Large multinational corporations spend tens of millions of pounds every year to fund their finance, accounting and auditing departments. The rationale behind this is that by conducting these activities it will put the company into a highly competitive position making it more efficient and informed. Employees in these companies undergo years of training both pre and post University to be able to conduct the complex and difficult activities this profession needs. Automotive manufacturers are no different, employing thousands of accountants and financial analysts.
If there is one thing that these individuals dislike the most it is uncertainty. They work best where cash-flows and interest rates are clearly known or can be determined with a high probability. Uncertainly adds both an element of frustration to these financial statisticians and also a level of risk to the company. Undoubtedly financial services have become better at taking account of uncertainty and working it into their analysis but this can only occur when the variable that is uncertain can be identified, investigated and quantified. In some situations it is not the known unknowns that we have to worry about, it’s the unknown unknowns.
Whenever situations seem risky and uncertain individuals and companies tend to be risk adverse and go for more sure options and strategies. The automotive industry has to invest millions of pounds to research and develop any new vehicle they want to bring to market. In the case of Low Emissions Vehicles, as they incorporate new technologies, these sunk costs are even greater and usually involve longer lead in times.
Specifically concerning Low Emissions Vehicles, the research, development, demonstration and deployment of these vehicles contains risks over and above those usually associated with conventional vehicles. This poses an extra challenge to automotive manufacturers. There is assuredly great scope for these vehicles and this market segment to be exceptionally successful and profitable however there also exists and increased probability of things going wrong. Governments have a role in trying to cultivate an optimum environment for automotive firms to operate and innovate in both in terms of policy, regulation and legislation. The situation in the UK market seems somewhat variable with the UK Government backing a consumer incentive scheme and preferential loan agreements to automotive firms at least for one year. The automotive manufacturers will clearly want more positive and solid signals than these allowing them to plan more for the medium and long term.
Consumer acceptance of these new automotive technologies is also a much unknown dimension. With other recent technological introductions in the automotive market, if the consumer didn’t like using the extra function or feature they had the ability to neglect it without hindering the ability o the vehicle to work. Much of these technological innovations also entered the market as optional extras such as GPS systems of Bluetooth connectivity. This is not the case with Low Emission Vehicle powertrains which are fundamental to the operation of the vehicle. If the consumer doesn’t like the feel of their new electric motor they can’t simply flick a switch to get rid of it.
These forms of uncertainty pose a big question mark to automotive manufacturers thinking about entering the Low Emissions Vehicle market. Many strategies exist to help alleviant some of the associated anxiety. Firstly, manufacturers could avoid being the first movers in this market and wait and see what experiences their rivals have. This will allow firms to be more certain of the likely implications but could also be disadvantageous if they wait too long to bring their vehicles online. Secondly, manufacturers could slowly introduce Low Emission Vehicles into the market to gauge actual market response and then throttle up supply if demand is high enough. This would limit the level of exposure but will do little to reduce the sunk costs associated with Low Emission Vehicle development.
Whatever the case may be, the situation doesn’t appear to be easy or straightforward for automotive firms. The risks involved with Low Emissions Vehicles are stark and have become more pronounced since the recession. The more research that is done in the area and the greater the support offered by Governments the more stable the environment will become. Low Emission Vehicles not only have the ability to move us onto a more sustainable personal transport pathway but also offer a fantastic opportunity for our national automotive industry to get a jumpstart into a potentially highly profitable new market. We need to be doing everything we can to make sure that both of these possibilities become realities.
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