The Automobile Industry is changing and it will affect Alberta

“McLaren is commited to having a 100% hybrid lineup by 2025 and has begun researching an all-electric auto despite concerns that clients might reject anything lacking the rumble of an internal combustion engine. “

  • McLaren Rolls out a GT to Rival Porsche 911 and Aston Martin, by Christopher Jasper, Bloomberg.com, July 8, 2019,

 

As an Albertan, I look at the changes moving through the automobile industry with apprehension, fear and dread. Fiat Chrysler is the eighth largest car company in the world; and in May of this year, Fiat Chrysler made an ambitious bid to create the third largest automobile company in the world. It announced a bid to merge with Renault.

 

This bid was interesting for many reasons. Renault, as an example, has a weird ownership structure. Fifteen percent of Renault is owned by the French Government. However, the French Government’s equity stake (i.e. 15%) represents 30% of the voting equity.

 

Moreover, Renault is also partially owned by Nissan Motors. This partial ownership is due to a partnership that has come to include Renault, Nissan and Mitsubishi Motors. The partnership means that Renault owns a controlling share of Nissan (43.4%), while Nissan has a non-voting 15% stake in Renault and the controlling stake in Mitsubishi Motors. This partnership agreement allows Renault-Nissan-Mitsubishi Motors have the ability to share lots of technology and production capacity, while each of them continues to be separate firms. So while Renault is the 9th largest car company on its own, together with its partners, they are considered to be the largest automobile “firm” in the world.

 

Now if the Fiat Chrysler- Renault bid would have be consummate; in theory, the Renault-Nissan-Mitsubishi partnership wouldn’t have changed. Only one thing would change: the European partner (i.e.

Fiat Chrysler- Renault entity) would have become larger. Instead of being the 8th and 9th largest car companies in the world, the Fiat Chrysler- Renault entity would have become the third largest automobile company in the world.

 

At this point, most Albertans are probably saying two things: what is the big deal and what does this have to do with Alberta? Well, both are answered with the reasons for the merger: Fiat Chrysler’s and Renault’s leadership thought that a merger was the best way to take on the coming burden twin burden:  driverless car and the electrification of cars. Yup, while companies both have been dealing with these issues on their own, the leadership of Fiat-Chrysler and Renault felt that they needed to work together to deal with the coming onslaught.

 

To understand that thinking let’s paint a picture. Most automobile company executives know that the electric vehicle revolution is coming and they know that it is coming in spite of the wishes of American Policy Makers. Or put differently, Chinese domestic policy is pushing the change. China is now the world’s largest automobile market. In 2018, 23 million cars were sold there. So while, Western countries are approaching peak car ownership, there are still hundreds of millions of Chinese families that don’t own a car at all – let alone two or more.

 

In fact, China has recently stated that they want to move towards electric cars and that they would like to be the leaders in the field. Consequently, the Chinese Government has been creating an environment where electric cars are preferred. Therefore, by 2015, electric vehicle sales in China had surpassed U.S. levels. While, by 2018, the Chinese electric automobile market topped 1.1 million cars. This means that more than 55% of all electric vehicles sold in the world were in China and those numbers are only going higher. Compare that to the American market, where only 358,000 electric vehicles were sold in the same year.

 

However, this is only the beginning. In addition to government subsidies, the Chinese are bringing in new regulations. For example, all automobile manufacturers will be required to sell a certain amount of electric cars into the market. Therefore, it is easy to see that China will hit their only goal: having 20% of their automobile market using electric engines by 2025.

 

Given that many large foreign car companies are already in the Chinese markets, many of them are now making large investments into China and their electric car divisions. Consider Volkswagen. They sell 40% of their output in China. Considering the diesel engine fiasco from a couple of years back, if China wants to have lower emissions, what choice does Volkswagen have? They just have to push for the development of electric vehicles.

 

If we bring this conversation back to Alberta, one can see an obvious problem: a worldwide drop in the desire to purchase our main exports. Society’s transportation needs supplies one of the major demand drivers for oil products. Oil has many uses in a modern internal combustion car. Oil is used to make, for example, transmission fluid, brake fluid, engine oil and gasoline/petrol. Now, we know that the modern internal combustion car has become more efficient and has used less oil. We also know that the internal combustion engine will become even more efficient. Over the next few years, gas powered cars will move from 20% to 40% efficiency. This in itself will cause a market glut for oil.

 

However, China’s push for electric cars will mean that that rate of efficiency will jump and it might jump exponentially. Consequently, as China pushes to have more hybrid and e-cars, there will be more oil left on the world market.

 

For, Alberta, this trend will have two corresponding and equally devastating effects. Firstly, if China – the world’s largest car market – is pushing for more electric vehicles, this will mean that the cost of producing electric vehicles will likely drop around the world. In 2005, e-vehicle battery costs were over $1000 USD per kWh, while now they have dropped to $410 per USD kWh. Some leading lights, like Tesla and Nissan, are talking about battery costs of US$300 per kWh. While, by 2022, batteries cost should be about $200 USD per kWh. If the analysts are right, the cost of electric car batteries may be as low as $7,500 today and move to $5,000 by 2022. With battery costs dropping, one could likely see that the purchase price for an electric car will soon be competitive to an internal combustion car. With electric cars being cost competitive to internal combustion cars, electric cars would no longer be exotic or scary. Without the additional costs, electric cars would also no longer require government aid. Thus, the average car consumer will increasingly look at an electric car as just another model. That type of acceptance will keep even more oil on the market; either leaving prices as they are or pushing them lower. .

 

However, as an Albertan, there is something even more worrisome. As China pushes car companies, the batteries, maintenance and other costs associated with electric cars will drop. This means that Western Governments might keep, or even move, their drop dead transition dates. Up until this point, European and North American Governments proposed dates to end the sale of internal combustion engines but it was very “showy”. Governments didn’t want to use a heavy hand to make transition happen. But with China’s public policy actions, Western Government action now becomes to accomplish. From Norway to Scotland, from France to Germany, dates like 2025, 2030, 2040 and 2045 were used. If China succeeds in their aims, the infrastructure for an e-car transition would have been created. Consequently, it is possible that in 15 years Alberta Oil will not fuel our transportation network. If Amy Myers Jaffe and Lewis Fulton are correct and 26% of oil used worldwide is used by passenger vehicles, Alberta could see dramatic changes in a decade. (How electric vehicles could take a bite out of the oil market, the Conversation.com, July 26, 2017 9.58pm EDT Updated August 3, 2017 11.51am EDT)

 

Imagine, for a second, that the nations of the world don’t change their public policy. Europe, depending on your definition, has about 8 million cars; and from 2025 onwards, countries like Norway, France, Germany, Italy, Spain, and the UK, will begin to enforce bans on the sale of internal combustion cars. India, Taiwan, Sri Lanka, California, Mexico City, Quebec and BC will do the same starting in 2030. Cumulatively, these jurisdictions regulate about 40% of the world’s cars. Assuming petrochemical companies the extra capacity, the oil market will decrease by 10.4%. Imagine what that will do to oil prices around the world.

 

If you can’t imagine, I can provide you with an illustration. Dr. Jean-Paul Rodrigue, Professor of Geography at Hofstra University, has compiled some numbers about oil production. (https://transportgeography.org/?page_id=5944) From 1900 to 2016, with one exception, we have seen oil consumption go in one direction: up. That one exception starts with a plateau in 1976, it moves to a fall in 1979 and it recovers in 1989. (https://ourworldindata.org/energy-production-and-changing-energy-sources). According to Dr. Jean-Paul Rodrigue’s chart, a 14.6% drop occurred. If one remembers, the stories of Alberta in the late 1970s & early 1980s, one can understand the magnitude of the challenge.

 

As an Albertan, I am worried. If, as I believe, government is supposed to provide the most benefit to the most people, the Government of Alberta should be doing more. Reasonable supposition tells us that as other countries move away from fossil fuels, Alberta will have fewer opportunities to develop itself. Consequently, we need to move now to change our economy. The question is when will our leaders recognize this problem and act to intervene, so that future generations of Albertans will continue to enjoy the prosperity that we do.

 

 

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