Why Smart Transportation Matters: The auto industry and the coming age of disruption

This is part one in the MaRS Smart Transportation Market Insights, part of the Connected World Market Insights series.

“Objects in mirror are closer than they appear.”

The connected car is coming fast. What happens next may be even more surprising than you think.

The connected car (essentially a smartphone on wheels), as well electric and hydrogen vehicles, are a sign that the future of transportation is arriving. How close are we to a future where our cars are smarter than us, cleaner, and act as an Internet of Things “device”? How is Ontario’s automotive sector responding to this? What innovations are on the horizon in Canada and further afield? Before we discuss changes that are happening and our transition to smart cities, let’s look at the context of Canadian transportation and car buyers’ attitudes toward the new “connected” experiences that they encounter.

Many consider transportation as a basic necessity in today’s society, along with essentials such as food, water, shelter and clothing. Of the four major modes of transportation (road, rail, maritime and air), road is by far the most popular. In Canada, there are 23.5 million registered road motor vehicles (and 32.5 million vehicle registrations in total) using more than 1.3 million two-lane equivalent lane-kilometres of public road. According to the latest annual report from Transport Canada, 15.4 million Canadians commuted to work in 2011 and eight in ten used a private vehicle. The rest of working Canadians used public transit (12%), walked/biked (7%), or used another means of transportation (e.g., a motorcycle). As our society continues to urbanize, the needs of cities will drive everything from real estate to smart transportation even further.

Record-breaking auto sales

The need to move people and goods from one location to another has kept auto sales consistently strong year after year since the depth of the Great Recession.

Moreover, Scotiabank senior economist Carlos Gomez estimated that 2015 auto sales gained momentum in the past couple of months and could very well exceed the sales record that was set in 2014. Looking across our border to the south, US auto sales were also posting strong gains and reaching historic heights established in early 2000.

Automotive sector in Canada and Ontario

Strong Canadian and US auto sales is good news for Canada’s automotive sector, which is the eighth-largest in the world and employs over half a million Canadians. In 2012, the sector recorded an increase of 17% in labour productivity.

There are four automotive regional clusters in Canada:

• British Columbia: Alternative powertrain (e.g., natural gas, fuel cell, etc.)
• Manitoba: Commercial vehicles (e.g., buses) and cold weather testing
• Quebec: Commercial vehicles (e.g., trucks and buses) and electric vehicle components
• Ontario: Passenger and commercial vehicles, auto parts supply, and auto-related MTDM (machine, tool, die and mold)

The automotive sector is especially important to Ontario, where most production activities are based. Ontario has manufactured nearly 16% of North American vehicles since 2010. Five major automotive companies, Fiat Chrysler Canada (FCA Canada), Ford Canada, GM Canada, Honda of Canada Manufacturing, and Toyota Canada, produce 25 different models of vehicles, and of the top 10 best-selling vehicles in Canada in 2015, four are assembled in Ontario.

Furthermore, Ontario is home to an early contender of the connected car platform, Blackberry’s QNX CAR infotainment platform. The Waterloo-based company recently marked the shipment of its 60-millionth vehicle with its CAR infotainment operating system. According to IHS Automotive’s research, QNX has had more than 50% of market share since the beginning of 2015.

Arguably, Canada’s automotive sector has many elements that will help usher in an era of smart transportation.

Demand for cars and new connected vehicle features

Without a doubt, cars are considered big-ticket items (mostly likely the second-biggest purchase for a consumer next to a home). Consumers’ income level, sentiment, and financing ability determine the overall sales level. At the core, consumers want cars that have a high level of safety, efficiency and convenience at their given price point. However, when it comes to selecting particular brands and car models, the connected car is increasingly becoming a major differentiator, according to Capgemini’s Cars Online 2015 report. A 2015 Canadian In-Car Data survey by CAA indicated that 75% of Canadians are aware of connected car technologies and features. A similar 2015 study conducted by AT&T Drive Studio and Ericsson found that 62% of US respondents are aware of the term “connected car” and consider a WiFi hotspot as the number-one feature that they will purchase for their new car. In fact, 75% of consumers surveyed from the United States, Germany, Brazil, Mexico and China consider connected car services an important feature in their next car purchase. For those who already use connected features, a Nielsen connected car survey found that nine in 10 drivers are satisfied with them. Overall, 2015 survey data point to a pattern of heightened awareness and interest level in the connected car as compared to survey data from 2014 or earlier.

At the moment, connected car drivers seem to differ from average drivers. For example, one US-based 2014 study found that the majority are men, older (42% are over age 55), and educated (62% have at least a university degree). They also earn a solid income (37% made more than $100,000 per year).

Millennials and cars

For the past several years, millennials were pegged as non-drivers by auto-industry insiders and journalists alike. They were also labelled as the “cheapest generation” by The Atlantic as a growing body of American-based statistics (from declines in driving distance to car ownership to usage) point to millennials as possibly the biggest cohort to shun cars in favour of travelling by public transit, bike, foot or ridesharing app (e.g., Uber). Author of “Zero Marginal Cost Society” and US economist Jeremy Rifkin argued that car sharing will be the norm and car ownership will be an anomaly in 25 years.

As documented by Goldman Sachs, one of the biggest challenges that millennials face is lower employment levels and smaller incomes (welcome to the “gig economy”)—both of which effectively limit millennials’ financial ability and willingness to own cars. In other words, millennials may want cars, but they have not been able to afford cars. Millennials finish their education later, carry higher debt loads and are more likely to still be living with their parents compared to previous generations. However, as millennials become the biggest generation in the workforce in both the US and Canada, their purchasing behaviour and attitude toward car ownership may shift. The latest J.D. Power data shows that millennials do want to own cars after all: they are the second-biggest group of car buyers (27%) after boomers. In parallel, an Enterprise Holdings’ 2015 US survey showed that nine in 10 millennials believe that car ownership is important. Many of these would-be car owners are also demanding more connected car and autonomous driving features.

Challenges, innovation and disruption in transportation

The analysis provided above points to a transportation system that serves the some of the basic needs of Canadians, and a consumer environment where Ontario’s automotive sector can thrive. Nevertheless, challenges do exist—in a medium-term future—that could dampen the entire outlook of the system and its industries. That said, as most startups will tell you, with challenges come opportunities. The challenges include:

• As vehicles become more connected and more like computing devices, Paul Barter (technology strategy professor at York University’s Schulich School of Business) suggests that the resources that help sustain an automaker’s competitive advantage may begin to erode. Would-be competitors such as Google and Apple may have unique resources that they could exploit in order to enter the automotive sector beyond their offerings of Android Auto and Apple CarPlay. Google’s Self-Driving Car Project, as well as persistent rumours of Apple’s electric vehicle project, suggest that the technology giants may want a bigger piece of the pie. Moreover, Capgemini’s study indicated that 65% of those aged 18 to 34 said they would consider purchasing a car offered by a technology company.

• From 2004 to 2013, road casualties in Canada as a result of auto collisions decreased by 17%. While this shows the auto industry’s commitment to safety, tech giants such as Google are imagining a future where driverless cars would decrease road casualties to zero. Interestingly, Capgemini found that not only would a significant portion of car buyers be interested autonomous driving features, many would pay more for autonomous driving. Can Blackberry’s QNX extend its current connected car dominance and offer automakers a quick transition from leveraging advanced driver assistance systems (ADAS) to fully autonomous vehicle systems?

• Canada’s road transportation sector emitted 132.7 metric tons (MT) of carbon dioxide equivalent (CO2e) in 2012. This amount represented 80.3% of transportation-related greenhouse gas (GHG) emissions, and it grew by 12% from 2000. GHG emissions from on-road passenger activities increased by 3% in the same period of time from 84 to 86 MT. With oil and gas prices off of their historic highs, higher number of vehicles on the road, and more stringent emission regulations not set to kick in until 2017 and 2018, GHG emissions will likely increase. We can only expect efforts to regulate GHG emissions to increase as it becomes more evident that emissions need to be curbed due to their impact on climate change—and as citizens and business and government leaders begin to realize that climate change is a key challenge of our time.

• As early as 2008, independent studies and statistics were showing that ridesharing/carpooling was enjoying a renaissance in Canada. Ridesharing seemed ordinary, and then Uber Technologies Inc. came along. According to the Wall Street Journal, at $51 billion, Uber is now the most valuable startup in the world. A startup success story is great, but Uber has clearly created a regulatory challenge for lawmakers and city officials around the world, including those in Toronto. At the same time, it also has potentially opened up a new and more affordable means of transportation for millions.

• Beyond North America, worldwide auto sales could be plateauing in 2015. Scotiabank is projecting record auto sales globally this year, but troubles are emerging as sales are falling in both Eastern Europe and South America. The continuing weakness of the Chinese economy may affect the global automotive sector from both a demand and supply perspective.

Managing these challenges is critical in our transition to smart transportation. Smart transportation matters because we collectively need a transportation network that is safer, cleaner, more efficient, and inclusive/open while we continue to innovate and enhance our automotive sector competitiveness.

Not coincidentally, the MaRS Market Intelligence team is interested in further exploring transportation market trends and the related challenges, as well as the resulting innovation, disruption and startup opportunities. Over the coming weeks, look for Market Insights blogs on the following topics as we examine the future of smart transportation:

• Connected cars/autonomous vehicles: McKinsey & Company revealed that “today’s car has the computing power of 20 personal computers, features about 100 million lines of programming code, and processes up to 25 gigabytes of data an hour.” Effectively, cars are becoming computing devices and a big-data generator. With the vision of vehicle-to-everything (V2X) slowly becoming the reality as part of the broader Internet of Things movement, our cars may truly drive themselves one day. This blog will explore connected car applications from telematics to infotainment, benefits, and potential issues such as security and privacy. Will Detroit beat Silicon Valley in the race to a self-driving car future? How will Ontario’s recent announcement that companies can start testing automated vehicle change the race? Will startups like TrustPoint Innovation Technologies be able to solve digital security problems in connected cars?

Read our insights on The Connected Car: Remaking the transportation and mobility experience and learn more about new Ontario companies that are innovating in the connected car space.

• Electric vehicles: Smart transportation does not only encompass more intelligent transportation solutions, but also greener solutions such as electric and hydrogen powered vehicles. Electric vehicles are arguably the cleanest form of vehicular transportation at the moment (depending on the electricity generation source), with a very low maintenance cost. Battery prices continue to decline, much faster than anticipated. (And while diesel power does not seem as clean as Volkswagen would have liked consumers to believe, we won’t get into biofuels in this blog.) Plug’n Drive, a non-profit organization in Canada, lists 14 different models of electric vehicles that are available in Canada. What is the future of electric vehicles in the context of smart transportation?

• Ridesharing: It has been a bit more than a year since Uber launched its ridesharing service in Canada. Surge pricing, court fights and public sentiment all became battlegrounds as this transportation network platform disrupted the $3-billion taxi industry in Canada and across the world. Ridesharing competitors such as Lyft are now lobbying to enter the Canadian market. What are the fundamentals of ridesharing? What role will ridesharing companies play in a smart transportation network?

If you are interested in more insights and learning about the opportunities in a smarter, more sustainable transportation future, please check the MaRS Blog often for our latest perspectives.

This series is a collaborative effort from members of MaRS Market Intelligence: Joe Lee, Emily Nicoll, Lynda O’Malley and Jovana Stranatic.