to being considered as a mode of transaction or a trustless platform, which utilizes inherent properties of blockchain, the overall acceptance of blockchain is also expected to increase. This shift is also likely to bring more stability in cryptocurrency prices, which in turn is also expected to generate a more positive regulatory outlook in favor of cryptocurrency and blockchain technology.

Once blockchain gains prominence, we are likely to witness a lot more start-ups promoting peer-to-peer car sharing (rental or leasing), driving a change in the way people look at their cars. Idle vehicles will increasingly be considered as assets which can generate a source of additional income via car sharing model, resulting in better overall utilization of cars.

ICOs are likely to remain the most common mechanism to generate funds. While the technology has several potential uses, which are expected to disrupt the car rental and leasing market in the near future, the state of blockchain acceptance currently remains highly speculative, primarily due to its close association with cryptocurrencies.

Fuel cell technology
by EOS Intelligence EOS Intelligence No Comments

China Accelerates on the Fuel Cell Technology Front

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For the past decade, China has been on the forefront of the New Energy Vehicles (NEVs) revolution. Although most of its focus has been on battery-powered electric vehicles (BEVs), the government has recently also begun to put its financial might behind hydrogen fuel cells for vehicles. Unlike battery-powered vehicles that need regular and long-periods of charging (therefore are more suitable for personal-use vehicles), hydrogen fueled vehicles do not need frequent refueling and their refueling is quick. This makes them ideal for long-distance buses, taxis, and long-haul transport. However, the existing infrastructure to support fuel cell-powered cars is limited. Thus, despite having inherent benefits over electric vehicles (especially in case of commercial vehicles), fuel cell vehicles fight an uphill battle to build a market for themselves in China, owing to the challenges in acceptability, infrastructure availability, and sheer economies of scale.

Over the last decade, the Chinese government heavily backed the production and sale of electric vehicles through substantial subsidies, investment in infrastructure, and favorable policies. This resulted in the sector picking up rapidly and reaching 1.2 million vehicles sold in 2018. However, the government has begun to reduce the subsidies provided to the sector and the focus is slowly shifting to fuel cell vehicles.

How do fuel cell vehicles work?

Fuel cell vehicles use hydrogen gas to power their electric motor. Fuel cells are considered somewhat a crossover between battery and conventional engines in their working. Similar to conventional engines, fuel cells generate power by using fuel (i.e. pressurized hydrogen gas) from a fuel tank.

However, unlike traditional internal-combustion engines, a fuel cell does not burn the hydrogen, but instead it is chemically fused with oxygen from the air to make water. This process, which is in turn similar to what happens in a battery, creates electricity, which is used to power the electric motor.

Thus, while fuel cell vehicles are electric vehicles (since they are solely powered by electricity), they are similar to conventional vehicles with regards to their range, refueling process, and needs. This makes them ideal for long-haul commercial vehicles.

Chinese government bets big on fuel cell vehicles

Under China’s 13th Five-Year Plan, the government has laid out a Fuel Cell Technology Roadmap, in which it aims to operate over 1,000 hydrogen refueling stations by 2030, with at least 50% of all hydrogen production to be obtained from renewable resources. In addition, it has set a target for the sale of 1 million fuel cell vehicles by 2030.

To achieve these ambitious targets, the Chinese government plans to roll-out a program similar to its 2009 program – Ten Cities, Thousand Vehicles, which promoted the development and sale of battery electric vehicles and hybrid vehicles. It currently plans to promote fuel cell vehicles in Beijing, Shanghai, and Chengdu. Considering the vast success garnered by this program, it is likely that the government will also be successful in achieving similar targets for fuel cells.

Moreover, while the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks. However, for the buses to receive subsidy, they are required to drive a minimum of 200,000 km in a year.

While the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks.

Moreover, the government also provides subsidy for the development of hydrogen refueling stations. A funding of US$0.62 million is available for hydrogen refueling stations having a minimum of 200kg capacity.

In addition to these national subsidies, state-wise subsidies are also available for several regions such as Guangdong, Wuhan, Hainan, Shandong, Tianjin, Henan, Foshan, and Dalian. Local subsidies differ from region to region and are given as a ratio of the national subsidy. For instance, it equals 1:1 in Wuhan, while it is 1:0.3 in Henan province. On the other hand, local or state subsidies are cancelled for BEVs (except buses).

Apart from subsidies given to fuel cell infrastructure and vehicle manufacturers, the price of hydrogen is also heavily subsidized, making it cheaper than diesel in many cases.

China’s fuel cell vehicle market picks up steam

The government’s backing and subsidies have stirred interest of several international players towards China’s fuel cell vehicle market. Considering its success and dominance of the BEV market, these players are placing their bets on China achieving similar volumes and success in the fuel cell sphere.

Chinese companies have also begun to invest heavily in fuel cell technology companies globally. In May, 2018, Weichai Power, a Chinese leading automobile and equipment manufacturer, purchased a 20% stake in UK-based solid oxide fuel cell producer, Ceres Power. Similarly, in August 2018, Weichai Power entered into a strategic partnership with Canada-based fuel cell and clean energy solutions provider, Ballard Power Systems. As part of the strategic partnership, the company purchased 19.9% stake in Ballard Power Systems for US$163.3 million. In addition, they entered into a JV to support China’s Fuel Cell Electric Vehicle market, in which Ballard holds 49% ownership. Through this partnership, Weichai aims to build and supply about 2,000 fuel cell modules for commercial vehicles (that use Ballard’s technology) by 2021.

China Accelerates on the Fuel Cell Technology Front - EOS Intelligence

Global leader in industrial gases, Air Liquide, has also partnered with companies in China to be a part of the fuel cell movement. In November 2018, the company entered into an agreement with Sichuan Houpu Excellent Hydrogen Energy Technology, a wholly-owned affiliate of Chengdu Huaqi Houpu Holding (HOUPU), to develop, manufacture, and commercialize hydrogen stations for fuel cell vehicles in China. In January 2019, the company also partnered with Yankuang Group, a Chinese state-owned energy company, to develop hydrogen energy infrastructure in China’s Shandong province to support fuel cell vehicles in that region.

Another global player, Nuvera Fuel Cells (US-based fuel cell power solutions provider) has also engaged with local companies to foster growth in China’s fuel cell vehicle market. In August 2018, the company entered into an agreement with Zhejiang Runfeng Hydrogen Engine Ltd. (ZHRE), a subsidiary of Zhejiang Runfeng Energy Group based in Hangzhou. Under the agreement, Nuvera will provide a product license to ZHRE to manufacture the company’s 45kW fuel cell engines for sale in China. While the fuel cells will be initially manufactured in Massachusetts, it is expected that they will be locally manufactured by 2020.

In December 2018, the company signed another agreement with the government of Fuyang, a district in Hangzhou (in Zhejiang province), to start manufacturing fuel cell stacks locally in 2019. The agreement also includes an investment by Nuvera to establish a production facility in Fuyang region. These fuel cell stacks will be used to power zero-emissions heavy duty vehicles (such as delivery vans and transit buses), which comprise 10% of on-road vehicle fleet, but account for 50% fuel consumption.

In addition to the fuel cell energy producers, global car manufactures have also shifted their attention to fuel cell vehicles market in China. In October 2018, Korean car manufacturer, Hyundai, entered into a MoU with Beijing-Tsinghua Industrial R&D Institute (BTIRDI) to jointly establish a ‘Hydrogen Energy Fund’. The fund aims to raise US$100 million from leading venture capital firms across the globe to spur investments in the hydrogen-powered vehicle value chain. This agreement will help the Korean automobile manufacturer identify and act upon new hydrogen-related business opportunities in China and will eventually help pave the way for Hyundai Motors to make a foray into the Chinese fuel cell vehicle market in the future.

A bumpy road ahead for fuel cell vehicles

While the industry players are working along with the government to meet the ambitious targets set by the latter, fuel cell vehicles must overcome several challenges for them to be a realistic alternative to conventional and electric vehicles.

Currently, the infrastructure for fuel cell vehicles is by far insufficient. More so, it is extremely costly to develop, costing about US$2 million to build a refueling station with a capacity of about 1,000 kg/day. While the government is investing heavily in developing hydrogen refueling stations (for instance, China Energy, China’s largest power company, has been building one of China’s largest hydrogen refueling stations in Rugao City, Jiangsu Province), it requires long term partnerships and investments from private and global players to meet its own targets. Until an adequate number of refueling stations is constructed, especially on highway routes (facilitating truck and bus transportation), fuel cell vehicles will remain in a sphere of concept rather than commercial and mass use.

Another challenge faced by the industry is that hydrogen, the main fuel, is also considered to be highly hazardous, and storing and transporting it is currently difficult. Moreover, it is difficult to convince customers to purchase hydrogen-powered vehicles because of this perceived notion of hydrogen being unsafe. In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

A lot of new technologies are also being explored to further make transporting and storing hydrogen safer. A German company, Hydrogenious Technologies, has developed a carrier oil that can carry hydrogen in a safe manner. This oil is non-toxic and non-explosive and thus makes transporting, storing, and refueling hydrogen safe. Moreover, using hydrogen mixed with this carrier oil to refuel fuel cell cars follows a similar refueling process as that of a conventional car, with one cubic meter of the oil carrying about 57kg hydrogen, which in turn is expected to give a car a driving range of 5,700km. However, the carrier oil is still in its nascent stage of development and would take time and resources to gain commercial applicability.

However, one of the largest challenges that fuel cell vehicles face is direct competition from battery electric vehicles. BEVs have a 10-year head start over fuel cell vehicles whether it comes to government support, technological development, infrastructure, or acceptability. Moreover, BEVs are cheaper both in terms of cars price and cost of running, which is an important factor for consumers. In addition, BEV players are constantly working towards reducing charging time and increasing driving range. Since both are green technologies, it is likely that the consumer prefers the one which has now proven to be a successful alternative to conventional vehicles in terms of pricing and supporting infrastructure. Although higher subsidies for fuel cell vehicles may help bridge the gap, it is yet to be seen if fuel cell cars will be able to give stiff competition to their green counterparts.

EOS Perspective

There is no doubt that the Chinese government intends to throw its weight behind the fuel cell technology for automobiles. In 2018 alone, the central and local governments spent a total of US$12.4 billion in supporting fuel cell vehicles. This has helped attract the attention of several local and international companies that want a share of this growing market.

It also helps that hydrogen as a fuel has several benefits when compared with battery power, the key advantages being short refueling time and long driving range. Moreover, some consider hydrogen to be a cleaner fuel when compared with battery power as the electricity required to create hydrogen (which is created by pumping electricity into water to split it into hydrogen and oxygen) can be derived from renewable sources from China’s northern region, which are currently going to waste.

Despite these inherent benefits, it will be difficult for fuel cell vehicles to catch up with battery-powered vehicles as the latter have significantly advanced over the past decade (leaving fuel cell vehicles behind).

Moreover, China’s model of promoting green energy is yet to pass its ultimate test, i.e., to sustain and flourish without government support. Since the government has now begun to phase out its support to BEVs, it is to be seen if the large group of domestic electric vehicle makers can survive in the long run or the market will face significant consolidation along with slower growth. Thus it becomes extremely critical for the Chinese government and companies in this sector to understand the feasibility of the market post the subsidy phase. Fuel cell vehicle market should take advantage of learning from the experience of battery powered vehicles sector, which was the pioneer of alternatives to conventional combustion vehicles.

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