Aaron Henry is the Senior Director of Natural Resources and Sustainable Growth at the Canadian Chamber of Commerce. ‘The Great Quickening’ is a new, regular column on CBRN focused on how COVID-19 will accelerate social, economic, and technological drivers of change. Based loosely on a strategic foresight approach, this column explores how certain trends are being accelerated in the post-COVID world to provide Canada’s business community with insight.
COVID-19 has battered the automotive sector on numerous fronts. The supply chains that support the sector face greater uncertainty as globalization continues to recede (see our first post). Uncertainty in these supply chains could intensify further as the production of electric vehicles will significantly increase the demand from North American manufacturers for rare earth metals, of which China currently holds dominance.
These supply chain challenges are combined with a significant drop in global vehicle demand. Industry analysts estimate that in 2020 global sales of internal combustion engines (ICEs) will be down anywhere from 20-25%. These numbers translate into 70 million passenger vehicles sold in 2020, compared to 90 million in 2019, and 94 million in 2017. While auto-sellers have tried to adapt to social distancing measures by increasing online sales, demand of vehicles could take years to recover in Canada and globally, and that’s bad news for global efforts to combat climate change. Let’s unpack this a little.
The purchasing of new vehicles remains coupled with household debt considerations. In many cases low interest rates have allowed debt servicing to coexist with consumption. But, COVID-19-driven unemployment, high debt, and economic uncertainty, may put a freeze on household decisions to buy new vehicles. Consequently, pressure from heavy debt and potentially less commuting time due to work from home policies, could make turnover in global vehicle stock very sticky.
While you’d be forgiven if the phrase global vehicle stock doesn’t hold you in rapt attention, it is a very important rate of change in meeting long-term global emission targets. In particular, it has been modeled that it takes nearly twenty-years for an existing vehicle stock to turnover 90%, this number falls a little if you just look at cars.
In short, it’s good news if you wonder how long you can keep your clunker going, but bad news for global emissions. The quicker the turnover rate, the faster we can capitalize on the iterative improvements in fuel economy. For instance, from 2005-2016, fuel economy for ICEs improved nearly 2% per year. The longer you hang on to an old vehicle, the longer you keep a higher emitting car on the road.
The additional impact is that the International Energy Agency (IEA) models for 2030 emission targets depends heavily on an aggressive uptake of zero emission vehicles. In particular, the IEA forecasts that by 2025, there should be 20-40 million electric vehicles in the global vehicle stock. That’s a significant uptick from the eight million EVs on the road today. The fallout of COVID-19 has already challenged this trajectory as the sales of EVs are on track to plummet 43% this year. As long as households are faced with high unemployment, heavy debt levels and long term uncertainty, the global stock of vehicles will prove increasingly sticky.
This leads us to the question how might businesses, and policymakers manage a potential COVID-19 hangover on new car purchases at time when global vehicle stock turnover remains key in combatting global emissions?
First, automakers have made considerable investments in both improving ICE and net-zero vehicles. There are significant economic and environmental benefits in getting 2019-2020 models on the road. One pathway may be to move from direct sales to selling subscriptions. Rather than owning a vehicle, consumers could pay monthly to use a suite of vehicles produced by an automaker. Though Ford and a few other automakers have piloted this model, COVID-19 may accelerate the dominance of this practice in the sector’s business model.
Second, a sticky global vehicle stock will have knock on impacts on ridesharing companies. For instance, Lyft has pledged to ensure all rides are carbon neutral. Low vehicle stock turnover will ultimately raise the cost of maintaining this commitment, and forfeited gains in fuel economy may eat away at driver’s profits. Now may be the time to explore selling vehicles in direct partnership with ridesharing companies. For instance, sale terms could include conditions that the buyer complete a specified number of rides per a month to achieve a lower financing rate.
Third, in the period before automated passenger vehicles hit the roads, vehicles will converge with 5G networks and greater connectivity, which may create significant pools of data that can be monetized and used to reduce the sale price of vehicles to reduce costs to consumers.
Any of these measures are going to require supportive policy and regulatory frameworks. Governments will need to consider how best to support the formation of new business models for the auto industry as it works to overcome subdued consumer spending. In addition, Canada will need to think about the upstream opportunities for its mining and mineral producers, as demand for secure rare earth metals will become crucial to the auto sector as it continues to pivot towards digitized non-emitting vehicles.
– Aaron Henry