Fitch: Disruptive Trends May Roil the Global Auto Industry

The global auto industry is ripe for disruption as a result of changing global demographics, increased urbanization, heightened environmental awareness, growing safety concerns and rapidly evolving technologies, according to Fitch Ratings. These changes are likely to create winners and losers and as technologies advance, there is an increased probability that they will play a potentially significant role in the ratings of original equipment manufacturers (OEMs) and suppliers.

Fitch is placing more emphasis on issuers' long-term positioning relative to these developing trends as the global auto industry evolves. The shifting landscape is unlikely to directly influence most issuer ratings in the near term, but a rapid change in the competitive environment could alter Fitch's view of an issuer's market position, which could affect its ratings.

As technology evolves, the car is being recognized as an under-utilized asset. New market entrants and business models pose an increasing threat to incumbent players. Pressure from startups and from technology companies outside the traditional auto industry is forcing OEMs and suppliers to work on new technologies, such as automated driving, and leading OEMs to consider transportation in addition to manufacturing vehicles. The success of these trends is not guaranteed as widespread adoption will require significant advances in technology, accommodating regulations, answers to thorny legal and ethical questions, and customer acceptance of new technologies.

Vehicle electrification, driven by tightening emissions regulations in most major global regions, is leading to significant changes in vehicle powertrains. Not all vehicles will be electric, but Fitch expects the number of hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs) and fully electric vehicles (EVs) to increase significantly over the next decade.

Electrification will alter the playing field for OEMs, Fitch believes. EVs do not need to meet emissions requirements and their powertrains are relatively simple, which has helped prompt a large number of startup EV OEMs around the world. Most are likely to fail, and it remains unclear whether even Tesla will successfully evolve from a luxury vehicle maker into a mass-market OEM. However, a future automotive environment marked by high fuel costs or heavy regulation of internal combustion engines would support the EV startups, increasing their chances of competing with traditional OEMs.

The business potential of autonomous vehicles is tremendous, especially for taxi services. Some studies suggest removing the driver could reduce the cost of operating a taxi by more than 80%. As a result, driverless taxis could be cheaper and more convenient than owning a car, particularly in urban areas. This could reduce urban congestion and lessen the need to devote scarce urban property to parking lots. Autonomous vehicles also promise to open up personal transportation opportunities for people who are unable to drive themselves.

Fitch expects that it will likely be at least a decade before the general public will be able to purchase fully autonomous vehicles for personal use. In addition to the technological hurdles, cost will be a factor. While the significant additional cost of the technology might make sense in a taxi, private owners may find it harder to justify. Also, there are more than 250 million registered cars and trucks in the U.S. today, and even if all new vehicles had fully autonomous capabilities next year, it would likely be more than a decade before even the majority of vehicles on U.S. roads were autonomous.

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