The future of cars

Gloom and boom

The motor industry’s fortunes are increasingly divided, says Peter Collins. But in the right markets and with the right technologies, they look surprisingly bright

Apr 20th 2013


A HUNDRED YEARS ago Henry Ford and his engineers perfected an idea whose time had come: the moving assembly line. By putting the car on a conveyor belt, they cut the time taken to assemble a Ford Model T from 12 hours and 30 minutes in 1913 to just one hour and 33 minutes the following year. That made the car a lot cheaper to build and opened up a mass market for it. By 1918 its list price was down to $450, or just over 5 months’ pay for the average American worker, against the equivalent of about a year and a half’s pay when the car was launched a decade earlier. Cars became a personal badge of status, and in time carmaking became a badge of national virility.

But since the 1950s the automobile has come to be seen as dangerous, dirty and noisy. In response it has been ever more strictly regulated, which has imposed additional costs. After the financial crisis the entire industry slumped spectacularly in many rich countries. Two of America’s big three carmakers, Chrysler and General Motors, went bankrupt and had to be bailed out by taxpayers. In Europe car sales last year were the lowest since 1995. The battery-driven cars that were supposed to solve the pollution problem have so far been an expensive flop. The motor industry seems to be in dire straits.

Yet this special report sees plenty to be optimistic about. Sales in Japan remain stagnant and in Europe they are unlikely to grow much in the next few years, but in America they are already beginning to bounce back, and in China and other emerging markets the current boom looks likely to continue for the foreseeable future. AlixPartners, a consultancy, forecasts that the worldwide market for cars and other light vehicles will expand from about 80m units a year now to 107m in 2020 (see chart 1). In China, now the world’s biggest market for cars, annual sales are expected to rise from 19m last year to 31m in 2020 as car ownership spreads to the country’s vast interior. So over the next seven years a Europe-sized market will grow up in China’s hinterland.

Over the past decade tens of millions of Chinese families have gained personal mobility on an undreamt-of scale while lots of new jobs have been created making, selling and servicing cars in China. But the Chinese government seems less concerned about that than about its failure to create strong national champions capable of taking on the foreign carmakers on their own turf. In future it may try harder to achieve this aim, which could deter foreign firms from continuing to invest in the country. A wiser course would be to accept—as Britain, and more recently Russia, have already donethat as long as the business is thriving and generating lots of well-paid work, the nationality of a car factory’s owners and the badges on the bonnets hardly matter.

As ever more consumers in China and other emerging markets have the money to buy fancier cars, makers of upmarket and high-performance vehicles will benefit. Mass-market carmakers will have a harder time: too many factories are being built, especially in big emerging markets, which will lead to intense competition and price-cutting. As the biggest, most efficient manufacturers—such as Volkswagen and Toyotapull ahead, those in the second division may seek salvation in alliances.

Consumer heaven
As an investment, then, the motor industry has to be treated with caution. But its engineering and environmental credentials are improving all the time. A century after becoming a mass-market product, the car is still a long way from being a mature technology. Manufacturers and their suppliers are investing huge sums in a variety of improved propulsion systems and in new lightweight materials to meet regulators’ emissions targets. The current generation of models is already vastly cleaner than earlier ones, and emissions of carbon dioxide, nitrogen oxides, soot and other pollutants are set to fall much further. The smog that began to afflict traffic-choked California in the 1950s and is now obscuring the sky in Chinese cities will gradually clear. The day may come when environmentalists stop worrying so much about cars and turn their attention to other polluters.

Consumers will be in heaven. Improved manufacturing systems will allow the bigger carmakers to offer an ever wider range of models, supplemented by a steady stream of niche products from new entrants. Fierce competition will keep prices down even as cars are packed with ever more technology that will make them more expensive to produce. More of them will drive themselves, park themselves and avoid collisions automatically. That should cut down on accidents and traffic jams, reduce the stress associated with driving and provide personal mobility for the growing ranks of the elderly and disabled.

All the technology that will go into making cars cleaner will also make them far more fuel-efficient and more economical. For motorists with short, predictable daily drives, all-electric cars may prove adequate and, as batteries improve, increasingly cost-effective. Others will be able to pick from a range of propulsion systems, including hybrid, natural gas and hydrogen as well as improved petrol or diesel engines, to suit their needs.

Manufacturers are hoping that all this technology will help counteract a worrying trend they are beginning to observe in rich countries: that car ownership is becoming unfashionable. In cities car-sharing and short-term hiring is becoming more popular. Young urbanites are getting their driving licences later, but the numbers of drivers at the other end of the age spectrum is growing, which may compensate for that loss.

Best of all, in emerging markets there is enough pent-up demand to keep the industry growing for many decades yet. But which makers, in which countries, will reap the benefits?

Up and Down Wall Street


Japan's New Export: Deflation?


Lower yen means dearer currencies for Asian competitors, just as China slows. 1997 redux?


The Bank of Japan's plan to double the size of its balance sheet, with the aim of lifting its nation's inflation to 2%, appears to be having the precise opposite effect on the rest of the world.
By sending the value of the yen sharply lower, the Japanese central bank's money-printing scheme effectively has lifted the exchange rates of the currencies of its Asian neighbors and other competitors in the global export market. That's especially true for China, the world's second-largest economy, which already was slowing.

China's currency, the yuan, already has risen to a record high versus the dollar. The greenback, meanwhile, also has appreciated more than 20% against the Japanese yen since late last year, when it became apparent that Shinzo Abe would become Japan's new prime minister and would set the government's policy on a course for radical reflation. Thus, China's yuan has increased in value even more than Japan's yet—an extreme disadvantage for the former's economy, which is dependent on cheap exports.

The effects are evident in the freefall of commodity prices, especially metals. And that has extended to the much discussed plunges in gold and silver, which has exerted a deflationary undertow on global equity markets. The Dow Jones Industrial Average fell only 138 points, or 0.9%, Wednesday.

In so doing, it held up better than other major market measures by virtue of not including Apple (ticker: AAPL) among its select 30 stocks, which lost 5% after briefly dipping below the $400 a share level. Apple still exerts a big influence on other market measures, even though it was eclipsed again by ExxonMobil (XOM) as the biggest market-capitalization stock in the Standard & Poor's 500; the large-capitalization-stock benchmark fell twice as much as the Dow Wednesday, or 1.8%.

But the market's woes extend beyond Apple. Dr. Copper—the commodity with a putative Ph.D. in economicsfell another 3.6% Wednesday, to a 17-month low of $3,1880 a pound for a June futures contract on the Comex division of the New York Mercantile Exchange.

With upbeat numbers for U.S. housing and auto activity, two major uses of the red metal, the weakest link appears to be China.
To Albert Edwards, Société Générale's chief global strategist, the yen's slide has echoes of 1997.

That's when the plunge in the Japanese currency set off a spill of dominoes in Asia, starting with the Thai baht, as the region's currencies suddenly were rendered uncompetitive versus the cheap yen. The same pattern may be playing out now, with similarly destabilizing ripple effects throughout the region.

This isn't how the Bank of Japan's monetary stimulus was supposed to work. The purchase of Japanese government bonds and other securities, in theory, should have worked to lower interest rates and put more cash into the coffers of the nation's banks, which they were supposed to lend out the money to support recovery. None of those simplistic effects described in elementary economics textbooks are playing out as described, however.

As Richard Koo, chief economist of the Nomura Research Institute details in his latest research report, past Bank of Japan programs of "quantitative easing"—the large-scale purchase of securities by the central bank—have not produced economic growth. That's even though the Bank of Japan's expansion of its balance sheet has been proportionately bigger than the Federal Reserve's or the Bank of England's, he notes.

In the case of Japan, the central bank's securities purchases—which inject liquidity into the financial system—have failed to produce a similar expansion of the money supply. That requires an increase in bank lending, which hasn't happened either because of banks' reluctance to lend or borrowers' reluctance to borrow. Koo pins the problem on the latter in a balance-sheet recession, where businesses and consumers are more apt to shed debt than take it on—even at interest rates of virtually zero.

As a result, the impact of the Bank of Japan's actions so far mainly has been felt in the currency markets, not the credit markets. Moreover, despite the prospect of heavy, continued purchases of Japanese government bonds by the central banks, JGB yields have been bouncing higher. Again, precisely the opposite of the planned outcome predicted in the textbooks.

Japan's actions mainly have worked to lower the yen, which in turn raises the exchange rate of the currencies of its export competitors around the globe. In effect, that is a tightening of monetary policy for everybody else—at a time that global growth is slowing. Viewed from that perspective, no wonder gold is being battered.

In his maiden voyage around the world as U.S. Treasury Secretary, Jack Lew implored the Group of 20 to eschew "beggar thy neighbor" policies, a phrase describing the destructive protectionist currency and trade practices of the 1930s. But the example of the meltdown of the emerging markets in 1997 and 1998 may be more relevant to what policy makers should guard against.

Robert Burns perhaps summed it up best: The best laid plans of mice and men often go awry (in the English version.) How well the words of the Scottish translate into Japanese, however, is beyond my ken.   

The future of the car

Clean, safe and it drives itself

Cars have already changed the way we live. They are likely to do so again

Apr 20th 2013

SOME inventions, like some species, seem to make periodic leaps in progress. The car is one of them. Twenty-five years elapsed between Karl Benz beginning small-scale production of his original Motorwagen and the breakthrough, by Henry Ford and his engineers in 1913, that turned the car into the ubiquitous, mass-market item that has defined the modern urban landscape. By putting production of the Model T on moving assembly lines set into the floor of his factory in Detroit, Ford drastically cut the time needed to build it, and hence its cost. Thus began a revolution in personal mobility. Almost a billion cars now roll along the world’s highways.

Today the car seems poised for another burst of evolution. One way in which it is changing relates to its emissions. As emerging markets grow richer, legions of new consumers are clamouring for their first set of wheels. For the whole world to catch up with American levels of car ownership, the global fleet would have to quadruple. Even a fraction of that growth would present fearsome challenges, from congestion and the price of fuel to pollution and global warming.

Yet, as our special report this week argues, stricter regulations and smarter technology are making cars cleaner, more fuel-efficient and safer than ever before. China, its cities choked in smog, is following Europe in imposing curbs on emissions of noxious nitrogen oxides and fine soot particles.

Regulators in most big car markets are demanding deep cuts in the carbon dioxide emitted from car exhausts. And carmakers are being remarkably inventive in finding ways to comply.

Granted, battery-powered cars have disappointed. They remain expensive, lack range and are sometimes dirtier than they look—for example, if they run on electricity from coal-fired power stations. But car companies are investing heavily in other clean technologies. Future motorists will have a widening choice of super-efficient petrol and diesel cars, hybrids (which switch between batteries and an internal-combustion engine) and models that run on natural gas or hydrogen. As for the purely electric car, its time will doubtless come.

Towards the driverless, near-crashless car
Meanwhile, a variety of “driver assistancetechnologies are appearing on new cars, which will not only take a lot of the stress out of driving in traffic but also prevent many accidents. More and more new cars can reverse-park, read traffic signs, maintain a safe distance in steady traffic and brake automatically to avoid crashes. Some carmakers are promising technology that detects pedestrians and cyclists, again overruling the driver and stopping the vehicle before it hits them. A number of firms, including Google, are busy trying to take driver assistance to its logical conclusion by creating cars that drive themselves to a chosen destination without a human at the controls. This is where it gets exciting.

Sergey Brin, a co-founder of Google, predicts that driverless cars will be ready for sale to customers within five years. That may be optimistic, but the prototypes that Google already uses to ferry its staff (and a recent visitor from The Economist) along Californian freeways are impressive. Google is seeking to offer the world a driverless car built from scratch, but it is more likely to evolve, and be accepted by drivers, in stages.

As sensors and assisted-driving software demonstrate their ability to cut accidents, regulators will move to make them compulsory for all new cars. Insurers are already pressing motorists to accept black boxes that measure how carefully they drive: these will provide a mass of data which is likely to show that putting the car on autopilot is often safer than driving it. Computers never drive drunk or while texting.

If and when cars go completely driverless—for those who want this—the benefits will be enormous. Google gave a taste by putting a blind man in a prototype and filming him being driven off to buy takeaway tacos. Huge numbers of elderly and disabled people could regain their personal mobility. The young will not have to pay crippling motor insurance, because their reckless hands and feet will no longer touch the wheel or the accelerator. The colossal toll of deaths and injuries from road accidents1.2m killed a year worldwide, and 2m hospital visits a year in America alone—should tumble down, along with the costs to health systems and insurers.

Driverless cars should also ease congestion and save fuel. Computers brake faster than humans. And they can sense when cars ahead of them are braking. So driverless cars will be able to drive much closer to each other than humans safely can. On motorways they could form fuel-efficientroad trains”, gliding along in the slipstream of the vehicle in front. People who commute by car will gain hours each day to work, rest or read a newspaper.

Roadblocks ahead
Some carmakers think this vision of the future is (as Henry Ford once said of history) bunk. People will be too terrified to hurtle down the motorway in a vehicle they do not control: computers crash, don’t they? Carmakers whose self-driving technology is implicated in accidents might face ruinously expensive lawsuits, and be put off continuing to develop it.

Yet many people already travel, unwittingly, on planes and trains that no longer need human drivers. As with those technologies, the shift towards driverless cars is taking place gradually. The cars’ software will learn the tricks that humans use to avoid hazards: for example, braking when a ball bounces into the road, because a child may be chasing it. Google’s self-driving cars have already clocked up over 700,000km, more than many humans ever drive; and everything they learn will become available to every other car using the software. As for the liability issue, the law should be changed to make sure that when cases arise, the courts take into account the overall safety benefits of self-driving technology.

If the notion that the driverless car is round the corner sounds far-fetched, remember that TV and heavier-than-air flying machines once did, too. One day people may wonder why earlier generations ever entrusted machines as dangerous as cars to operators as fallible as humans.

April 16, 2013 6:33 pm

Fair value is not the same as market Price
The belief that the only measure of value is what someone is willing to pay is wrong
Bitcoins bitcoin©Bloomberg

Anyone who comments publicly on economic affairs receives regular correspondence from monetary cranks, who espouse schemes for securing peace and prosperity by reforming the world’s money. Bitcoin, the private cyber currency whose supply is fixed to prevent inflation, is only the latest entrant to a lengthy catalogue. Bitcoin also attracts anarchists and libertarians. The web should be free, they cry, blithely disregarding its dependence on telephone networks funded by middle-aged people in grey suits, servers provided by large corporations and protocols negotiated in international conferences.

Finally there are the nerds and quants, for whom the computational complexity behind the Bitcoin software is itself a virtue. The algorithms behind it are so elaborate that their implementation imposes a significant load on power supplies. Goodness knows the nature of the problem such effort is designed to solve.

The Bitcoin story stumbles towards its inevitable sad conclusion, and we will probably never penetrate the mixture of naivety and venality that lies behind it. But these events prompt reflection on the relationship between price and value. The growth of the trading culture has encouraged the belief that the only measure of value is what someone is willing to pay.

The termsfair value” and “market price” are today used almost interchangeably. But this is a mistake.

The fundamental value of an asset is derived from the cash or earnings or utility the asset generates. Prices can deviate from fundamental value because future cash or earnings or utility are uncertain, or because of momentum – the belief that overvalued or undervalued assets may become yet more overvalued or undervalued. But there are few cases where prices are forever divorced from fundamental values – that was the lesson of tulips, dotcom stocks and collateralised debt obligations.

The value of gold is that it is both beautiful and scarce. These characteristics made the display of gold a symbol of wealth, enhancing the value of the metal further. Diamonds acquired similar cachet in the 20th century as a result of inspired marketing. Yet the value of diamonds still lies in the utility they offer the wearer, even if that utility derives from the envy of others.

I sometimes wonder about art masterpieces how can owners obtain $100m of benefit from a painting so valuable that the original must languish in a vault? Still, many people can own a copy of a Picasso that only a few experts could distinguish from the original, but only one person can own that original. The utility derives from the owning – and perhaps from being known to be the owner – of the painting, rather than the joy of looking at it. The price of diamonds and old masters does not deviate from their fundamental value in use, even though the use and the fundamental value may be influenced by the price.

Gold is different. Since gold had high value relative to its size and even weight, gold was employed as a convenient means of storing wealth and settling accounts for many hundreds of years before people realised that certificates of title to gold would do just as well. Many more years passed before the further realisation that, so long as people believed in the general acceptability of the certificates, there could be more certificates than gold. The rest is monetary history.

The transition from the world in which money is valuable because it is valuable to the one in which money is valuable because it is money could happen only because centuries of experience had established confidence that such money would be accepted. There are two commoditiespaper money and gold – whose price permanently exceeds fundamental value. But only two. And, with gold looking as volatile as Bitcoin, perhaps only one.

Yet the Bitcoin enthusiasts who believe the internet changes everything have a point, even if they misunderstood that point. Today’s technology allows records to be dematerialised and transactions to take place instantaneously at distance. These developments potentially eliminate the need to carry stores of value in our pockets.

The writer Mark Boyle wrote a book describing a year lived without money. His was not a lifestyle I would enjoy. But the need to tip the bellboy is now the only obstacle to a life of luxury lived without cash.

Copyright The Financial Times Limited 2013.

Up and Down Wall Street


Gold's Rout Puts Me in Good Company


Bill Gross still likes gold despite an epic plunge. Have governments lost their grip on markets?


I may be wrong but at least I'm in good company.

Gold plunged the most in 30 years Monday, April 15, the same date as the current issue of Barron's, which contained the print edition of this column, entitled "Bitcoin for Your Thoughts? Buy Gold."
The red on my computer screen might as well have been from rotten tomatoes. Current month gold futures plunged some $140, over 9%, to $1360.80 an ounce Monday, a two-year low. And in overnight trading, gold was off more, under $1330. (By the time you read this, who knows where the yellow metal will be, so check the home page for the latest quote.)

As for investing minds far greater (and richer) than mine who were wrong-footed by gold, there is Pimco Bond King Bill Gross. He tweeted Monday: "OK, so I made a bad call at the Barron's Roundtable. I would still buy gold here. World reflating."

The problem at the moment is that central banks don't appear to be up to the task. "Don't fight the Fed" is the dog-eared aphorism, but markets seem to be fighting central banks around the globe, which are intent upon reflation. The inflation of financial and other assets, such as residential real estate, had seemed to be proceeding apace but the plan seems to have hit a speed bump of sorts.

The Dow Jones Industrial Average shed some 266 points, or 1.8%, in a continued retreat from its recently set records. More as a point of morbid curiosity, I relate that the broadest measure of the U.S. stock market, the Wilshire 5000, fell 2.5%, which sliced some $475 billion from its value.

That's equal to about five months' slated purchases of Treasury and agency mortgage-backed securities by the Federal Reserve. So far, the Fed's buying has paid off in spades. Since last September, when Fed Chairman Ben Bernanke outlined plans for the current round of quantitative easing (the purchase of government securities with electronically "printed" money), the U.S. stock market had gained some $1.5 trillion -- even after Monday's losses.

But the scheme seems to be working less well in Japan. In direct contravention of the Bank of Japan's plans to double its balance sheet -- with the stated aim of lifting the nation's deflation to 2% inflation through the lowering of the yen -- markets aren't following the government planners' dictates. In the slide in risk assets such as stocks and commodities Monday, the yen also reversed a portion of its decline.

Meanwhile, yields of Japanese government bonds have been on the rise in recent sessions despite the BoJ's bond-buying plans. And in Tuesday morning trading, the Nikkei 225 slid another 1%. All contrary to the aims of "Abenomics," which got a skeptical review in the current print edition of Barron's ("Does Japan Face a Debt Apocalypse?").

Notwithstanding central bankers' best efforts, the global slide in equities and commodities shows "what deflation looks like," according to Walter J. Zimmerman, chief market analysts at United-ICAP technical advisory service." This is a theme he has sounded previously, including here late last year ("Is the Fed Losing the Fight Against Deflation?" Nov. 13).

The deflation undertow is evident in the decline in everything -- stocks, metals and other commodities, and currencies -- except the U.S. dollar, Zimmerman contends. And the definition of deflation is that the dollar gains purchasing power.

David P. Goldman, the head of Macrostrategists advisory, pins the plunge in gold on the increased confidence in dollar's status as the global reserve currency. The last time gold lost its luster was in 1980, when the Fed under Paul Volcker pulled the dollar out of its death spiral by pushing interest rates to near 20%. The monetary squeeze restored the dollar's credibility and punished non-believers who had to dump their precious metals.

One piece of the puzzle that didn't quite fit was the lack of rally in the Treasury market. The yield on the benchmark 10-year notes edged down a couple of basis points, to 1.70% -- around the low of its recent trading range. But it wasn't any huge breakthrough as might be expected to accompany an epic plunge in gold. Perhaps Treasuries were being sold by speculative accounts to meet margin calls for risk assets?

That remains to be seen. In any case, newly resurgent gold bears implicitly argue that governments can maintain the value of the paper money they are issuing with abandon to cover their debts.

While it may be couched in more academic terms, that is what QE comes down to. The plunge in gold might be seen as a reduction in the insurance premium against currency debasement.

The irony of the financial markets is nobody wants anything that's cheap but clamors for what's dear. That's what makes markets.