HOW THE DUAL FORCES OF LOW CARBON AND HIGH TECH ARE TRANSFORMING THE CAR INDUSTRY

HOW THE DUAL FORCES OF LOW CARBON AND HIGH TECH ARE TRANSFORMING THE CAR INDUSTRY
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By Luke Fletcher, Senior analyst

The rapid progress of new technology and the transition to a low carbon economy are two of the most powerful megatrends shaping global capital markets. When these two forces come together they have the potential to massively disrupt industries and create both risk and opportunity for investors. Nowhere is this more true than in today’s automotive sector.

In ‘Driving disruption’, a new CDP report released today, the scale of that transformative change is revealed. The report analyses a $790 billion group of 16 of the world’s largest publicly-listed automotive companies including the likes of Toyota, Ford and General Motors. It finds that:

  • Profits are going off road: Technology and software firms, such as Uber and Google are already taking market share away from the traditional car market players. It’s predicted that over 20% of automotive company profits will shift to tech or software companies by 2030.
  • The future is green: A third of new car sales are expected to be zero emissions and plug-in hybrid by 2030, representing a $1 trillion market. This is creating enormous opportunity, especially in China – now the largest vehicle market in the world - which has set aggressive targets for electric vehicles (EVs). Up to a third of car companies’ energy needs are now sourced from renewables.
  • Low carbon innovation is the road to future sales: The car makers have invested more than $11 billion in autonomous and shared vehicle companies such as Lyft since 2015, a higher rate of R&D than most sectors. Companies such as General Motors are working towards an “all-electric future” with ambitious automation targets and heavy investment in self-driving cars and ride-sharing services.
  • The low carbon transition is also creating financial risks: Half of these carmakers still risk penalties by missing their emissions targets, and costs could be high, with up to EUR€940 million at risk. In the EU alone, emissions must be reduced by up to a fifth over the next five years, meaning that some companies will need to increase their share of sales from EVs to 20% in order to meet the EU’s 2021 targets. Compliance with emissions regulations for traditional car engines is expected to increase threefold by 2025 and reach over $2,200 per vehicle.

Who are the winners and losers?

It is probably too early to tell which companies will be the winners and losers from this dramatic shake-up of the car industry. What is clear, however, is that business resilience to such disruptive change varies. The report looks at criteria including emerging market exposure, levels of diversification, share of luxury vehicles and operating margins and found a significant variation between companies, with Daimler, Toyota and Tata Motors the most resilient to industry change.

The table below looks at which companies are best placed for a low carbon transition based on all climate-related metrics– including management of all transition risks and opportunities and corporate climate governance frameworks (the three key components of the G20-backed Task Force on Climate-related Financial Disclosures). It shows that the three best performing companies are BMW, Daimler and Toyota. The companies that rank lowest of the 16 assessed are Subaru, FCA and Suzuki.

The companies that will concern investors most are those that do not disclose their environmental data to CDP. These include Kia, Great Wall and Geely (Volvo).

The report also reveals all 16 companies perform poorly on governance of climate issues. For example, all the car makers feature weak to average incentives for climate-related remuneration in their CEO pay packages.

Figure: CDP’s summary League Table for automotive companies:

The environmental dividend

The future of the car industry is crucial to keeping the world on track to meet the Paris Agreement‘s commitment to keeping global warming below 2C.

The 16 carmakers analysed by the CDP report represent more than three quarters of the global passenger vehicle market, and road transport accounts for 17% of global CO2 emissions (equivalent to running over 1,800 coal-fired power stations). Therefore, commitments such as Toyota aiming to reach zero CO2 emissions in the entire vehicle life cycle by 2050, are an important step in the right direction.

The growth of ride-sharing apps such as Uber and Lyft can also be seen as generally positive for the environment. More car-sharing makes it easier for drivers to leave a car at home or to get rid of their car altogether, meaning less driving and lower carbon emissions. One report found that for every vehicle used in a car-sharing fleet, carmakers will lose 32 vehicle sales.

Lessons for the wider economy

The automotive sector is enormously important to the global economy. This is because of its size with current global revenues from vehicle sales reaching in excess of US$2trillion - and because of its knock on effects to other sectors, as changes in the car industry have a material impact on other sectors such as oil & gas and the power sector.

However, perhaps most importantly, the auto industry has become a poster child for the future of industry as we know it. The forces of high tech and low carbon are set to disrupt practically all sectors of the economy in the same way that they are driving change in the car industry today. How quickly car manufacturers adopt new business models and adapt to the low carbon transition will tell us a lot about the future of the global economy.

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Driving Disruption is available here.

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