Lifecycle of the Car Industry

PY Gerbeau discusses 'The Lifecycle of the Car Industry' in the BBC/Open University's Rules of the Game.

By: PY Gerbeau (Guest) , Sir Clive Sinclair (Guest) , Mat Hunter (Design Council) , Professor Mariana Mazzucato (University of Sussex)

  • Duration 10 mins
  • Updated Thursday 13th October 2005
  • Introductory level
  • Posted under Business Studies
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One very surprising thing about the car industry is that it could well have sprung up almost a hundred and fifty years earlier. The first steam car took to the road in France in 1867 – but Cugnot's novel idea just didn't catch on.

Sir Clive Sinclair notes: "The whole point about innovation is that it is novel. If it's novel then no-one can know in advance whether an idea is great or not so great. And indeed sometimes great ideas do not succeed. The first cars ran over 100 years before they became commercially viable. There was no reason for that – the technology was there, it was steam of course. The 19th century saw railways built around the world but no cars, and to this day I don't understand why. Sometimes an idea that's perfectly viable doesn't happen even though people have the technology, have the means of doing it – it just doesn't happen, it just comes along too early in some respects."

It was the invention of the internal combustion engine that saw what economists call the introductory phase of the car industry, when it was a hotbed of innovation. "At the beginning of an industry’s life cycle there are many types of firms, with different efficiency levels and historical backgrounds, that experiment with new product varieties. There are lots of opportunities for technological innovation and there's little or no product standardisation." (Dr Mariana Mazzucato, an Industrial Economist from the Open University)

By 1910 there were 300 firms in the automobile industry in the United States alone. But because there were so many firms, and such a huge variety of products rolling out from their factory gates, each firm had to be satisfied with a small share of the market.

The industry soon entered the growth phase of its life cycle. "The growth phase of the industry life cycle begins once there is a move towards a particular “industry standard”. The market grows as consumers gain more knowledge about the product. Economies of scale in production allow both costs and prices to fall. But profit margins fall as well, and lead to industry 'shakeout' – only the largest most efficient firms are able to compete while many smaller firms are forced to exit. By 1923 there were only 100 firms manufacturing in the US." (Mazzucato)

Also in 1910, a single innovation – the moving assembly line – led to the age of mass production. Economies of scale allowed products to become more standardized – costs fell and so did prices. And lower prices opened up the product to the mass market – cars were no longer just a hobby or a luxury item.

"What 1910 signified in this industry is a turning point from a period of radical change, radical innovation to one of standardization, where the focus really began to be on producing cars much more efficiently, on making them much cheaper. What happened afterwards, the number of firms shot down. By 1940 in the US there were only a couple of dozens and in the eighties the big three - Ford, General Motors and Daimler-Chrysler". (Mazzucato)

For the last 50 years, the car industry has been in the mature phase of its life-cycle. "The mature phase of the industry life cycle is one in which the opportunities for product innovation are low. Demand is centred on replacements for what people already own. Manufacturers concentrate their efforts on improvements to the manufacturing process, advertising and price competition. Price wars create further barriers to entry for new or smaller firms, and existing firms tend to keep their market share." (Mazzucato)

The mass market is supplied by ever fewer and ever larger producers who have invested huge amounts of money in building up their shares of the market, and profit margins are increasingly small. Sir Clive Sinclair notes: "The car industry is caught in a very difficult position. Because it’s a very mature business, it has vast amounts of capital already exploited, vast investments made, narrow profit margins because of the highly competitive nature of the business and the fact that it’s a global business. So they have narrow margins and yet they face change. They are unwilling to innovate because of these narrow margins. They would much prefer to continue to make the sort of products that they’ve been making for decades now. That's what they do and largely they do very well. It's very difficult for companies with highly established businesses to be truly innovative."

You only have to turn on the television or flip through a Sunday colour supplement to see that competition between manufacturers is driven mainly by advertising based more on emotion than on technological advance. What innovation there is tends to be evolutionary rather than revolutionary.

"In the last thirty or so years what we've seen is that firms in this industry have spent almost all their energy on advertising and on price wars, not product innovation. And the fact that advertising is so incredibly expensive, especially in this industry, has reduced tremendously the number of firms – you have a lot of big firms competing on extremely expensive advertising and not on product innovation." (Mazzucato)

Mat Hunter, a designer from IDEO comments: "We're always conscious that we're working on many different types of innovation. Some of it is really evolutionary and incremental and some of it is much more revolutionary and radical and will really change the world. Sometimes radical change is not appropriate and it's certainly not possible – it's remarkable difficult sometimes to find the idea that really will change the world."

One problem is that car manufacturers have to take notice of what their existing customers want. What the car industry is doing is trying to reinvigorate itself by incorporating other developing technologies to add value to its products and create the appearance of radical innovation.

"It's interesting to see some of the older industries reinvigorate themselves by using this tidal wave of digital technology. I think that car manufacturers have understood that the car is an important part of our lives so they're interested in two things – using digital technology to augment the cars, the products themselves, with new functionality for the cars; and also a way to deliver services to people. As we're going places we may want to just generally carry out other things that we do elsewhere. We might want to do shopping, we might want to send e-mails. They have a captive audience really to which they can sell new services and products." (Mat Hunter, IDEO)

"The car industry today is an industry that is piggy-backing off the type of innovation that is occurring in an industry that is still in the early phase of its life cycle. In fact an industry that looks a lot like the car industry looked 100 years ago – the IT industry. And that’s why you see these cars firms like Peugeot, Jaguar, Mazda filling up their cars with all these IT gadgets because that’s the only way that they can appear innovative." (Mazzucato)

The future of the car industry depends on the degree to which new technological opportunities will allow the industry to be as dynamic as it was 100 years ago.

Its greatest challenge is meeting the changing attitudes to transport, and the need for cars to run on fuels which are less damaging to the environment. Sir Clive Sinclair notes: "Increasingly, people are realising that we need electric transport to remove pollution. Increasingly too, technological solutions like the hydrogen fuel cell are appearing that make this plausible. I see the day when hydrogen is the principal fuel, generated by some renewable means like wind power or solar power. But it's very hard to move from an oil based transport system to a hydrogen based one because you have to put the infrastructure in and you don't have the demand immediately."

Revolutionary innovations will be crucial if the car industry is to avoid decline and move into a new growth phase. The challenge revolves around the fact that cars are just part of a system – transport is an infrastructure not a product.

"Transportation is a fascinating industry because it's an infrastructure not a product. In order to radically change cars, we'd have to change petrol stations, roads, mechanics, car sales forecourts, all these things. So it is remarkably difficult – it's a multi-billion dollar challenge to change a multi-billion dollar industry like this. However through constantly applied and very carefully focussed evolutionary innovation we believe that over time we will change the car beyond anything that you would have imagined." (Hunter)

The product life cycle of the people carrier

The Renault Espace was the first so-called people carrier, or MPV. In technological terms, it wasn't particularly innovative, but it created a market for a whole new class of vehicle.

Toyota, Volkswagen, Ford, Fiat, and other big manufacturers soon jumped onto what continues to be a very profitable bandwagon.The market for full size people carriers is now in its mature stage.

As their share of the market dropped, Renault created a smaller version of the people carrier – the Megane Scenic. Once again other manufacturers have seen the potential and have been bringing their own versions onto the market.

Currently the Citroen Picasso has taken over from the Megane as the market leader in this still growing market. It is likely that demand for MPVs and mini-MPVs will continue, and that the next major innovation in these markets will involve a move from the internal combustion engine to fuel cells which use hydrogen as the energy source.

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