Used car ‘time bomb’ complicates auto industry transformation, new report says

The historic transformation of the automobile industry will generate billions to trillions of dollars for companies and investors. But for traditional automakers, the road ahead will be bumpy, risky and expensive.

That’s the assessment of consulting firm AlixPartners, which released an extensive report Wednesday that uses market research and consumer surveys to lay out some of the major challenges facing automakers — with some interesting findings about Tesla.

The report includes a near-term industry outlook with a darker forecast for U.S. auto sales than most other prognosticators have put forth.

Record-high vehicle sales in 2016 will dive 13% from 2017 through 2019, the firm predicted — to 15.2 million vehicles from 17.5 million — in what it calls a cyclical but ill-timed downturn made worse by a “used car time bomb” as hundreds of thousands of vehicles come off lease all at once.

“That increased used car supply reduces used car prices and pulls sales from new to used,” said Mark Wakefield, who heads the automotive practice at AlixPartners. About a third of vehicles are leased, not sold, with a typical lease period of three years.

The downturn is Ill-timed, the report said, because impending industry upheaval is forcing major new capital commitments, unfamiliar new partnerships and fundamental shifts in strategy for a future of driverless electrified cars that may be shared and not owned — all this while trying to run a traditional internal combustion car business as the world changes.

“They’re moving toward something that doesn’t connect with 99.9% of the business that’s generating good cash flow now,” Wakefield said.

Deciding what to invest in while maintaining enough flexibility to shift with unpredictable turns in technology and the marketplace will be a real trick, he said.

For example, Wakefield said, “the flattening out of car sharing is a great example of just how uncertain the world is.”

A few years ago, car sharing companies such as Zipcar, Car2go, Enterprise CarShare and others, which let users rent cars hours at a time, looked set to take off, with great expansion plans and high brand awareness. But that business peaked in 2014, the report said, and brand awareness is fading fast. A 2013 survey by the firm in 10 major cities showed just 4% of respondents had never heard of any of the listed car-sharing companies; in this year’s survey, 21% had never heard of Zipcar, Car2go or any of the others.

The reason: Uber and Lyft. “They got sidelined as ride sharing became a thing,” he said. “Five years ago it looked like the next great thing, now it doesn’t look so critical.”

Electric cars inject even more uncertainty. Sales are growing but the base is tiny in the U.S. Despite rich federal and state incentives, they still represent less than 1% of the nation’s automobile market.

Yet they’re taking off fast in China and Europe. Last year, the report said, about 350,000 plug-in cars were sold in China, up 84% from the previous year and almost twice as many as in the U.S. And while foreign automakers account for the majority of total auto sales in China, the report said 96% of those electric cars are made by Chinese companies.

“The Chinese government is saying this is our chance to leapfrog the industry and take a commanding position in a growing space,” Wakefield said.

That applies to the lithium-ion batteries that power electric cars as well: China’s battery manufacturing capacity is growing twice as fast as any other country’s, the report said, never mind Tesla’s $5-billion Nevada “Gigafactory” battery plant.

Meantime, the industry faces the prospect of driverless cars. Every major auto company has already made significant investments in the field, such as Ford’s $1-billion purchase of Argo AI and GM’s acquisition of Cruise Automation, which are aimed at trying to avoid getting rolled over by the likes of Google, Apple and China’s Baidu.

The financial risk should ease in coming years, especially as an expensive object-sensing technology called lidar comes down in price; according to the report, driverless system costs are predicted to decline 78% by 2025, to $3,250 from $15,000.

But traditional automakers face a major public relations challenge on driverless technology. Silicon Valley “dwarfs traditional automakers in consumer awareness of driverless technology, survey statistics show. About 55% of respondents recognize Tesla and 20% Google as companies developing the technology, but traditional automakers together registered 12%. Meanwhile, 41% said they’d trust Silicon Valley autonomous vehicle programmers the most, while just 17% picked Detroit automakers.

Curiously, awareness of Tesla more than doubled after a 2016 crash in which a driver using the company’s Autopilot system was killed after his Tesla Model S failed to “see” a big rig and drove beneath the trailer. But “it didn’t move the needle on trust,” Wakefield said. On surveys before and after the crash, the Silicon Valley trust number remained at 41%.

And whatever the prospects for Tesla’s new Model 3, the company remains far ahead in what’s known as over-the-air software updates that fix software problems on the cars and add new features whenever they’re ready, without a trip to the dealer.

Tesla launched the over-the-air system in 2012 and, according to the report, “no other automaker has moved to match the system.”

russ.mitchell@latimes.com

Twitter: @russ1mitchell

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