Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
September 30, 2013 – 10:30 am ET
DETROIT, Mich. – With volumes surging over the past two years and record OEM earnings reported, the auto space has rebounded smartly from the dark days of the Great Recession. Nevertheless, there is seemingly an endless parade of issues that confronts the industry now and going forward. Here are a few problems facing us despite the good results we see today:
We must change the perception that manufacturing is unattractive. Here in the U.S. most Millennials view manufacturing as a slow, dirty grind…basically a dead-end road. Why would they want to build one when they don’t even care to buy one? This is a tragic belief, yet manufacturing does in fact bear high fixed costs and little interest to outside investors. In the automotive space these are some of the reasons we don’t have more new age engineers coming into the industry to lead development of advanced technology.
Why are there fewer Echo Boomers who seek a career in engineering, and when they do, why do they dodge the auto space? When we de-emphasized math and science years ago as a society in favor of celebrating spring break, there was in short no driving force to replace some of the brilliant automotive engineering talent we had in the 1960’s and first half of the 1970’s. Add to that the benign indifference today toward manufacturing in our country, plus the fact that the Millennials don’t believe it’s sexy to be in the auto space, and you are left with the emergence of a huge talent vacuum sucking away much of our manufacturing future.
The shift from traditional to alternative powertrain must be a profitable one. Right now the industry is trying to cross a raging river, moving from traditional internal combustion to alternative powertrain options such as electric vehicle (EV), biodiesel, hydrogen fuel cell, and more. Most industry experts predict that consumer demand for such options as well as hybrid variants will not reach significant levels until at least next decade. Thus, there are long years ahead before commercial viability and market acceptance, and this creates a huge gap between investment and future profits.
Because powertrain variants such as EV are still in a developmental stage, it is difficult to propel a clear path for the build-out of infrastructure and the overall “ecosystem” to support its growth. Infrastructure such as battery warranties, utility metering, parking requirements, charging options, etc. will be crucial to perpetuate the EV industry and create dramatic growth going forward. And we can no longer afford the mixed signals regarding government involvement. If we are to see the private sector unleash financial support in the electric vehicle segment and elsewhere, the government must first reject its fanciful notion that acting as a business owner is appropriate. A much wiser role for Washington is to put relevant, comprehensive federal energy and industrial policies in place that drive growth and private investment in the alternative powertrain space instead of “cherry-picking” winners and losers. All these powertrain variants have potential, but profits won’t likely be realized until next decade and will require government support…not government interference.
There is a critical need to increase domestic oil production and tap our own U.S. resources now. We cannot meet our transportation needs given our current energy situation. “Demand is growing on a global scale, supply is becoming more and more expensive, and this trend will not stop,” John Hofmeister, former CEO of Shell Oil, said recently. “Do we have enough oil to meet demand? Yes. However, not cheap oil. The price of oil, and therefore gas, will continue to grow at crippling rates, because we don’t have enough cheap oil to meet demand inexpensively.”
Hofmeister and others suggest we need a competitor for oil, in particular commercializing our vast supply of natural gas. Competition will drive transportation fuel prices down, structurally and sustainably. Hofmeister’s approach is to open new fuels markets and thus break the oil monopoly, which he believes is America’s next giant leap forward. “It will promote innovation and entrepreneurship, creates new American industry, with new American jobs.” While the U.S. cannot domestically produce our way to lower gas prices immediately, we do have the resources here to impact supply and lower overall cost of oil production and delivery. What’s really needed is a sustainable energy policy from Washington, and the willingness to let private markets operate more unfettered.
This alone solves not only many automotive industry problems but would create dynamic paths of growth for the entire U.S. economy. Automakers need to insure that they solve the right problems and don’t end up doing the wrong thing really well. This has become the new strategic standard in the global automotive industry.
Phil Biggs is Partner, Automotive Markets, for the Bethesda, MD-based management consulting firm The Highland Group.
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