The Future of the Automotive Industry

By: Thibault Sorret, for WI Harper (Beijing Office) On: August 23rd, 2015

Abstract

The following 3-Part white-paper explores the future of the automotive industry. It presents a context for investment opportunities to be placed against. To this effect, its aim is to understand:

What technologies and market shifts that will enable the transition into a future of mobility that will both maximize consumer experience and net societal benefit?

What role does China play, both present and future?

The research points to three clear trends: ubiquitous car connectivity, on-demand autonomous cars, and electric vehicles. These trends seem inevitable to both external analysts and industry insiders. It is in their timing, application and the possible implications that opinions differ. In short, William Gibson put it best:

"The future is here. It's just not widely distributed yet."

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Table of Contents Abstract 1 Table of Contents 2 Introduction 3 Part 1 - Car connectivity and intelligence 4 The Driving Force 4

The Real Impact 5

Technological Implications 7

Roadblocks 8

The China Corner 9

Part 2 - The Self-Driving Car 10 The Importance of Autonomy 10

On Demand 10

Current State and The Road Ahead 11

Roadblocks 12

The China Corner 13

Part 3 - Sustainability 14 Going Electric 14

The Tipping Point 14

The missing pieces 15

Lighter cars 16

Roadblocks 17

A note on Hydrogen Fuel-Cells 17

The China Corner 18

Works Cited 20 Introduction 20

Part 1 20

Part 2 22

Part 3 23

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Introduction

The future of the transportation industry is changing such that the top players 20 years from now could be radically different from today. In the face of these trends, large companies need to adapt to an ever-increasing speed of innovation.

A hundred years ago Henry Ford brought the automobile market into existence with the model T. Ever since, cars have improved on an incremental basis. Industry giants emerged, such as the Volkswagen Group (88.44b market cap) and GM (50.61b market cap). In the last few years, however, tension has grown. As the great-grandson of the Ford’s founder and current Chairman of the company, Bill Ford, puts it: "It used to be that the auto industry, and the car itself, were part of a self-contained ecosystem. […] That’s all been turned on its head; we now have disruption coming from every angle, from the potential ways we fuel our vehicles to the ownership model.” 1

The current atmosphere is the perfect storm for disruption. On the supply side, the car indus-try’s lag in innovation stems partially from its insularity; the high barriers to entry have histori-cally made it difficult for new players to enter the space. In recent years, however, technology companies such as Google and Apple have being amassing large cash reserves, while macro trends of larger venture capital funding rounds and decreasing startup costs have allowed entre-preneurs like Travis Kalanick and Elon Musk to launch car-related startups such as Uber and Tesla Motors, respectively.

The future of cars lies in the sharing economy. On the demand side, the internet has powered a cultural shift in the relationship consumers have with goods; ownership has given way to access. With the rise of the sharing economy, cars are slowly becoming just another utility. Despite the status and power symbol that a car represents, relatively young car markets like China are quick-ly catching on: one need only Kuaidi/Didi who cater a reported 6 million rides a day.

The future lies at the intersection of the two. The future is isn’t about cars, it’s about mobility. More specifically, autonomous vehicles, running on sustainable energy sources, being sum-moned on demand by consumers to take them where they please When looked upon holistical-ly, the supply side’s ever increasing speed of innovation is giving way to two major shifts: au-tonomous (self-driving) vehicles and sustainable fuels. On the demand side, consumers want to have access to a vehicle at will, without necessarily owning the vehicle.

! KPMG interview with Bill Ford (http://www.mckinsey.com/insights/innovation/bill_ford_charts_a_1 -course_for_the_future)

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Part 1 - Car connectivity and intelligence

The first major shift towards the future of mobility, car connectivity, already has traction. By 2020, it is estimated that 90% of cars will be connected to the internet . If fact, "the connected 2

car market is expected to reach $46.69 Billion by 2020, at a CAGR of 10.82% from 2014 to 2020.” 3

In an interview with an industry insider, it was clear that all major car companies will have inter-net connected cars within the next 3 years. BMW, for example, has 3 million connected vehicles on the road today and is projecting 10 million connected cars by 2018.

The Driving Force

The driving force underlying this shift is consumer demand. With the rise of mobile technolo-gies, consumers now expect access to the digital world on demand; they seek to stay digitally connected.

“It all starts with the customer – a rich and robust understanding of the customer, what they want, what they are going to, but most importantly, what they want in the future.” 4

Consumer demands (both existing and expected), as well as government regulations, are key drivers in this market, and both are increasingly targeting connected vehicles.

In-car technologies, however, have become so outdated that even non-car companies, such as Apple (with Carplay) and Google (with Android Auto), have decided to tackle this issue. For now, due to safety concerns, CarPlay and Android Auto have limited apps to keep the driver fo-cused on the road. As the industry moves towards autonomous driving, more applications will be added.

Finding ways to keep the drivers’ eyes on the road has been increasingly difficult with the rise of mobile devices, which is why both automakers, like BMW, and startups, like Navdy, are tackling this issue with augmented reality head’s up displays (HUD), in the near future.

Telematic opportunities from connected cars (http://techcrunch.com/2014/10/03/from-model-t-to-4g-2

how-connectivity-is-revolutionising-the-car/)

Volkswagen connected cars (http://www.marketwatch.com/story/volkswagen-offers-new-levels-of-con3 -nectivity-with-class-leading-suite-of-infotainment-technologies-2015-07-29)

BMW connected cars (https://gigaom.com/2013/09/18/car-companies-are-now-cloud-companies-bmw-4

to-have-10m-connected-cars-by-2018/)

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The caveat here is that benefits from connectivity improvements will come incrementally. Car companies, due to stricter safety considerations and more difficult hardware conditions (includ-ing constant vibration, greater temperature ranges, budget-restrictions) are slower to integrate technology.

"For a range of reasons, car companies simply have to work with product development cycles that are three to five times longer than the tech industry. This lag is most visible to end users in the context of infotainment systems, ” 5

Furthermore, infotainment in cars will always lag mobile because the primary purpose of a vehi-cle is safety and mobility. Entertainment and communication, on the other hand, are better served by today’s mobile devices.

The main developments in infotainment, from the end-user’s point of view, are going to be har-nessing the power mobile devices. From music streaming apps to voice recognition to answer abstract queries, such as, “I’m feeling a hungry” with actionable information such as directions to restaurants nearby that fit one’s preferences.

"Our smartphones and tablets are setting the pace for digital entertainment everywhere, including our cars, and these devices will continue to do so. Meanwhile, car manufacturers must come to grips with the need to keep those infotainment systems fresh, something that will require much shorter development cycles than they're traditionally used to working with.” 6

Although relying on another company for something as important as the dashboard may be a tac-tical risk for car companies, Tesla is thus far the only major car company who's technology is updated frequently enough to stay independent. In order to stay relevant, car manufacturers need speed up the development cycles of hardware technologies to support the increased pace of inno-vation.

The Real Impact

Outside the incremental improvement in infotainment and navigation, connected cars will trigger tremendous developments in the less flashy scope of telematics (the transfer of data to and from the vehicle). The impact will be exponential, as more data about the vehicle, driver, and envi-ronment is collected, analyzed and used to engineer new solutions.

Infotainment systems (http://arstechnica.com/cars/2014/06/the-past-present-and-future-of-in-car-info5 -tainment/)

AR Dashboards (http://www.telegraph.co.uk/motoring/motoringvideo/9915073/Augmented-reality-car-6

windscreens-to-display-phone-calls-and-GPS-information.html)

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Vehicle data will improve maintenance information for car manufacturers and prevent issues ear-ly on for costumers. Huge recalls will become far less frequent with the advent of over-the-air (OTA) software and firmware updates. Tesla customers, for example, wake up to find out their car is now able to process voice over commands, has a faster acceleration, or improved steering. Preventative measures and sensors will reduce and improve car maintenance by addressing prob-lems before they occur. Dealership are resistant to these changes, as it affects their business mod-el, but it isn’t stopping companies like Jaguar-Range Rover to develop these tools, and empower-ing consumers with access to the information on mobile apps.

"Dealers have mixed feelings about this. Of course, it provides a better satisfaction rating, but it lowers their revenue as a dealer network over time [referring to the elimination of labor charges for upgrades.]” 7

Behavioural data will also start to personalize the driving experience ranging from the type of music a person likes to listen to at a specific time of day, energy management, frequent locations. Nest (a smart thermostat maker) and Mercedes Benz, for example, have partnered to enable your thermostat to start adjusting your home to the perfect temperature when it knows your car is on its way home.

Environmental data will help improve traffic flow, avoiding collisions, and better emergency re-sponse. Improved sensors and telematic systems will enable the creation of vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I), laying the path for better fleet-scale traffic manage-ment and autonomous driving.

Collision prevention is already a standard feature among new cars, and will only improve with V2V technology. In fact, the US Department of Transportation recently stated that connected cars can prevent 70-80% of crashes. 8

In the case of an accident, pre-installed devices will notify emergency response services. Gov-ernmental mandates are making this technology ubiquitous in new vehicles. The European Union’s eCall Mandate and Russia’s GLONASS program have paved the way. The increased connectivity of cars will enable ambulances to have a clearer picture of the accident, possibly extending the “Golden Hour” for medical treatment, saving thousands of lives.

The full impact of changes in telematics through the advent of connected cars yet to be discov-ered, but government mandates and customer demand are pushing the entire industry towards smarter, safer vehicles.

Over the Air Software (http://www.computerworld.com/article/2880150/over-the-air-software-coming-7

soon-to-your-next-car.html)

Unresolved issues in the connected car market (http://www.mobilecloudera.com/airbiquity-unresolved-8

issues-in-the-connected-car-market)

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Technological Implications

The technological advances that companies are facing, however, don’t only reside on in the front-end; the entire IT infrastructure of the car industry is at stake. Although LTE, 3G, HSPA+, Wi-Fi, chips, Bluetooth technologies will become increasingly important in the car industry, im-provements in these fields aren’t dependent on car companies per say. Suppliers like QNX, Texas Instruments, and Harman, make these technologies accessible to all players. This is part of the reason that connected cars will be mainstream by 2020. The real challenge ahead is in IT In-frastructure.

"Everybody knows yesterday’s IT infrastructure was not built for the challenges of this new world, of big data, and connected devices. We need a new approach to the data center that in-creases IT agility and builds on from what exists today. That approach is Cloud [computing].” 9

One of Tesla’s main strengths in its battle with the giants is the fact that its IT system was built from scratch with cloud computing in mind. This gives them the ability to stay ahead of competi-tors in real time, through OTA software and firmware updates, for example.

"Research firm IHS expects most, if not all automakers, to offer fully fledged OTA-enabled plat-forms that encompass every vehicle system - from infotainment, safety, comfort, and powertrain -- in three to five years.” 10

Before any of this can happen on a large scale, however, have to make the transition from legacy IT to cloud computing without any maintenance or downtime.

BMW, like many other car manufacturers, are running at maximal capacity: plants run 24 hours a day, even on weekends. Server downtime would hold severe negative consequences in a plant that produces a car every 30 seconds.

Moreover, the amount of data companies need to be able to process has increased dramatically. It used to be that connectivity involved low bandwidth tools like GM’s Onstar system, that the au-tomaker could afford to pay for. Nowadays, consumers use high bandwidth apps (such as Net-flix, Youtube, Instagram). As previously mentioned, new telematic systems will also enable companies to gather huge amounts of data on the vehicle, driver’s behaviour, and environment.

The fundamental shift is both in the backend management and the electrical control units (ECU). Most companies today place firewalls around their systems to prevent hacking. Tesla, on the

BMW connected cars (https://gigaom.com/2013/09/18/car-companies-are-now-cloud-companies-bmw-9

to-have-10m-connected-cars-by-2018/)

Over the Air Software (http://www.computerworld.com/article/2880150/over-the-air-software-coming-10

soon-to-your-next-car.html)

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other hand, allows its telematics system to control ECU’s. This is a fundamental paradigm shift enables Tesla to aggregate more data, analyze it and push relevant updates to vehicles OTA. This is the future of data in the car industry.

Players like BMW and Hyundai are catching up, yet most companies, such as Ford, Toyota and GM, are still in the experimentation stage. Toyota speaks for most when it "recognizes that re-mote updates are technically possible, and could be convenient. But despite the inconvenience of the current approach, it’s decided not to do them for now because of 'security challenges.'"

Roadblocks

"The average new vehicle today has about 2,000 functional mechanical components, and up-wards of 100 million lines of software code.” 11

It is undeniable that the extraordinary complexity of modern cars make them an attractive target for hackers. The high-stakes involved with remote access to a device that could potentially cause death is root for concern.

These concerns were recently amplified by the media buzz of recent hacks on a Jeep in the Unit-ed States and Tesla in China as part of security challenges. Access to the ignition, brakes, and transmission, among others, in the Jeep highlights major security holes that stirred up politicians and consumers alike.

As concerning as that may be, the real problem lies in a security paradigm shift. Egil Juliussen, research director for IHS Automotive, points out that current security systems rely on firewalls, on the assumptions that a good enough security system cannot be breached. The complexity of connected cars makes it impossible to create an unhackable vehicle. Here, the automobile indus-try needs to look at other sectors that have to deal with cyber security; the answer lies in detec-tion and reaction.

It’s a cat-and-mouse game of patching security vulnerabilities as soon as they are exploited that’s been the norm in the software industry since the first viruses. This is, in part, why OTA updates will soon be necessary. Having to recall millions of vehicles for security updates will not be sus-tainable as vehicles become more connected, and, therefore easier to hack. Historically, the most successful strategy in this field is the concept of red teaming.

In this respect, Tesla and Daimler have hired white-hat hackers to hack their cars, in-house. This will enable them to detect and fix security issues. Tesla even went so far as to attend Def Con, a

Big data and cars (http://www.forbes.com/sites/ibm/2014/12/18/3-ways-big-data-is-helping-to-build-11

better-cars/)

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hacker’s conference. The stakes are high and being proactive will lead to huge savings in the long term. Car companies will no longer be able to rely on outsourced security systems; the in-creasing complexity of cybersecurity will require in-house help.

Despite the media frenzy, employees from Tesla and Mercedes Benz reported that they weren’t too worried by this threat. They point to how banks have made the transition, for example, and despite the occasional, isolated attacks, the industry as a whole was able to transition into cyber-space successfully. Moreover, it is through the ubiquity of connected cars and their associated technologies that the industry will be able to move towards increasingly autonomous vehicles.

The China Corner

In the wake of a slowdown from the world’s fastest growing automotive market, there has been increasing pressure to launch connected cars to revitalize interest in the high-end car industry.

Although current penetration of telematics and infotainment systems is low, there is a lot of in-terest in this area. China is a peculiar market when it comes to these systems: with Google blocked in China and government owned internet providers, the political and economical land-scape allows for new players. Among the biggest players are car companies like Toyota and Ford, but also local telecoms and automakers such as Shanghai Pateo, China Unicom (partnered with Tesla and Airbiquity), China Mobile and Hawtai and Bluestar Technology. 12

Additionally, outside players and startups are beginning to venture in this field. Alibaba and SAIC motors recently announced joint investments of $160 million in connected cars, as Baidu partnered with Harman to integrate CarLife infotainment systems. Lifan Industry, an automaker will acquire an Internet of Things company called Woasis for $48 million to improve its position in the connected car sector. 13

Things are heating up in China, due to its high concentration of car component manufacturers. In fact, Ernst and Young’s 2015 survey found that "as many as 70 percent of automotive companies intend to pursue deals in the next 12 months.” 14

China is a fast follower, and despite it’s current lag in connected cars, it will likely be one of the first markets to achieve ubiquity in connected cars.

Chinese Connected Car Market (https://www.abiresearch.com/market-research/product/1017293-con12 -nected-car-services-in-china/)

Chinese Billionaire Investing in Connected Cars (http://www.forbes.com/sites/russellflannery/13

2015/08/02/china-billionaire-targets-connected-cars-as-sales-cool-in-worlds-largest-auto-market/)

China’s Demand for Connected Cars (http://www.bloomberg.com/news/articles/2015-05-18/delphi-14

sees-china-s-demand-for-connected-cars-driving-growth)

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Part 2 - The Self-Driving Car

There are six stages of autonomous vehicles. For the intents of this section, an autonomous car can be defined as “any car with features that allow it to accelerate, brake, and steer a car’s course with limited or no driver interaction,” (i.e. autonomous driving from level 4-6). A self-driving 15

car constantly tries to assess where it is, what’s around it, what will happen next, and how to re-act. It does so through both mapping technology (including GPS) and sensor information to un-derstand what street, lane and position its in. This also helps the car know what the speed limit is and where red lights are placed, for example. By processing inputs from the sensors (which in-clude lasers, radars and cameras with a 360-degree view) the software detects and classifies cer-tain objects such as other cars, cyclists and pedestrians. It tracks the speed, size and position of these objects to predict how they might move (i.e. pedestrian crosses the street). Based on the aforementioned factors the car adjusts its speed and trajectory in a safe manner.

The Importance of Autonomy

The impact of driverless cars is, first and foremost, a massive shift in car safety, not unlike how the seatbelt and airbag before it.

"Deaths from traffic accidents—over 1.2 million worldwide every year—could be reduced dra-matically, especially since 94% of accidents in the U.S. involve human error.” 16

Cars will be redesigned for passengers, not the driver. It’s possible that cars will come to feel like a second living room or office, allowing for more enjoyable and productive commutes.

Additionally, autonomous cars will bring enormous positive environmental and economical im-pacts. Researchers at the Lawrence Berkeley National Lab estimate that a fleet of autonomous, electric taxis that would replace all of today’s cars would lead to a 90% decrease in greenhouse gas emissions. This is, in part, because the an on-demand fleet of about 15% percent of the US’s current cars would suffice to serve everyone’s mobility needs. 17

On Demand

10 Million Self-Driving Cars by 2020 (http://www.businessinsider.com/report-10-million-self-driving-15

cars-will-be-on-the-road-by-2020-2015-5#ixzz3iNnpMl00)

How Google’s Self-Driving Car Works (http://www.google.com/selfdrivingcar/how/)16

Green Argument for Driverless Cars (http://www.popsci.com/green-argument-driverless-cars)17

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A related trend is the rise of “on-demand” cars. Popularized by car-sharing services, like Uber, Lyft and Car2Go, consumers have grown accustomed to the idea of a cars being a utility. In Eu-rope, government-backed car sharing programs like Autolib’ in Paris have exceeded all expecta-tions. Autonomous vehicles will only accelerate this trend.

Simply from a financial point of view, for many people, not having a car and using Uber instead can be quite appealing: the average cost of car ownership is near $9,000 per year, yet Morgan Stanley’s research shows that cars are driven just 4% of the time. 18

A Columbia University study suggested that with a fleet of just 9,000 autonomous cars, Uber could replace every taxi cab in New York City –passengers would wait an average of 36 seconds for a ride that costs about $0.50 per mile. In fact, Uber CEO projects a shared ride will eventual-ly cost just $0.08 per mile . At this point, owning a car will make absolutely no financial sense 19

for most people.

Moreover, PricewaterhouseCoopers predicts a 99% reduction in the number of cars on the road (245 million to just 2.4 million vehicles in the US,an even more aggressive estimate than Berke-ley’s study) . This will have significant impacts on both the car industry and its auxiliaries. With 20

this macro-trend in the horizon, insurance startups like Metromile, are coming up with new ways to price car insurance in preparation for the future.

The big winner is likely to be Uber. At a $41 billion valuation, it has the resources to be the first mover in on-demand, autonomous, electric fleets. In fact, Uber is ready to buy half a million au-tonomous Telsa’s as soon as the cars can achieve full autonomous driving. Automakers are catch-ing up on this threat, as Ford and Audi are already testing on-demand car fleets.

Current State and The Road Ahead

Self-driving cars are (almost) here, and players from all sides are trying to compete. From tech companies like Google, Apple, Nvidia, to tier-one suppliers like Delphi, to car-makers like Audi, Tesla, and Volvo are investing in autonomous cars. Tesla’s 2015 Model S already has a self-dri-ving feature that allow for 90% autonomous driving, and other big players have fully function-ing, semi-autonomous vehicles on sale.

Morgan Stanley’s Car Report (http://qz.com/264781/the-latest-attack-on-americas-car-culture-comes-18

from-wall-street/)

Savings from Self-Driving Cars (http://www.fastcompany.com/3048777/just-how-much-money-will-19

self-driving-cars-save-you)

Autonomous Cars to Reshape the Economy (http://www.businessinsider.sg/ubers-autonomous-cars-de20 -stroy-10-million-jobs-reshape-economy-2015-2/)

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Although we’ve seen tests for fully autonomous vehicles (defined by the ability to drive from point A to point B and encounter the entire range of on-road scenarios without needing any inter-action from the driver), commercial versions are only projected to debut production in 2019.

The missing piece is V2X —the combination V2V (vehicle-to-vehicle) and V2I (vehicle-to-in-frastructure). These technologies, once deployed on a mass scales are projected to reduce acci-dents by 81%, improve traffic flow and enable the legalization of mass autonomous driving sys-tems. This infrastructure will then lead to ripple effects: by finding a parking spot irrelevant, 21

thus freeing up extra lanes in busy cities, for example; the possibilities and opportunities are end-less. The only issue is that this could take up to 20 years to build.

Roadblocks

In the US alone, 10 million jobs will be the price to pay for this future. Almost a million are em-ployed in manufacturing, 3 million in the dealership and maintenance network, and 6 million in truck, bus, delivery and taxis. Not to mention the collapse of the billion dollar industries of car insurance and car financing. 22

This is why although the technology for “go to sleep and wake up at your destination” au-tonomous vehicles, as Elon Musk puts it, will be ready by 2020, regulators are likely to make the transition a difficult one. As policy makers worldwide will be slow to make the transition, which will allow slower automakers will be able to catch up technology wise. In the meantime, we can expect semi-automation to become mainstream.

In developing countries, the barrier will be cultural. Lack of respect of road regulations will make difficult to transition into autonomous vehicles fleets. In fact, countries like China, India, and Thailand could lag the rest of the world by 10-20 years.

Perhaps the most prevalent threat, however, is consumer fear. Although these fears are largely ungrounded, as riding in an autonomous vehicle today is statistically safer than letting one’s par-ents drive, consumers will need to be educated.

V2X approach to Autonomous Driving (http://embedded-computing.com/articles/a-holistic-approach-21

v2x-autonomous-driving/)

Autonomous Cars to Reshape the Economy (http://www.businessinsider.sg/ubers-autonomous-cars-de22 -stroy-10-million-jobs-reshape-economy-2015-2/)

! of !12 24

Schoettle and Sivak found that a majority of those surveyed "replied that they were moderately (32.7 percent) or very (35.6 percent) concerned about riding in an autonomous car if that was the only option, with levels of distrust increasing with the age of those surveyed.” 23

The China Corner

As China’s population becomes more wealthy the car industry will continue to boom, but a re-cent lull in car sales hints at the increase in on-demand vehicles. Severe problems with air pollu-tion and traffic have catalyzed policies that make car ownership more difficult: license plate con-trol and congestion pricing, among others. On the other hand, car sharing has never been easier. The pre-merger war between Kuaidi and Didi incentivized millions to start using car sharing apps. The central government views these companies as allies in its current scheme against air pollution and congestion.

Although Beijing has a "relaxed attitude towards internet companies competing in inefficient state regulated markets, which Prime Minister Li Keqiang has described as China’s “Internet Plus” strategy,” the regulatory problems come at the local level. Where nationals politics and 24

local interest diverge, conflicting regulations put drivers for Didi Kuadi and Uber in tough posi-tions.

Nevertheless, car-sharing in China is expected to grow by 80% annually for the next five years, as long as the government continues to provide support. Local car sharing companies, not just taxi-hailing apps, are bound to benefit.

Consumer Fears of Self-Driving Cars (http://arstechnica.com/cars/2015/07/self-driving-cars-are-com23 -ing-but-most-drivers-dont-want-them-yet/)

Car Sharing in China (http://thecityfix.com/blog/car-sharing-china-alternate-vehicle-ownership-car-24

congestion-peer-to-peer-growing-government-support-heshuang-zeng/)

! of !13 24

Part 3 - Sustainability

As humanity faces global sustainability issues, moving towards cleaner energy sources has be-come a priority. No matter the automobile industry’s improvements in gas per mileage, reliance on fossil fuels is unsustainable in the long term. With increasing pressures from governments, consumers, and international organizations, car-markers have begun to realize this. Most players have begun to realize this: BMW and Mercedes recently announced that each will have close to a dozen fully electric models on the market in the next two years, for example.

Going Electric

The first advantage to going electric is stability. Electricity prices are steadily going down and will continue to do so as advances in renewables make electricity cheaper. Gas prices, on the other hand, are subject to huge variability, and high in both economical and political risk factors. The 1970’s oil crisis exemplifies this point. Going electric will free non-oil producing countries from much of their trade deficit while increasing their political leverage.

The second is that electric vehicles are simply better vehicles. The Model S is the case in point. It now outsells Mercedes’ S Class. It’s currently rated as the safest car on the market. It’s a seven-seat sedan with better acceleration than a Porsche 911 (0-60mph in 2.8 seconds). It’s quieter at all speeds. It helps owners save an estimated $1000/year. Moreover, the engine itself has fewer moving parts, is cheaper to insure, and much smaller, allowing for increased spaciousness. Con-sumer reports sums it up in the following way: “Of all of the impressive new vehicles released in 2014, none was able to eclipse the innovation, magnificence, and sheer technological arrogance of the Tesla. That’s why it’s our best overall pick for the second consecutive year.” 25

The question remains: what’s holding the industry back?

The Tipping Point

Consumer Reports 2015 for Cars (http://www.cheatsheet.com/automobiles/behold-consumer-reports-25

top-10-vehicles-for-2015.html/?a=viewall)

! of !14 24

According to a 2013 study by the US department of energy, 78% of light duty vehicles will still be powered by gasoline in 2040. The study arrived at this conclusion by reasoning that the shift to electric cars would require manufacturers to undergo too many structural changes. 26

Geoff Ralston, a partner at YC, argues that predictions like this are akin to predictions of smart-phone penetration from 2005; way off mark. No one predicted the smartphones to have any rele-vance and yet 10 years later a quarter of the world’s population owns one.

The fundamental error in most of the projections available today rests on the assumption that “electric car sales will slowly increase as the technology gets marginally better, and as more and more customers choose to forsake a better product (the gasoline car) for a worse, yet “greener” version.” 27

It is far more likely that, in the next 5-10 years, electric cars will experience exponential growth in penetration to meet consumer demand. As aforementioned, the Model S proved that electric cars are simply better cars. BMW’s i8 and i3 models reinforce that point. This is the reason why every major car manufacturer is making electric cars. It is also why total cumulative sales of electric vehicles (EV) are set to pass the 1 million car mark this year, nearing an inflection point towards exponential growth.

First, economies of scale are making electric cars far cheaper to produce. Tesla’s upcoming Model 3 and GM’s new Bolt represent an emerging class of desirable $30,000 electric cars that will appeal to a mass market. As time moves forward superior electric vehicles will enter ever lower price ranges for cars, increasing penetration.

Furthermore, gas stations have razor-slim margins. The short-term increase in profit margins from 1% to 3% isn’t sustainable. An adoption rate for electric vehicles of just 10% will be 28

enough to drive many gas stations out of business, rendering gasoline cars more inconvenient. On the other hand, the electric car industry norm is moving towards a 200 mile range minimum, and will likely double within the next 5 years. Combine both trends and owning a gasoline car in the US and Western Europe will be more difficult than going electric in the next decade.

The missing pieces

US Government Predicts EV’s will stay small (http://www.theverge.com/2013/12/22/5236698/doe-pre26 -dicts-electric-vehicles-wont-make-a-dent-by-2040)

YC Partner on the Electric Car (http://blog.geoffralston.com/the-electric-car)27

Short-term increase in gas station margins (http://www.forbes.com/sites/sageworks/2014/01/21/profit-28

margins-at-gasoline-stations-have-increased/)

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The remaining hurdle remains range, but the scope of the problem is larger than it seems. Battery technology, lighter materials, as well as public perception will need to be targeted.

The initial goal for EV’s is to bring the cost down from $250 per kilowatt-hour to $100. At this price point, EV’s can be expected to compete subsidy free against its combustion engine coun-terparts. With Tesla and Panasonic’s multi-billion investments in the Gigafactory to develop Li-ion batteries that reach this benchmark within the next decade, it is safe to say that most cars will continue to rely on lithium-ion batteries (which also power our cell phones, laptops and tablets) for some time. Due to the scale of these markets, this technology has already benefited from economies of scale and continued innovation. In the near future, we can continue to expect 5-10% efficiency increases yearly. Although li-ion batteries meet our safety requirements in most settings, any battery technology more reactive or unstable could be hazardous. Moreover, the science journal Nature predicts that li-ion batteries will hit a ceiling relatively soon. 29

The potential for the right balance of stability and greater range could offer tremendous payoffs, which is why many high-tech companies, such as Phinergy Alcoa and Fuji Pigment, are working on different versions of aluminium-air battery technology, which could increase the storage ca-pacity of current li-ion batteries by forty-fold. Singapore’s Nanyang Technical University claims to have battery technology which would reduce charging time to a few minutes and increase ex-pected lifespan to 20 years by "replacing the graphite in the anode side of lithium-ion batteries with a gel made from ultra-thin titanium dioxide nanotubes.” Other battery technologies under30 -going research are Lithium-Oxygen/Sodium-Oxygen (various), Li-Sulphur (Oxis Energy), and Magnesium-Ion batteries (MIT).

Lighter cars

The 1970’s oil crisis led to incredible developments in lighter car bodies to improve fuel effi-ciency. Since then, however, cars have increased back to their original weights. As fuel efficiency becomes relevant once again, car bodies are becoming lighter again.

Ford’s top-line of F-150 trucks have gotten 15 percent lighter by replacing steel frame with alu-minum, thereby leading to a 20 percent improvement in fuel efficiency. This strand of aluminum is far safer, as it is roughly twice as robust as steel. In fact, steel industry players such as ArcelorMittal, responded to this shift by introducing high-strengths steels that can help improve weight efficiency by 23 percent. 31

Better Battery Revolution (http://www.nature.com/news/the-rechargeable-revolution-a-better-29

battery-1.14815)

The Future of EV (http://www.telegraph.co.uk/cars/green-cars/the-future-of-the-electric-car/)30

The Future of the EV (http://www.greentechmedia.com/articles/read/the-future-of-the-electric-car)31

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Looking towards the future, BMW is setting the standard for car materials. Its recently released i3 model under-weighs any comparable car due to its carbon fiber body. Although this is a first for a car, modern airplanes are increasingly constructed with carbon composites. Carbon fiber is both 30 percent lighter and stronger than aluminum. For EV’s this shift towards light materials 32

increases range and battery efficiency.

Roadblocks

The biggest challenge facing EV’s, however, isn’t a technical one, it’s consumer education. Most electric vehicles on the market offer enough range for most commuters and city dwellers. The ability to charge cars at home overnight makes cars with over 100 mile range enough for the needs of a majority of car owners. It is the early perceptions of "ugly, slow golf carts,” as Elon Musk puts it, are difficult to change. Memories of the Nissan Leaf’s 84 mile range is what the majority of consumers still consider the norm, despite the fact that new electric vehicle models often offer a 200 mile range.

An unexpected driver of change in consumer perceptions is motorsport. The all-electric Formula E championship has just completed it’s first successful season, while all Formula One and most Le Mans 24 Hour race-cars have transitioned to hybrids. This helps drive innovation in the elec-tric car industry and educate large populations about electric vehicles.

As governments and private investors increase the availability of electric charging stations and reserved parking for electric vehicles, range anxiety is also beginning to fade. The lack of indus-try standards for charging plugs, however, remains a hurdle.

Following in Tesla’s footsteps, major car companies are releasing increasingly beautiful, high-range, top-of-the-line models, which is helping shift consumers away from the “green means ugly and inconvenient” mentality. As high-quality electric vehicles become more massed-pro-duced, therefore cheaper, more consumers will go electric.

A note on Hydrogen Fuel-Cells

Recent auto shows and media buzz, mostly driven by Toyota, are showcasing hydrogen fuel cell cars as an alternative to EV’s when it comes to zero-emission vehicles. The main argument for hydrogen is that due to its similar distribution infrastructure needs as gasoline. Both are energy storage mechanisms, not energy sources. This means that the very process of extracting hydrogen

The Future of the EV (http://www.greentechmedia.com/articles/read/the-future-of-the-electric-car)32

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and transporting it requires significant amounts of energy, transported at a loss from production to delivery. Electrolysis, which would be used to split water as a fuel source, is about half as effi-cient as current solar panels. Moreover, hydrogen’s highly flammable nature lends it to large 33

risks at each step of the value chain.

On the other hand, electric cars’ delivery network and infrastructure is largely built into the exist-ing grids. Although some argue that the new load couldn’t be supported, it is overlooked that most charging occurs at night, when there are large amounts of excess capacity, and that home solar power rollouts will pick up an increasing amount of slack in the coming decade.

The China Corner

China is a fast follower market. Although EV’s in the world’s largest car market have yet to gain traction, the tides may be turning. Recent tax exemptions, subsidies, government quotas on “new energy vehicles” (NEV) and state-funded electric charging infrastructure have boosted sales. In September 2014, the country saw sales rise to 11,991 units (28 percent of the year’s total). "On an annualized basis, September’s sales would indicate a yearly rate that is well above the sales rates in the United States and Europe.” 34

Shanghai, for example, offers free license plates for NEV’s, which when added to other subsidies for qualified vehicles, can add up to RMB 120,000 ($19,395). In May, State Grid announced it would allow private investors to construct charging station and the five biggest municipalities announced plans related to NEV infrastructure. "Finally, in July 2014 the National Government Offices Administration declared that from 2014-2016, no fewer than 30 percent of all govern-ment cars purchased each year must be battery-powered, gasoline-electric hybrids, or other new non-polluting vehicles.” 35

Although these subsidies have already led to significant increases in electric car sales, the real issue for China lies further down the supply chain, at the energy production level. With 70 per-cent of China’s energy coming from coal (75 percent of it for electricity generation), an increase in electric cars may actually result in a net negative impact on the environment. Additionally, the US government projects that, in China, one coal plant will continue to be built every 10 days for the next 10 years.

Hydrogen vs. Electric (http://evobsession.com/hydrogen-cars-vs-electric-cars-detailed-comparison-effi33 -ciency/)

Electric Cars in 2014 (http://www.forbes.com/sites/jackperkowski/2014/12/12/electric-cars-a-review-34

of-2014/)

China’s EV market (http://www.chinabusinessreview.com/opportunities-and-challenges-in-chinas-elec35 -tric-vehicle-market/)

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In the long term, however, due to massive investments in the sector, "China could get 85 percent of its electricity from renewable resources by 2050, according to the China 2050 High Renew-able Energy Penetration Scenario and Roadmap Study, a nongovernmental report by Energy Foundation China.” The future looks bright. 36

Study on Renewables in China (http://www.efchina.org/)36

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Part 2

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Part 3

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