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Auto industry awaits full effects of disruption

The USD40bn merger between Fiat Chrysler Automobiles (FCA) and Peugeot’s owner, PSA, announced in October, comes at a time of escalating disruption in an industry that has remained remarkably stable for decades.

This is a sector that has seen many mergers and joint ventures over the years between its leading players, but one that has seen few real challengers emerge to threaten their market dominance. That’s largely because few others have mastered the art of building internal combustion engines, a surprisingly complex technology.

With the advent of electric vehicles (EVs), that is likely to change radically, especially as battery technology improves. A whole range of potential competitors will be able to put this simpler technology to use, and, as data becomes the key to future mobility, rather than petrol, the field is increasingly open to tech companies and others to join the fray.

The industry giants are now reacting to this in two main ways. They are continuing to look for opportunities to achieve scale and global reach through consolidation, the rationale for the FCA/PSA tie-up.

Most have also set up incubators and tech accelerators to invest in tech companies that can help them compete in the new world of data-driven mobility services. Volvo Cars, for instance, has just announced investments in two Israeli start-ups, UVeye and MDGo. Toyota’s USD1bn investment in the Asian ride-hailing business, Grab, is also part of this trend.

Their experience of mass-producing cars remains an advantage – there will still be demand for lots of vehicles. Tesla does not have such mass-manufacturing skills and its decision, announced in November, to site its new super factory outside Berlin, is, perhaps, a recognition that it can find the skilled autoworkers it needs more easily in Germany than in the new markets it wants to target.

While we may not see many more big tie-ups between the major players, there is still plenty of scope for consolidation among the companies that supply them. At the luxury end of the market, we may see growing alliances between makers of high-end cars and luxury goods manufacturers. Jaguar Land Rover is already the biggest exporter of luxury goods to Japan.

But we are certain to see a flood of investment and M&A activity as the industry becomes increasingly disrupted, and the ramifications will stretch way beyond the auto sector itself.

What will happen to the downstream operations of the oil companies, not least their petrol station networks? Car insurers will also have to rethink their model. As autonomous driving becomes a reality, and if, as expected, we move away from car ownership to subscription and leasing models, liabilities will shift from individual drivers to the vehicle makers and software providers, with huge cost implications that will need to be addressed.

We are certain to see a flood of investment and M&A activity as the industry becomes increasingly disrupted.

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