Marc Alochet - Technological breaks and industry dynamics. The transition towards electro-mobility

Publication Type:

Compte Rendu / Report

Source:

Report of the Gerpisa monthly seminar, Number 256, Virtuel (2020)

Notes:

Marc Alochet

Full Text:

Report of the Journée n° 256: Marc Alochet, Polytechnique, i3-CRG, " Technological breakthroughs and the dynamics of an industry, the transition to electromobility ".

Marc Alochet intervenes at the Journées du Gerpisa. This year, they focus on how the Covid-19 crisis is changing the trends that were already present in the auto industry, including electrification.
His starting point is the fact that electrification is on the move. However, this is not a voluntary transition. As we saw the previous Journée with Tommaso Pardi, there is strong regulatory pressure on manufacturers by the European Union. Other elements must also be taken into account, such as the suppression of internal combustion vehicles in city centres, or carbon neutrality objectives in certain cities. For example, over the last 2-3 years, most manufacturers have started manufacturing electric vehicles (EVs). These will be available on a massive scale around 2022.

What will happen following the Covid-19 crisis? The automotive market was shaken in 2020, even if it had started in 2019. Sales of EVs have certainly fallen, but less than the total market. The data shows that today it is Europe that is driving the EV market. The current crisis has slowed down the conversion to EVs, but has not stopped it: sooner or later EVs will overtake combustion vehicles. Some estimate that this will happen around 2035.

One question that remains unanswered is whether massive electrification is likely to disrupt the industrial architecture of the automobile. In fact, a technological innovation could disrupt the firms, which may cause some them to disappear from the market; here it may disrupt the structure of the automobile market. However, the automobile industry is very resilient, stable, even conservative. Everything seems to indicate that in the case of massive electrification, the automobile industry would retain this degree of resilience.

However, this does not answer the question of what effects electrification will have on the automobile industry: will it disrupt its architecture? To answer this question, Marc Alochet carried out an empirical study on the development of EVs on 14 global manufacturers, both old companies and new entrants. What are their strategies? Do they manufacture EVs in existing plants? Is it by adapting their skills? Have they had to develop new industrial sites?

He notes seven strategies in this regard, which are different configurations between make, buy and ally. In particular, he notes that 80% of manufacturers have chosen to fabricate the battery systems themselves and that 90% of manufacturers have chosen to make electric propulsion systems by themselves. Similarly, as far as the manufacturing of the models, in 42 out of 44 cases there was manufacture in readapted factories. Only two are manufactured in new industrial sites. It therefore appears that it is the manufacturers who manufacture EVs in their existing production sites and that they have also integrated batteries (at the level of the modules and the pack) and electrical systems (engine and transmissions) into these manufacturing systems.

However, for Marc Alochet, other architectures may exist, with more horizontal (modular) value chains. In such configurations, the manufacturers of batteries and electrical systems could take the lead. There is nothing to say that in such a configuration the manufacturers of batteries and electrical systems could not achieve production and quality levels equivalent to those of the car manufacturers.

This configuration has not occurred for several reasons. 1) The battery system (the pack) is the heart of the car, it is also the manufacturer's core business (because it defines the identity of the car). 2) Electrification reduces the share of additional production. If these elements are integrated into the activity of manufacturers, this may be a way of reducing the impact of electrification on employment. 3) There has been a substantial improvement in battery systems, but we do not see any technological movement where battery suppliers would be able to impose a technological breakthrough that would make them take over from the manufacturers.

For Marc Alochet, this confirms the resilience of the automotive industry. Does this sum up the effects of electrification in the automotive industry? In order to answer this question, Alochet proposes to start from three questions. 1) What is being transported (people, products, services, etc.)? 2) Who drives the vehicle (an individual, a company or an autonomous system)? 3) Who owns the vehicle (the driver, an individual, a mobility operator)?

We can see then that the automotive industry is undergoing transformations other than EVs, such as shared mobility, autonomous vehicles, urban transformations, consumer behaviour, etc. New players (Uber, Tesla, etc.) could also have the capacity to disrupt the auto industry. There are therefore internal and external, technological and non-technological factors of change. In this framework of analysis, technological dynamics is only one of the factors of change among others, a broader vision is reached which goes beyond the question of the technological determinant.

By broadening the focus, mobility initiatives can be studied at the international level. According to Marc Alochet, at least three ideal-types of mobility initiatives can be identified:

The first, that of "mobility service added to product" is an extension of the automotive value chain. Here, there is always a model of selling mass-produced products to individuals. The business model is not changed.

The second, that of the "robotaxi" has a strong impact on the architecture of the automobile market. The mobility operator imposes his model on his suppliers, he can integrate a complete system. We are in the electric model, autonomous and shared. The robotaxi is in competition with the traditional vehicle and could even supplant it. The automobile manufacturers would be reduced to suppliers of commodities (vehicles).

Finally, the third is that of an open platform of territorial mobility. It could potentially destabilise the architecture. It is a model oriented towards the territory. It is the latter that can dictate the specifications of the mobility model. They are heterogeneous ecosystems that respond to collective needs. The vehicle here is only one of the tools for achieving mobility, it is not the only one.

A final element added by Marc Alochet is the comparison between national regulations. These influence the direction and speed of change in the industry. Environmental regulations can be compared between Europe (European Commission) and China (Chinese State Council). How do these regulations influence the car industry?

In Europe, competition must remain fair, the policy is oriented towards "fair" competition. But coordination is difficult between 27 countries, with a lot of inertia. In China, the policy is oriented towards industry and the regulations are very directive: manufacturers have less latitude. For example, with Made in China 2025, the automobile industry must not only be a "good competitor", but it must also guide the global industry as a whole, it must take the leadership of the industry. Currently, China has the ability to impose its standards on the global auto industry by its market and percentage of electric vehicles.

Discussion :

Question: The EV is a systemic innovation. But, at the same time, EVs do not change the control that manufacturers have over their product, EVs do not change the nature of the product, and they do not change the value chain. It is a paradoxical innovation. EV is becoming a conventional product. However, Michel Freyssenet said that the electric vehicle could completely change the automobile. Why haven't these changes occurred? Why has there been no disruption?

What about the business models? Certain players can enter the market with innovative products. However, Uber is losing money, they don't have a viable business model. Are there any business models that could help them take over?

China has a political conception of the industry, which is lacking in Europe. China is the largest market in the world, but the Chinese market is still dominated by European manufacturers. Can we see the emergence of a Chinese EV champion? Can regulation help these dominant players to emerge?

Only Tesla is committed to transforming its firm into an industrial player. But certification can lead to product standardisation. It can strengthen the car manufacturers, i.e. those who already have a dominant position in the market?

Can it be said that European regulations aim to push CO2 standards to very high levels by 2030 to stay ahead of China? Is this ecological protectionism which would then allow us to attack the Chinese market?

Answer from the speaker : Why have manufacturers kept the dominant positions? The answer lies in the use of vehicles. An EV or a thermal vehicle are not fundamentally different. EVs are designed to be used in the same way as internal combustion vehicles. The EV is a new, but not entirely separate, offering.

Car manufacturers have promoted the idea that EVs will be used like traditional vehicles. Manufacturers have not gone in the direction that EVs will have a different use. Those who are moving in this direction are those who think in terms of mobility, who think about the use of the object, which can destabilise the car industry.

Question: Those who control fixed costs, value chains, design, etc. are the same, they are the manufacturers. They are the ones who determine the types of EVs that are manufactured. There is no sufficiently profitable business model that can challenge them?

Answer: The role of mobility operators is to take the lead in moving the industry out of the traditional B2C model. Manufacturers have managed to maintain the traditional use of the vehicle with EVs, because they control the barriers to entry, and because they maintain relations with customers. Nobody questions the fact that PSA, Renault, etc., offer EVs. They haven't even been shaken by the diesel gate.
Mobility operators, such as Uber, use the cars already on the market. Uber has not changed anything, it relies on the already existing architecture. If an innovative robotaxi existed, this could change, but this is not yet the case. Manufacturers are moving towards services as they are moving towards the top of the range. We remain in the B2C model. The mobility operators, by moving towards the robotaxi, seek to remove the most important recurrent cost, i.e. the driver. This could finally enable them to arrive at a profitable modal business. Does this bet work? We can't answer that yet.

Finally, public authorities can constitute another business model, where they take charge of the mobility of their territories. They would dictate what tomorrow's mobilities would be. The car manufacturer could find itself in the situation of losing hegemony over the B2C model.

Will China succeed in developing an industry that will supplant the traditional car manufacturers who impose the dominant technological direction? China has two advantages and one weakness. They will produce an increasingly large electric car fleet. But China is introducing regulations which also want to reduce the energy consumption of vehicles. If these regulations are adopted, this may give them a significant competitive advantage.

This is an approach that focuses on vehicle performance (even if Chinese energy is carbon-based). Tesla has entered from the top with top-of-the-range vehicles, imposing the idea that the EV must be a high-performance vehicle. This favours a race for technological power that does not go in the direction of frugality and optimisation of the ecological performance of vehicles. There is an orientation dimension and a regulatory dimension. The new players in the USA can easily raise funds, especially for projects that do not always succeed in terms of profitability, such as Uber. Paradoxically, they have means of action that European manufacturers do not have.

In a scenario where companies that fleet managers appear, the manufacturers can be suppliers of commodities in a dominant position This is the case of aircraft manufacturers, where the manufacturers have kept a very strong place in the value chain. They ensure safety and technological innovation. In addition, the conditions for optimising mobility and certification mean that public players retain a central place. Perhaps in this case manufacturers can migrate into a model of mobility operators.

Question: public authorities can also play a role in other models, such as robotaxies. This is the case of electric scooters, where there has been significant regulation. Can we think that a city will accept ten different robotaxi operators?

Answer: there are large-scale robotaxis experiments in the USA. What do we see? They are using local public actors to obtain authorisations to carry out their experiments. There is no real collaboration yet. Their model is this: in some cities it works, we know how to do it, we can propose this technology in other cities in the world. A powerful local authority could refuse them, or could accept them, but on condition that they adapt to their mobility model. Especially because it is a more flexible model than the existing mobility with buses.

Question: China could take a decisive advantage. Would we be moving towards less efficient, lighter electric vehicles? What is the car for the Chinese and could there be a step backwards/regression towards a low-cost vehicle?

Answer: Manufacturers have taken over the design of batteries. For the moment, battery manufacturers are far from taking the lead. However, Chinese battery manufacturers should not be underestimated. In the same way, the Chinese have stricter regulations. As a result, there will be a lot of EVs made in China, but not just Chinese brands.

Question: is EVs a red carpet for the manufacture of vehicles made in China? What will be the European added value of manufacturing EVs and batteries in particular?

Answer: where is the electro-chemical power of a car? In the cell. The Chinese industry has the upper hand in the extraction of ore, in China and elsewhere. At the same time, they are trying to limit scarce materials. The objective of Saft, a subsidiary of Total, is to use solid technology, while production based on liquid ion is taking place in China, Korea and Japan.

Question: Is there a disruption or not? The concept of disruption is ill-suited to talk about what is happening in the automotive industry. We observe the coexistence of technological changes, mobility systems, socio-economic systems, etc., which will take place over a very long term. Perhaps it is necessary to get rid of the theoretical framework of disruption. We will still be able to see a fleet of thermal vehicles for 20, 30 years, coexisting with a fleet of robotaxis, and different models of mobility. And perhaps the manufacturers will keep their hand, because they are the ones who keep their hand on the different stakes.

Answer: when I started this research I thought that electrification was going to change the architecture of the automobile industry. Do we have the right theoretical equipment ? We can say that there are internal and external factors, technological and non-technological, that are transforming the automobile industry. The question must therefore be asked to widen the debate beyond technological factors. We have seen many technological revolutions in the automobile industry. And each time, it is the car manufacturers who have been the winners. We must therefore give ourselves the means to widen the debate in order to analyse things in a more systemic way. Will there be a coexistence of several mobility models? Perhaps. We are heading towards a long transition, on the scale of 2035-2050. The technological breakthrough is not so fast. The autonomous vehicle is proof of this: it has taken more than ten years for industrial research to take this path and the results are not yet effective.

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