The business of making cars is complex and, as the world has recently learned, vulnerable not only to swings in energy prices but also to the economy as a whole. Today, industry analysts are struggling harder to figure out the short term than the future. "It's an unbelievably volatile market right now," says Rebecca Lindland of Global Insight. "It's never been more difficult to project."
But sooner or later, the car market will recover. Globally, cars represent freedom, opportunity, and economic status, and that's not likely to change. The global car park now contains 800 million vehicles; that could rise as high as 3 billion by 2050, as emerging middle classes in India, Russia, Brazil, and especially China buy cars.
At the same time, the structure of the industry will evolve toward higher production volumes and greater cooperation among makers. Driving these trends is the huge cost of meeting the growing demands on cars and manufacturers. Vehicles continue to get more complex and more electronic, and they face ever-increasing regulatory burdens.
To meet tough US crash-safety standards, for instance, the average car now has 6 to 10 airbags. It may also have electronic sensors and controls that prevent it from skidding, adjust cruise-control speed to maintain safe distances, keep it inside lane markings, and alert the driver to cars in its blind spots. Technology to lower fuel consumption and emissions-from gasoline direct injection and turbochargers to cylinder cutoff and idle-stop hybrid systems-adds componentry and cost. For hybrids and plug-in electric vehicles, lithium-ion battery packs alone run up to $10,000, demanding subsidies for years to come if they are to be affordable in the mass market.
These rising costs threaten to raise the real price of vehicles, which could depress sales. To avert that danger, carmakers are being driven to cooperate on core technologies and share the building blocks of their cars. Going forward, each carmaker will have fewer basic vehicle platforms, but will build each in far greater numbers. Globally, for instance, Volkswagen makes more than a dozen models from the basic components of its high-volume Golf/Jetta/Rabbit line, totaling 2 million units a year. The resulting cars are sold as VWs, Seats, Skodas, and even Audis.
Carmakers that can't reach those volumes by themselves will share platforms-even with their direct competitors. Done right, this is far from the "badge engineering" that slaps different nameplates on the same car. Instead, body panels, interior fittings, perhaps even engines may be unique to each variant-but the expensive understructures and mechanical parts are shared. In Europe, the Fiat Panda hatchback is mechanically the same as the stylish Fiat 500 and the new Ford Ka. Here, Volkswagen's Routan minivan is a Dodge Caravan under the skin, and Nissan's next Titan pickup truck started life as a Dodge Ram.
Even more common will be joint development for the costly, complex, "invisible" components that consumers never see: engines, transmissions, and the like. GM and Ford jointly developed their current six-speed automatic transmission, and the Two-Mode Hybrid system was a four-way project among GM, Daimler, Chrysler, and BMW. Considering the enormous and necessary costs of developing electric-drive systems for greener cars, this trend can only spread.
Finally, carmakers may even share entire factories. The model for this is Subaru's 20-year-old plant in Lafayette, Indiana. It originally built Subarus on one line and Isuzus on the other. With Isuzu gone, Toyota (which owns a portion of Fuji Heavy Industries, Subaru's parent) picked up another 100,000 units of Camry assembly-without having to build a new plant from scratch.
Finally, the car industry will consolidate globally. To cover development costs for a full lineup of vehicles, successful carmakers must compete around the world and sell at least 4 or 5 million units a year. The recently proposed partnership of Fiat and Chrysler proves the point: it knits together companies that build about 2 million vehicles each, with complementary product ranges and no geographical overlap. The similar linkage between Nissan and Renault has cut costs and raised margins for both partners, through effective management and retaining distinct corporate identities.
Despite structural changes, personal vehicles will remain with us for decades to come. And these changes will bring a payoff: better, safer, cleaner, greener cars for the new drivers of the world.VisitÃÂ Portfolio.comÃÂ for the latest business news and opinion, executive profiles and careers.ÃÂ Portfolio.com© 2007 Condé Nast Inc. All rights reserved.