The Future of Mobillty - LeasePlan Go

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Introduction

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EXECUTIVE SUMMARY

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MAJOR THEMES 2.1 Environmental Regulation 2.2 Cost Pressures 2.3 The Developing Markets 2.4 Technology and Connectivity 2.5 Rapid Manufacturing and New Materials

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WILDCARD SCENARIOS

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CONCLUSION

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0 introduction

LeasePlan Go asked Proximity to report on the directions that personal mobility is likely take from now up to 2023. We have consulted a wider range of sources in order to identify the key trends most likely to shape this future.

1 executive summary – five key trends

Five major trends seem likely to dominate the development of the mobility landscape over the coming decade. While each individual trend may not represent a significant shift, their overall effect could revolutionise attitudes to motor vehicles. This executive summary presents a brief overview of the five key trends and their implications – explore in greater depth in the main body of the report.

1 executive summary

1. Environmental Regulation When the EU signed the Kyoto treaty in 1997, this signaled their intent to reduce long-term environmental harm from carbon emissions.

Although the US and China were not signatories, manufacturers face collective pressure to produce cleaner, more energyefficient vehicles. There are obvious synergies with technological developments around new propulsion options, new energy sources, and new ways of using existing infrastructure.

It is clear that electric vehicles are set to form a larger proportion of the vehicle stock, but questions about where the energy to charge them will come from, and when they will become truly competitive with combustion cars, still linger on. It is the belief of the EU transport commission, that, for mid to long distance travel, the first and last ten miles of most journeys will become a feeder solution for mass-transit systems.

2. Cost pressures The need to recoup increased environmental costs, at the national level, combined with peak oil “polluter pays” pricing, means that both the base price of fuel and fuel taxation, will rise.

There will be indirect costs from increased congestion, as more road space is allocated to HOV, EV and cycle routes. And fewer new roads are likely to be built, as planning wisdom sees that they only encourage more driving until congestion reverts to the mean.

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Technology will alleviate some of the pain with better real-time journey planning. The road network will need to be organised centrally so that it can be more efficiently utilised.

And, as the speed of the internet and available bandwidth increases, the advantages of video chat may begin to outweigh the disadvantages of physical movement, taking some of the pressure off the road network, as homeworking becomes more widely accepted and more practical too.

3. Emerging markets Vehicle manufactures, keen to service the most lucrative markets that offer most potential growth, will continue their shift in focus towards the BRIC countries, – Brazil, Russia, India and China. We’ve already seen manufacturers such as Mercedes and BMW make special versions of their vehicles for these markets and the tastes of the BRIC countries, particularly China and Russia, will gradually begin to influence the cars produced for the European market. For example, in response to Chinese and

Russian perception that premium means large and 4x4, we’ve seen new, luxury 4x4s produced by Bentley, Rolls Royce, Jaguar and Lamborghini.

And, as many Asian cities expand beyond populations of 10 million, we’ll see the needs of these ‘Megacity’ dwellers shaping the output of car manufacturers. China is an exciting market for automotive brands because it has no embedded brand perceptions. It’s a blank canvas where manufacturers can try out new technologies and brand positions.

1 executive summary

4. Technology, connectivity and the car The ways in which consumers, and their devices, connect to their vehicles will open up some intriguing possibilities. Cars will become “appified” as their specialist hardware is co-opted into software running on the user’s own phone or tablet. The car’s systems will become a conduit controlled by these personal devices. This begs the question; if the unique differentiators of “your car” are defined by your personal device, how much sense does it make to own a car, rather than have access whenever you need it? Consequently,

we could see a shift away from personal ownership.

The driving process will be made safer and more efficient, by further automation: Techniques such as motorway “platooning,” will see vehicles travel together, in convoy, by communication with infrastructure and each other. A logical progression of this is the self-driving cars Google, Nissan, Audi and others are working to bring to market. But you may not own one – with Google’s X, as a service model, you may lease access to a cloud of cars that comes to you on demand.

5. The impact on manufacturing New manufacturing techniques like 3D printing will allow faster turnaround of design concepts, increased choice of personalisation, and more niche models to be spun off the same basic platform. The lower break-even costs through scale means more diversity, personalisation, and product risks being taken. New materials will emerge in the quest for lighter and more efficient vehicles - we spotlight the BMW i3’s carbon fibre reinforced plastic construction to

demonstrate what this means for ownership and repair costs. As personal devices become more integrated into the sphere occupied by the car, “personalisation” will begin to apply, as much to behaviour as aesthetics. Manufacturers and other mobility providers will begin to offer lifestyle mobility packages, allowing drivers to swap out for a different car with specialist capabilities, greater utility, or more driving pleasure.

2 major themes

2.1 ENVIRONMENTAL REGULATION Whenever the future of mobility is discussed, the environment must be a prime consideration. Between now and 2050, major climate change mitigation initiatives will start to bite. At the same time, a “second billion” people in emerging nations will demand western standards of living and freedom.

Regulatory response Given the US and China’s reluctance to sign up to Kyoto, the EU is the only significant governmental body to have produced an on-the-ground transport plan to the timescales involved. The key observation to note from the report is this principle: “Curbing mobility is not an option.”

The EU does not envisage solving the climate crisis by any means which would prevent the free flow of goods and people across the continent. Mobility currently makes a direct contribution of 5% of the continent’s GDP, and immeasurable indirect contribution.

However, this is not to say that the EU Transport Plan is anything but highly ambitious: Conventional cars would be banned from cities. The focus of personal transport would be around the first and last 10km of any journey, with cars acting as feeders to and from high-speed rail lines. Oil dependency would be reduced by 60% and relatively few time-dependent goods would move by road, with the rest shifted instead to rail and sea channels.

In the next decade In the shorter term, the EU sees transport emissions being cut by a variety of means.

By 2020, 10% of all mobility fuel consumption should come from renewable sources.

Initially, the majority of this will come from biofuels, but in the longer term population growth across the EU will put pressure on crop growing space, with both biofuel and food production competing for the same land.

Limitations on car use will prevent some of the more inefficient uses of fuel. For example, the London Congestion Charge could be replicated across European cities to discourage uneconomical short, stop-start journeys.

Costs across fuel options will be normalised by the implementation of “polluter pays” taxation policies. Which means that consumers will bear the environmental cost of their travel through directly, through taxes, or indirectly through increased costs of goods or services.

2.1 Environmental Regulation

Case study London As one of the EU’s most populous urban centres, London is at the forefront of developing integrated mobility networks in the context of the environmental and human challenges of the 21st century. These are some of the highlights of its current plan: London’s population is growing faster than previously predicted, hitting 8.2 million in 2011, some 15 years ahead of predictions. It may reach 10 million by 2031.1 Crossrail opens in 2018, adding capacity for 72,000 passenger journeys per hour across Central London.2 The extra capacity added by Crossrail and all current tube upgrade projects will be outstripped by population growth in around 20311.

Crossrail 2, running from Wimbledon to Alexandra Palace, could open by 20301.

With public transport just keeping pace with population growth, traffic congestion isn’t going away. The EU predicts the productivity cost of congestion will increase 50% in real terms by 2050.3 New technologies and political measures will be required to mitigate the environmental costs of inefficient fuel use in congested areas.

As cycling increases in popularity, due to its environmental and health benefits, more road space will be reserved for cycle lanes. Through-travel, by motor vehicles will be also be discouraged, reducing the average speed of cars across the capital.

The Congestion Charge is considered to be a success, which could lead to larger zones and more granular charging using Automatic Number Plate Recognition and/ or geolocation.4 Goods vehicles will be subject to additional charges and restrictions, as exemplified by the Low Emissions Zone, the proposed Safer Lorries Charging Zone,5 and existing time restrictions on operations.

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https://consultations.tfl.gov.uk/crossrail/2/supporting_documents/Summary%20of%20Option%20Development.pdf http://crossrail.co.uk EU Transport 2050 report http://www.london.gov.uk/media/mayor-press-releases/2013/03/crossrail-for-the-bike-in-mayor-s-913m-cycling-plan https://www.gov.uk/government/news/dft-and-mayor-announce-plans-to-tackle-hgv-safety-and-support-londonscycling-revolution

2.1 Environmental Regulation

Hydrogen & electric cars The combustion engine will still have the lead market share until at least the mid-2030s.

Downsizing, turbocharging and hybridisation will keep it relevant through many rounds of stricter CO2 targets. In fact, it may be the case that the tipping point away from petrol and diesel will come as a result of social rather than technical or legislative factors: As oil becomes more difficult to extract, we could see increased local opposition to operations, such as the protests we are currently seeing against fracking. Sufficient protest could lead to a change in the social acceptability of any fossil fuel use, in the same way that the acceptability of fur was challenged in the ’80s.

In the medium term, a shift to biofuels is likely. But, as biofuels share space requirements with food supplies, and climate change is likely to place pressure on food supplies, it is likely that the long-term future lies in electric propulsion.

Energy density The key factor to consider when determining which fuel is likely replace fossil fuels, for cars of the future, is that of Energy Density. This is the amount of available energy from a source for a kilogram of weight or a litre of volume of that source. When discussing automotive applications, volume is generally more applicable, as this has a greater effect on the form of the vehicle, than weight.

Fossil fuels are convenient because they marry a very high energy density (typically 26 MJ/ Litre for petrol) with a fast recharging ability (a couple of minutes at the pump).

The best batteries, currently available for automotive use, approach 2.6 MJ/Litre, and take much longer to recharge. Whereas hydrogen, when compressed for use in a passenger vehicle, has an energy density of 5.6 MJ/Litre.

What this means is that, all things being equal, a Hydrogen Fuel Cell Electric Vehicle (FCEV) requires a fuel tank that occupies nearly 5 times the volume of a petrol-fuelled vehicle with the same range. A Battery Electric Vehicle (BEV) requires batteries that occupy 10 times the volume of the petrol vehicle’s tank.

The race to power vehicles of the future revolves around one factor: Increasing energy density. And, while petrol and hydrogen have fixed energy densities, batteries do not.

BMW ran several rounds of real-world data gathering on BEVs as part of the Megacity project which led to the creation of the i3. They discovered that, for urban dwellers, a range of 100 miles with an overnight charge would be sufficient for 95% of all journeys.

A combination of improved energy density and fast-charge facilities, such as Tesla’s Supercharger network1, would cause that number to converge on 100%. At that point, the combination of price, energy density and recharge time would be such that BEVs become a practical choice, alongside petrol or diesel.

The question is whether that happens quickly enough to beat FCEVs to the same punch.

BMW predicts that by 2020, BEVs and Electric Range Extender Vehicles will make up 5 to 15% of its sales. However, for manufacturers like Ford, that sell cars in much larger volumes are likely to struggle to sell 15% of their vehicles as BEVs. This is because many of their customer base would not consider paying the price premium inherent in BEVs and FCEVs.

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http://www.teslamotors.com/supercharger

Energy sources While the majority opinion appears to be that hydrogen is the fuel of the future,1 it is important to understand that hydrogen differs from fossil fuels in one key aspect: hydrogen is not a fuel source, but a reservoir for conventionally-generated electricity. While the energy extracted from fossil fuels is “free” in the sense that oil takes less energy to extract than it releases when burnt, present production methods mean hydrogen must be “cracked” from water in a process that takes more energy than can be recouped from the resulting hydrogen. So hydrogen can be considered more like a liquid battery than a fossil fuel.

This means, whether for batteries or hydrogen, the source of power, for both BEVs and FCEVs – in the UK at least – is mostly generated by burning fossil fuels. With neither renewable nor nuclear power gaining any serious traction in the UK, this is likely to continue certainly until around the 2030 period. Thus, the true environmental benefits of BEVs and FCEVs will not be realised until the grid is significantly greener, or an alternative method of cracking hydrogen – which does not require grid energy as an input – can be developed.2 In the meantime, offsetting and carbon credits are likely to gain increased importance in the consumer market as the reality of climate change becomes apparent.

What this means for the private purchaser In the short and medium term, buying a BEV will remain an urban, niche decision, often limited to those who have a guaranteed parking space, with charging facilities at their office.

Currently, most owners of EVs already own a petrol vehicle, although they prefer to use the EV where possible. With space limitations on parking in urban areas, this is a factor that is likely to limit growth. To get around this, BMW supports its i3 BEV with the BMW Access scheme, in which purchasers can redeem points for access to conventional BMWs when needed for longer journeys, or just when they feel like a change. Peugeot has also indicated it will expand its similar scheme when its own BEVs come to market. Broadly speaking, schemes of this type could do a great deal to increase BEV adoption in urban markets.

What this means for a fleet Private purchasers and leasers will make the choice between BEV, FCEV, Petrol or Diesel according to their own circumstances, but fleet managers will have to make the choice on an aggregate level. In addition to the traditional factors of cost, reliability and so on, there will also be a marketing dimension to the choice of EVs. However the range limitations of EVs could cause difficulty for those industries, such as delivery and home service, that rely on keeping their fleets on the road all day.

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To combat this, organisations that make an early shift towards BEVs in particular, will look for support services that allow them to manage the new needs these fleets. For example: Fleet disposition management to ensure even battery wear on all vehicles.

Fleet disposition management to ensure that an exhausted vehicle can be swapped for a charged one, should the driver need it.

Route planning to maximise range (especially for multi-drop delivery services).

Specialised recovery solutions for exhausted vehicles.

Driver training Charging services; installation, management, and cost optimisation.

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YouGov Green & Electric Cars report http://www.nsf.gov/news/news_summ.jsp?cntn_id=110648

2.2 COST PRESSURES Between the rising cost of fuel and increased taxation, the cost of personal mobility will continue to rise for the majority of drivers. However, the perceived value of a car, at purchase, should increase, as technological progress, appification and smart manufacturing produces vehicles that do more, more personally, for the same cost.

Fuel costs This report will not attempt to predict the timescale on which Peak Oil will occur (although, for the record, BMW works on the expectation that it will occur in 2025), but it is clear that extraction costs, political volatility and environmental responsibility taxes will continue to push fuel prices upwards.

“The less successful the world is in decarbonising, the greater will be the oil price increase” - EU Transport 2050 report Taxation As part of their “polluter pays” policies, governments across the EU have toyed with the concept of satellite-tracked per-mile taxation. Should it be implemented, this could change the face of motoring dramatically.

Several charging structures are being considered: Journeys could, for example, be taxed at a falling rate, where the first few miles are charged very highly, and beyond that only at a few pence per mile. This would encourage drivers not to make short, more polluting journeys. Alternatively, different roads could be charged at different rates, discouraging drivers from urban centres and other highly-congested places.

Alternate fuel vehicles currently receive effective tax subsidies on VED and the Congestion Charge, but as they become a larger proportion of the total vehicle stock, it is likely these benefits will be eroded. Taxation levels will more accurately reflect these vehicles’ true cost to the environment by including the environmental impact during their manufacture.

In terms of the CO2 equivalent currently used for calculating tax, this would be a reduction of roughly 50%. For the Congestion Charge it is likely that, over the course of several years, the existing discount for EVs would decline to zero.

VED rates for combustion engined vehicles should be expected to continue rising according to the CO2 g/km rating.

Purchase price At present, BEVs are about £10,000 more expensive than an equivalent combustion vehicle, although a government grant of £5,000 is available at purchase which lessens the sting somewhat. Technological advances are expected to reduce the price of batteries.

The government grant may well be reduced in tandem. (FCEVs remain so expensive relative to combustion cars that the few “on sale” are actually leased direct from the manufacturer as part of an extended testing programme).

In order to close the price gap between EVs and combustion vehicles, governments may choose to increase the existing “gas guzzler” tax on the purchase price of large-engined cars.

2.2 Cost Pressures

However, the ability to simplify and standardise internal data networks, the falling cost of sustainable materials, and the trend away from bespoke interfaces to appification, should mean that the list price of an average car will, in real terms, stay about the same (even as the capabilities of the vehicles improve).

Running costs In contrast to the purchase price, the running costs of vehicles can be expected to increase. Not least in terms of the time: Routes will need to be planned more carefully to maximise range, and minimise tax and congestion. And new classes of tax will inevitably lead to increased administration.

For example, it took several years for the Congestion Charge to gain an automatic payment mode. Companies such as ZipCar that can offer a service designed to alleviate the pain of this administration would have an opportunity to create a lasting relationship with the customer.

What does this mean for leasing?

Increased cost and inconvenience is a natural driver away from car ownership in any form.

Those who can do without private mobility, especially those who live in cities, will avoid outright ownership, or a sole-driver lease, as much as possible. Those who have a specific need for ownership, whether in cities or outside, will save money by driving fewer miles and seeking cheaper fuel options. To remain competitive, leasing companies will need to demonstrate that costs can be saved relative to outright purchase, and add value by removing more of the common frustrations that accompany motoring.

Fewer journeys will not mean less time spent in the car. Increased congestion will mean that opportunities will arise for time management and working solutions that take otherwise dead time in the car into account. Equally, drivers will seek ways to make the most of that time through entertainment or managing other aspects of their lives.

Vehicle Excise Duty and other automotive taxation will become increasingly complex and interlinked with other aspects of the general tax code. Providing a service that simplifies this at source presents an opportunity to position a car lease as a tax management benefit.

2.3 THE DEVELOPING MARKETS In many ways it is the newest markets that offer car companies the greatest scope for innovation, since these markets have few pre-conceptions about what the cars they buy should or should not feature. Even as these markets develop through their early stages, patterns or tastes (which can be quite short-lived) emerge, and the motor manufacturers do their best to cater to them.

BRIC Brazil, Russia, India and China (BRIC) are the four major fastest developing nations.

Of these four, the most interesting case is China, with is rapidly growing middle class and challenges of extreme urbanisation. The effects of the Chinese market of which will increasingly feed back into older established markets in significant ways. India holds massive potential for market growth but the failure of the Tata Nano demonstrates that the market still has yet to pass the threshold of middle-class growth that would make it relevant in the timescale covered by this report. Brazil remains dominated by locallyassembled vehicles from US and European mass-market brands like Chevrolet, Fiat and VW, and as a result tends to be reactive to these parent markets at present. Russia, by its proximity to Europe, does have some interesting brand and manufacturing implications for Europe as a whole and this are explored below.

Eyes on the prize of the Chinese market However, any analysis of the automotive market in BRIC must begin with the China factor.

China is now the world’s largest car market by volume, having passed the US in 2009 and Europe in 2012. Though growth is beginning to slow, the market is still predicted to expand 8-10% year on year1. While this shift notably occurs during a period of recession and financial stagnation in the West, China has resoundingly emerged as the key growth market for car manufacturers. Both GM and Toyota are chasing global sales of 10m vehicles for the first time ever in 2013, with VW close behind2.

China’s tastes as a country will directly affect the kind of products car manufacturers offer in the rest of the world; in fact, they already have. BMW’s controversial restyling programme in the early 2000s, led by Chris Bangle, was directly driven by Chinese market tastes in the then-rapidly growing luxury car sector. Chinese buyers of luxury cars demand presence and scale in their vehicles, and the Bangle era responded to this with 7- and 5-series models which were far taller and visually imposing than the outgoing models. It is notable that while BMW, Mercedes and Audi sell ever more standard (and lightly stretched) executive models in Asia, back home in Europe all three manufacturers have introduced “4 door coupé” models which hark back to the original remit that the 5 series, E-Class and A6 used to occupy–but now with a lifestyle proposition that enables them to be sold at a useful premium.

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http://www.carnewschina.com/2013/01/10/china-buys-more-cars-than-europe-for-the-first-time/ http://www.autonews.com/apps/pbcs.dll/article?AID=/20130730/OEM01/130739984/toyota-production-to-top-10-millionvehicles-this-year-report-says#axzz2dRaKv8sP , CAR Magazine September 2013

2.3 New Developing Markets

For premium manufacturers the emphasis is shifting to large 4x4s, with BMW preparing an X7 and Rolls-Royce 4x4, and in Volkswagen Group the platform of the new Q8 will also underpin the production versions of the Bentley EXP 9 F and Lamborghini Urus, and a Q7 coupé-SUV cross. Jaguar is showing its C-X17 crossover concept at Frankfurt.

This again is a response to the Chinese premium market’s fixation on size as a marker of privilege (along with a Russian preference for ruggedness and the general American preference for SUVs). China will not drive a premium downsizing trend, but it’s highly likely that small premium cars like the BMW 1 Series and Mercedes A-Class will sell well as a result of the brand association to super-premium 4x4s.

Brand acquisitions Moreover, European brands are beginning to be directly controlled by Chinese influence with MG Rover, Saab and Volvo now all owned by Chinese interests (along with Jaguar Land Rover now owned by India’s Tata). We can expect more underperforming manufacturers to shift to China as the West’s economy continues its uncertain recovery.

While MG Rover and Saab were bankrupt at the time of purchase, the economic growth of China means that more successful brands are now potential acquisitions. Volvo, for example, was a strong-selling brand and key technical centre for Ford when it was sold to China’s Geely. Volvo is showing two new concepts at the 2013 Frankfurt motor show designed to herald a new direction that will sell in the West and the East. Other brands that continue to sell well in Western markets will soon be affordable for consumers in the expanding Chinese economy. Meanwhile MG and Saab are tentatively returning to retail operations in Europe.

Expanding middle classes The centre of gravity in the Chinese market has now shifted to the middle classes rather than the super-rich, and we will begin to see the same kinds of product trends affecting mass market vehicles. For example, Peugeot-Citroën (PSA)’s new brand strategy sees Peugeot moving upmarket to challenge VW in the European market. Meanwhile Citroën, which is a larger player in China, will split its range between semi-premium DS vehicles and low-cost C vehicles, the latter being specifically designed according to the tastes of China and other emerging markets.

Market expectations Buyers in China are not subject to the same embedded expectations as those in Western markets. Users are far more likely to have owned a smartphone as their first middle-class technological investment prior to a car purchase, so there is an automatic assumption that the car will take advantage of the phone’s capabilities. Equally, China presents a much clearer opportunity for alternate propulsion methods to take hold - not only are there fewer preconceived notions about range, cost and prestige, but new charging or hydrogen distribution networks can be built out more easily as part of the rapid urbanisation of the country.

A further way in which market expectations differ throughout BRIC is that although the markets have very strong recognition of certain brands (especially super-premium brands), in the middle market there is less distinction between what we in the west consider to be established and challenger brands. While in Europe we may remember when, for example, Korean manufacturers had to be positioned as a low-cost option in order to gain a foothold, these brands have arrived in BRIC with competitive mid-market propositions from day one. Additionally, companies like VW and Citroën target low-cost markets with designs that have been superseded in the West (at least 3 generations of VW Passat remain on sale under different names) which means that the quality proposition of VW is stretched compared to a brand like Hyundai, which comes to market with only its current, modern and capable product roster. This offers the opportunity for challenger brands to make a prestige leap by coming to market with the right product and proposition.

Expansion into European market Towards the end of the period we cover here, “native” Chinese manufacturers may begin to make inroads into Western markets (though this has of course been predicted before).

One can look at the turnaround in Hyundai/Kia to realise exactly how quickly a product transformation of the type required can be effected once the strategic will and funding are put in place.1 It is likely that this influx from the Chinese manufacturers will initially come in the form of a foothold in low-cost small commercial vehicles and extend into passenger cars in the following decade.

Solutions for megacities Broader demographic trends will have a powerful effect on China’s motoring needs. China is experiencing a rapid migration of population from the countryside to urban areas, meaning that it is becoming the first country having to deal with the notion of designing megacities (defined as urban areas with populations in excess of 10 million) essentially from the ground up. The EU currently has only two megacities in the form of Greater London and Paris, and with population growth trends in the EU it is unlikely that many more will join them before 2050. The solutions China finds for its megacities will influence urban landscapes throughout the world. This will include smarter traffic management to prevent congestion, APIs that allow for smarter journey planning, and new solutions in the area of communal transport, whether that be traditional public transport or something more closely resembling a car-sharing club on a citywide scale. Some of the possibilities for this latter option will be explored in other areas of this report. However cities will also be likely to take their cue from Songdo in South Korea2, where the city is structured so that every citizen has the option to walk to work. Such radical restructuring of the city proposition could not occur in Europe, but on smaller scales such as neighbourhood replanning, the principles may well be influential.

What does this mean for leasing?

China and Russia (and later Brazil and India) could present a disruptive opportunity for leasing companies who are able to understand the market and present a compelling alternative to outright ownership.

Chinese manufacturers looking to get a foothold in the European market will be eager to move vehicles to organisations that can give them volume and profile. Initially it will be easier to place these vehicles in extremely TCO-sensitive sectors such as commercial fleets, but this may mean finding a way to reassure those clients that untested total lifetime costs will not exceed expectations.

In Europe, cars that meet the market’s embedded expectations of desirability will increasingly be shifted to higher-grossing premium placement, matching consumer mood as the economy begins to pick up again. This may offer opportunities to add premium services to leasing agreements, or use premium positioning of existing benefits as a zero-cost value add.

Chinese auto manufacturers seeking greater understanding of new markets may be keen purchasers of anonymous, aggregated driver data of the type a telematics-enabled leasing company would have to offer.

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Ben Oliver, Car Magazine September 2013 http://www.bbc.co.uk/news/technology-23757738

2.4 TECHNOLOGY AND CONNECTIVITY “There are no airplanes, only computers that fly. There are no cars, only computers we sit in. There are no hearing aids, only computers we put in our ears.”

- Cory Doctorow1 Since 2007, a quiet revolution has been underway. The bulk of our most personal interactions with technology have shifted away from fixed environments such as a PC at a desk to the personal sphere, first with smartphones providing a pervasive bubble of connectivity, and latterly with tablets taking over many of the functions that a laptop would previously serve. Steve Jobs described this world as a place where PCs became analogous to trucks, performing specialised tasks for professional users, and tablets took over the “car” role of day-to-day interactions with the internet. With this in mind, the key themes of the coming decade are those of pervasive connectivity, software and services that support our lives, and the expansion of the new “superpowers” these devices give us into whatever environments surround us.

Appification An accompanying trend is that of the “appification” of what had previously been distinct products2. For example, the standalone TomTom GPS unit is rapidly being made obosolete by cheaper smartphone apps which provide the same capabilities. While the dedicated hardware may be able to acquire a satellite signal faster and hold onto it better, the performance of mobile hardware is good enough for most users. It is this aspect of “good enough” for a far cheaper price that drives appification. In fact as an app can be supported by other commercial models than outright purchase, the choice for a user may be expensive hardware or a completely free app.

Examples in action GPS is the first and most obvious example of this occurring in the automotive sphere, but as our lives are increasingly expected to connect to the cloud, more and more features that currently live on the car platform will migrate to the user’s own devices.

Volvo for instance, has recently embedded a Spotify app into its in-car platform. But Spotify is one of many options for consumers who want to stream music, and may already have a relationship with Rdio, iTunes Match, Google Music, Amazon or any of a hundred other providers. They have direct access to these services via their smartphone, without needing a second mobile data subscription. So the pressure from consumers will be for the car’s ICE to become a dumb pipe for those services. iOS and Android, and Microsoft’s Devices division (Nokia as-was) will both soon offer a mode in which the car’s touchscreen simply offers access to a paired phone, and the phone’s apps and services drive the required functionality3. Once that happens for entertainment and GPS, it is quite easy to see a path down which all of the car’s user-accessible functions are appified in the same way, although the need for cross-manufacturer APIs would push this further into the future.

Ford’s Open XC endeavour demonstrates some early progress in this area4.

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http://boingboing.net/2012/01/10/lockdown.html The Appification Of Everything Will Transform The World’s 360 Million Web Sites - Forbes http://www.forbes.com/sites/ anthonykosner/2012/12/16/forecast-2013-the-appification-of-everything-will-turn-the-web-into-an-app-o-verse/2/

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Nokia unveils its connected car platform: Here Auto — Tech News and Analysis http://gigaom.com/2013/08/30/nokiaunveils-its-connected-car-platform-here-auto/ 4 How tech nerds will write the next generation of car apps | TechHive

2.4 Technology and Connectivity

There are start-ups already working on this vision. Like the CarKnow platform that aims to provide the ability to write apps on a third-party platform that plugs into the OBDII port and interfaces with the vehicle’s CANBus internal network1. Manufacturer-backed schemes will naturally be more elegantly integrated.

New interactions Interacting with a device while driving a moving vehicle is a particularly challenging proposition. Drivers have limited capacity for extra attention, and touchscreens as they currently exist lack the important haptic qualities of physical controls: touchscreens must be looked at to be interacted with. A variety of solutions exist: BMW has the iDrive controller which is now, despite teething problems, successful; Audi has introduced a touchpad on which gestures can be drawn; Jaguar and others offer voice control of some functions. Future vehicles are likely to continue to use a mix of options as brands see the cabin experience as a key differentiator. Although there will be some common metaphors, there will not be any industry-wide standard within the timeframe of this report.

However, one very clear inference from the current generation of mobile devices such as the iPhone 5s and Moto X is that voice will play an ever-larger part in the way drivers interact with their cars. Apple’s “Siri Eyes-free” mode is targeted for manufacturer support in 2014 and offers a specific mode of Siri in which it responds to the driver only in voice and without visual feedback. For now, the limited functions that Siri can operate in a car mean that manufacturers will cede those interactions to Apple. However at some point manufacturers will realise that these voice interactions and responses will have a significant effect on the driver’s perception of the car’s personality. Mini’s 50th anniversary specials had some limited development in this direction2, but as voice recognition and server-backed response systems become more sophisticated this channel will be a more important aspect of prompting an emotional bond to the car.

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http://www.greencarreports.com/news/1044317_the-50th-anniversary-talking-mini-cooper-in-dealerships-now ‘Big data’ from a car is worth $1,400 a year, Cisco exec says http://www.autonews.com/apps/pbcs.dll/article?AID=/20130805/OEM06/130809928

2.4 Technology and Connectivity

The Internet of Things Although the user’s interaction surface will increasingly be their own device, and the car may “piggyback” the connection when an app is in play, the car will retain a cellular data connection of its own. This will allow the user (and the manufacturer, service agent and possibly government) to remotely interact with the car - starting the heating system on a cold day to clear ice from the windscreen, identifying itself in a crowded car park and guiding the user back to it, reporting its service status to the dealership to trigger customer contact, for example. As the Internet of Things begins to connect physical objects to the cloud, cars will become a first-class player in this new world.

The value of data Naturally with this access to the vehicle’s systems flowing in one direction, a torrent of useful data will flow in the other, through the phone’s data connection and out into the cloud. Cisco estimates that the savings and revenue from this flow of data could add up to $1400 per year1. This flow of data is not unique to the car. As the cost of connectivity hardware and services decreases, we will see many more sources of data being aggregated in the cloud. On a small scale, we can see the trend for personal quantification with devices like the Nike+ Fuel Band allowing people to track their daily activity, plot it against time and compare to others. For a vehicle, this means the ability to interact with connected objects around it - in the real world and in the cloud.

•

•

•

There are three classes of vehicle-centric communication.

V2V is inter-vehicle communication - cars will be able to relay weather, congestion and road surface conditions, match speed so they can be “platooned” together and driven automatically on motorways, and alert each other to avoid accidents.

V2I is vehicle-to-infrastructure communication, in which cars can communicate with the fabric of roads and smart cities to route around roadworks, co-ordinate journeys to make the best use of congested facilities, communicate hazards to the driver and, possibly, tax by the mile.

Finally V2X is the principle of the vehicle communicating with anything, using either a dedicated local radio frequency or connecting via the internet. This could be something as simple as automatic mileage transmission for a company driver, up to emergent uses such as new location-based social applications. However, for all three of these classes the assumption should be that some endpoint within the system will connect to the internet, and huge volumes of data relating to traffic, rather than individual cars, will be available for analysis. For the authorities this will mean more granular control over traffic in real time and better assumptions when planning infrastructure upgrades, and for third parties this will mean new business possibilities will emerge in managing and analysing this data, in building services with consume and react to it, and in using it to understand the situation on the ground when developing new products.

More accurate position and speed data GPS will be joined by fully-operational networks of Russian GLONASS and EU GALILEO satellites, offering potential location resolution down to an accuracy of 10cm (or better with a subscription). At this level of granularity, geolocation becomes useful for more than just navigation purposes - cars will be able to tell when they are being parked across two parking spaces, or driven too fast into a tight corner.

1

Google sees self-driving cars in 3-5 years; Washington, insurers not so sure - Autoblog http://www.autoblog.com/2013/02/08/google-sees-self-driving-cars-in-3-5-years-washington-insurers/

The car in the cloud Increasingly, ownership of a car will mean ownership of a virtual object and its attendant services and applications, but it may not necessarily mean ownership of a physical object.

For urban dwellers, services like ZipCar currently offer timeshare ownership of a car, but cannot solve some of the pains of motoring such as urban parking, congestion or the need to actually drive the car. However, motor manufacturers and tech companies are looking at possible solutions. GM and Toyota have both exhibited single-person mobility pods which are self-driving on their own segregated road network. GM said of its En-V model, “it might not be something you own.” Larger, more traditional vehicles will exhibit similar swarming behaviours. Volvo and the EU’s SARTRE project envisages “platoons” of vehicles on motorways, all driven automatically by a professional driver in a lead vehicle. The cars in the platoon are able to drive with reduced space between them, improving aerodynamic efficiency and reclaiming space. Beyond this semi-autonomy, entirely self-driving cars are being developed by Google, Audi, Nissan, Stanford University and others.

The car as a cloud Google recently claimed its self-driving cars may only be 3-5 years from market6. It is unlikely that a company like Google, with its native understanding of mass resource management and network effects and its advertising-driven revenue model, would release a product like this into the market with a traditional purchase model. It is not unimaginable that users will subscribe to a “cloud of cars” model where a car is guaranteed to arrive within minutes when called, and be ready-tailored to the user’s preferences when it does arrive. The user can then drive or be driven to their destination, at which point the car disappears to serve the next user, removing any need for parking. This kind of network management could also provide enough surplus vehicles at any time to ensure that a service operated by electric vehicles could always have enough out-of-service charging time without compromising the service.

Objects of desire As millenials come of age, we can see the above trends begin to come to fruition. In the US, teens increasingly see a smartphone as their object of desire, rather than a car1. Where cars once symbolised freedom and independence and acted as a social hub, those functions are now served through the internet–and appified. As these teens grow into adults with differing needs, it is likely to be a race as to whether the need for independent mobility shifts further into life, or new digital solutions arise to obviate it further. The need to physically move people from A to B will never go away, but the expectation that the most efficient way to serve that need is to own one car per person may.

People who choose not to own a car will still have access to personal mobility through “cloud ownership” where a car is available on demand. Again, through interaction with devices and digital selves, these cars will demonstrate a level of personalisation which, while not on the order of that available to private purchasers, will still mean that there is a level of connection somewhere between that of a taxi and one’s own car.

However, this does not mean that private car ownership is going away - certainly not outside urban areas. Instead, manufacturers will leverage new technologies to make the ownership experience more personal and customer-centric than ever before.

6

http://bits.blogs.nytimes.com/2011/11/20/a-teenage-question-a-car-or-a-smartphone/?_r=0

2.4 Technology and Connectivity

What does this mean for leasing?

As vehicles and technology converge, it becomes equally likely that disruption will come from technical organisations as from automotive organisations. Equally it becomes clear that non-technical companies wishing to stay relevant will increasingly need to engage in technical development to meet user expectations.

New attitudes towards non-traditional ownership of and access to vehicles will open up a third option beyond purchase and leasing. Leasing organisations that choose not to participate directly in this model may still have a part to play in fleet supply, management and maintenance.

• • •

An opportunity exists at the nexus of vehicle data and owner data to: Gain extra value from aggregation and use of generated data Offer drivers differentiators and value-adds through the technological platform Offer fleet managers more visibility and control over their vehicles

2.5 RAPID MANUFACTURING AND NEW MATERIALS As the need for greater efficiency bites, cars will increasingly be built from weight-saving materials other than steel and glass. BMW’s recently launched i3 makes extensive use of Carbon Fibre Reinforced Plastic for both bodywork and structural applications. BMW claims that its designed-in reparability means CFRP will be no more expensive to repair than a steel component1, but there will be a natural ramp-up time for dealerships to acquire the experience and equipment required, and it is unclear what possibilities there will be for out-of-network repairs. The i3 is a premium small hatchback, but the technology will filter down rapidly. Ford is already exploring ways of reducing CFRP production costs2.

Model proliferation The modular platforms which underlie these CFRP bodies will allow much greater variation in the kinds of vehicles that are built on top. Fiat and VW have managed to massively decrease the break-even volume of a particular model by spinning many models off the same platform and component set. However new propulsion and manufacturing models will increase this efficiency further. In common with many emerging electric vehicle architectures, GM’s 2003 Hy-Wire concept sits upon a “skateboard” platform containing the batteries, propulsion, suspension and so on, and have a “passenger module” on top which the passengers occupy. A single skateboard platform can underpin many types of vehicle with the development cost of only the individual passenger modules. GM even envisaged that the life module could be changed at a dealership from a sensible saloon during the working week to a sleek sports car at the weekend. This lower development cost to extend a range means that we will see an explosion of niche vehicles designed to more accurately target every conceivable consumer sector.

Rapid production start-up by out-of-sector competitors Hand in hand with this new style of engineering, Gordon Murray has begun to licence his iStream manufacturing process which takes this modular, platform-based construction as the seed for a faster, cheaper and more flexible method of vehicle manufacturing3. Murray envisages that the majority of licensee companies will not already be in the automotive manufacturing sector - for instance, Sony or Nike may take the opportunity to compete in the automotive market, adding their own differentiators along the way - as Swatch attempted to do with the original conception of Smart.

1 2 3

New BMW i3 - can its carbon-fibre panels be repaired? http://paultan.org/2013/08/06/new-bmw-i3-can-its-carbon-fibre-panels-be-repaired/ Ford working on mass-market carbon fiber components to save weight, improve efficiency - Autoblog http://www.autoblog.com/2012/10/12/ford-working-on-mass-market-carbon-fiber-components-to-save-weig/ http://www.gordonmurraydesign.com/istream.php

2.4 Rapid Manufacturing and New Materials

Lessening use of plastics Increasing oil costs and carbon accounting may mean that the use of plastics is lessened. Bamboo, as a lightweight material and good way of removing carbon from the environment, is frequently suggested as an alternative material for interior surfaces, including fabrics1. As more of the vehicle interface moves to reconfigurable forms such as touchscreens, simpler dash architectures will enable further weight savings.

BMW’s i3 Spotlight: BMW i3 Known in development as the Megacity Vehicle, is the most comprehensive re-architecting of the car currently available. Unlike Nissan’s Leaf, which is built on an existing combustion car platform, or even the Tesla model S which uses a bespoke but conventional platform, it has been designed from the ground up to maximise the new opportunities of an electric architecture.

1 Life/Drive architecture: Like GM’s Hy-Wire concept, the i3 is split between a skateboard floor “Drive” module containing the batteries, suspension, crash structures and propulsion modules, and the upper “Life” module with passenger volume and external body panels.

2 Carbon Fibre Reinforced Plastic platform offers lighter weight and greater rigidity than steel. If a damaged section of CFRP needs to be replaced, it can be cut out at marked safe points and a replacement module can be patched in 3 BMW expects 5 to 15% of its sales to be EVs and EREVs by 2020 4 Buyers get credit with BMW Access scheme, allowing them to swap their i3 for a combustion-engine BMW for longer journeys - or just for fun 5 BMW ConnectedDrive app helps drivers find public charging points to alleviate range anxiety 6 Satnav can plot energy-efficient routes and recalculate expected range based on terrain

1

http://www.usatoday.com/story/money/cars/2013/06/27/wood-fisker-bmw-ram-lexus-gs-es/2413611/

2.4 Rapid Manufacturing and New Materials

Local, rapid, personal, post-manufacturing This modularity of hardware will be complemented by a revolution in manufacturing as processes such as Selective Laser Sintering allow the design and manufacture of short-run parts at low cost. Ford, for example, is developing a new super-rapid panel prototyping technique which uses two metal dies to reshape a flat panel1. Initially this process is targeted at the creation of prototype and concept vehicles, but it is easy to imagine a time when every Ford dealership has a machine that can “print” body panels on demand to match a customer’s vision.

BMW’s strategy with MINI to encourage personalisation has proved the increased opportunity for emotional connection to branded products. Manufacturers who can offer the ability to go further than just graphic and colour choices will make commensurate gains in mindshare. This is something mass-market brands like Ford will increasingly need to do as they are squeezed from the low end by competent lower-cost brands like Kia and Skoda, and from the other by entry-level prestige options as BMW, Audi and Mercedes fill more and more niches with their flexible architectures.

Personalised premium services These premium personalisation options will be backed by premium services and support packages. Ford has announced its Vignale sub-brand will encompass not just upgrades to the vehicles, but also services such as free car washes for life and dedicated dealer concierges. It’s easy to see how this level of service could integrate with the connected car to offer complete lifestyle support through the driver-car-manufacturer relationship.

Built around the customer The upshot of these innovations is that those who choose to own a car in 2023 will own cars that are more intensely personalised than ever before. Personalisation will take the form not just of colour and graphics, but body styles, bespoke panels, and even in the way the car drives and reacts to commands.

Rapid model turnover As the cost of model proliferation falls, car manufacturers may re-energise markets by following the smartphone model of making significant upgrades to their core lines each year, hoping to push image-conscious consumers down to a 2- or even 1-year renewal cycle. This would naturally be accompanied by new lease-like forms of financing, and require some solution in the form of fleet disposal to ensure that general resale values remain high. Solutions developed in the era of GM’s planned obsolesence may be relevant again.

1

Ford Develops Advanced Technology to Revolutionize Prototyping, Per ... - Press Release http://corporate.ford.com/news-center/press-releases-detail/pr-ford-develops-advanced-technology-38244

What does this mean for leasing?

Consumers will expect the same level of personalised design, behaviour and services from their leasing companies that they will expect from the purchase experience. Leasing companies’ Q&O process will need to support an explosion of model bases and optional extras. However, as the experience of owning a car outright increasingly comes with the expectation of a package of services attached, leasing companies will have an opportunity to outcompete manufacturers on the service offering.

Customers will need reassurance that adopting vehicles built from new materials will not impact repair or maintenance costs.

Out-of-sector brands that enter the automotive market via new manufacturing methods will seek distribution models that disrupt the existing market. This presents both a potential challenge and an opportunity for leasing companies.

As leased vehicles are tailored more and more towards the taste of an individual customer, sell-on values may be impacted as one person’s dream car may be another’s ugly mess.

Options for mitigating this include not giving customers complete freedom at the Q&O stage, including a reversion charge along the same lines as the current wear and tear charges, or developing bespoke personalisation solutions that can be reversed at low cost, along the lines of vinyl wraps.

3 wildcard scenarios

3 WILDCARD SCENARIOS UK Energy Crunch

Rapid environmental change

In 2015, several coal-fired electricity generating facilities in the UK will fall below emissions standards and be decommissioned. The UK’s generating surplus will fall from 15% today to 4%, with a consequent rise in costs and uncertainty of supply.

With no clear path to replacement for this lost capacity, this could be a long-term situation which colours public opinion of EVs and PHEVs for a generation.

Lithium

A serious environmental disaster (eg a “Super-Katrina” destroying an Eastern Seaboard US city) may result in a hard shift towards severe environmental restrictions, with consequential knock-on effects for first world manufacturing.

3

Li 6.341

Hard shift to Asia If the Chinese economy continues to grow during a depression in the West, then naturally there will be a hard economic and product development shift towards the East. This would cause a hastening of some of the effects we discuss in the BRIC major theme.

Energy density breakthrough At present, the best (and most expensive) battery technologies allow an energy density of around 1/10 that of petrol, at a much greater cost than a comparable petrol vehicle. However, there are several promising new battery technologies claimed to be “close to market.” These promise energy densities up to 1/4 that of petrol, often with greatly decreased recharging time and lower production cost. Should one of these technologies disrupt the market, it could result in increased pure EV uptake against existing predictions.

Limitation of mineral supply Certain battery and electronic components in modern vehicles (and personal devices) rely on the supply of rare-earth minerals from countries which are prone to instability. A destabilising event such as a war or natural disaster could disrupt supply long-term, or encourage a new wave of economic empirebuilding to secure supply of these minerals. Equally, public opinion may be coloured by the adoption of campaigning platforms against the exploitation of these resources, for example

by Greenpeace.

Alternate economic recovery scenarios At present, a steady recovery from 2008’s financial collapse, lasting up to a decade is predicted. However, if recovery is faster than expected it may presage a return to 2000s- style conspicuous consumption, or on the other hand a further depression would cause severe problems, in particular for European manufacturers who continue to find their domestic market shrinking.

4 conclusion

3 Conclusions

Who will the disruptors be?

For the leasing market, incumbents will be increasingly pressured by holistic solutions from the manufacturers themselves. The BMW i3, sold with BMW Access, BMW ConnectedDrive and a subscription to a public charging service, is one example of the kind of integrated solution that manufacturers will offer. BMW is ahead of the curve but by no means unique: Audi: “In future, there won’t be just one automobile, but a variety of different forms of mobility” Peugeot: “Mu by Peugeot is the ultimate mobility solution. Buy online credit and rent a vehicle, scooter, bike or accessory when you want” However, for the automotive market in general, there is a clear desire from Silicon Valley to be the disruptor. Google’s self-driving car project clearly indicates a will to challenge the notion of car ownership, and if they were to acquire one of the emerging EV manufacturers such as Tesla, their 3-5 year go-to-market time would not look unrealistic.

The modularity of non-combustion vehicles and the emergence of new manufacturing systems will present an opportunity for any player to become an automotive manufacturer on scales commensurate with the power of any existing brand they own. Hence a major disruptor could be Sony, Nike, or even Apple. These disruptors will bring with them new distribution channels and ownership models.

Car-share ownership is a clear challenger to the traditional leasing model. The increased ability to make a vehicle react to an individual driver’s preferences will mean the sole ownership experience of leasing will be less of a differentiator from the car sharing providers.

As many of these providers emerged as digital native entities, they have a greater embedded understanding of the online world and network effects. An intimate and implicit understanding of these effects will be vital for any organisation wanting to play in an increasingly connected marketplace.

One serious disrupting influence will be governmental regulation. To meet the EU’s 2050 transport targets, infrastructure development needs to be reshaped in the next few years.

At some point governments will be forced to choose between missing those targets and pushing harder to get people out of combustion cars and into EVs and public transport.

This will probably not come until the 2030s but one or more of the wildcard scenarios could have an accelerative effect.

And finally‌ We are clearly closing in on the end of the internal combustion era, but reports of the death of the petrol car have clearly been exaggerated. Within the timescales covered by this report, the combustion engine will continue to command no less than 85% of the newpurchase market, and a commensurately larger portion of total vehicle stock.

However, drivers will pay handsomely to own and drive those vehicles, and will spend longer sitting in traffic in them. As a result, cars will act as a “fourth space� distinct from home, work and public spaces, where owners are entertained, express themselves and get things done.

To make the most efficient use of the entire transport network, it will be truly integrated with the internet, allowing smart cross-modal journey planning, real-time route comparisons, and post-facto analysis to refine and improve in future.

As the 2020s arrive, cars will begin to operate independent of their owners, coming when called and finding their own parking spaces. The notion of ownership will mean access to services and networks that enhance the experience of owning the car, up to and including allowing the car to be swapped for other purposes such as moving house or enjoying a weekend away in a convertible.