Green Car Future 2020: Scenario Implications For The European Automotive Industry

Cover Image: Copyright BMW AG, Munich, Germany

GREEN CAR FUTURE 2020

SCENARIO IMPLICATIONS FOR THE

EUROPEAN AUTOMOTIVE INDUSTRY

S a i l e s h P a t e l

M B A R e s e a r c h P r o j e c t

C a s s B u s i n e s s S c h o o l , L o n d o n

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GREEN CAR FUTURE 2020:

SCENARIO IMPLICATIONS FOR THE EUROPEAN AUTOMOTIVE INDUSTRY

Presented by:

Sailesh Patel

Reg. no. 100019537

In partial fulfilment of the:

Master of Business Administration (MBA) degree

Submitted for:

Business Mastery Project

Presented to:

Dr Mohan Sodhi

Cass Business School

Date: 30th September 2011

Word count: 14,435

GREEN CAR FUTURE 2020: SCENARIO IMPLICATIONS FOR THE EUROPEAN AUTOMOTIVE INDUSTRY

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Preface

This business research project on „Green Car Future 2020: Scenario implications for

the European Automotive Industry‟ has been conducted in partial fulfilment of the

full-time MBA programme at Cass Business School, City University, London.

The intent of this project is to provide advanced strategic foresight for the European

automotive industry, by exploring critical mid to long-term forces likely to affect

industry competitiveness, and developing plausible 2020 scenario world-views which

challenge existing policy and business strategies to facilitate enhanced strategic

options within a range of potential „green car‟ futures.

It is envisaged that the real test of this research‟s value will be its ability to prove

relevant to business leaders not only in 2011, but in each year to 2020, by moving

beyond historically-based trends and forecasting to provide robust scenario-based

insights that enable valuable strategic planning, thinking, and action for a globally-

competitive Europe.


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Contents

Preface ................................................................................................................................ 3

Definitions ............................................................................................................................ 6

Executive summary............................................................................................................. 7

1 Introduction ................................................................................................................ 12

2 Research methodology ............................................................................................ 14

2.1 Target stakeholders ............................................................................................ 14

2.2 Research objective ............................................................................................ 15

2.3 Research outline ................................................................................................. 16

2.3.1 Research question ....................................................................................... 16

2.3.2 Research method selection ....................................................................... 18

2.3.3 Research method approach ..................................................................... 22

2.3.4 Data collection and analysis ...................................................................... 27

2.3.5 Research limitations ..................................................................................... 31

3 Driving forces analysis ............................................................................................... 33

3.1 Scope .................................................................................................................. 33

3.2 Method ................................................................................................................ 42

3.3 Trends and uncertainties .................................................................................... 58

4 Scenario development ............................................................................................. 63

4.1 Mapping uncertainty ......................................................................................... 63


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4.2 Scenarios ............................................................................................................. 65

5 Scenario implications (2020) ..................................................................................... 69

5.1 Opportunities ...................................................................................................... 69

5.2 Risks ...................................................................................................................... 71

5.3 Opportunity horizon ............................................................................................ 74

6 Recommendations (2011) ........................................................................................ 75

6.1 CAPIRE stakeholder groups ............................................................................... 75

6.2 European automotive industry .......................................................................... 78

Appendix ........................................................................................................................... 80

Bibliography ...................................................................................................................... 82

Acknowledgements ......................................................................................................... 86

About the author .............................................................................................................. 87


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Definitions

ACEA European Automobile Manufacturers‟ Association

BRIC Brazil, Russia, India, and China: ostensibly referred to as the

Emerging Market economies

CAPIRE Coordination Action PPP Implementation for Road-transport

Electrification

CARS21 Competitive Automotive Regulatory System for the 21st century

CORDIS Community Research and Development Information Service

EC European Commission

EPoSS The European technology Platform on Smart Systems integration

ERTRAC European Road Transport Research Advisory Council

EU European Union

EU27 The 27 member states of the European Union, comprising Austria,

Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia,

Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,

Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal,

Romania, Slovakia, Slovenia, Spain, Sweden and the United

Kingdom.

Europe 2020 The EU's growth strategy for the coming decade, aimed at

making the EU a smart, sustainable and inclusive economy.

ICE Internal Combustion Engine

Intelligent Car Initiative EU programme aimed at accelerating the deployment of

intelligent vehicle systems on European and international

markets.

LCV Light Commercial Vehicle

NAFTA North American Free Trade Agreement: trilateral trade bloc

comprising North America, Canada, and Mexico

OEM Original Equipment Manufacturer

PPP Public-Private Partnership

RTD (Programme for) Research and Technical Development


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Executive summary

Energy access and mass-adoption of the automobile have shaped our

environments and the way we live for much of the 20th century, creating unforeseen

opportunities for a global automotive industry to prosper and fail in often unforeseen

ways.

In 2011, the European automotive industry stands on the brink of uncertain and

potentially unprecedented change – the purpose of this report is to explore these

complex global and industry unknowns and explain possible outcomes in the form of

plausible, bounded industry scenarios, which will challenge incumbent and new

businesses to test the resilience of planned strategies, and to develop readiness and

recognise opportunities in alternative futures.

This report is presented for the interest of the 14 consortium members of CAPIRE, a

public-private research initiative within the framework of the European Green Cars

Initiative, one of the three Public-Private Partnerships (PPP) of the EC European

Economic Recovery Plan announced in 2008.

Due to time-constraints and limitations on publicly-available information, this report

predominantly addresses passenger car scenarios; however it is envisaged that the

analysis and implications will be of value to all members, irrespective of market

interest.

Europe‟s automotive industry faces paradigm challenges over the next decade,

during which four certain global macro forces prevail: imbalanced population

growth, resource demands, rebalancing of economic power, and universal access

to information. However, uncertain and dynamic forces – political, social,

technological, and many more – can have a profound impact on decision-making,

hence strong differences of opinion about the future prevail and uncertainty is high,

relative to business‟ ability to predict or adjust. These differences arise because trend

and forecasting methods are limited by their bias towards statistical mapping of

known relationships, with limited incorporation of new and unexpected dynamic

forces.


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There are therefore clear strategic benefits to moving beyond short to mid-term

methods, namely by mapping the development of known trends and the influence

of critical unknowns and uncertainties, such that the most likely disruptive industry

scenarios are explored, and their resultant implications used to test and develop

future policy and business strategy.

Proven methods of scenario planning were employed, adapting economic models

of national competitiveness and evidence-based research to identify and relate

critical industry driving forces and their outcomes. The following four „Green Car

Future 2020‟ scenarios were thus identified as most likely to influence the

international competitiveness of the European automotive industry:

‘Renaissance 2.0’: The European personal transport market becomes

the most sophisticated and demanding in the world, fuelled by

effective wealth generation strategies and innovation through

products and services; by comparison, the rest of the world are

suffering under the might of shared financial liabilities, whilst their

citizens face high unemployment and provide only undifferentiated,

price-sensitive markets.

‘Global Wealth’: In this scenario, the emerging economies transition to

a near-developed state, and connectedness between the East and

West facilitates effective wealth generation and redistribution. There is

much homogeneity between markets, and the concept of „national‟

automotive manufacturers becomes outdated as products and

service offerings merge to be provided by large multinationals.

‘Advanced Austerity’: Financial shocks hit hard and persist across the

world‟s economies, slowing growth and refocusing governments on

their own liabilities and debts. The international automotive industry

becomes an uncompetitive environment, except for small

entrepreneurs realising benefits from price-sensitive consumers.

‘Yin Yang’: Wealth from the West is redistributed to the East, as BRIC

nations collaborate to realise liberal and sustainable business

environments, fuelling indigenous wealth generation in products and

services. In contrast, the US and Europe are burdened by financial

shocks, poor access to energy, and a loss of knowledge workers to

opportunities in the East.

These scenarios are not predictions of the most likely automotive future, however

they provide a robust indication of how far the 2020 competitive landscape may –

due to critical driving forces - sustainably differ from that of 2011.


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Implications for the competitiveness of the European automotive industry were

derived both from the scenario-building process, which is a strategic learning

process in itself, and from the final scenarios. Three key factors were identified as

most influential to the relative competitiveness of the industry: 1. Demand of the

European market; 2. Related and supporting industries (e.g. products and services);

3. Factor conditions, such as infrastructure and advanced conditions such as R&D.

Demand was predominantly influenced by the sophistication and size of market,

and identified to be the single largest determinant of competitiveness; one whose

relative development across international borders is significantly impacted by global

uncertainties. The future competitiveness of the European automotive industry is

therefore considered largely unknown. Faced with increasing competition from

emerging nations supported by government programmes, consideration must also

be given to the mutual reinforcement of international and national competitiveness.

Furthermore, as the automotive industry aims to transition into delivering products

and services, it must recognise that competitiveness in services may require different

factors to manufacturing competitiveness.

Accordingly, the top three scenario opportunities for each of the CAPIRE

stakeholder groups were identified as:

• Product and service innovation

• Development of supporting industries

• Manufacturing and delivery innovation

Automotive Manufacturers and Suppliers

• Realisation of integrated transport model

• Sustainable energy efficiency gains

• Enhanced quality of life

City Transport Authorities

• Retail model innovation

• Supply chain innovation

• Lifestyle market penetration

Electricity Suppliers


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Conversely, the top three scenario risks for each of the CAPIRE stakeholder groups

were identified as:

Hence, recommendations for immediate action, with the intent of maximising value

capture opportunities and minimising risk consequences, both now and in the future,

were identified for CAPIRE stakeholders as below:


I. Develop affordable, integrated personal transport solutions

II. Deliver differentiated products and services

III. Share innovation risk in non-core aspects; design and develop

for flexible breakeven volumes


I. Develop indispensable transport infrastructure and services

II. Improve accessibility and affordability whilst monetising service-

delivery capabilities

III. Maximise efficiency through integration, and learn from the best


I. Develop a sustainable relationship with consumers lifestyle

energy needs

II. Provide a differentiated, integrated energy service through

suitable channels

III. Develop capacity and flexibility

• Differentiation and affordability

• Investment costs

• Capacity and service quality


• Transport capacity

• Market cannibalisation

• Living costs


• Capacity utilisation

• Supply chain disruption

• Retail model resilience



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This report concludes by advising all European automotive industry stakeholders to

consider the following factors in order to enable 2020 competitiveness:

Future planning

Strategy

Operations

Competencies

Tracking events

Overcoming resistance

Through deeper understanding of these scenario implications, and implementation

of suggested recommendations, Europe‟s automotive industry will be better

prepared to innovate and develop agility to compete in the green car future of

2020 and beyond.


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1 Introduction

In an increasingly unpredictable, complex world, this report aims to answer the

strategic dilemma that is foremost for the European automotive industry: How to

compete in the green car future, 2020?

Presented with long-term uncertainty, industries and businesses tend to adopt one of

three strategic postures (Knowledge@Wharton 2009):

1. Do nothing (the „zero-future‟ option): caution rules, no attempts

are made to analyse, anticipate, or predict beyond the short-

term, and major decisions are deferred until the fog of

uncertainty clears.

2. Take a calculated bet on one particular future: a clear message

is presented, and bold action is taken that could play out as

brilliant, or fail through wishful thinking.

3. Separate knowns and unknowns, in order to explore possible

futures: scenarios, not predictions, are developed, focussing on

the development of agility and options.

Though postures (1) and (2) may prove successful, the risks for businesses committed

to such approaches are high, especially if the competitive business environment

undergoes irreversible and rapid change.

Hence, whilst acknowledging that „No one can definitively map the future, but we

can explore the possibilities in ways that are specifically intended to support

decision-making‟ (Shell International BV 2008) businesses that adopt posture (3) are

more likely to be competitively enabled to reduce risks, and expedite effective,

informed strategic decisions in order to maximise potential benefits.

To provide maximum business value to the European automotive industry, this

research will be split into four principal sections:

Developing an optimal research method to identify key driving forces and

produce relevant, applicable scenarios.

Understanding the key trends and driving forces of change in the

automotive industry, and identifying the impacts and uncertainties.


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Constructing scenarios by mapping uncertainties, identifying themes, and

describing significant scenarios.

Determining scenario implications and developing strategic

recommendations for the European automotive industry.

In doing so, it is hoped to provide a learning process; one which helps broaden and

deepen the understanding of stakeholders, and permits improved knowledge of the

trends and uncertainties which could impact the competitiveness of the European

automotive industry of 2020.


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2 Research methodology

2.1 Target stakeholders

This research is provided for business decision-makers in the European automotive

industry, with specific regard for the 14 consortium members of CAPIRE

(Coordination Action PPP Implementation for Road-transport Electrification), a

public-private research project within the framework of the European Green Cars

Initiative (EGCI), one of the three Public-Private Partnerships (PPP) of the EC

(European Commission) European Economic Recovery Plan announced in 2008.

CAPIRE aims to produce a dedicated roadmap based on an elaborated and deep

analysis of R&D needs, respective milestones and supporting measures. The project

focuses on the definition of potential flagship projects which could foster the

competitiveness of the European Automotive Industry in the domain of Transport

Electrification as well as in the development of technologies and services to reduce

the European CO2 footprint. (CAPIRE webmaster n.d.)

The 14 CAPIRE consortium members, home countries, and their main business

activities are summarised in Table 1.

CAPIRE member

Home

country Business activities

RENAULT France

Car, light commercial vehicle, and truck

manufacturer

AVL LIST Austria

The world's largest private independent

powertrain and instrumentation systems

developer

CRF Italy

Centro Richerche Fiat - Fiat Automobile

Group's research centre

Volvo Technology Corporation Sweden

Volvo Group's main technology research

centre

VDI/VDE-IT Germany

Providers of IT innovation and technology

services across automotive and other sectors

Robert Bosch GmbH Germany

Suppliers of technology and services in

industrial, automotive, construction, and

consumer goods

VALEO France

OEM module and systems supplier to the

automotive industry

IBERDROLA Spain

Number 1 Spanish energy company, and

number 1 global wind power provider

http://www.renault.com/en/pages/home.aspx

https://www.avl.com/home

http://www.crf.it/en-US/Pages/default.aspx

http://www.volvogroup.com/group/global/en-gb/volvo%20group/our%20companies/volvotechnologycorporation/Pages/volvo_technology.aspx

http://www.vdivde-it.de/about-us

http://www.bosch.de/start/content/language2/html/index.htm

http://www.valeo.com/en.html?L=223

http://www.iberdrola.es/webibd/corporativa/iberdrola?cambioIdioma=ESWEBINICIO


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CAPIRE member

Home

country Business activities

Transport for London England

Transport authority and operator for London's

public transport network

Continental Teves AG Germany

Auto supplier, covering Chassis & Safety,

Powertrain and Interior

HIDRIA d.d. Slovenia

Climate and automotive components

supplier

Procter & Gamble Eurocor Belgium

Household and personal products

manufacturer

TÜV Rheinland Consulting

GmbH Germany

Product development, certification, and

approval services

SOLARIS Bus & Coach Poland

Family-owned bus and tram manufacturer,

including hybrids (60% export activity)

Source: Author analysis of member websites

Table 1: CAPIRE consortium members and business activities

2.2 Research objective

This business-focussed project, supplementing existing technology R&D programmes,

aims to inform and enable European automotive industry decision-makers

responsible for implementing the CAPIRE roadmap.

The importance of the European automotive industry to Europe‟s future cannot be

underestimated. Following the 2008 financial crisis, the EC‟s „Responding to the crisis

in the European automotive industry‟ publication recognised:

“With an annual turnover of €780 billion and a value added of over

€140 billion, it [the European automotive industry] makes a major

contribution to the EU's GDP. It exports far more than it imports, with a

surplus of over € 60 billion on overall exports of €125 billion. In addition,

the sector plays a central part in tackling many of the key economic,

social and environmental challenges faced by Europe today, such as

sustainable mobility and safety.” (European Commission 2009b, p.3)

Therefore, the research objective of this project is to develop and evaluate the

business implications of plausible mid to long-term global scenarios likely to be of

highest sustained impact to the European automotive industry.

http://www.tfl.gov.uk/corporate/default.aspx

http://www.conti-online.com/generator/www/de/en/continental/automotive/general/about_us/about_us_en.html

http://www.hidria.com/

http://www.pg.com/en_US/index.shtml

http://www.tuv.com/en/corporate/business_customers/vehicles_traffic_2/vehicles_traffic.jsp

http://www.tuv.com/en/corporate/business_customers/vehicles_traffic_2/vehicles_traffic.jsp

http://www.solarisbus.pl/en/


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2.3 Research outline

In order to distinguish relevant, sustainable outcomes which challenge and

constructively inform the future strategies of the European automotive industry, the

research process must be designed to efficiently and effectively explore critical

uncertainties.

The primary resources available for this project include but are not limited to:

Approximately 300 hours of MBA student time (40 hrs per week)

Academic supervision to direct research and review drafts

City University library resources

Publicly accessible information sources

In this section, a suitable research outline is determined by evaluating the five core

research elements illustrated in Figure 1.

Source: Author analysis Figure 1: Research outline process

2.3.1 Research question

The research question for this project has been formulated in consideration of the

goals of the CAPIRE programme, the challenges facing the European automotive

industry, and the value of existing prevailing research.

A comprehensive literature review was performed, assessing the scope of existing

industry, academic, and public policy insights, trends, and foresights (see

Bibliography). Although a wealth of near-term insights and opinions can be readily

discerned, uncertainty about the future is commonly discernible as mid to long-term

foresights providing limited strategic direction and comparability, as illustrated by

the EC‟s sectoral overview of the European automotive industry:

Research question

Research method selection

Research method

approach

Data collection and

analysis

Research limitations


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“In the medium-term, the technological competition in this industry is

set to intensify, with different fuel and energy concepts plus intelligent

transport playing a particularly important role. […] In the long-term, the

global market for motor vehicles is set to grow substantially” (European

Commission 2009a, pp.9–10)

From a business perspective, notable anchoring biases were observed, with

research tending to assume that a product-based retail model will prevail in future,

while incorporating the substitution of emergent „green‟ technological

developments and associated infrastructure to varying degrees. E.g. J.D. Power and

Associates 2010, Phil Gott 2008, Housely Carr 2011.J.D. Power and Associates 2010

Limited consideration is evidenced from published research for the substitution and

disruptive effect of alternative product, service, and transport models, or the

composite impact of political, economic, and social factors, for example.

Furthermore, consolidated research specifically evaluating the extent to which the

competitive position of the European automotive industry might be challenged is

notable by its absence.

Nonetheless, literature consensus is achieved on the core challenge facing the

global, and the European automotive industry – that of competing effectively in a

future in which sustainability and „green‟ (environmentally responsible)

considerations are no longer consumer preferences, but substantially business and

policy requirements.

Therefore, to inform and enable the European automotive industry, a timescale of 5-

10 years is identified as the strategic domain of critical uncertainty, urgently requiring

improved foresight to inform imminent mid to long-term competitiveness planning

and action (see Figure 2), hence the research question for this project is formulated

as: „Green Car Future 2020: Scenario implications for the European Automotive

Industry‟.


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Source: Jones 2010 Figure 2: Domains of strategic uncertainty

2.3.2 Research method selection

To determine an appropriate research method, the common nature of the

challenge facing leaders in the automotive industry must be understood.

Schoemaker‟s research identifies strong parallels with CAPIRE members‟ interests:

“Senior executives commonly ponder such questions as "What might

give us continued competitive advantage?" and "What new product

or markets should we enter and how?" Both questions go to the heart

of a firm's strategic vision. […] Knowing the answers constitutes the

difference between muddling through and running the business from

day to day with confidence and foresight.” (Schoemaker 1997, p.43)

Thus, the dilemma for business is one of developing an appropriate strategic vision to

enable corporate planning for action within a range of possible future scenarios. To

inform this strategy a variety of research methods may be utilised to provide future

foresight, including:

Statistical techniques

Decision analysis

Standard forecasting

Scenario techniques

Schoemaker‟s 1991 research describes extensively the limitations of statistical

techniques based on historically-derived, albeit complex models, which incorporate


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multiple known variables within a simplified view of the world, or decision analysis

examining the effect of one variable whilst holding others constant. His research on

standard forecasting observed that:

“forecasts are often wrong (Smyth, 1983; Zarnowitz, 1984, 1985),

especially when dealing with the macro environment (Page, 1982;

Leamer, 1983) […] The more stable the game, the more valuable

forecasts are; the more unstable the environment, the more scenarios

may be of help.” (Schoemaker 1991, p.551)

Pierre Wack (1922-1997), a successful practitioner of scenario thinking at Royal Dutch

Shell, similarly identified the core risks of relying on forecasts alone:

“Forecasts are not always wrong; more often than not, they can be

reasonably accurate. And that is what makes them so dangerous.

They are usually constructed on the assumption that tomorrow's world

will be much like today's. They often work because the world does not

always change. But sooner or later forecasts will fail when they are

needed most: in anticipating major shifts in the business environment

that make whole strategies obsolete.” (Wack 1985)

Put simply, these traditional techniques produce outcomes which are to a large

extent bounded by the influence of known variables. For example, Thomas Watson,

chairman of IBM, predicted in 1943, "I think there is a world market for maybe five

computers." informed by his bounding of the future using existing market models.

However, if presented with scenarios that identify relevant and critical uncertainties,

it is unlikely that business leaders should fail to recognise and understand outcomes

in alternative futures. It is therefore advantageous to develop scenario techniques

that recognise and incorporate critical uncertainties and their driving forces, and

bounds their potential impacts, opportunities, and risks in the form of relevant

scenarios.

Referring to Figure 3, mapping differing degrees of uncertainty, businesses can seek

to improve their knowledge of the future by:

Firstly, identifying and developing a better understanding of the impact of

known trends – stable driving forces that will affect us and others, which

we can predict quite clearly. e.g. population growth, universal data

access, etc.


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Secondly, identifying and developing a better understanding of the

potential impact and driving forces of unknown trends – unstable forces

that will affect us, but that we cannot predict clearly. e.g. the price of oil,

recessionary recovery, demand for raw materials, etc.

Thirdly, identifying uncertainties – relevant unknowns that could

significantly affect us - and developing an understanding of their potential

impact and driving forces. e.g. intelligent highways, government subsidies,

political succession, electromobility, etc.

Source: Author analysis Figure 3: Degrees of uncertainty

Scenario techniques can facilitate exploration of all the above degrees of

uncertainty, and to a large extent are concerned with the likely challenges and

outcomes of the unknown and uncertain. Though in use since the 1960s and 1970s, it

must be recognised that they are „a difficult technique to define and describe.‟ and

that their „very flexibility and widespread applicability seems to limit their general

acceptance in everyday organisational use.‟ (Verity 2003, p.186)

Furthermore, some practitioners (such as Shell) sometimes draw a distinction

between scenario thinking, which is aimed at the exploration of uncertainties, and

scenario planning, which is aimed at applying scenarios to support decision-making,

using probabilities, decision analysis, etc, to support other strategy methods.

Henceforth in this document, „scenario planning‟ will be used interchangeably to

refer to both scenario techniques of thinking and planning, as both elements will be

valuable in order to derive implications for the European automotive industry.

KNOWN

UNKNOWN UNCERTAIN


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Therefore, scenario planning to reduce uncertainty for the automotive industry

appears well-suited as a research method, as Verity, arguing for greater use of

scenario techniques in business environments that are increasingly complex,

changing, and global, notes Michael Porter‟s early advocacy of scenario

techniques to achieve competitive advantage:

“As Porter (1985) pointed out: „Every plan is based on an industry

scenario in one form or another, though the process is frequently an

implicit one‟. He was an advocate for practising scenario techniques in

strategy formulation. He recognised that the assumptions managers

used as background to generating their strategies were rarely made

explicit or challenged. By acknowledging the uncertainties, he foresaw

much improved strategy outcomes.” (Verity 2003, p.188)

Advancing Porter‟s research, Schoemaker further identifies industry and corporate-

level conditions favouring the use of scenario planning, as described in Table 2.

Source: Schoemaker 1997 p.48

Table 2: Business conditions favouring the use of scenario planning

Though these conditions may not reflect the views of all organisations in the

automotive industry, the symptoms have historical precedent and reflect the

uncertainties and difficulties increasingly likely to be felt by the European automotive

industry. Therefore, scenario planning is determined as an ideal research method to

achieve the objective of this project.


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2.3.3 Research method approach

Scenario planning is a flexible, non-prescriptive technique facilitating many different

research approaches, as its practitioners have noted, „There are different schools of

thought about what scenarios are for, how scenarios should be built and when they

should be used.‟ (Verity 2003, p.186)

Consequently, there are strong reasons why managers will resist or reject using

scenario techniques. Verity explains:

“One of the reasons why scenarios are not adopted more widely is this

divergent set of methodologies and the different emphases on

quantitative or qualitative input. It is difficult for managers to sift

through the different approaches and know, with confidence, which

one to adopt for which business issue.” (Verity 2003, p.187)

Hence, to effectively develop „Green Car Future 2020‟ scenarios and produce

implications that will be confidently received and used by leaders and managers in

the European automotive industry, this section will draw upon scenario practitioner

experience to clearly detail:

What the scenarios will be for;

How the scenarios will be built;

When the scenarios should be used.

What the scenarios will be for ____________________________________________________

The scenarios produced by this report aim to serve two primary business needs for

CAPIRE members and the wider European automotive industry:

1. Strategic thinking: by exploring and highlighting large-scale forces that

could push the competitiveness of the European automotive industry in

markedly different directions

2. Strategic planning: by providing scenarios that encourage decisions

made today to play out well across several different scenarios

The scenarios will provide analysis of the driving forces affecting the competitiveness

of the European automotive industry within a range of critical uncertain futures.


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Company-specific decision scenarios will not be within the scope of this project. It is

important to emphasise that the scenarios will not be a prediction of the most

probable futures, but will aim to serve as strategic tools to permit learning,

exploration, and decision-making, best expressed by Schoemaker‟s analogy:

“Suppose you are planning to climb a mountain. Corporate planning

of the past would provide you with a detailed map, describing the

predetermined and constant elements of the terrain. Of course, this

traditional planning tool is very valuable and, indeed, indispensable in

this case. Just as geographical mapping is an honored art and

science, so corporate mapping can be very useful. However, it is

incomplete. First, the map is not the territory, but an incomplete and

distorted representation (any two-dimensional map distorts the earth's

surface). Second, it ignores the variable elements, such as weather,

landslides, animals, and other hikers. The most important of these

uncertainties is probably the weather, and one option is to gather

detailed meteorological data of past seasons, perhaps using

computer simulations.

Scenario planning, however, goes one step further. It simplifies the

avalanche of data into a limited number of possible states or

scenarios. Each scenario tells a story of how the various elements might

interact under certain conditions. Where relationships between

elements can be formalized, quantitative models can be developed.

Each scenario should be evaluated for internal consistency and

plausibility. For example, high visibility and heavy snow drifts are an

implausible combination. Although the boundaries of scenarios might

at times be fuzzy, a detailed and realistic narrative may direct your

attention to aspects you would otherwise overlook. Thus, a vivid snow

drift scenario (with low visibility) may highlight the need for skin

protection, goggles, food, supplies, radio, shelter, and so on.”

(Schoemaker 1997)

How the scenarios will be built____________________________________________________

A typical scenario-building exercise, illustrated in Figure 4, requires the definition of a

core issue, scope, and stakeholders (to provide context and a „test of relevance‟),

followed by identification of trends and uncertainties, which are then developed

into scenarios by various means, and disseminated to permit strategic thinking and

planning.


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Source: Author analysis

Figure 4: Overview of typical scenario-building process

Numerous sources have been referred for guidance, however only Schoemaker

provides a comprehensive ten-step guide to scenario-building and dissemination,

which is adapted in Table 3 to provide an overview of the scenario planning

activities included within this project.

Scenario planning activity Implementation within ‘Green Car Future 2020’ project

1. Define the issues

Time frame: 2020 (incorporating changes in technology,

products, services, competition, markets, economies post-

2011)

Scope: scenario implications for the European automotive

industry

Issues: how to compete in the „green car‟ future 2020 –

understanding uncertainty to industry risks and opportunities

2. Identify the major

stakeholders See Section 3

3. Identify basic trends

4. Identify key uncertainties

5. Construct initial scenarios

See Section 4

6. Check for consistency

and plausibility

7. Construct learning

scenarios

8. Identify research needs See Sections 5 and 6, including scenario implications and

Define focal issue

(test of relevance)

Identify trends and uncertainties

Develop scenarios

Disseminate scenarios to stakeholders

Use scenarios for strategic thinking and planning


25

Scenario planning activity Implementation within ‘Green Car Future 2020’ project

recommendations

9. Develop formal models Not in project scope

10. Create decision

scenarios Not in project scope

Source: adapted from Schoemaker 1997

Table 3: Scenario planning activities implemented in the ‘Green Car Future 2020’ project

The main purpose is to identify dynamics of critical uncertainties and potential

business environment states that might affect the competitiveness - for better, or

worse - of the European automotive industry. Table 4, adapted from Schoemaker‟s

experience of developing and applying scenarios in industry, provides the criteria

that will be used to direct and evaluate the quality of the final „Green Car Future

2020‟ scenarios.

How can you assess if your scenarios are good ones?

1. Objective: The scenarios should cover a wide range of possibilities and highlight

competing perspectives (within and outside the industry), while focusing on

interlinkages and the internal logic within each future.

2. Relevant: To have impact, your scenarios should connect directly with the mental

maps and key concerns of those who will use them (e.g., senior executives, middle

managers, etc.).

3. Consistent: The scenarios should be internally consistent (and be perceived as such)

to be effective.

4. Distinctive: The presented scenarios should be archetypal - that is, they should

describe generically different futures rather than variations on one theme.

5. Sustainable: Each scenario should ideally describe an equilibrium or a state in which

the business environment might exist for some length of time, as opposed to being

highly transient. It does an organisation little good to prepare for a possible future

state that will be quite short-lived.

Source: adapted from Schoemaker 1997 p.54

Table 4: Essential criteria for successful scenarios


26

When the scenarios should be used ______________________________________________

The industry-level scenarios, themes, and frameworks developed within this project

should be used by firm managers for four complementary purposes:

1. To test existing strategy: by applying industry level scenario planning to

existing firm-level strategy, managers will be able to test the resilience and

flexibility of their strategies within a range of critical futures. Resilient

strategies are those which are sustainable across multiple scenarios.

2. To develop strategy (existing and new): industry level scenario planning

may be used to develop understanding of opportunities and risks within

existing strategy, and to identify and test new strategic opportunities.

3. To develop organisational awareness: by propagating scenario themes

within the organisation, managers and employees can together benefit

from increased organisational awareness of risks and opportunities in

critical future scenarios.

4. To develop organisational agility: responsiveness during uncertainty is

often demanded of modern organisations; by propagating awareness of

future critical scenarios an organisation can begin preparing for

uncertainty, and learn to understand and recognise signals and signposts

of change.

Ultimately, scenario planning can help an organisation make better decisions, as

illustrated in Figure 5, by encouraging multiple perspectives, and striving for an

integrated analysis and understanding of critical future scenarios.


27


Figure 5: Generic levels of scenario analysis

2.3.4 Data collection and analysis

The data collection methods selected for this research will be aimed at supporting

the production of scenarios that:

Cover a wide range of possibilities

Highlight competing perspectives (within and outside the industry)

Focus on interlinkages and the internal logic within each future

Describe sustainable futures

As the „Green Car Future 2020‟ scenarios will, by definition, aim to explore

developmental (change) factors in relation to context, the data collection and

analysis method most appropriate to this project is the case study. Thomas (2011)


28

offers the following definition of case study: "Case studies are analyses of persons,

events, decisions, periods, projects, policies, institutions, or other systems that are

studied holistically by one or more methods.”

Yin (2003) further defines a case study as:

“an empirical inquiry that:

investigates a contemporary phenomenon within its real-life

context; when

the boundaries between phenomenon and context are not

clearly evident; and in which

multiple sources of evidence are used.”

To analyse the perspectives, interlinkages, and driving forces influencing the

automotive industry in a plausible, cohesive manner, it will be necessary to obtain

and evaluate data from a variety of sources, in a method appropriate to the

subsequent scenario-based analysis. Rosenberg and Yates (2007 pp.449-450) outline

a framework for identifying and analysing data, as shown in Figure 6.

Source: Rosenberg and Yates 2007 p.449

Figure 6: Identifying data collection and selecting analysis methods

However, in contrast to Rosenberg and Yates‟ approach of selecting data analysis

strategies after collecting data, scenario planning requires that an analysis strategy

(the scenario building method) is selected before collecting data, after which the

required data collection methods may be identified. It is evident that scenario

building will require the collection of data supporting content, thematic, and

statistical analysis, necessitating both qualitative and quantitative input.


29

Due to time constraints, resource limitations, and the requirement to collect a large

range of unbiased data, only secondary research will be conducted. As far as is

reasonably possible, attempt will be made to use multiple sources of evidence, and

to aid scenario learning by identifying relevant assumptions and limitations of

collected data (in so doing, it may also be more readily feasible for others to

develop this research beyond the scope of this project).

It is envisaged that the nature and quantity of data required will inhibit the

derivation of purely quantitative models of relationships by which to determine

driving forces; similarly, the incorporation of qualitative data will necessitate a more

stochastic method. It is therefore reasonable to determine that a heuristic method of

scenario building will be required in order to efficiently identify and understand

significant driving forces and their relationships within the timescale of this project.

Henceforth, proven qualitative and quantitative models and frameworks will be

utilised for analysis and scenario building where possible, and where necessary,

logical, bounded approximations to models will be developed and applied.

In order to capture a full perspective of the driving forces affecting or capable of

affecting the European automotive industry, data collection will encompass the

field-of-vision proposed by Day and Schoemaker, illustrated in Figure 7, aimed at

helping organisations1 actively capture strategic signals from the periphery.

1 Although Day and Schoemaker‟s original intent was to help capture signals at the organisational level, many of the areas identified are equivalent at industry level, and therefore these areas are

considered advantageous for identifying driving forces at industry level.


30

Source: Day and Schoemaker 2007 p.22

Figure 7: Capturing external and internal driving forces at the organisational level

Research will therefore be undertaken to identify the external and internal driving

forces affecting (or likely to affect) the competitiveness of the European automotive

industry by exploring the following five areas:

Political, legal, social, and economic forces

Emerging technologies and scientific developments

Influencers and shapers

Customers and channels

Competitors and complementors

To provide perspective within each source, appropriate macro-level evidence from

economic, industry, and consumer perspectives will be sought, using academic,

industry, and available media sources. Where possible, insights and opinions will be

derived from multiple disciplines and industry thought leaders, thereby developing a

„richness of insight‟ that is encouraged and desired when conducting – as Shell have

done – workshop-based, global scenario building processes (Lawrence Wilkinson

n.d.). It is also considered advantageous to refer to published scenarios at the

economic, industry, and consumer foresight level, spanning multiple timelines, as


31

these research sources, despite their differing methods, will help identify core data

sources and further inform the application of scenario planning techniques.

Together, the above approaches are intended to reduce bias errors when exploring

areas we don‟t know (second class – see Figure 3), and areas which are unknown to

us (third class), as observed by Schoemaker:

“Various biases - overconfidence, narrow framing, the tendency to

look for confirming evidence-plague all three classes, but by far the

greatest havoc is caused by errors of the third kind (Russo &

Schoemaker 1992). Although no fail-proof techniques exist to avoid

them, much improvement can be garnered by focusing our attention

on classes two and three.” (Schoemaker 1997, p.68)

By reducing systemic errors when collecting data in the realm of uncertainty,

scenario planning is more likely to achieve effective understanding and learning

since, as Schoemaker (1997 p.68) described “it is essentially a study of our collective

ignorance.”

2.3.5 Research limitations

To achieve the aim of this research project using available resources, the research

scope is intentionally limited to focus on the driving forces affecting the passenger

car market only; LCVs (Light Commercial Vehicles) and buses will not be explicitly

analysed. This decision is considered appropriate because, during 2009:

14 million passenger cars were produced in the EU by 17 countries, in

comparison with only 1 million LCVs produced by 10 EU countries.

Truck production accounted for 0.25 million units, whilst buses represented

only 0.035 million units of production.

Source: ACEA 2009 p.70

Although EU production figures alone do not reflect the full interest of the European

automotive industry, the above data illustrates the greater significance of its car

production activities. Furthermore, as the market for LCVs and trucks is primarily

concerned with demand for transport of goods and not people, it is desirable to

separate this element from analysis of the market for cars and mobility, unless

determined as a key driving force. Nonetheless, it is envisaged that the analysis and


32

implications presented in this report will be of value to all members, irrespective of

market interest.

Implicit research limitations likely to influence this project will arise due to behavioural

bias; namely, the author of this report will, by definition, incorporate individual biases

into data collection, scenario development, and analysis, hence every attempt is

made to identify assumptions and minimise errors by seeking a broad range of

relevant perspectives. To mitigate against researcher bias and inexperience, the

final report will incorporate comments and changes advised by an experienced

academic professor.

Following the preliminary completion of this report, it may be desirable to solicit and

incorporate feedback from CAPIRE members, however to achieve these activities

within the project timescale is unfeasible, therefore this intention may instead be

considered as the scope of a follow-on research project.


33

3 Driving forces analysis

3.1 Scope

This section details the scope and method used to identify the competitive

environment, major stakeholders, basic trends, and key uncertainties.

Focal issue ______________________________________________________________________

The focal issue is to identify the significant drivers of change that could result in

critical scenarios likely to strategically impact the competitiveness of the European

automotive industry in 2020. An overview of the approach to developing scenarios is

shown in Figure 8.


Figure 8: Building blocks for scenarios

Drivers of change will include basic trends and key uncertainties, the significance of

which will be evaluated based on their likelihood of change and the sustained

impact this might have on the competitiveness of the European automotive industry.

Competitive environment ________________________________________________________


34

As the „Green Car Future 2020‟ project addresses the competitiveness of the

European automotive industry within a global environment, an understanding of the

scope and nature of the competitive context is warranted:

In 2005, the global automotive industry made over 66 million cars, vans, trucks and

buses. If vehicle manufacturing (only) was a country, it would have equated to be

the sixth largest economy in the world. (OICA 2006)

In 2011, the six major competing global automotive industry suppliers, defined by

economic interest and development are:

The European automotive industry (EU)

The North American automotive industry, including Mexico (NAFTA)

The Japanese automotive industry

The South Korean automotive industry

The Emerging Markets automotive industries (BRIC)

The global market share by volume of each competitor is illustrated in Table 5,

describing relative 2009 passenger car production. Note that these figures do not re-

domicile overseas production by national car manufacturers, either through joint

venture production or wholly-owned overseas factories. Furthermore, there may be

a surplus between passenger car production and actual sales.

Source: OICA

Table 5: Passenger car production worldwide - 2009


35

The relative share of total global sales is shown in Figure 9, describing total worldwide

motor vehicle registrations for 2010, and illustrating how the EU represents a market

for one in four vehicles sold in the world.

Source: ACEA 2010 p.77

Figure 9: Motor vehicle registrations worldwide - 2010

Trade between economic blocs provides an important global import and export

market for each competitor‟s business activities. The European automotive industry is

a net exporter of business activities, generating net value for the EU as highlighted

by the EC:

“With an annual turnover of €780 billion and a value added of over

€140 billion, it [the European automotive industry] makes a major

contribution to the EU's GDP. It exports far more than it imports, with a

surplus of over € 60 billion on overall exports of €125 billion.” (European

Commission 2009b, p.3)

The importance of the industry to Europe‟s prosperity is underscored by the scope of

its network of business and economic activities, acknowledged by the EC:

“The European automotive industry is one of Europe's flagship

industries. It is a key driver of growth, exports, innovation and jobs. Its

impact filters down across a wide variety of other sectors. And it has a

particularly important cross border reach, with suppliers, manufacturers

and sales and servicing downstream creating a web of mutual interest

that touches every one of the EU's Member States.


36

As a consequence, the value of intra-Community trade in automotive

products is substantial with around € 360 billion in 2008. Any downturn in

the automotive sector therefore strongly affects other sectors and all

EU Member States. ” (European Commission 2009b, pp.2–3)

Highlighting the importance of exports, Figure 10 illustrates the relative contribution

by value of EU passenger car exports, whereby North America, Asia, and Eastern

Europe represent approximately 80% of total export value of €40 billion (down from

€60 billion in 2008).

Source: Eurostat

Figure 10: Relative value of EU passenger car exports – 2009

Overall, the domestic European market (illustrated as „EU‟ in Figure 9) represented

the largest market for the European automotive industry, registering 16.6 million

passenger cars in 2009, of which 2.3 million cars were imported from non-European

automotive industries, primarily Japan and South Korea, as shown by units of sales in

Table 6.


37

Source: Eurostat

Table 6: Origin of EU passenger car imports – 2009

However, when compared by value received (see Table 7), Japan (€8 billion) and

the Unites States (€3 billion) were the largest non-European industry competitors,

differences attributable to a higher average cost of cars sold.

Source: Eurostat

Table 7: Value of EU passenger car imports – 2009

Nevertheless, the European automotive industry remains a net exporter for the EU,

representing a trade balance of nearly €26 billion in 2009 (down from €40 billion in


38

2008), as shown in Table 8. Note that these figures classify geographically European,

non-EU countries within the European Free Trade Agreement (EFTA) - Turkey,

Switzerland, etc - as export markets.

Source: Eurostat

Table 8: Trade balance of EU automotive industry passenger car sales – 2009

‘Green’ context _________________________________________________________________

The US, Japan, China, Korea and the EU have given priority to reducing the climate

impact of automobile production and use by developing programmes which target

two outcomes:

1. Reducing primary energy requirements: Growing dependency on

primary (naturally sourced. i.e. non-fusion) energy sources suggest this

factor is very likely the most motivating one. “In the EU, 73% of all oil (and

about 30% of all primary energy) is consumed by the transport sector.”

(EGCI Ad-hoc Industrial Advisory Group 2008)

2. Reducing greenhouse gas effect on climate change: Vehicle emissions

are contributing to the increased concentration of gases that lead to

climate change; Figure 11 illustrates the global contribution of road

transport to total man-made CO2 emissions in 2007.


39

Source: OICA 2007

Figure 11: Global contribution of Road Transport to man-made CO2 emissions

These „electromobility‟ and „green car‟ programmes primarily focus on developing

integrated transport methods to reduce the energy and climate cost of personal

mobility, and the production of commercially-viable electric vehicles, which can be

powered from „clean‟ energy sources and are estimated to reduce energy demand

beyond that achievable by internal combustion engine (ICE) cars:

“A comparison with the situation ten years ago shows that in the last

decade the technological evolutions have radically changed the

impact of the electrical vehicle on primary energy consumption: from

about 30% higher primary energy consumption as compared to the

ICE in 1998 to about 25% energy savings in 2008. These figures do not

yet take into account the potential for energy harvesting e.g. by

modern low cost on-board photovoltaic technology.” (EGCI Ad-hoc

Industrial Advisory Group 2008)

Nonetheless, traditional fuelled vehicles are widely expected to prevail by 2020.

Figure 12 illustrates the relative proportion of climate impact during the production

and use of a typical vehicle in use for 8 to 10 years.

Source: WWF-UK 2006

Figure 11: Distribution of energy demand/carbon consumption throughout the life cycle of a

typical car

Major stakeholders ______________________________________________________________


40

Scenario stakeholders will be international or national groups or individuals who

have, or potentially will have, an interest in the drivers of change and their

implications for the European automotive industry, including those who could

significantly influence change.

Figure 12, adapted from Schoemaker (1991), provides an overview of the macro

and industry-level forces likely to affect industry, which will be utilised as a taxonomy

to identify influential stakeholders, with direct interest on driving forces inferred for

industry stakeholders and indirect interest for world and country stakeholders.


Figure 12: Typical industry-level driving forces

Interested and influential industry stakeholders include:

Suppliers European automotive manufacturers2

Customers Private transportation buyers

Business transportation buyers

2 The vehicle manufacturing business is highly complex. It is not limited to the assembly of vehicles and

production of engines. The same manufacturers engage in testing, sales/marketing and distribution,

maintenance, recycling and disposal. Most also make components – although the degree of vertical integration varies. They also have separate finance arms. These finance companies can provide

finance to their dealer network, leasing activities and to final customers (captive finance). In recent

years these non-automotive parts of a vehicle manufacturer's business have tended to generate more

profits than their core manufacturing assembly operations and in some years may have been the only

source of profits, thereby supporting the loss making automotive arm.(IHS Global Insight 2009)


41

Public transportation buyers

Competitors Non-European automotive manufacturers3

Substitutes Public transport suppliers

Alternative forms of personal transport suppliers

Alternatives to travelling suppliers (e.g. e-retailers)

Source: Author analysis Table 9: Major automotive industry stakeholders

Potentially interested and influential world and country stakeholders include:

Economic Related and supporting industries (e.g. energy)

Automotive industry employees

Aftermarket industry (servicing, parts, accessories)

Automotive industry investors

Aftermarket industry investors

Related and supporting industry investors

Externality industries (e.g. infrastructure)

Customer stakeholders (e.g. employers, etc)

Political Governments

Politicians

Regulators and legislators

Social Non-profit externality industries (e.g. healthcare)

Society at large (male, female, young to old)

Technological Automotive industry suppliers

Aftermarket industry suppliers

Related and supporting industry suppliers

Public transport suppliers

Alternative forms of personal transport suppliers

Alternatives to travelling suppliers

Source: Author analysis Table 10: Major world and country stakeholders

3 There is no straightforward delineation of ownership interest between European and non-European automotive manufacturers, as shared engineering, manufacturing, ownership, and joint ventures are

extremely common across the global automotive industry, as depicted by the „Tube Map‟

representations presented as Exhibits 1 (2005 environment) and 2 (2010) in the Appendix.


42

3.2 Method

This section identifies the desired requirements of driving forces, evaluates typical

methods and their limitations for identifying industry driving forces, and evaluates

and proposes an evidence-based industry competition model to effectively identify

relevant driving forces and determine their influence on competitiveness.

Driving force requirements _______________________________________________________

To reliably output good quality scenarios meeting the criteria specified by

Schoemaker (see Table 3), the driving forces – that is to say, the inputs required for

the scenario building process, and the model-building methodology - should aim to

meet equivalent, supporting criteria. Every future is comprised of known, unknown,

and uncertain driving forces that can alter, inhibit, or enhance each other in

complex and chaotic ways. It is therefore desirable for scenario driving forces to

exhibit the characteristics described in Table 11.

1. Objective by identifying unbiased knowns, unknowns, and

uncertainties.

2. Relevant by relating to the competitiveness of the European

automotive industry in an international environment.

3. Consistent by considering the effect of all stakeholders to evaluate

competitiveness.

4. Distinctive by discerning the driving force of significant uncertainties

which could affect the competitiveness of the European

automotive industry.

5. Sustainable by identifying influences which may persist for an

impactful period of time (minimum 2 yrs).

Source: Author analysis Table 11: Desired characteristics of ‘Green Car Future 2020’ scenario driving forces

Typical identification methods, scenarios, and limitations __________________________

Typical scenario planning methods aim to resolve complex, global uncertainties by

using formal or intuitive methods, with each approach determining the nature and

scope of driving forces required as inputs to the scenario-building process.


43

Formal approaches seek to develop, quantitative models from economic theory, an

example of which is shown in Figure 14. Intuitive methods, as practised by Shell,

involve teams up to 250, with roles spanning Scenario Director, Planning, Analysis,

Synthesis (Editor & Research Leader), Primary Recipients, Specialist Contributors, and

External Recipients (Shell International BV 2008).

Source: Global Insight, Inc 2007

Figure 14: Example of typical industry-level scenario driving forces

It is undesirable and impractical for this project to develop and utilise purely

quantitative, formal methods, at risk of merely reproducing existing research, and

restricting the ability scenarios to effectively convince business level strategists.

Similarly, typical methods for identifying and analysing driving forces for intuitive

methods of scenario building – as shown in Figures 15 and 16 - require subjective and

time-consuming iterations and analysis to identify dependencies, relationships, and

criticalities within scenarios, without demonstrating a consistently objective model of

scenario building.


44

Source: Schoemaker 1991

Figure 15: Example of typical intuitive identification of driving forces

Source: Schoemaker 1991

Figure 16: Example of typical intuitive identification of key uncertainties


45

Hence, variation in focal issues, stakeholders, and a lack of consistent

methodologies result in the generation of bespoke, global level scenarios, each

identifying and interpreting critical driving forces subject to the capabilities of the

scenario-building team, as Verity acknowledges:

“building the team to participate in a scenario exercise appears to be

more crucial to the outcome than is the case using other planning

tools. It is a methodology that requires multiple inputs in order to

generate thought-stimulating outcomes.” (Verity 2003)

It is therefore unlikely that high-level, global scenarios will capture a full range of the

driving forces directly influencing industry and businesses, requiring secondary

interpretation and translation in order to benefit CAPIRE members. Schoemaker

discerns that:

“the scenarios will generally be at too aggregate a level to be directly

linked to an option's consequences. They first need to be translated

from the macro-economic or political level to the industry and firm

level.” (Schoemaker 1991, p.559)

Therefore, whilst published scenarios such as ‟Future Agenda: the world in 2020‟

(Jones 2010) serve to identify global automotive industry challenges, they do not

identify and relate the driving forces that may affect the relative competitiveness of

each national automotive industry, and hence there is a distinct need for an

method of producing more relevant scenarios.

Desired method _________________________________________________________________

To more effectively identify driving forces affecting the competitiveness of the

European automotive industry, it is desirable to utilise an evidence-based model of

scenario building – as shown in Figure 17 - that reliably relates the dynamics of:

Stakeholder influences

Business factors (qualitative and quantitative)

National industry competitiveness in an international environment


46


Figure 17: Desired model of scenario building to determine international competitiveness

Furthermore, it is extremely desirable to capture the diversity and influence of

qualitative factors, whilst minimising undue human bias that quantitative scenario-

builders strive to avoid, described below:

“Although all scenarios should be treated equally, the reality is that

they typically are not. Both scenario generating teams and executives

gravitate toward the scenarios that they find to be “most interesting,”

which typically reflect corporate cultural biases and wishful thinking.

The use of probabilities actually forces scenario teams and executives

to examine likely scenarios that they might otherwise dismiss as

plausible but not attractive.” (Futuring Associates LLC n.d.)

In so doing, the final quality of scenarios produced is less reliant on utilising an

experienced and reputed team of scenario builders, and instead facilitates a more

robust method of identifying driving forces, evaluating impacts, and determining

implications. Improved transparency would also permit the re-use, development,

and refinement of driving force identification and analysis.

Porter’s ‘National Diamond’ – a suitable model of national competitiveness? ________

Literature research was performed, identifying Michael Porter‟s study-based

„National Diamond‟ (M. E. Porter 1998) as a suitable analytical model of national

competitiveness, placing the ability of firms at the heart of local, regional, or

national competitiveness by inter-relating the dynamic effect of four interdependent

variables (the „diamond‟), and two supporting enablers, as the factors supporting

local, national, and global competitive success.

Unidentified influences

(International and National)

Dynamic model of national

industry competitiveness

Identified Driving Forces

(International competiveness)

International competitiveness

scenarios


47

Figure 18: Michael Porter’s ‘National Diamond’

For the „diamond‟ to positively impact competitive performance usually requires

that all four sets of influences are present in a „home‟ environment; conversely, the

relative weakness of factors (when compared to competitor environments) may

indicate a condition limiting ultimate competitive potential. „Clustering‟ by industry

and/or geography was determined to provide a reinforcement of overall

competitiveness through knowledge transfer and internalisation of industries.

Government enabling – through increased rivalry, etc, as opposed to subsidising - of

a more competitive environment further strengthens national competitiveness, whilst

„Chance‟ or luck is essentially the stochastic element within the model, albeit one

which scenario planning aims to minimise.

A summary of the main influences on the „National Diamond‟ is presented in Table

12.

Demand conditions: Porter places particular emphasis on the role of home demand in

providing the impetus for 'upgrading' competitive advantage. Firms are typically most

sensitive to the needs of their closest customers, hence the characteristics of home demand

are particularly important in shaping the differentiation attributes of domestically-made

products and in creating pressures for innovation and quality. Porter places particular


48

emphasis on the role of sophisticated and demanding domestic customers, noting the

influence of highly-discerning home buyers on the development of the Japanese camera

industry, and the German passion for durable, high-performance cars as a factor in German

dominance of the world luxury-car market.

Related and supporting industries: One of the most pervasive findings of the study was the

tendency for the successful industries within each country to be grouped into 'clusters' of

related and supporting industries. Economies which are external to individual firms and

industries are internalized within the industry cluster. Technological leadership by the U.S.

semiconductor industry during the period up until the mid-1980s provided the basis for U.S.

success in computers and several other technically-advanced electronic products.

Factor conditions: Advanced factors are the most significant for competitive advantage

and, unlike factors whose supply depends upon exogenous 'endowment' advanced factors

are a product of investment by individuals, companies, and governments. The relationship

between basic and advanced factors is complex. Basic factors can provide initial

advantages which are subsequently extended and reinforced through more advanced

factors, conversely, disadvantages in basic factors can create pressures to invest in

advanced factors.

Firm strategy, structure and rivalry: Within this broad set of influences, the most interesting

relationship which Porter identifies is between domestic rivalry and the creation and

persistence of competitive advantage. Rivalry is critically important in pressuring firms to cut

costs, improve quality, and innovate. Because competition between domestic firms.

Source: Grant 1991 Table 12: Summary of the four core influences on Porter’s ‘National Diamond’

Supporting its application as a model for the European automotive industry‟s future

international competiveness, Grant‟s (1991) assessment of Porter‟s model recognises:

“First, Porter's integration of the theory of competitive strategy with

theory of international trade and comparative advantage extends the

analysis of strategy formulation to an international environment.

Second, Porter's emphasis upon innovation and 'upgrading' as central

to the creation and sustaining of competitive advantage represents

further steps towards the reformulation of the strategy model within a

dynamic context.” (Grant 1991)


49

This is an important assessment, because it identifies that the model may be applied

to compare the advantage of different environmental states, as scenarios seek to

evaluate and describe. This in contrast to Porter‟s earlier „Five Forces‟ strategy

model, which based competitive advantage upon achieving an ideal position of

cost and differentiation, which has clear weaknesses when applied to a complex,

competitive environment undergoing constant and regular change.

Research evidence and considerations __________________________________________

Porter's analytical framework was developed through studying competitive

performance among 10 countries (United States, West Germany, Italy, United

Kingdom, Sweden, Switzerland, Denmark, Japan, Korea, and Singapore), each

involving between 5 and 19 industry cases.

These countries‟ conditions and cases may not accurately represent the

competitive environment of the European automotive industry and anticipated

scenarios, therefore further research performed to evaluate relevant applications of

the framework, identifying the following evidence and considerations:

1. Porter’s diamond holds true for the automotive industry

Evaluating performance as Profits as a Percentage of Revenues and Profits as a

Percentage of Assets, Sledge (2005) found a positive correlation for the three non-

firm influences defined and measured as shown in Table 13, with the statistical

significance of demand over twice as large as that for related & supporting

industries (representing a vital network clustering effect), and investment in

upgrading and maintaining advanced factors noted as a necessity for the

maintenance of global competitive rankings.

Automotive industry research further supports these conclusions (N Boudette 2003),

and its application, Sledge notes, has also been found to hold true for the banking

industry‟s firm performance.

Definition Representative measurement

1. Demand Consumer sophistication and home market

demand. Generally, demand conditions are

Weighting of: percent of home

market enrolled in higher


50

associated with a country's level of

economic development.

education, and national share

of international automotive

revenues.

2. Related &

Supporting

Industries

Oil and gas, chemicals, metals, mining and

crude oil production, insurance, electronics,

building materials and glass, banks and

petroleum refining.

National share of international

related & supporting industry

revenues.

3. Factor

Conditions

Naturally occurring and man-made

endowments, such as physical infrastructure

and knowledge resources. Porter states that

advanced factors are more significant than

basic ones and specialized factors are more

relevant than general ones.

Weighting of: number of internet

hosts per 1,000 people (a proxy

for communications

infrastructure), and number of

U.S. patent filings.

Source: adapted from Sledge 2005, pp.24–26

Table 13: Ranking of significant driving forces affecting the relative competitiveness of a

national automotive industry

2. The main drivers of competitive advantage are determined by a country’s stage

of national development

Table 14 summarises Porter‟s identification of the main drivers of development as a

country develops its competitive advantage.

Source: adapted from Grant 1991, p.540 Table 14: The stages of national competitive development (Porter)


51

Sledge‟s (2005) research, comparing the development of 1960 and 1985 data for 49

countries, identified demand as a significant catalyst for development:

“The differences between industrialized and developing countries are

strong enough to suggest that specific features of the dynamic

diamond, such as the demand conditions, might be significantly more

important in one stage of a country's development than in others.”

(Sledge 2005)

3. The role of ‘government’ may not be optional in developing countries

Porter originally considered „government‟ as an optional factor in his Diamond

model, however Sagheer et al‟s (2007) assessment of India and Thailand‟s shrimp

industry competitiveness considered government influence essential in developing

country scenarios, relating Thailand‟s success to, collaboration, commitment, and

flexibility its environment:

“Thailand's national government is seen to be more collaborative as

compared to that of its Indian counterpart. Programmes implemented

by the Thai government working with the industry at interactive levels

have yielded positive results. The focus of the Thai government to push

this high revenue earning food industry to higher productivity and

income earning levels and has brought commitment and sustained

efforts from all stakeholders in the industry.

While there are opportunities for India, Thailand has proven itself to be

a country where human interventions - at government level,

entrepreneurial level etc have brought about positive results.”

(Sagheer et al. Jan-Jun2007)

Essentially, a firm is only able to leverage competitive advantage when there is a

supporting enabling environment, either nationally or internationally.

4. National and international determinants of competitiveness can be mutually

reinforcing for business

The important conclusion of Porter‟s analysis is that a firm or industry's

competitiveness may or may not result primarily from influences at the national or

subnational level. Sledge (2005) recognises the limitations for business and policy of

focussing only on national competitiveness:


52

“Porter's exclusive focus on national determinants of global

competitive success may turn the attention of managers and public

policy makers away from the need to monitor international threats and

opportunities, as well as the requirement to build up strengths and

reduce weaknesses in foreign nations. Such an inward diversion of

focus in the long run would serve neither the affected firms or industries

nor the home nations involved.

Because competition can be either from domestic or international

companies it is not enough to consider only businesses within a country

market as potential competitors.” (Sledge 2005)

Whilst, Cartwright‟s (1991) research paper identifies that there is limited usefulness of

focusing on national determinants of competitiveness for home-based industries that

export a high proportion of their production.

To achieve resolution, it may be most appropriate to consider Rugman and

Verbeke‟s (1993) attempt to operationalise Porter's framework to incorporate the

modern theory of the multinational enterprise:

“In fact, it may be precisely a synergistic combination of determinants

at the national or subnational level and determinants at the foreign or

global level that may generate international success. In this case, it

would be sensible to attribute international competitiveness primarily to

a mutual reinforcement among national and international factors

leading to success” (Rugman & Verbeke 1993)

5. Local clustering may be more influential to the performance of services, whereas

manufacturing may be more reliant on national and international networks

McDonald„s (2007) study of UK industry identified benefits to clustering services:

“Cluster policies to promote a variety of economic and social

objectives may require a focus on employment growth and

improvements in income distribution rather than the development of

international competitiveness. However, the results from the present

study indicate that clusters in the services and MCRB [media,

computer-related and biotechnology] sectors are more likely than

manufacturing clusters to deliver employment growth.” (McDonald et

al. 2007)

However, McDonald also acknowledges research identifying dependencies for the

manufacturing sector, noting “Consideration should also be given to the possibility


53

that local networks may not be as important as links to national and international

networks, particularly for flows of information and knowledge.” (Hendry et al. 2000)

Modelling assumptions __________________________________________________________

In consideration of presented theory, evidence, scenario objectives, and good

modelling practise, Table 13 identifies the assumptions that will be used to identify

relevant driving forces and evaluate their influence on the competitiveness of the

European automotive industry.

Assumption 1 Driving forces will be identified from the following five areas of vision: 1.

Political, legal, social, and economic forces, 2. Emerging technologies

and scientific developments, 3. Influencers and shapers, 4. Customers

and channels, 5. Competitors and complementors

Assumption 2 Driving forces will aim to fulfil all of the desired characteristics

described in Table 11.

Assumption 3 Firm strategy, structure and rivalry will be considered neutral, and will

not be considered as an influence on the relative competitiveness of

Europe or the rest of the world.

Assumption 4 Driving forces will be considered to influence only demand, related &

supporting industries, and factor conditions.

Assumption 5 Driving forces will be considered to affect a maximum of two out of

three factors of competitiveness.

Assumption 6 The outcome of driving forces will be determined in consideration of

theory, evidence, and the conditional influence of unknowns and

uncertainties. Each driving force can have a neutral, positive, or

negative effect on the factors of competiveness.

Assumption 7 The degree of certainty will be determined as follows, with regards to

the influence of the driving force on the factors of competitiveness

influencing the European automotive industry in 2020:

Known: the outcome of this force on relative competitiveness is


54

predetermined and unconditional on other forces.

Unknown: this force represents a known influence on the

current (2011) business environment and is reasonably

expected to remain significant in 2020, however its outcome is

unknown, possibly due to conditional relationships.

Uncertain: this force represents an uncertain driving force

(weak in 2011 or new in 2020) which could significantly

influence the 2020 environment. Uncertain forces are most

likely to be dependent on conditional relationships.

Source: Author analysis Table 15: Assumptions used to identify driving forces and their influence on competitiveness

Modelling example ______________________________________________________________

Figures 19 to 22 provide a „before‟ and „after‟ example to illustrate how the inter-

relationship between knowns, unknowns, and uncertainties can be applied to

determine (one of) the potential future competitive outcomes of Europe against the

rest of the world. Note how future competitiveness is dependent on the conditional

interaction between expected and potential influencers of outcome. (Note: see

Table 16 for Key.)


55

Figure 19: Schematic representation of Porter’s ‘National Diamond’

Source: Author analysis Figure 20: The focal issue - Porter’s ‘National Diamond’ can describe current European auto

industry competitiveness, but how can relative 2020 competitiveness be determined?

Automotive industry competitiveness, 2020 Automotive industry competitiveness, 2011

Rest of

World

+

+ + Europe

Rest of

World

?

? ? Europe

Knowns

Unknowns

Uncertainties


56


Figure 21: The expected and potential influence of knowns, unknowns, and uncertainties is

identified


Rest of

World

?

? ? Europe

Rest of

World

+

+ + Europe

N Europe Known: population growth

Unknown: oil price

[ ]

[ ] Europe

[ - ]

[ - ] Europe Uncertainty: „double dip‟ recession


57


Figure 22: The uncertainty and unknown are defined, conditional outcomes determined, and

the net effect on the European auto industry’s relative competitiveness is identified


Rest of

World

N

- Europe

Rest of

World

+

+ + Europe

N Europe Known: population growth

Unknown: oil price

+

- Europe

-

- Europe Uncertainty: „double dip‟ recession

2020: High oil price realised

2020: „double dip‟ affects world


58

3.3 Trends and uncertainties

The key driving forces affecting the European automotive industry were identified

and their expected or potential influence on industry competitiveness determined,

using the methods detailed in Section 2 and assumptions in Table 15. Table 16

presents the trends and uncertainties determined as most influential to the

competitiveness of the European automotive industry in „Green Car Future 2020‟.


59

Driving forces affecting the European automotive industry (2011 to 2020)

Sc

op

e

De

gre

e o

f c

ert

ain

ty Relative influence

on EU auto industry

competitiveness

Key: Scope I International Expected outcome N Neutral (no relative advantage)

E / R EU / Rest Of World + / - More or Less competitive

Degree of certainty K Known Potential outcome [ ] More or Less competitive

(see Figure 3) UK Unknown (where driving force is [ + ] More competitive

UC Uncertain Unknown or Uncertain) [ - ] Less competitive De

ma

nd

Re

late

d &

Su

pp

ort

ing

Ind

ust

rie

s

Fa

cto

r

Co

nd

itio

ns

POLITICAL , LEGAL , SOCIAL , AND ECONOMIC FORCES

Political

Energy security concerns. E UK [ ] [ ]

Electrical mobility prioritisation in the US, Japan, China, Korea. R UK [ ] [ ]

Chinese government continues to subsidise purchase of domestically manufactured electric vehicles. R UK [ - ] [ - ]

Russian energy companies develop preferred supply agreement with China. R UC [ ] [ - ]

Chinese government privacy requirements restrict business access to personal location information. R UK [ ]

European restrictions imposed on number of cars per household. E UC [ + ] [ - ]

Legal

Imposition of regulation on EU manufacturers without prior consultation. R UC [ - ]

Widespread intellectual property abuse of premium European brands and products in BRIC nations. R UC [ - ] [ - ]

Security and privacy of individual location restricts implementation of „smart‟ private transport infrastructure; consumers favour public

infrastructure.

E UC [ - ] [ + ]

Significant patents monopolised by non-European consortium (e.g. US-Korea), resulting in license charges R UC [ - ]

Severe penalties for breach of intellectual property set new precedent for Chinese manufacturing industry. R UC [ + ]

Social

Healthcare costs in Europe prioritised in order to support increase in retirement age. E UC [ + ]

Corporate Social Responsibility becomes significant decision-factor in consumer purchases. I UC [ + ] [ + ]

Economic

China‟s GDP expected to overtake US. R UC [ + ]

Imbalanced population growth. (Jones 2010) I K N -

Rebalancing of economic power. (Jones 2010) I K [ ] [ - ]

Overcapacity in the manufacturing sector coupled with a shortage of “human capital” in a time of ageing populations and falling

birth rates. (Cass Business School 2011)

I K [ ]

Global versus local: as companies become more global they centralise, squeezing regional working. (Cass Business School 2011) I UK [ ]


60


Sc

op

e

De

gre

e o

f c

ert

ain


on EU auto industry

competitiveness






ma

nd

Re

late

d &

Su

pp

ort

ing

Ind

ust

rie

s

Fa

cto

r

Co

nd

itio

ns

„Double-dip‟ recession in Developed economies. I UC [ - ] [ - ]

Overcapacity in European manufacturing sector. E UK [ ] [ ]

Overcapacity in Chinese manufacturing sector. R UK [ ] [ - ]

Oil price. I UK [ ] [ ]

China becomes an increasingly service-based economy. (Sir Martin Sorrell 2011) R K [ ]

70% chance that Chinese GDP growth slows by 2015 when per-head GDP reaches around $16,740 on a purchasing-power-parity

basis, reflecting historical trends. (Economist 2011)

R UC [ - ] [ - ]

Around 60% to 80 % of new private vehicles continue to be bought using some form of credit requiring financing. E UK [ ] [ ]

Personal credit availability in BRIC countries restricting uptake of premium-priced vehicles. R UK [ - ] [ + ]

Resource demands. (Jones 2010) I UC [ ] [ ]

Commodity prices will likely trend upward, with a lot of volatility, and global imbalances will worsen. (Nariman Behravesh 2011) I UC [ ] [ ]

The momentum of global growth is strong enough to withstand these “known unknowns”. (Nariman Behravesh 2011) I UK [ ] [ ]

EMERGI NG TECHNOLOGI ES AND SCI ENTI FI C DEVELOPMENTS

Emerging technologies

Low cost modular vehicle architecture and factory permits licensed production from developing economies. (Gordon Murray Design

n.d.)

R UK N [ + ]

Breakthrough high-density, fast-charge battery technology commercialised in China. R UK [ + ]

International standards for interoperability of „smart‟ personal transport. I UC [ ] [ ]

BRIC experience in value-driven manufacturing and services facilitates new, resource-efficient manufacturing and service innovation. R UK [ - ]

Commercialisation of hydrogen fuel cells. I UK [ + ]

European commercialisation of „hub motors‟ permitting flexible vehicle architecture. E UK [ + ] [ + ]

Scientific developments

Commercialisation of hydrogen storage in solid form. E.g. carbon nanotubes. E UC [ + ]


61


Sc

op

e

De

gre

e o

f c

ert

ain


on EU auto industry

competitiveness






ma

nd

Re

late

d &

Su

pp

ort

ing

Ind

ust

rie

s

Fa

cto

r

Co

nd

itio

ns

INFLUENCERS AND SHAPERS

Mobility tax levied on individuals for all transport types – public, private, business. E UC [ ] [ + ]

Battery supply security to European industry. E UC [ ] [ ]

Prohibitive „recycling tax‟ on end-of-life electric vehicles. E UK [ - ] [ + ]

Manufacturers‟ ability to successfully market technologically innovative „green car‟ products. (Cass Business School 2011) I UK [ ] [ ]

Manufacturers‟ ability to successfully market technologically innovative „green car‟ services. E UC [ ] [ ]

European mass-adoption of mobility as a service. E UC [ + ] [ + ]

RoW (China esp.) mass-adoption of mobility as a service. R UC [ + ]

Too much power in the hands of procurement. There‟s a limit to what you can do to cut costs. I UK [ ] [ ]

End of life recycling responsibility for manufacturers imposed outside Europe. R UC [ ] [ - ]

International agreement on standards for energy generation emissions, coupled with upgrading and replacement costs for old and

„dirty‟ infrastructure.

I UC [ + ]

Perceived range limitations and incompatibilities between energy infrastructures limits uptake of non-gasoline powered transport. I UC [ ] [ ]

Security of personal data. I UC [ ]

High battery costs continue to require consumers to decide between rental or outright purchase. I UC [ - ] [ ]

Consumers embrace „crowd sourced‟ navigation systems in densely-packed Western cities, with value captured by telecoms

providers or software entrepreneurs. BRIC adoption limited by infrastructure and restrictions on access to public information.

I UC [ + ] [ + ]

CU STOMERS AND CHANNELS

Challenge of deriving „consumer surplus‟ by differentiating electric powertrains. I UC [ ] [ ]

Universal access to information. (Jones 2010) I K N [ ]

Significant differences in expected market share of electric cars. I UC [ ] [ ]

Increasing sales to business users. (Arthur D. Little 2010) E UC [ + ]

EU products not positioned particularly well for price competition. (European Commission 2009a, p.12)

EU products positioned in premium segments only. (European Commission 2009a, p.12) I UK [ ]


62


Sc

op

e

De

gre

e o

f c

ert

ain


on EU auto industry

competitiveness






ma

nd

Re

late

d &

Su

pp

ort

ing

Ind

ust

rie

s

Fa

cto

r

Co

nd

itio

ns

Most of the increase in global demand will come from China, India, or Russia. (European Commission 2009a, p.12) R UC [ + ]

Negative consumer reaction to battery performance of Chinese manufactured vehicles. I UK [ + ]

Consumers delaying demand until provision of full integration of green cars and electromobility. I UK [ - ] [ - ]

COMPETI TORS AND COMPLEMENTORS

Governments in BRIC countries become biggest customers for supply of „mass transit‟ smart personal transport. R UK [ - ] [ + ]

Battery demand for consumer electronics restricts supply for electric vehicles. (Martin LaMonica n.d.) I UK [ - ] [ + ]

Main competitors to Europe are Japan, US, and South Korea. (European Commission 2009a, p.12) I UC [ ]

Commercial hydrogen fuelling infrastructure gains foothold in European market; national governments subsidise conversion of existing

ICE cars to run on „dual fuel‟ sources.

E UC N [ + ]

Governments and electricity companies introduce levies on electric car charging during peak hours. E UC [ - ] [ - ]

Diversification of energy companies into electricity market to hedge against loss of income from petrol and diesel. (Viren Doshi,

Robert Oushoorn, and Robert Famulok 2011)

I UC [ - ] [ + ]

Source: Author analysis unless otherwise specified

Scope, Degree of certainty, and influence on competitiveness: Author analysis

Table 16: Driving forces affecting the international competitiveness of the European automotive industry


63

4 Scenario development

This section determines the extent of competitive uncertainty for the European

automotive industry in 2020, identifies distinct themes of the competitive

environment, and presents potential scenarios characterising critical outcomes.

4.1 Mapping uncertainty

To effectively navigate uncertainty, it is necessary to map the extent of uncertainty

and its critical underlying forces, just as a good sailor would do by identifying land,

sea, and the currents and winds that can present opportunity or extreme hardship.

Extent of competitiveness ________________________________________________________

The „Green Car Future 2020‟ presents two distinct extents of international

competitiveness for the European automotive industry: one in which it can fully

maximise its competitive advantage against the rest of the world (best case), and

one in which it is comprehensively disadvantaged against the a strong „rest of the

world‟ automotive industry (worst case), as shown in Figure 22 (see Figure 19 for key).


Figure 22: The extent of competitiveness for the European automotive industry in 2020

The most significant factor determining relative competitiveness is European market

demand, both its sophistication and size, whilst factor conditions, and related and

supporting industries play important contributing roles. The extents depicted do not

Competitive advantage: Rest of World

+

+ + Rest of

World

-

- - Europe

European automotive industry competitiveness, 2020

Competitive advantage: Europe

-

- - Rest of

World

+

+ + Europe


64

consider the relative competitiveness of firm strategy, structure, and rivalry, however

it is assumed that a competitive European automotive industry is comprised of more

competitive firms than the rest of the worlds, and vice-versa.

Scenario outcomes ______________________________________________________________

The future is clearly comprised of many complex and uncertain influences on the

competitiveness of the European automotive industry, however to understand the

potential implications and facilitate understanding, it is advantageous to distinguish

the range of critical and distinctive outcomes.

Much as a weather forecaster will identify sun, rain, and snow forecasts instead of

providing modelling methods to determine the weather, effective scenarios will

allow stakeholders to relate to and begin considering the implications of potential

futures.

To determine the main scenarios underlying the „Green Car Future 2020‟, the key

driving forces influencing competitiveness are separated („Demand‟ vs „Related &

Supporting Industries + Factor Conditions‟) on two axes to map the potential

competitive outcomes for the European automotive industry, as shown in Figure 23.


Figure 22: Driving forces influencing the extent of competitiveness for the European

automotive industry in 2020

Related & Supporting Industries + Factor Conditions

Demand Potential range of outcomes influencing the

competitiveness of the European automotive industry


65

The extent of competitive scenarios were mapped, and alternative critical scenarios

based on uncertain relative influences (identified as „?‟) defined, hence four critical

scenarios influencing competitiveness were identified, as depicted in Figure 23.


Figure 23: Critical scenarios influencing the competitiveness of the European automotive

industry in 2020

4.2 Scenarios

Table 17 presents the scenarios determined as most significant to the

competitiveness of the European automotive industry in „Green Car Future 2020‟, by

inductively defining and determining the trends and uncertainties in Table 16 to

achieve cohesive world views of the critical uncertainties in Figure 23. Key global

themes are identified and the main influences on competitiveness described.

It is important to recognise that these scenarios do not provide an indication of the

most likely, least likely, or probable futures, but instead seek to go beyond trends and

extrapolations in order to understand and identify the deeper forces driving

competitiveness in the global automotive industry.

Related & Supporting Industries + Factor Conditions

Demand

Competitive advantage: Europe

-

- - Rest of

World

+

+ + Europe

Competitive advantage: Rest of World

+

+ + Rest of

World

-

- - Europe

Demand advantage: Europe

?

- ? Rest of

World

?

+ ? Europe

Non-Demand advantage: Europe

-

? - Rest of

World

+

? + Europe


66

Scenario Theme

Influences on competitiveness

Demand Related and supporting

industries

Factor conditions

‘Renaissance 2.0’

Competitive

advantage: Europe

European debt restructuring and

investment in advanced factors exceeds

targets, catalysing resurgent innovation

and confidence. In the rest of the world,

BRIC nations continue to generate

wealthy rich, but their middle class are

struggling, whilst the US‟ expensive gamble

on manufacturing investment has not paid

off, presenting severe social and political

repercussions.

Europe: European consumers are

sophisticated, wealthy, and

demanding of product and

service innovation in mobility. The

Euro becomes the currency to

peg to.

Rest of World: Impoverished US

consumers are reluctant to adopt

new mobility products and

solutions, whilst the BRIC nations

remain socially polarised with

imbalanced wealth distribution.

Europe: Versatile

manufacturing and service

capabilities reign supreme.

Europe-wide, integrated

energy infrastructure

maximises the region‟s

resistance to oil price

shocks.

Rest of World: Expensive

investments in

manufacturing and service

during the Noughties prove

expensive to upgrade and

limit innovation.

Europe: Sophisticated

infrastructure and smart

communication and

working methods facilitate

a liberal yet effective work

and leisure balance.

Rest of World: US brains

drain to Europe, whilst BRIC

nations take out loans from

European banks to fund the

cost of expensively built

new cities.

‘Global Wealth’

Demand advantage:

Europe

Political and economic stability bolstered

by effective investment in knowledge and

infrastructure provides widespread

international benefits, as GDP growth in

developed and emerging economies

aligns. Citizens are content, however

competitive advantage between

Europe: Europeans remain

sophisticated and discerning,

though traditionalism and

conservatism prevail.

Rest of World: The US and BRIC

nations realise effective, price-

Europe: Oil prices remain

moderately high but stable,

facilitating investment in

more efficient energy

infrastructure.

Rest of World: Stable and

Europe: Competitiveness in

manufacturing innovation

slows, as systems and

service innovation becomes

paramount.

Rest of World: Realising


67

economies is more difficult to achieve, as

innovations are predominantly realised by

globally networked individuals innovating

off services, not products.

differentiated public transport to

suit all tastes, whilst personal

transport becomes a minority

interest.

more resilient financial

systems enable investment

focus on services.

small improvements from

mega-scale integrated

systems of living and

working becomes a major

focus of BRIC nations.

‘Advanced Austerity’

Non-Demand

advantage: Europe

Extended austerity measures caused by

recessionary fears and debt restructuring

crises inhibit international investment and

growth. The high volume markets of India

and China suffer as a GDP growth ceiling

is discovered, and automated

manufacturing and service reduces

Western demand. Small entrepreneurs

thrive in small pockets of opportunity and

big industry suffers.

Europe: High unemployment and

low spending reflects European

consumers‟ price sensitivity in

straitened times.

Rest of World: The US Dollar

weakens, reducing trade, whilst

BRIC nations focus on

restructuring expensive and

ambitious infrastructure

programmes, burdened by

mounting healthcare liabilities.

Billions of Chinese and Indians

choose to save, not spend.

Europe: Political instabilities

with Russia and the Middle

East raise energy prices,

whilst the financial sector is

forced to comply with

restrictive regulations as it is

fundamentally rebuilt.

Rest of World: Housing and

finance continue to be the

world‟s worries,

compromising investment

and growth.

Europe: High education

and living costs limit growth.

Unemployment, pensions,

and healthcare remain a

burden.

Rest of World: return on

education and

infrastructure investments is

difficult to obtain, with

limited sources of private

investment and credit.

‘Yin Yang’

Competitive

advantage: RoW

The wealth which sired a now-weakened

and austere West contributes to the rise of

the East, as the BRIC nations develop

strengths in scale and innovation of

products and services, supported by

sophisticated, high volume local markets,

Europe: European consumers are

hamstrung by poor credit

availability and high living costs.

Mobility is expensive, highly taxed,

and many choose to work from

home for „virtual‟ companies.

Europe: Russian oil wealth,

allied to Chinese interest in

African oil, disadvantages

Europe‟s energy costs.

Rest of World: The financial

centres of the world

Europe: Expensive

education and living costs,

coupled with overcapacity

public and private transport

systems, make Europe‟s

cities (housing 80% of its


68


Table 17: Critical scenarios affecting the international competitiveness of the European automotive industry

and manufacturing know-how allied to

the USA.

Those who can, expatriate to

BRIC nations.

Rest of World: Further Chinese

liberalisation develops

sophisticated and discerning

consumers. India‟s middle-class is

buoyed by wealthy expatriates

returning from developed

countries.

become Dubai and

Shanghai, representing the

largest traded value in the

world.

population) an undesirable

place to live or work.

Rest of World: BRIC

investment in infrastructure

and education manifests as

an effective climate in

which to live and do

business. Western expatriate

communities migrate to

BRIC nations and the US,

seeking opportunities and

wealth.


69

5 Scenario implications (2020)

Implications for the competitiveness of the European automotive industry were

derived both from the scenario-building process, which is a strategic learning

process in itself, and from the final scenarios.

Three key factors were identified as most influential to the relative competitiveness of

the industry: 1. Demand of the European market; 2. Related and supporting

industries (e.g. products and services); 3. Factor conditions, such as infrastructure

and advanced conditions such as R&D.

Demand was predominantly driven by the sophistication and size of market, and

identified to be the single largest determinant of competitiveness; one whose

relative development across international borders is significantly impacted by global

uncertainties. The future competitiveness of the European automotive industry is

therefore considered largely unknown.

Faced with increasing competition from emerging nations supported by

government programmes, consideration must be given to the mutual reinforcement

of international and national competitiveness. Furthermore, as the automotive

industry aims to transition into delivering products and services, it must recognise that

competitiveness in services may require different factors to manufacturing

competitiveness.

Accordingly, the top three opportunities and risks of the „Green Car Future 2020‟

scenarios are presented below for each of the primary CAPIRE stakeholder groups.

5.1 Opportunities

This section explores business opportunities that are most likely to increase the

relative competitiveness of the European automotive industry in 2020.

Automotive Manufacturers and Suppliers _________________________________________

1. Product and service innovation


70

Transformational factors such as consumers‟ green considerations, enhanced

mobility requirements, and stringent regulatory efficiency targets challenge the

European automotive industry to innovate in its delivery of products and services.

Example initiatives include (but are not limited to) green car and electromobility

projects.

2. Development of supporting industries

Development of new products and services provides an opportunity to gain

international leadership and realise enhanced value from complementary industries,

such as energy production. Support factors could include clustering effects and

infrastructure considerations.

3. Manufacturing and delivery innovation

The realisation of value from existing and new markets is likely to warrant innovation

in the delivery of products and services to consumers, supported by investment in

advanced and specialised manufacturing and supply infrastructure innovation.

City Transport Authorities _________________________________________________________

4. Realisation of integrated transport model

An integrated transport model can provide economic and social benefits to cities

by facilitating mobility of people and goods, thereby enabling more sophisticated

and competitive value creation and capture opportunities.

5. Sustainable energy efficiency gains

Large-scale gains in efficiency through infrastructure and integration can allow cities

to realise sustainable advantage from supporting industries; for example, energy

suppliers can be competitively incentivised to achieve more stringent targets,

insurance costs (say, for pollution damage, health costs) can be reduced.

6. Enhanced quality of life

Effectively satisfying individuals‟ city transport requirements can encourage

residents, workers, and visitors to benefit from access to enhanced living conditions,

and provide greater access to leisure and recreation.


71

Electricity Suppliers ______________________________________________________________

7. Retail model innovation

Green considerations, primarily driven by efficiency gains from electromobility, have

put the spotlight on electricity suppliers‟ relationship with consumers. This presents an

opportunity to develop new markets and retail relationships, facilitated by suitable

integration and infrastructure capabilities.

8. Supply chain innovation

In contrast to the end-to-end supply chains required to supply fossil-fuels, electricity

suppliers can fulfil an increasingly important intermediary role for consumers in the

sourcing and supply of renewable and non-renewable energy in a flexible end-user

form. To achieve this transition, gains can be realised through complementary

industries driving generation efficiencies, smart grids, and innovative, cost-effective

retail models.

9. Lifestyle market penetration

Increasing presence in powering all aspects of consumers‟ lifestyles offers electricity

suppliers the opportunity to fulfil energy, efficiency, and green requirements.

Advanced and specialised relationships may therefore be possible, providing

incentive for commercial partners to work with electricity suppliers, and for electricity

suppliers to move beyond the traditional „forecourt‟ model of energy retail.

5.2 Risks

This section explores business risks that are most likely to negatively impact the

relative competitiveness of the European automotive industry in 2020.

Automotive Manufacturers and Suppliers _________________________________________

1. Differentiation and affordability

As new products and services are created, effective differentiation and affordability

(both perceived and real) in a crowded market will become the key to consumer

demand, market share, and overall growth. Fulfilling basic demands for early

adopters, as the battery-powered Nissan Leaf currently does, is unlikely to remain a


72

sustainable advantage as other products emerge with comparable specifications,

functionality, and affordability.

2. Investment costs

Achieving a return on high initial investment costs, especially where such spending

represents an unrecoverable market entry cost, is likely to prove damaging in a

business environment affected by finance and energy insecurity. Furthermore,

European investment in supporting industries (such as charging grids) may, in the

long-term, prove to be less competitive than offerings from the rest of the world.

Competitive investment by competing industries, and unforeseen product and

service obsolescence represent further significant risks to investment activities.

3. Capacity and service quality

Overcapacity in manufacturing or service capabilities represents a costly risk in the

event of a market downturn, or competition from alternative providers. More

advanced and specialised investments (such as proprietary mobility services, or

dedicated technology manufacture) can exacerbate risk if their marginal costs are

high, and breakeven volumes are significant and inflexible.

City Transport Authorities _________________________________________________________

4. Transport capacity

Capital-intensive investments – for example, charging grids or new transport

connections - are subject to uncertainty about their utilisation rates and internal rate

of return. Further expected risk includes revenue protection and distribution, and

requirements to fulfil customer charters and political aims.

5. Market cannibalisation

Competition between public and private transport providers, in an integrated,

personalised transport environment, could potentially intensify and render public

investments less viable. Furthermore, the provision of enabling infrastructure (such as

smart grids) may encourage disintermediation of transport network monopolies by

allowing alternative providers (for example, taxi companies) to create and market

more agile transport solutions.


73

6. Living costs

Expenditure on transport will likely continue to compete with other major living costs

for most consumers. In an uncertain environment, the price sensitivity of consumers

to new or enhanced city transport products and services presents an unrehearsed

risk.

Electricity Suppliers ______________________________________________________________

7. Capacity utilisation

Capital-intensive supply infrastructure will require high utilisation rates in order to

achieve an effective return on investment, subject to potentially volatile energy

sourcing and supply costs. Smart grids and other services present additional market

risks because the demand for, and potential obsolescence of asset investments such

as charging points is unknown.

8. Supply chain disruption

Electricity suppliers‟ position as essential energy intermediaries may become subject

to regulatory restrictions or review. This could arise as a response to traditional fossil-

fuel energy suppliers facing oligopoly-pricing pressures from major electricity

suppliers. Supply chain risks also include disintermediation of smart grids as a service

by alternative electricity and non-electricity suppliers.

9. Retail model resilience

Electricity suppliers may face fragmentation of customers, due to differences

between corporate and personal energy demands, and customisation thereof.

Flexibility and responsiveness to energy sourcing and supply may prove essential, as

consumer energy demand may become much less predictable. In the longer term,

consumers‟ perception of the „value added‟ to electricity supply will determine their

willingness to pay for electricity supply as a commodity, or as a service providing

additional consumer surplus.


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5.3 Opportunity horizon

The opportunity horizon depicted in Table 18 presents a simple snapshot summary of the top opportunities and risks for CAPIRE

stakeholders in 2020.

The horizon is divided into three sections, each representing the main drivers of competitive success identified in Section 3 (Driving

forces analysis).

The opportunities highest above the horizon are considered most likely to increase the relative competitiveness of the European

automotive industry; conversely, the risks furthest below the horizon are considered most likely to negatively impact relative

competitiveness.

Demand Related & Supporting Industries Factor Conditions

Opportunity Product and service innovation Development of supporting industries Manufacturing and delivery innovation

Realisation of integrated transport model Supply chain innovation Lifestyle market penetration

2020 Horizon Retail model innovation Sustainable energy efficiency gains Enhanced quality of life

Capacity utilisation Market cannibalisation Retail model resilience

Differentiation and affordability Supply chain disruption Capacity and service quality

Risk Transport capacity Investment costs Living costs


Table 18: 2020 opportunity horizon for the European automotive industry


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6 Recommendations (2011)

Recommendations for immediate action are presented specifically for CAPIRE

stakeholder groups, and generally for all business stakeholders in the European

automotive industry.

These recommendations - derived from the scenario implications - are aimed at

sustainably enhancing competitiveness through uncertainty by:

1. Maximising value capture opportunities now and in the future

2. Minimising risk consequences now and in the future

6.1 CAPIRE stakeholder groups

Stakeholder group recommendations are presented in three general categories:

I. Strategy

II. Market offering

III. Organisational capability

It is recommended that these are implemented in the presented order, whilst the

anticipated time required to realise value from each category will range from 1 to

5+ years depending on context.

Automotive Manufacturers and Suppliers (e.g. Renault, Bosch, AVL) ________________

I. Develop affordable, integrated personal transport solutions

Aim to deliver personal transport solutions that reinforce and develop your brand

qualities, thereby enhancing the perceived affordability and market demand for

your products. To enhance utility and consumer value, identify and evaluate the

perceived and real consumer benefits realisable by vertical integration (e.g.

charging + car + personal navigation from the same provider) and horizontal

integration (e.g. interchangeability between car / bike / van modes of transport).

Integrated solutions may provide surplus consumer value and enhance retentions,

also providing an opportunity to create and monetise complementary assets.

II. Deliver differentiated products and services


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Identify, evaluate, and deliver products and services which can be differentiated

and understood by the end user. It is, therefore, advisable to communicate your

products through more than their technological virtues, as these attributes may soon

be substituted by competitors. To develop manufacturing flexibility, it may be

advantageous to share product platforms between Europe and the rest of the

world, such that volume and sophistication attributes provide mutually reinforcing

benefits for product quality, and resilience in the event of imbalance regional

demand. Service distribution, if defined, should aim to integrate existing brand

qualities and provide compelling differentiation from, say, rental car companies and

clubs.

III. Share innovation risk in non-core aspects; design and develop for flexible

breakeven volumes

Identify organisational opportunities to distribute R&D and manufacturing capacity

without restrictive capital costs, perhaps by licensing technologies or services, and

leasing flexible production capacity closer to anticipated markets. Ensure there are

no fundamental bottlenecks which may restrict access to essential products and

services required for your proposition (e.g. battery supply, service capacity, etc),

and hedge against these risks.

City Transport Authorities (e.g. Transport for London) _______________________________

I. Develop indispensable transport infrastructure and services

Aim to deliver transport solutions that are integrated and indispensable to all city

lifestyles. Identify opportunities to enhance existing lifestyles, or develop new lifestyles

through transport services (e.g. late night culture, automatic bus route planning and

notification). Identify suitable demographics, products, and service combinations to

enable these lifestyles (e.g. bike transport capability for buses).

II. Improve accessibility and affordability whilst monetising service-delivery

capabilities

Identify means to increase transport service access and lifestyle value, thereby

increasing utilisation and benefiting affordability. This could take the form of energy

and time-based pricing, whereby customers are incentivised to utilise the network at

less busy times, whilst achieving their net green goals by using your most efficient


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offerings. Monetise service capabilities by developing corporate partnerships with

private transport organisations and other public cities, in order to share infrastructure

know-how.

III. Maximise efficiency through integration, and learn from the best

Learn from best-in-class examples, and identify opportunities to integrate capabilities

whilst presenting consistent, coherent benefits to customers. For example, an

integrated approach with councils to determine transport policies for schools could

be used to develop integrated systems for timetable planning and activity

scheduling. Integration with electricity suppliers may represent mutually beneficial

development and capability interests.

Electricity Suppliers (e.g. Iberdrola) _______________________________________________

I. Develop a sustainable relationship with consumers lifestyle energy needs

Aim to develop and deliver an embedded, sustainable energy-based relationship

with consumers, as they transition from traditional energy sources to efficiency-

benchmarked energy suppliers. Identify evolving corporate and personal

requirements, such as fleet-based energy supply contracts, or pay-as-you-go

charging for personal customers.

II. Provide a differentiated, integrated energy service through suitable channels

Integrate capabilities through intermediaries, or on behalf of intermediaries such as

transport authorities, by (potentially) consolidating billing systems for energy and

transport to simplify and reduce consumers‟ perceived living costs. Identify

opportunities to become a preferred buyer for „traditional‟ non-electric energy

suppliers, providing an end-to-end benefit for consumers (e.g. partner with a

synthetic oil producer to provide a greener solution for consumers).

III. Develop capacity and flexibility

Organisationally, identify supply chain opportunities to develop a flexible

architecture for distribution and potential storage of energy (e.g. by providing and

subsidising solar powered energy storage systems for consumers, which discharge to

the grid). Focus on optimising capabilities as a preferred energy carrier for

consumers‟ lifestyles, in contrast to utility supply, and identify complementary means

to monetise supply. In the long-term, price competition will favour electricity suppliers


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who have managed to deliver consumer surplus, not dissimilar to the mobile

telecoms industry in which the supply of a network is not valued, but rather the

services and options each provides.

6.2 European automotive industry

This report concludes by advising the following general recommendations to

enhance the 2020 competitiveness all business stakeholders in the European

automotive industry:

Future planning: Addressing the most demanding customers with

effective products and services is likely to be the largest determinant of

future competitiveness. Rehearse each future to identify the changing

needs of the most sophisticated national and international customers,

and evaluate the competitiveness of your future plans in satisfying their

requirements. Aim to provide a „consumer surplus‟ above and beyond

mere „utility value‟.

Strategy: To decide which strategic options Europe‟s automotive

industry should pursue in dynamic market conditions, apply the „Green

Car Future 2020‟ strategies to test the resilience of your existing

organisational strategies and to identify opportunities. Develop and

regularly renew organisation-level scenarios using the competiveness

model developed in this report. Test how existing scenarios will play out

across each scenario, and aim for resilience across several scenarios.

Identify opportunities to innovate through new offerings, markets, and

processes, including new distribution methods and customer

experiences.

Operations: Identify how your organisation, products, and plans will

respond in different scenarios, in order to identify areas of strength and

weakness. If future plans require product and service capabilities,

identify appropriate facilitating clusters and infrastructure.

Competencies: Develop organisational awareness by disseminating

scenarios within your organisation, thereby building organisational

awareness. Most organisations track their competitors, and many do

not aim to understand environmental change. Cultural change may

be required to prepare your organisation for the required agility and

resilience through change.

Tracking events: Incorporate scenario building processes into your

organisation by identifying and recognising key environmental signals.

The trends and uncertainties template developed in this report may be

readily incorporated to facilitate regular scenario input and review of


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new signals from the periphery of your organisation. Incorporating

environmental scanning into your organisation will help build

intelligence to identify signals of future change.

Overcoming resistance: Encourage diversity of perspectives within your

organisation, and apply the scenario-building process within mixed-

stakeholder groups to encourage ownership and incorporate critical

review into future foresight.


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Appendix

Source: Car Magazine (UK) n.d.

Exhibit 1: Who owns who in the automotive industry - 2005


81

Source: Car Magazine (UK) n.d.

Exhibit 2: Who owns who in the automotive industry - 2010


82

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Acknowledgements

To my supervisor, Professor Mohan Sodhi, for his invaluable direction and feedback.

To my family and friends for their understanding and support.

To all whose thoughts helped fuel my own.


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About the author

Sailesh Patel has a degree in Chemical Engineering from the University of Bath, and

will complete his full-time Cass MBA in September 2011. He is a Chartered Chemical

Engineer with eight years experience as a process engineering consultant to the oil

and gas industry, and a self-professed fan of all things automotive. He believes the

automotive industry is poised to undergo paradigm change arising from embryonic

effects, and hopes that Europe continues to remain at the forefront of automotive

innovation and success during exciting and uncertain times.