Sector Review: Overdue Change

Published in 2010 Best Global Brands | Interbrand

The financial crisis had a profound impact across many industries. But in particular the automotive sector had to struggle with a cautious consumer market while addressing significant, longer-term structural challenges.

If one digs deeper into the underlying trends in the automotive sector, the need for change has been long overdue. The rising stature of emerging markets, urbanization, limitations of transportation infrastructures, and an increasing demand for cleaner and smarter technologies are trends that are forcing the industry to change at a rate and level of intensity that has never been attempted.

The center of gravity will continue to accelerate and expand from the U.S. and the European Union into Asia Pacific and South American markets. The cost structure and growth opportunities in countries such as China, Brazil and India make the business case an easy sell. China alone has already become the world’s largest market, and its expansion is in its early stages; with only two cars per 100 residents and a population of over a billion, the potential growth is mind-boggling. India, with an equally large population, is not far behind.

As production becomes more localized and trading blocks emerge, the need and associated costs for transporting vehicles will decline. However, this may be ambitious considering the financial health of auto parts suppliers and the shortage of developed suppliers in fast-developing markets. With three quarters of the world’s production in the hands of 10 global automakers, these structural shifts will require a more integrated management approach and stronger conviction for automakers to define their businesses, relationships with partners and brands within a complex quilt of regions, cultures and economic maturity.

Across the world, many cities will continue to grapple with infrastructures that were not designed to handle the volume of vehicles on its roadways while simultaneously seeking to develop greener, more open urban spaces. City populations will continue to grow and will add additional stress to a system that is at or above capacity. The United Nations predicts that by the year 2030, five billion people will live in cities, as opposed to 3.2 billion today; by 2050, 70 percent of the world’s population will be city-dwelling. These trends will force municipalities to develop systems that manage traffic flow through public works projects, mass transit and congestion pricing, but will also keep automakers focused on designing and building cars that are lighter, cleaner and more efficient.

The concern for the environment and future oil price fluctuation will further drive the need for smaller vehicles. Companies that support automakers will continue to focus on designing powertrains and support structures that will make electric vehicles and hybrids a viable, mass-market alternative. The investments are beginning to gain momentum but the solutions may be further out than immediate market needs.

Technology will continue to play a vital role: alternative materials in the structure and components of vehicles as well as the electronics and software that operate them. Consumers will expect easy connectivity with their smartphones and computers, and the level of technological integration with vehicles will be akin to the way mobile devices have changed how we live, work and play. Ford’s SYNC-based cars, due to be available to the public later in 2010, will have proprietary smartphone applications as well as the ability to integrate with third-party providers – and this is only the beginning.

With all the challenges in this segment, expect to see the durability of a brand’s reputation continue to be tested with revolutionary product launches and safety recalls. Success will be driven by global automakers that can manage their businesses across mature and fast-developing markets in a profitable manner, but also ensure that their brands and experiences share a core idea and have the versatility to evolve and adjust to local market needs.