Electric cars one of several disruptions that will steer auto industry

Electric vehicles, driverless cars, ridesharing, changing patterns of vehicle ownership and use, and the recognition that climate change poses an existential threat are just a few of the major disruptions that may force automakers to modify their current business models.

Climate scientists contend that electric vehicles are one of the best ways to reduce greenhouse gas emissions, most of which come from cars and trucks. In the United States, the transportation sector is the largest source of emissions, and the automobile industry is under great pressure to meet regulatory emissions targets and do its bit for the planet. Automobile firms, their suppliers. and other mobility players must adapt to an emerging future that threatens their existing business models.

For example, car sharing may undermine the pattern of single-family ownership that has been fundamental to automobile firms’ business model for over a century. If a ride sharing company such as Lyft or Uber is able to send a fully self-driving vehicle to customers’ doors and take them wherever they want to go on command, those customers may be most closely connected to that service, not the automaker.

Electric vehicles will also impact the traditional business model. For starters, there is a dramatic increase in new entrants into the market, and sales and distribution channels are moving from physical dealerships to online stores. Service requirements for electric vehicles are less than for the gas-powered internal combustion engine because of their simplicity, and gross margins may shrink due to much higher competition and lower pricing for electric vehicles over time. In addition, policy makers in Washington will continue to promote and support faster electric vehicle adoption to deal with climate change.

Increasing electric vehicle ownership is at the heart of the Biden administration’s $2.3 trillion infrastructure package. It would provide $174 billion to spur development and adoption of electric vehicles including incentives to buy them and to get more EV charging stations installed across the country – 500,000 of them by 2030 – so people will feel confident they won’t run out of juice. There are currently about 41,000 charging stations in the U.S., compared to more than 136,000 gas stations.

Surveys indicate that while consumers’ appetite for electric vehicles has grown significantly, they remain concerned about the price of battery-powered cars, which can cost up to $10,000 more than conventional vehicles. But total operating costs for electric vehicles may well be less than for conventional ones. Fewer maintenance and charging costs may offset the higher upfront price over time. Electric vehicles also have fewer moving parts and they don’t require oil changes.

The hope is that federal largesse will push the growth of electric vehicles, which currently make up just 2 percent of the new car market and 1 percent of all cars, sport-utility vehicles, vans, and pickup trucks on the road, according to the Department of Energy.

Autonomous or fully self-driving vehicles represent perhaps even greater disruption for the automotive industry, although there remains considerable uncertainty around fully self-driving vehicles, despite considerable investment in them. It is difficult for potential customers to imagine what a community in which these are a viable transportation option would look like.

Even once fully self-driving cars are available, it is extremely difficult to predict their rate of proliferation.  It remains unclear whether they are five, 10, or 15 years away. In any case, they may lead to declining traditional car sales.

All these factors are significantly altering the auto manufacturing landscape. Incumbents will be forced to change their business model, leading to wholesale modifications in their manufacturing base, the closure of current facilities, adjustments to their dealership network and fundamental changes to their overall cost structure.  This kind of disruption does not come easy to large, mature companies.

One thing is certain: How people move from one location to another affects numerous aspects of daily life along with hundreds of related industries, and it will be changing in the near future.

Managing the demographic risk of an aging population

One trend that has been largely overlooked by the movers and shakers is our aging population. It is one of the forces that will shape society and the global economy over the next decades and governments need to adjust their policies accordingly.

Around the world, workforces are steadily aging. Among the key drivers of a rapidly aging population are declining fertility rates, increased longevity, and the decline in mortality rates. For example, retiring baby boomers in the United States will live longer, but there will not be enough new births to offset the surge in the ranks of the elderly.

The world’s fertility rate fell from five children per woman in 1950 to roughly 2.5 today and is projected to drop to two by 2050. This decline has been the result of such factors as the rising social status of women and their increased participation in the workforce, widespread availability of birth control, and the increasing costs of raising children.

On the other hand, global life expectancy has increased from 50.09 years in 1960 to 72.6 years in 2019 and is expected to rise to 75 years by 2050. In the United States, life expectancy is projected to increase by about six years from 79.7 in 2017 to 85.6 in 2060. By 2035, there will be more people in the U.S. aged 65 and over than there will be children under 18, according to the Gerontology Institute at the McCormack School of Policy and Global Studies at UMass Boston.

The reasons for increased longevity include advances in health care, increased emphasis on personal and social hygiene, and increased government programs for the elderly.

In the developed world, the ratio of dependents to workers is rising sharply as baby boomers retire. Retirees are not only living longer but are increasingly prone to dementia at older ages. As the CEO of Dana-Farber Harvard Cancer Center said, one out of three people who reach 85 will have Alzheimer’s. This is a group largely dependent on others to help with daily living. As the need for caregivers intensifies, there will be fewer workers available for other work.

A rising dependency ratio is inflationary because dependents consume but do not produce. The growth in retirees may trigger a vicious cycle of slower economic growth and higher taxes. Going forward, policy makers should consider a progressive decline in the size of the labor force.

With fewer people producing goods and services and significantly more non-working people consuming them, global supply will tend to lag demand. Combined with a greater bargaining power of the workforce in wage negotiations, this may increase inflation.

Meanwhile, workers are likely to consume more as a labor shortage pushes up wages. Investment will rise in advanced countries as companies substitute capital for more expensive labor. Rising wages may improve the galloping inequality gap.

Despite these facts, many business leaders and policymakers don’t have a good grasp of the realities of an aging population and the economic challenge it will pose. Aging populations increase the financial burden on governments, creating a pension time bomb, and increasing demands on health care and elderly care systems.

But these outcomes are not inevitable. Greater longevity presents individuals, employers, and policy makers with opportunities to help the elderly live more purposeful lives. Policy makers should take steps to harness the productive potential of older people. For example, by promoting an education policy that includes a strategy for supporting lifetime skill formation.

The famous maxim that “demography is destiny” may or may not be attributable to Auguste Comte, the 19th century French sociologist. But it was certainly true that it was Comte who first wrote about how population trends could determine the future of a country.

What is not true is that destiny is not susceptible to change. Just as societies must adjust their lifestyles to adapt to climate change, societies with aging populations must adjust their policies to promote economic growth.