The latest European passenger vehicle emissions standard (“Euro5″) was introduced in September 2009. Since that date, in Europe it has been illegal to sell new vehicles that do not meet this standard. Older models that only met the Euro4 standard can only be exported outside Europe to markets with more lenient standards. Within Europe the cars have little value – they can only be disassembled in order to reuse the components – and this value is therefore below cost.

This situation alone raises the possibility that dominant carmakers in the other markets will already be very suspicious of Euro4-compliant automakers. But it can get worse, much worse. Imagine that the government in another market introduced emissions standards that the locally dominant carmakers were not meeting, but with which the Euro4 vehicles were compliant. Imagine that, to compound that, the local market had only recently introduced a new emissions standard so many vehicles were in the early phases of their marketing cycles and the automaker had not had much time to prepare for the new emissions standard.

So the consequence is that the locally dominant carmakers find that (part of) their range is no longer legally saleable before they have achieved payback, plus they do not have new compliant models waiting for release to fill the gaps. And so the Euro4 compliant automakers find a hungry market for their formerly almost-worthless cars.

Well from July 2010, China will require compliance with Chinese5 emissions standards. And guess what? Chinese5 is basically the same as Euro4. So vehicles that become unsaleable in Europe last year remain compliant in China whilst some competing models in that market will be withdrawn from sale. And guess what else? Chinese3 emissions standards were only introduced in July 2008. So some of the vehicles to be withdrawn may have only been available for two years.

So perhaps there will be an opportunity for China to complain about dumping?

At Vox Sapiens we are disappointed by a recent FT article which appears to show sloppy research. We have long admired the quality of the research and analysis in the FT compared to many other newspapers. However, today’s article appears to have taken an idea from an old article and repeated it almost verbatim, thereby misleading the reader. We are using this as an example of how it is important to be careful when using the Internet for research.

The article in question relates to Toyota – When sorry is the hardest word. In the article the author states:

A related weakness, says Hisao Inoue, author of Toyota Shock, a book on Toyota’s recent problems, is that Toyota’s relentless growth has amplified its conservative culture, by favouring bureaucratic conformity and discouraging the sort of negative views that are vital to anticipating disaster. “People with contrary opinions used to be respected, but today’s managers have succeeded by getting along,” he explains.

So as readers we probably assume that the recent problems referred to in that quote are the recalls that started earlier this year? Well, unfortunately these problems are not the subject of Inoue’s book. Consider the following from June 2009:

Hisao Inoue, author of “Toyota Shock,” a book that chronicles the automaker’s recent troubles, said Toyota sorely needs what he called “a philosophy” or “a spirituality” that a founding family member like Akio Toyoda might offer.

Source: Japan Times, Toyota counting on family ties

So Inoue’s book was published before June 26 last year. But Toyota’s recall-related problems began to become a public problem when?

Well here at Vox Sapiens we actually discussed this matter in a previous post. The post Toy-woe-ta – Looks like a business school case study in the making was published in January this year. In the post, we don’t name the exact date when the issue regarding floor mats preventing accelerator pedal release became big news. But a quick search shows that this was September last year – three months after the Japan Times article. (See, for example, Toyota/Lexus Consumer Safety Advisory: Potential Floor Mat Interference with Accelerator Pedal.)

So Inoue cannot be referring to the floor mat recall nor subsequent problems.

Sorry FT, but this just isn’t good enough.

We would have made these comments on the FT.com website against the article in question, but unfortunately this article appeared not to have comments enabled.

Powertrain 2020! The EV vision! The lust for lithium! The fuss about fuel cells! The automotive industry is alive with a debate over the replacement of the gasoline powertrain.

This is an extremely important debate, and will have major impacts on the strategic positioning of the OEMs. For example, what would happen if the future is rechargeble batteries and in the future the electricity supply companies give away vehicles in exchange for exclusive recharging contracts? Don’t believe it could happen? Look at the mobile phone handset industry.

But creeping up quietly is another technological shift that could have even more impact

Telematics is likely to completely change the way consumers choose, use and maintain cars.

Telematics will feed frequent, perhaps daily, maintenance data feeds to the dealer network where analysis will determine service needs in a far more precise manner than the current mileage-based approach. The data will also be used to predict imminent component malfunctions.

Telematics will support the driver with applications that are orders of magnitude more advanced than the existing satellite navigation systems. Want to take a break? Well just lock into an automated convoy.

Telematics will bring to automotive accident investigations what the “black box” has brought to aircraft accident investigations.

Telematics will enable usage-based insurance – and not just “how many miles?,” “where?” and “when?” but also speeds, severity of breaking, amount of skidding, etc. – indicators of driving style that might be indicators of propensity to be involved in an accident (let’s wait for the cries of “unfair” regarding whether or not these indicators really are predictive).

And where in the list of “telematics will” did I mention gasoline or internal combustion engines? I didn’t. The vast majority of the telematics enhancements are powertrain-agnostic and will be incorporated into future vehicles irrespective of their means of propulsion.

Add to this the fact that the vast majority of car drivers really don’t understand the technical details of their vehicles – they assess them on cost, looks, ride quality and user interface. Telematics could be the determining factor for the final element in the list of criteria.

If I wanted to predict the winners to dominate the next generation of vehicles, I would be seriously examining the telematics suppliers.

So Renault-Nissan and Daimler have agreed a cross-shareholding and cooperation on future technology. Here at Vox Sapiens we are not optimistic about this alliance.

Firstly, this seems very one-sided. New emissions standards is forcing Daimler to develop its small-car models (smart, A-class, B-class). So far it has made a right pig’s ear of anything below its C-class range, and is desparate for a partner that can help it. So this deal, if successful, helps to dig Daimler out of a big hole.

But Renault-Nissan have no similar burning platform. Both businesses will need to continue to cut costs to remain competitive, and one route is co-development of technology and even shared production. This agreement supports this option, particularly through Daimler’s engine technology contribution. But Renault-Nissan already has a lot of the necessary expertise in-house. Daimler’s engineers will add value, but not to the extent that Renault-Nissan adds value for Daimler in the small-car areas.

Second, the management’s comments don’t sound too confident about making the alliance work.

“The main difference is … that with Chrysler, we agreed on a merger but had no ideas about areas of collaboration, … This is just the opposite of what we did with Chrysler and I am very optimistic that the outcome will be the opposite as well,” Dieter Zetsche, Daimler’s chief executive, said.

OK, so this time Daimler is out of first grade. But second graders are not that mature. Will a 3.1% equity stake really be enough to influence Renault or Nissan as a shareholder? Probably not. And does a change in the value of a 3.1% shareholding in Renault and Nissan have a major financial impact on Daimler? Once markets recover, probably not. So getting value out of this deal is all about being able to influence the technical guys to work together. Daimler couldn’t do this when it owned all of Chrysler. What has happened in the intervening period to show that it can do it now, especially when it doesn’t have the management control to force cooperation?

And thirdly, and this concerns us greatly as another unknown for Daimler, the French government is able to control this agreement. Just this week, Christian Estrosi, the industry minister said: “It is a very strong undertaking of the French president that from now on the state will take part … in the industrial strategy of Renault.”

Wow ! Not much requirement to read between the lines there.

Although a senior government official tried to assuage concerns by saying “We will have our say about Renault, but not about Daimler,” we don’t see how having a say about Renault’s participation in this agreement can not impact Daimler.

Earlier this year the French government appeared to alter Renault’s manufacturing strategy by blocking the transfer of Clio production from France to Turkey. What happens if the Daimler-Renault-Nissan alliance plans to produce a co-developed engine outside France during the next economic downturn?

And the French state will buy 0.55% of Renault as this agreement dilutes its stake and it drops below the 15% required to meddle to the degree that it wishes.

We will sit, watch and wait for the tears.

Toyota seems to have spent the last few weeks giving PR people a good example of how not to handle a negative story.

Firstly, there were the stories of floor mats preventing the release of the accelerator pedals and the potential for accidents.

Then, two days ago (on January 26, 2010), there is the halt to production in North America and the recall of another couple million vehicles.

But, worst of all, many consumers do not know that the latter recall is a separate problem because Toyota never managed to clearly articulate the fact. So many consumers do not appreciate that the reason for the second recall is nowhere near as dangerous as the first.

Let’s look at the state of the Toyota website on January 28, 2010.

http://pressroom.toyota.com/pr/tms/news.aspx is the main webpage (live).

Or click on the thumbnail to see a partial screenshot taken on January 28, 2010.

Shameful. Utterly shameful. Here at Vox Sapiens we have major concerns here that Toyota does not know the scale of its PR shortcomings and that there are big troubles ahead.

Vox Sapiens will be watching this closely and there may be more blog posts about Toyota.

Renault has announced that it will produce a cheaper vehicle than the Tata Nano, which is currently the world’s cheapest car.

This story from Autonews (registration required) reports that the CEO of Renault and Nissan, Carlos Ghosn, states that an agreement has been signed with Bajaj Auto whereby

• an ultra-low-cost car would be produced at a lower cost than the Tata Nano
• Bajaj would undertake design, manufacturing and sourcing
• Renault and Nissan would handle marketing (including in the Indian market) and provide technical support
• no changes were indicated to a previously signed ULC cooperation agreement whereby Bajaj would own 50% of the project, Renault and Nissan would each own 25%

Apparently Ghosn indicated that there would be a difference between price and cost, suggesting perhaps that the ULC would sell at the same price as the Nano, thereby giving Renault, Bajaj and Nissan a better margin than Tata’s. “I can tell you the cost of this car would be lower than any car today made in India,” said Ghosn.

Here at Vox Sapiens, we have already written about the Nano, and how it might change the auto market in our Here comes the Nano tax article.

Additionally, General Motors plans to launch a small car for India next year, and Toyota plans one the year after.

These ULC initiatives only confirm our view that ultra-low-cost vehicles are going to cause a dislocation in the automotive industry.

Ghosn only confirmed that the ULC will definitely be sold in India, although he did state that exports will be a possibility. We don’t understand the reluctance of OEMs to consider the developed world market for these vehicles, especially in the near future where such ULC offerings may be the only affordable options for many families.

Dr Dieter Zetsche, CEO of Daimler AG (that produces Mercedes-Benz and Smart) is reported in Automotive News to have said of electric cars being on the immediate horizon that “we are at that tipping point now.”

Really? I disagree for several reasons. …

Insufficient range

How far can an electric vehicle travel between charges? About 80 km (50 miles)? That’s less than an hour on the open road, and a bit more in slower-moving urban areas. For many people that is not enough for the daily round-trip commute to work. So if you want a quick journey to visit the relatives who live just 170 km (105 miles) away (less than two hours down the freeway/motorway/autobahn), that means two charges on the journey there and two on the way back. Is that practical. A resounding NO.

No charging infrastructure

So we need to stop on the freeway every 80 km (50 miles).

Existing gas/petrol/filling stations are not equipped with charging mechanisms. How long will it take to roll out a complete infrastructure upgrade? A partial upgrade is no use – what do I do if I need to charge my vehicle every 80 km and the upgraded charging stations are located 100 km apart?

And I’m not sure that every freeway has filling stations every 80 km. So new buildings are also required, or signposted diversions into local charging stations are needed. How long will it take to build these new stations? And how economic will the business model become after the new stations cannibalize the non-fuel sales from the existing stations?

An alternative charging/refuelling process is required

How long does it take to refill a vehicle with gas/petrol/diesel? A couple of minutes?

How long does it take to recharge an electric vehicles’s battery pack? Much more than two minutes. Hours. Although I have heard that technology is advancing and super-fast charging techniques are being honed. Thankfully the existing filling stations tend to be hooked into the high-power grids that can deliver, say, 100 amps at 440 volts. But this sort of high-speed charging will never be possible for home-based use.

An alternative approach would be removable battery packs. You pull up at a charging station, underneath a hoist, and your existing battery pack is lifted out and a new pack is lowered in.

There are health and safety issues here to be overcome – but if we can allow people to squirt highly flammable liquids out of nozzles on pressurised hoses, then I doubt we will be stumped by an acceptable approach to lifting battery packs.

And another issue is to ensure that new packs are not removed and replaced by old ones, leaving the system overly expensive whilst the people responsible find themselves with high quality and readily saleable goods to quietly slip over the border into a different country.

The media report that General Motors was loathe to sell (a full or partial stake in) its European Opel operations to the Magna consortium because it is concerned that this will provide a conduit via which GM’s intellectual property (“IP”) might end up in the hands of GAZ, a competitor to the Chevrolet brand in Russia. Today the media report that GM has agreed to sell to the Magna-led consortium, but that there are conditions attached to the sale. I find this approach somewhat strange, and wonder whether it is a smokescreen.

We also read media reports that Ford is concerned about the possibility that a Chinese company (Geely being the most commonly quoted) might buy (a stake in) Volvo Cars as a mechanism by which to acquire automotive IP. Furthermore, Ford is reported to have concerns about Magna, which is one of Ford’s major suppliers too, owning a rival to Ford’s European operations (although Reuters reports that Magna co-CEO Donald Walker recognizes the need for “a clear barrier between the parts and car companies”).

For many years, the greater portion of automotive IP has not been developed and owned by the OEMs. Most IP sits in the supply chain. The OEMs work with the suppliers to define requirements for new parts, and the suppliers develop the IP as part of their work in producing these new parts (in fact, the failure to take advantage of this situation is one key reason behind the weakness of many suppliers, but that’s a story for another blog post).

The skills and knowledge in the OEMs revolve around:

1. Supply chain management – managing a cascaded supply chain of hundreds of suppliers providing tens of thousands of components is an enormous challenge. There might be some program management IP here, but very little automotive product IP.
2. Sales and marketing – the OEMs have done a great job of keeping their suppliers’ brands out of the general public’s awareness. Whereas, for example, Dell and HP have been unable to resist the “Intel Inside” initiaitive, the OEMs do not have to contend with “Denso Inside” or “American Axle Inside” or “Bosch Inside” slogans. As a result, only the automotive afficionados are interested in the source of components when buying a car.
3. Channel logistics – predicting demand, having the right models, with the right attributes (engine size, color, extras, etc.), in the right place at the right time. The performance of the Detroit 3 in this respect might also be the subject of another blog post.

So why do I think this is a smokescreen?

1. It is very difficult to protect product IP – your competitor only needs to purchase your product and dismantle it to discover 99% of the product IP that is embedded in it. Process IP is another matter, of course, but …
2. Russian tax laws make it advantageous for OEMs to supply CKD/SKD kits that are reassembled in Russia (whether this is the approach taken for Chevrolet and/or Opel vehicles, I don’t know), making it easier to determine the later-stage process IP. Furthermore, more assembly process IP can easily be obtained by luring away two or three key personnel.
3. Opel is the technology source for GM’s small car platform, which possibly represents GM’s future growth strategy. Does GM want to risk this strategy by releasing ownership of the technology to another industrial player?
4. Without Opel, GM ceases to be a global company. In particular, Russia is a market with a huge potential. And if GM loses control of Opel, what prevents the new owner targetting Russia and seriously affecting Chevrolet? At present, GM has the opportunity to ensure that Opel and Chevrolet present complementary product ranges in the Russian market; a new owner for Opel is likely to ensure the establishment of competitive product ranges.
5. By selling to a financial buyer, GM has the opportunity to buy back into Opel at a later stage when its finances are in better shape. Would an industrial owner be prepared to sell (at a realistic price)?
6. Magna, as the owner of Opel, will obviously become the preferred supplier to Opel. With Opel and the remainder of GM sharing many components (especially for the new small car platform), this gives Magna immense additional leverage over the remainder of GM.

Why might GM have a point?

In the interests of balance, here are some reasons why GM and Ford might be right to be concerned.

1. Shanghai Automotive Industry Corp (SAIC) bought the rights to the 25 and 75 models when MG Rover Group collapsed (it bid for the entire group but lost out to Nanjing Automobile). SAIC then transferred the assembly from UK to China where the same cars are assembled at a lower cost (see this Reuters blog). GM and SAIC have a joint venture, so maybe GM has seen at first hand some of the tricks used to transfer IP.
2. A Magna-owned Opel may be less concerned about IP for Opel components being utilized for parts destined for other OEMs, because the benefit still accrues to Magna

The Tata Nano is likely to change the lives of an immense number of families in the developing world, with the possibility that the Indian car market will increase by 65%, according to Standard and Poor’s Indian arm, CRISIL (source India Times). And much has been written about Ratan Tata’s dream of migrating Indian families from two wheels to four.

But how about the developed world? I believe that it will be disruptive here too – by fundamentally altering the tax applied to private vehicles.

Car ownership patterns

The Tata Nano promises to bring a fundamental change to car ownership in the developing world. It is cheap enough to appeal to a new group of car owners for whom no other car is affordable. However, I believe that the Nano is also cheap enough to be affordable as a second, or third, or even fourth car, for developed world families. And it comes with the benefits of new car warranties, rather than the potential cost of breakdowns that accompany used cars that can be found at the same price.

The basic model, the Nano BSII, sells in Delhi, India for about 115,000 Rupees (about 2,400 US dollars), and for between 5% and 10% more in most other Indian cities (source Tatamotors.com). Expectations are that the “Nano Europa” prices in the developed world (meaning mainly Europe, rather than North America) will be a little more than double this – so a westerner will be able to buy one for about 6,000 US dollars (about 4,500 Euros). And the Nano is very economical to run, with the extremely good fuel economy that one might expect from a car that only weighs the same as a Formula One Grand Prix car (including driver).

How many developed world households will replace public transport usage by an additional car at this price? How many parents will be able to provide their eighteen-year-old child (17 in UK, Ireland, Poland) with a Nano so that the child no longer needs to ride the bus to school/college/university, or catch a lift with the parent?

A surge in vehicle ownership

And what will be the effect of all of these additional cars?

Well there have been several comments on the web about the potential gridlock that the anticipated traffic volume surge will create. And also many comments about the environmental effect of the additional exhaust gases, for example:

• The New Scientist Environment Blog
• The Independent (a UK newspaper)

But there has been previous little commentary on how governments will react, particularly regarding fiscal matters.

Welcome the “Nano Tax”

I believe that the time is ripe for an “additional car tax” or “Nano Tax” as it could be called. I think that governments might seize the opportunity to portray green credentials and formulate a new approach to vehicle taxation. And the additional income will be most welcome as a contribution towards paying down the public debt mountains that the recession has given western economies.

For governments this is almost a “must win, can’t lose” story:

• too many additional cars on the road, outpacing road building programmes, will lead to congestion for everybody – so people will support measures that reduce the number of “other drivers”
• governments need to meet the requirements of the Kyoto Protocol – and the notable absentees from the list of signatories, USA and Australia, are not the most attractive markets for Nanos and other ultra-cheap but very small cars, due to their low population densities and requirements to travel long distances
• a tax on additional vehicles does not penalise the poorer families that can only afford one car – in fact left-wing governments could portray this as a redistributive tax if the tax for the primary car was reduced

Forms that the Nano Tax may take

A substantial amount of mathematical modelling would be required to predict the impact of the Nano and how vehicle tax changes might alter the impact. Would a 30% increase in tax be required to avoid a 10% increase in the number of vehicles on the average European highway? I don’t know. My gut tells me that Europe’s citizens will be quite inelastic to changes in the tax charge when offered such a radical reduction in the cost of vehicle ownership. Thus I expect that a major increase in vehicle tax will be required to halt the increase in vehicle ownership, and that governments will need to reduce the tax on the primary vehicle in order that the overall vehicle tax revenue doesn’t increase so much that the governments are accused of profiteering.

And so where will the increase in tax fall hardest? The upper working class and the lower middle class. These groups, already comprising a large number of two-car families, and dependent upon two cars, will not have the disposable income to handle a radical change in second-car tax policy. The lower working class will probably benefit, if the tax on the first car is reduced, due to the low rate of second vehicle ownership. And the upper middle class and upper class have enough disposable income to absorb the additional tax.

So if you are in these social classes, enjoy your second car while you can. In 2011 or 2012 you might find it becoming a luxury that you have to live without.