The car started life in Germany, and early development of the industry began in France. But it was in America that it came of age.

Raghu Dayal

The automobile industry is now over 100 years old. Modern car manufacturing was born in the mid-1920s, and General Motors soon swept past Ford as Alfred Sloan revolutionalised the nascent car industry. He coined the phrase "industry of industries". For much of the 20th century, car-making, indeed, was the "industry of industries". Today, it makes nearly 60 million cars and trucks a year; its products account for almost half the world's oil consumption, their manufacture uses up nearly half the world's annual output of rubber, 25 per cent of its glass and 15 per cent of its steel. The car industry accounts for about 10 per cent of GDP in rich countries.

A century ago, the car industry more or less invented modern industrial capitalism. The car started life in Germany, and early development of the industry began in France. But it was in America that it came of age. It was invented by Edward Budd, taken up by Dodge and, finally, by Citroen in Europe, and then by all volume carmakers. The US remains the largest single market for cars, but nearly half the cars sold in America are foreign brands.


The car industry has been consolidating since it was born. In the late 1920s, there were 270 car companies, mostly in America, before the Big Three gobbled them all up. In volume terms, six groups, GM, Toyota, Ford, Renault/Nissan, Volkswagen and DaimlerChrysler, with their affiliates, account for some 70 per cent of global sales.

When Daimler-Benz announced its merger with Chrysler in 1998, the bosses of Toyota's American subsidiary held an impromptu party as they foresaw what the Germans did not: That the sheer difficulty of a transatlantic merger would distract Chrysler and boost its competitors. Now Renault and Nissan are pushing ahead with their plans to share car platforms, reducing the number across the two companies from 40 in 2000, and then to ten. The two stars of the European volume car market have been Peugeot and Volkswagen.

Europe's three weak brethren are Fiat, Ford Europe and GM Europe. Fiat was nearly sold to DaimlerChrysler in 1999. Since 1984, Nissan, Toyota and Honda have been opening their own European factories and the competition has grown tougher. Toyota alone now has 5 per cent of the European market.

Renault's attempted merger with Volvo fell apart after the Swedes resisted French government dominance. PSA Peugeot Citroen seemed too small and too restricted to Europe to survive. Now BMW and Mercedes have broken through in global markets, and Volkswagen has grappled with many of its problems and made progress in America and China. Peugeot is no longer so heavily dependent on France. Renault has changed the industry's entire landscape with the Nissan deal.

Goldman Sachs came to a sobering conclusion: Of the world's top 17 car companies, only half were earning more than the cost of their capital. The value creators in Europe were Porsche, the Mercedes bit of DaimlerChrysler, BMW and Peugeot. In Asia, Toyota, Nissan, Honda, Hyundai and Kia made the cut. But the American Big Three GM, Ford and Chrysler were all in the value destruction group, along with Renault, Fiat, Mazda, Mitsubishi and VW.

Transportation consumes more than one-fifth of the world's total primary energy and produces much of the world's air pollution. Today's internal combustion engines are notoriously inefficient, converting only about 15 per cent of the heat content of petrol into useful energy. Even in their primitive state, fuel cells can already manage at least twice that efficiency.

The switch to fuel-cell cars promises other differences that consumers may find attractive a much quieter drive, a constant torque regardless of speed, a clean "engine off" energy source for electronics and a simpler transmission requiring less maintenance. The most promising type of fuel is the "proton-exchange membrane". This is a sandwich of two electrodes - an anode and a cathode with a polymer membrane serving as an electrolyte stuck in the middle. The methanol champions argue that, unlike petrol, their fuel can be produced from a variety of sources ranging from natural gas to "biomass". Sceptics argue that it might be cheaper to go straight to hydrogen.

Recent arrival of highly efficient hybrid cars such as the Toyota Prius and the Honda Insight, that combine petrol engines with electric motors, is significant.

While hydrogen is inflammable, methanol is corrosive and extremely toxic, and petrol is both carcinogen and highly flammable. With public education and garage-style handling, hydrogen can be at least as safe as today's fuels. A tougher challenge is storage. Hydrogen has the smallest atomic structure of all elements. The leakage from a pressurised hydrogen tank could be significant. Hydrogen is also exceptionally light. An obvious answer is to compress the hydrogen.

To reduce the cost of manufacturing fuel cells and win public acceptance, authorities may encourage a shift to hydrogen for fleet vehicles such as city buses, delivery trucks, etc. Fleets of commercial vehicles have the added advantage of refuelling at central depots. Hydrogen buses have been running the streets of Vancouver and Chicago. Cars can run on unconventional fuels such as alcohol (ethanol and methanol), natural gas and hydrogen. BEVs (battery-electric vehicles) in the US are predominantly coal-powered; that is, they use the power generated by thermal plants, while Canadian BEVs run mostly on hydroelectric power; those in France are about 60 per cent nuclear-powered.

An electric motor that runs on a fuel cell tops the agenda of car-makers. A fuel cell combines hydrogen with oxygen from the air to produce water.

The process generates an electrical current strong enough to power a car. Honda was the first to get a BEV ready for the market, but nearly all the other car companies are working on their own versions.

The fuel cells are still about ten times more expensive to make than internal combustion engines. Meanwhile, most car companies are introducing hybrid-electric cars, emulating the Toyota Prius, of which two lakh units have already been sold.

The electric motor runs the car in slow and stop-start motoring and the conventional engine takes over on the open road. The battery also provides extra power for acceleration. It is kept charged by the conventional engine and by the energy generated during braking.

(The author is a former Managing Director of Concor.)

(This article was published in the Business Line print edition dated December 20, 2006)
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