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The future of urban mobility: Planning for disruptive change

19 May 2014 Egil Juliussen, Ph.D. IHS Markit Expert Nigel Griffiths Philip G. Gott

What are the prospects for the automotive industry as the world's population explodes and cities fill with new residents? One thing is for certain: The future is not what it used to be.

The scene is a familiar one to any recent traveler to Southeast Asia: swarms of bicycles and motorcycles at a busy urban intersection, edging into moving traffic, impatiently awaiting their chance to move. Now imagine that all those bicycles and motorcycles have been transformed into cars and light trucks, each with the footprint of six to eight two-wheelers. Suddenly, the chaos of the intersection has multiplied exponentially into acute congestion and unbreakable gridlock. That nightmare is the future of urban mobility, if the personal car ownership rates hold true to historical trends.

But will those trends hold true? That is the burning question that confronts the automotive industry and its suppliers. For almost as long as the automotive industry has existed, its growth has been predicted, with uncanny accuracy, by a simple formula. That formula posits that as a nation's population and personal wealth increase, its motorization rate (that is, the number of automotive vehicles per 1,000 people) increases at a predictable pace. Today, though, that formula's predictive power is rapidly waning.

The urban tipping point

What is emerging is an alternative scenario. It posits that as the world becomes increasingly crowded and urbanized, the automotive industry will take a radically different growth trajectory.

A tipping point occurred in 2005 when, for the first time in human history, more than half the world's population lived in urban areas. By 2035, according to the United Nations, the global population will have increased by 2 billion, to 9.2 billion, and nearly all of this additional population will live in urban areas. By 2035, roughly two-thirds of the world's people will be urban dwellers. (See figure below.) Because most cities in the future will likely grow vertically rather than sprawl horizontally, they will be far denser-that is, they will contain more people per square kilometer-than they are today. So if the world's population grows as projected and motorization growth continues at historical rates, urban traffic will become unmanageable-and cities themselves unlivable.

Weak signals of an epochal change in personal mobility preferences are already sounding from many quarters. A growing percentage of younger people are deferring obtaining their first driving licenses. Mass transit options are steadily multiplying, despite their expense. And in mature cities such as London, Paris, New York, Stockholm, and Tokyo, motorization rates have been declining steadily for the past decade, as more and more urban dwellers happily relinquish their cars. (See figure below.) For these people, the sheer misery of urban driving-with its clogged roads, limited alternative routes, uncertain trip and arrival times, and anxieties around parking-outweighs the increased freedom and autonomy that car ownership provides.

The people opting out of car ownership will likely have plenty of company in the next 25 years. As congestion increases and alternatives to driving within cities proliferate, the links between wealth, population, and motorization are weakening, and forecasts of automotive growth that rely solely on that link are becoming less and less reliable. The implications of this breakdown are profound and reach far beyond the automotive industry itself. They have the potential to affect the plans of developers of connectivity solutions, suppliers of chemicals and materials, energy producers, and makers of mass transit systems, to name just a few. Some companies will anticipate the change and prosper from it. Others, to their peril, will see growth continuing in a straight line and continue to plan for a future that might very well never arrive.

It all comes down to congestion

The auto industry may well be approaching an inflection point of its own. Extensive analysis reveals that, generally speaking, motorization rates peak when about 80% of a country's population lives in urban areas. At that level, it appears, there simply is not enough room on city roads for more cars. But that number is more of an average than an absolute rule. An IHS study of motorization rates in 20 model cities shows that motorization is declining, at least in developed markets, at a rate that the traditional formula for motorization cannot account for. In some cases, population density alone accounts for the decline. In others, though, multiple factors come into play, including access to the internet, the availability of acceptable transportation alternatives, and government regulations designed to mitigate congestion.

The factors that limit the growth of the total number of light vehicles in operation-a figure referred to in the automotive industry as the "parc"-vary widely, depending on the level of regulation, the type and number of mobility options that each city offers, their population, and their stage of development. The one thing they share is congestion. Some cities address the problem by imposing regulatory or financial measures to control car ownership and usage, while others allow congestion itself to impose limits.

The study groups more than 1,600 cities covering 25% of the world's population-and more than 30% of the addressable automotive market-by their level of regulation, categorizing them as "reactive," "soft active," and "tough active." Reactive cities have no anti-congestion regulations, and congestion itself will limit the growth of motorization. Soft active cities are building or have built the infrastructure for transportation alternatives (such as light rail, dedicated bus lanes, and municipal bike-share programs) but have not yet established incentives or sanctions to shift drivers into other forms of transportation, such as stiff tolls at crossings or pay-as-you-go pricing for road use. Tough active cities have regulatory regimes that all but force people out of their cars, through strong fiscal incentives and penalties, outright bans on driving in certain areas or at certain times, caps on vehicle registrations, or strict controls on parking.

The regulations are a response to economic concerns. Congestion is enormously costly. Not only are there direct costs, such as wasted fuel, the deleterious effects of pollution on public health and infrastructure, and the time lost sitting in traffic, but the indirect costs are also significant. Cities with unmanageable (or unmanaged) congestion suffer economic losses from reduced employment opportunities and lack of access to leisure activities, cultural events, and entertainment.

Congestion and the various tough and soft measures taken to address it will have a significant impact on the automotive industry and its stakeholders. To quantify that impact, IHS developed three different scenarios for how motorization could develop in cities of 300,000 people or more over the next quarter-century. These three scenarios are the Base Case, the New Urban Mobility (NUM) model, and the Technological Breakthrough model.

The Base Case is a standard industry projection of the global light vehicle parc and resultant annual sales. This projection takes into account the various limitations on growth imposed by congestion and regulation, the different characteristics of cities in developed and developing markets-such as the widespread use of two- and three-wheeled vehicles in the developing world-and the need to control congestion in order to enable economic growth. The Base Case, however, does not weight these factors as heavily as does the NUM model.

The NUM model, by contrast, proceeds from the assumption that new trends in urban mobility-including mobility options such as car-sharing and car-pooling-will gain momentum, with a growing impact on the number of light vehicles in operation and annual vehicle sales.

The Technological Breakthrough scenario assumes that autonomous and self-driving vehicles will come into wide use. Should this scenario be realized, the effect on the number of registered vehicles and annual sales will be profound, and not necessarily in a negative way. However, these developments occur at a rate that will delay the full impact until roughly 2050.

This article focuses on the NUM model because it represents the most plausible near- and medium-term alternative to the Base Case. Under the NUM model, the growth in the global number of vehicles in operation would be at least 13% less than the growth projected under the Base Case. The real number could be larger if today's vehicle owners scrap their vehicles sooner than the model anticipates. If scrappage rates accelerate, the number of vehicles in operation would shrink proportionately, widening the gap between the parc growth projected in the Base Case and that projected by the NUM model.

If the world develops in line with the NUM model, the number of vehicles in operation worldwide in 2035 could be some 260 million vehicles fewer than the number projected in the Base Case. New sales worldwide in 2035 could come in at 27 million less than the Base Case projection. Sales in India and China, the two countries to which the industry looks for aggressive growth, could fall short of the base case projection by 15 million units annually in the same year.

If those projections are realized, then by 2035 there will be little or no net organic growth in the automotive market, with total worldwide sales topping out at roughly 100 million vehicles annually. Sales in some regions such as Asia, Africa, and Latin America will grow, but declines in the developed world will largely offset the increase. And there will be no need for an increase in net new manufacturing capacity to meet anticipated demand, although some capacity may have to move closer to pockets of growth. In fact, the industry, already on pace to expand capacity to 120 million units a year by 2016, could face acute overcapacity. (See figure below.)

Disruption brings opportunity

The NUM scenario presents automotive manufacturers with an opportunity to grasp the growth possibilities inherent in disruptive change. The key is to recognize that though there may well be, in the aggregate, a reduction in the net demand for new vehicles, there will be a growing need for mobility. People will still have to move about, both physically and virtually. Digital connectivity will address some of this need. But new solutions to enable physical mobility will drive the emergence of a new mobility industry, which will include both existing light vehicle manufacturers and new entrants offering innovative solutions. Manufacturers, though, will need to recognize that they are no longer in the business of selling cars and light trucks. They are selling mobility.

This shift requires manufacturers to reconceive themselves as service businesses, selling end-to-end mobility as a concierge-level service. Just as the music industry has evolved from manufacturing and distributing tangible artifacts such as vinyl records and CDs into delivering the experience of music, manufacturers have an opportunity to evolve toward selling the experience of mobility.

The NUM model also implies that the industry will need to rethink its plans to add capacity. The NUM scenario's projection that capacity will exceed demand by more than 25 million vehicles by 2035 implies that manufacturers must adjust their investment plans. They may choose to sell subsystem and assembly plants to contract manufacturers or collaborate with other manufacturers. In addition, they may want to shift some capacity to regions where the demand for new vehicles has room to grow substantially.

Manufacturers may also find growth potential in markets adjacent to the existing private-vehicle market. The New Urban Mobility model will call for new types of vehicles to move people and goods through increasingly crowded urban spaces. This hardware will have to be integrated with software, services, and lifestyle products to solve the problem of mobility and meet customer preferences. As mobility service providers, today's manufacturers can offer time-pressed customers various options for moving from Point A to Point B, at different price and service levels. They can tailor their offerings to customers looking for the most environmentally friendly option, or the most luxurious, or the service that allows them to use their time sitting in traffic to work or be entertained.

One of the most intriguing implications of the New Urban Mobility is the shift toward autonomous vehicles. It is already under way, in the form of Advanced Driver Assistance Systems, such as park-assist and self-parking systems, adaptive cruise control, lane-departure warnings, and forward-collision alerts. Just over the horizon is the possibility of self-driving or autonomous cars, which, in addition to improving road safety, offer passengers the opportunity to engage in work or leisure activities while on the road.

Development of autonomous vehicles is dependent upon a number of factors, including extensive changes to existing legal and regulatory regimes. Above all, though, it depends on further expansion of connectivity, especially in the field of the so-called Internet of Things. To be widely used, autonomous vehicles will need to be part of a network offering continuous connection to road sensors, other vehicles, and areas designated for passenger pickup and drop-off.

Finding a place in the new mobility ecosystem

This article describes where we believe things are heading, but it is unlikely that mobility will evolve precisely as projected here. Thus, the insights developed by this project may be viewed as a planning platform, a chance to imagine the future and the automotive industry's place within it. While the outlines of this new world are only now beginning to emerge, it is already clear that big changes are in store. So are the opportunities for industries that feed the automotive ecosystem.

Energy companies clearly have a large role to play in the mobility market of the future. Although reductions in the number of light vehicles on the roads and the road-miles driven will cut into sales of fuel and lubricants, opportunities abound for developers of alternative powertrains and their energy sources.

Possibly the greatest opportunities await technology companies. Automobiles, already bristling with electronic components, will increase their technology content in coming years. There is also an acute need for technology that can integrate information from across an entire urban mobility system in a form that allows travelers to choose the mobility option that best suits their needs at any given time.

A change of plans

The thesis underlying this article is that the car and light vehicle market simply cannot grow at historical rates. Even the Base Case scenario projects that motorization will grow at rates below the historical norm. In such circumstances, energy companies, safety regulators, urban planners, and operators of chemical and refining facilities must challenge the prevailing expectation that automobile usage will develop in line with historical trends.

As cities fill with more and more people, fewer of them will own their own cars. The automotive industry and its stakeholders should therefore plan ahead to ensure that they can provide the needed and desired levels of mobility to everyone who requires it in the most affordable, socially beneficial manner possible.

Automobile manufacturers will have to shift their focus away from unit volume growth toward growth based on providing mobility as a service. In a world where incremental sales gains will come only by taking share away from rival manufacturers, they will have to find other growth drivers. Car-sharing services, production of people and goods transporters, and service on demand are all avenues that require a mindset that looks beyond the traditional car ownership model.

Technology companies will be key players in building and maintaining the mobility infrastructure. New forms of mobility will demand new technologies, from the systems needed to support autonomous vehicles (including both vehicle componentry and the road sensors those components communicate with), to new assembly techniques, including 3-D printing, to tracking the mobility grid in real time.

Planning for such an uncertain future is a challenge for all companies involved in the extended automotive value chain, from energy providers all the way to after-sale product and service companies. But what is the alternative? If a new type of urban mobility is emerging, then the status quo is untenable. The automotive industry and its stakeholders have a choice: to seize and profit from the opportunities that the disruption will create, or to stand by as others, perhaps from outside the industry, provide innovative solutions to urban mobility challenges, while the incumbents wither away, having realized only too late that the world has changed.

Innovation through anticipation

How Valeo connects the trends of tomorrow to today's product design

"Anticipation is the key word for what we do," says Derek de Bono, product marketing director for Valeo Group, a global producer of automotive components, systems, and modules, with US$16.2 billion in annual sales and 73,300 employees working in 28 countries. In effect, de Bono and his product design team strive to know in advance what consumers want and deliver it to them precisely when they want it. "We don't want it before," de Bono says, "because then it will be too early, and we don't want it after, because we lose the innovation edge on the market." Innovation, de Bono makes clear, is what fuels Valeo's impressive growth.

Anticipation in de Bono's world is both an art and a science, and Valeo's product designers take both quantitative and qualitative data into account when preparing the annual 10-year product development plan. The research includes long-range trend and sentiment analysis as well as traditional quantitative forecasting. The team analyzes economic growth trends, the price of fuel and batteries, and coming technological developments, but they also listen closely to consumers, holding focus groups around the world to determine what drivers like and dislike about the driving experience.

Through a series of such focus groups, de Bono and his team learned that parking is one of the biggest pain points for drivers, who would welcome a bit-or a lot-of assistance from technology to make it less of a chore. Based on that feedback, Valeo has developed a range of parking-assistance technologies, from backup cameras to fully automated parking. That response to consumer needs typifies Valeo's approach to innovation. "The first goal," says de Bono, "is to address moments when the driver does not enjoy driving."

In pursuit of that goal, Valeo is now exploring ways to more fully automate the driving experience. The company's product designers have learned that in some parts of the world many drivers would willingly give up control of the car, at least in congested conditions, to focus on other activities. American workaholics, for example, would happily relinquish control in a traffic jam in order to turn their attention to writing emails or conferring with work colleagues. "Automation allows them to take back two hours a day to work," de Bono says. Millennials, on the other hand, would prefer to use the time spent stalled in traffic on entertainment. So Valeo is working on new display technologies.

Not every driver, though, is ready to let go of the wheel. Chinese drivers, de Bono says, are wary of automated driving because they do not believe that any algorithm, no matter how clever, is equal to the chaos that prevails on China's roads. German drivers, for their part, enjoy driving at high speeds on the country's autobahns, where there are no speed limits, and would not willingly cede that fun to a computer. Technology marches on, but it will never eliminate the human need for speed. That is one more thing for Valeo to anticipate, and one more opportunity for the innovation that drives growth.

Based on an interview with Derek de Bono, product marketing director, Valeo Group.

The sharing economy and the future of urban mobility

Groupe Futuribles is in the business of telling stories-stories about the future. The Paris-based organization uses qualitative and quantitative information about organizations, regulations, personal values, and other phenomena as the basis for storylines that describe what might unfold in consumer markets in the next two decades or so.

The narratives we develop rely also on quantitative forecasts that make them compelling and persuasive to business leaders. The combination of quantitative forecasts from IHS and qualitative foresight from Groupe Futuribles offers a compelling vision of the future of the automotive industry based in part on how young people around the world are converging around the idea of the sharing economy.

Thanks in large part to exchanges enabled by the internet, we have found that young people in developing and mature markets alike are more willing than their elders to share many forms of consumption. They use the internet to swap apartments, exchange services, or band together to form ad hoc buyers' clubs.

The sharing economy is nothing new. It has existed at the neighborhood level for generations-think of the bakers who, once the day's bread was baked, allowed local women to use their ovens to cook one-pot family meals. Today, though, the internet has enabled people to share over longer distances, and young people are taking advantage of digital connectivity to share a wider range of goods and services than their elders.

Several attitudinal shifts help account for the rise of the sharing economy, with implications for the automotive market. For one thing, younger people, who since childhood have been absorbing messages about pollution, climate change, and sustainable living, have developed an acute sensitivity to environmental concerns. They see the sharing economy as a more environmentally responsible way to consume. For instance, if you share a car with 100 other people, you need fewer cars.

In what might be the most startling twist, young people have developed an affinity for the sharing economy by observing the lifestyles of the rich and famous. They see celebrities moving from limousine to airplane, from rented luxury cars to hotels, then back to the limousine and the next airplane. The rich and famous don't own anything-they rent what they need and when they no longer need it, they just drop the keys off at the front desk. Why should the well-heeled be the only ones to enjoy such convenience?

Young professionals in emerging markets also enjoy the unique advantage of being able to learn from the developed world's mistakes. In my collaboration on the future of urban mobility with IHS, I had the opportunity to speak with young urban planners in places such as Jakarta and Shanghai. Nearly all of them studied in Europe or the US, where they saw firsthand the consequences of the unrestrained growth of automobile-centric economies. The philosopher George Santayana famously remarked that those who forget the past are condemned to repeat it. These young planners seem determined to avoid that fate, which may well lead to less urban congestion and a brighter future not only for their societies but for the entire planet.

Veronique Lamblin is foresight and strategy studies Director, Groupe Futuribles. IHS Automotive collaborated with Groupe Futuribles on the recently released Future of Urban Mobility study.

Phil Gott Senior Director, long range planning, IHS Automotive.

Chris G. Christopher Jr. Director, IHS Economics & Country Risk.

Nigel Griffiths Chief Automotive Economist, IHS Automotive.

Egil Juliussen Research Director, IHS Automotive.

Veronique Lamblin foresight and strategy studies Director, Groupe Futuribles.



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