Sustainable Development: Opportunity or Threat for the Auto Industry?

Excerpt from Global Automotive Perspectives 2008

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Will You Handle the Curve? Global Automotive Perspectives 2008

Sustainable development: Opportunity or threat for the auto industry?

Automakers feel the heat on the environment
Growing concern about the environment is creating serious challenges for industries across the business spectrum. The auto industry, already under re for its perceived role in harming the environment, is being held increasingly responsible, especially in light of the not only high but, also increasing number of cars on the roads. There are about 600 million vehicles on the worlds roads, with the International Monetary Fund estimating a gure close to 3 billion by 2050, representing an incredible 60-fold increase within a hundred years. Cars emitted approximately 2.6 billion tonnes of carbon dioxide (CO2) in 2000, or about 6.1 percent of overall emissions. This gure could reach 6.8 billion tonnes (8.1 percent of overall emissions) by 2050. For the maligned auto industry, sustainable development cannot be discussed without considering restrictions. Massive commitment is needed from the entire sector if current technical and technological standards are to be met. However, environmental challenges mean more than just pressure for automakers. They also open the door to broader horizons. Opportunities for new prot sources and competitive advantages are available, and changes may produce safe, comfortable, simple vehicles. In a sector that already has seen a radically altered competitive climate due to the ramp up of inexpensive and eco-friendly brands such as Indias Tata, the balance of competition may continue to change. Automakers environmental initiatives are sure to win investors attention, and this article sets out to shed light on the opportunities and threats that sustainable development poses for the auto industry. Since 2003, European standards have limited carbon monoxide (CO), hydrocarbon (HC), nitrogen oxide (NOx) and particulate (PM) emissions within the European Union. The next stageset out in the Euro 5 directive, will apply to most new cars sold in the European Union from September 2009 and should lead to a more widespread use of particulate lters on diesel engines. Similar legislation has been adopted by Japan and the United States, and emerging nations in Africa, South America and Asia are working towards integrating emissions standards and fuel regulations as well. The Chinese government, for example, is aiming to catch up with Europe through the implementation of China IV standards in 2008. Other standards address vehicle design. Europes REACH (Registration, Evaluation and Authorisation of Chemicals) regulation is aimed at a wholesale crackdown on the use of chemical substances. REACH has a downward effect on the auto industry, ensuring transparency by suppliers and substance importers. Burgeoning and ever-more restrictive regulatory constraints pose the rst hurdle for the auto industry, with players required to constantly anticipate future standards to adapt and meet market demand.

Willing commitment
Current standards do not lay down any restrictions regarding CO2 emissions by vehicles. Nevertheless, in accordance with objectives set by governments, several automobile associations have taken the initiative to reduce average emissions. In 1998, the members of ACEA (European Automobile Manufacturers Association) signed a voluntary agreement with the European Commission under which it committed to reduce CO2 emissions to an average of 140 grams per kilometre by 2008 for new cars (a 25 percent reduction from 1995). Japanese and Korean automaker associations (JAMA and KAMA) have committed to the same reduction by 2009. Despite considerable progress, ACEA may not meet the 2008 deadline. Therefore, the commission has proposed introducing new and even tighter legislation, with an emission target of 120 grams of CO2 per kilometre. This proposal has been ill-received by automakers, who complain of overly restrictive objectives and believe that the auto industry is being made to bear the brunt of

Regulatory restrictions
Increasing unease about air qualityboth an environmental and a public health issuehas prompted governments and international bodies to introduce regulations concerning emissions by new vehicles. Most of the worlds major auto markets are subject to various standards, with a gradual move towards zero emissions.

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Will You Handle the Curve? Global Automotive Perspectives 2008

emission reductions. They also bemoan the failure by European powers to implement a labelling system and tax incentives to encourage consumers to purchase cleaner vehicles. Thus, CO2 restrictions pose the second major hurdle, with the problem of how to divide responsibility among the various industry players. Automakers are taking a progressively more integrated approach to the problem by looking for more ways to lower emissions. At vehicle production level, improvements are expected through technological progress. Automakers should be able to share this burden with automotive suppliers. The latter are being strongly encouraged to develop ways to reduce CO2 emissions through measures such as new air-conditioning systems; new ways to monitor tire pressure; and enhanced safety. In terms of the number of cars on the road, CO2 could be decreased through a changeover from petrol to diesel, the use of biofuels, a change in driver behaviour, and a move towards smaller, less gas-guzzling vehicles. Automakers will, therefore, share the burden of reducing CO2 emissions with their partners, governments, and consumers.

Taxes are one way of enhancing a turnaround in consumer demand. In France, a special eco-tax (copastille) was introduced at the end of 2007, nancially penalising owners of polluting cars and rewarding those who purchase cleaner vehicles. Since the tax was implemented, sales of vehicles eligible for the reward (or at least ineligible for penalisation) have jumped 45 percent, while sales of cars that would be penalised have dropped by 40 percent.

Cross-dimensional challenges
The automobile industry is a mature sector, in which innovation is a sure way of gaining a competitive lead. For an automaker, incorporating sustainable development concerns within its innovation strategy comprises a whole host of technical and technological challenges. From a technical point of view, the entire vehicle design needs to be revamped , with a focus on eco-design. A pre-eminent way to approach this would be to carry out a Life Cycle Analysis (LCA), enabling an objective assessment of a vehicles effects on the environment at each stage of its life cycle. An LCA can help a company measure the environmental and economic cost of measures such as implementing a responsible procurement policy, using new materials, reducing the weight of vehicles, or recycling end-of-life vehicles (ELVs). Targets have been set in Europe regarding the recycling of ELVs and should lead to the creation of an economically viable industry. As well as offering an opportunity to review and optimise production costs, an LCA may provide transparency, allowing the consumer access to more accurate, comparative and easyto-understand information. By incorporating eco-design, automakers are embracing the possibility of creating innovative and enhanced vehicles. Sustainable development also is spurring production and use of new technologies. Potential means of reducing CO2 emissions, as yet in the research and development (R&D) stage, include new and improved diesel engines, biofuels, hybrid technology, and fuel cells. Each new technology has its limits regarding the amount of potential CO2 reduction, and time will be needed to carry out the necessary ne-tuning. The key challenge, in the short term, is to minimise the cost of bringing future models into compliance with current standards,

Lower purchasing power and sky-high oil prices change consumer demand
Automakers also need to take the demands of the consumer into account when addressing environmental issues. Drivers expect safety and comfort, as well as state-of-the-art equipment, resulting in heavier and consequently more energy-hungry vehicles. The increased scarcity of petrol and the spike in oil prices are other signicant factors, gradually inducing consumers to demand smaller, more cost-efcient vehicles. If the success of discount outlets is an indicator, price is becoming an increasingly important criterion in the current economic climate. One salient example of this is the unexpected success of the Renault Logan. Initially aimed at the eastern European market, the Logan has proved extremely popular in Western Europe, with more than 60,000 models sold in 2007 . European and US manufacturers are also under threat from new market entrants in the form of Chinese and Korean brands at ultra-competitive prices. The Chinese Landwind, for example, offers an SUV for just 17,000 euro.

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Will You Handle the Curve? Global Automotive Perspectives 2008

through incremental technology or a gradual changeover from petrol to diesel. Incremental technology is a primary solution available to automakers, notably through the optimisation of engines and transmission systems. Although widespread and well understood, it is unlikely that this solution would grant competitive advantage in the long term. Diesel technology is also widespread in Europe, with signicant quantities of diesel imported each year. Uncertainty still surrounds its introduction to the US market, but it may be protable if consumers, who are used to petrol, can be encouraged to change their habits. In the long term, mastering new technology will be fundamental for automakers. Manufacturers are already feverishly developing hybrid prototypes, likely to become one of the prevailing trends in the next decade. A key strategic challenge also exists for automakers to establish a strong competitive position regarding the potentially disruptive technology of fuel cells and thus to rapidly recover R&D costs by becoming a benchmark in the eld. Although hybrid technology appears promising as a mediumterm solution, fuel cells no doubt will take over once the various technical and economic obstacles have been overcome.

increases to be incurred at each stage of production, from R&D, to design, to changes in the production chain. More intangible concerns will then be addressed, such as innovation capacity and brand concerns. There is already widespread controversy about dishonest advertising by major car manufacturers who feign environmental consciousness to sell cars that generate aboveaverage pollution. To better bear the weight of new regulations, automakers may start to join forces and divide CO2 emission rates between them. Sustainable development implies the creation of new management challenges, with the objective of increasing or maintaining prot while producing more eco-friendly vehicles. Automakers today nd themselves on various rungs of the ladder in regards to these challenges. They need to remain vigilant and perceptive to make strategic decisions that will be sustainable over time.

A new business model component

It would seem that sustainable development is the latest dynamic to be incorporated into companies strategies. It affects both supply and demand, changing the way a company approaches its market, and it opens up new horizons and spawns new ways of generating prot. But what if we took things further and pressed the question of deeper, more radical change? What if we pushed for change caused by a turnaround in consumer demand that would lead to a whole new vehicle concept and a new business model for automakers? In todays world, people are more interested in using rather than owning goods and servicesa trend that highlights the gradual shift from an age of ownership to an age of access. This trend is causing manufacturers to reect on the necessity to produce what they sell rather than sell what they produce, as has traditionally been the case since the 1950s . We can thus expect to see a new offering in phase with the move from a product-driven economy to a service economy, where its no longer cars that are sold, but access to mobility. This scenario is all the more plausible when you consider that the average passenger car is stationary 92 percent of the time . This type of service is already starting to appear, with aim of offering a service that meets immediate needs. In Paris, for example, companies such as Caisse Commune and Mobizen allow consumers to hire cars by the hour. The main objective of such a market is to develop user loyalty to win long-term customers by offering more and more services. The notion

It would appear that the technical and technological challenges posed by sustainable development are throwing up numerous potential strategies for automakers but that nding an approach that works is rather more difcult. This could lead to a market restructuring, resulting in losses for those that cannot adapt and a major move ahead for those that know how to seize the new development opportunities.

A new way of assessing performance

Automakers must do more than simply rethink technical and technological considerations. Factoring in sustainable development requires a whole new approach by the auto industry, with a new source of risks and opportunities. Environmental challenges could affect automakers competitiveness and protability by upsetting their traditional value drivers. With this in mind, traditional assessment methods need to be reviewed in line with the new demands. Concrete issues must be tackled rst. For the launch of new models, for example, consideration must be given to the price

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Will You Handle the Curve? Global Automotive Perspectives 2008

of consumer loyalty highlights the importance of marketing. In some cases a sense of identity builds among users of the same service. Sustainable development has a role to play not only in society but also at a corporate level, as a gauge of a companys organisation and group culture. The idea is that employees will rally around a new set of corporate values, feel a connection, and take pride in their companys philosophy. A popular initiative in this respect is the promotion of eco-driving, either on automakers websites or through on-site training sessions .

For further reading: The Sustainability Yearbook 2008

Sustainable development: a measure of excellence and value creation

Sustainable development has brought a number of constraints whether self-imposed or regulatoryto the auto industry. However, the new challenges it engenders may also offer enormous opportunity to redistribute the balance of competition within the sector. All that remains is for automakers to adopt a strategy that will enable them respond to drivers new requirements.

About the PwC Sustainability Advantage

PricewaterhouseCoopers works to solve complex business issues locally and globally. Our teams draw upon skills in nance, regulation, risk, tax, people, operations and technology to design, manage and execute lasting change. We advise and we implement. When it comes to matters of sustainability, organisations have very specic concerns.
Thierry Raes Partner Sustainable Business Services thierry.raes@fr.pwc.com Nicolas Loz de Cotgourhant Consultant Sustainable Business Services nicolas.loz.de.coetgourhant@ fr.pwc.com

To help us respond to our clients requirements effectively and efciently, PwCs Sustainability practice offers a range of solutions. We can help clients to: Evaluate the strategic relevance and commercial implications of sustainability, including the potential impact on revenues, costs, risk prole and acquisitions. In addition, we provide assistance with the formulation of robust business strategies which include sustainability issues Put a suitable governance, organisational structure and management process in place to capitalise on the commercial opportunities arising from the sustainability agenda, as well as establish appropriate systems for managing the risks

Olivier Muller Senior Manager Sustainable Business Services olivier.muller@fr.pwc.com

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Will You Handle the Curve? Global Automotive Perspectives 2008

Implement sustainable processes and procedures, identify key targets and performance measures, and implement corresponding monitoring frameworks Design reliable management information systems and develop non-nancial reporting frameworks Embed compliance with policies and regulations, ensuring that our clients reporting frameworks are robust, and assure the non-nancial information they disclose Factor sustainability issues into nancial market transactions and advise clients on new markets (such as the carbon market)

We take the time to listen to your situation and offer a range of smart choices to consider; choices based on independent and challenging insights, supported by facts and industry benchmarks. For more information please visit www.pwc.com/sustainability.

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