Forecasting and the Auto Industry
Whether it be for one company or an entire industry, forecasting is one of the most difficult practices in business. We have not yet invented a crystal ball to tell us exactly what will happen next, but through opinion, expert, and data analysis, we can come pretty close. In addition to the business world, forecasting is evident in everyday life. For example, I use forecasting to predict my final grades here at UR. Analyzing previous test or homework scores for a class enables me to develop an estimate for what I might receive on the final exam. Forecasting is all around us, but for this post specifically, it leaves its mark on the automotive industry.
https://www.ft.com/content/32aa5418-1ada-11e8-aaca-4574d7dabfb6 *Google article title if link won’t work*
According to the article above, a major French supplier to the automotive industry, Valeo, predicts that 10% of all vehicles sold by 2025 will be completely battery-powered. This is a major step up from the 5-6% they predicted for 2025 only a year ago. So, what caused the sudden jump in expectation? Car manufacturers across the globe have ramped up their investment in electric-battery technologies due to a number of external factors including plummeting diesel demand and the banning of older cars in certain cities. Valeo has taken note and increased their forecast accordingly.
To better understand this forecasting increase, it is essential to look at the time series. In this case, the demand pattern for electric-powered vehicles can be explained as a trend. Government regulations are continuously being implemented to preserve the environment, so as a result, clean, electric cars are becoming more popular each year as they better align with regulatory standards. In addition to government regulations, everyday consumers are growing more environmentally conscious. People are actively looking to do their part to help the environment. These two factors serve as the main drivers for automotive manufacturers to invest more heavily in electric vehicles. Because the technology is not quite there yet, electric cars remain comparatively expensive and, as a result, less popular. As more vehicle manufacturers invest in new technology, however, electric cars will grow less expensive and more accessible. Using this judgment method and thought process, Valeo’s forecasting increase for electric car sales can be explained.
While electric vehicles are forecasted to grow, the article above details how gasoline is expected to do the exact opposite. The two have a very strong negative correlation. For companies like Sunoco, this disheartening information needs to be handled carefully. They could use this forecast to their advantage by investing in new electric technology, but if they reallocate their funds from gasoline to technological investment too quickly, they could face major issues involving backorders or stockouts. As fuel becomes less useful for cars, gasoline suppliers need to keep a close eye on their forecast and prepare accordingly as to not incite a gas shortage or, on the other hand, harbor toxic waste. Forecasting can serve as an advantageous tool for any company or industry, but if it is not handled properly, it can quickly turn into a major problem.
That being said, how would you recommend fuel companies manage their forecast moving forward? What about automotive manufacturing companies? How do they compare? What other industries regularly implement forecasting into business strategy?
Nicholas,
This is truly an intriguing topic. I myself would like to see this transformation from gas-powered cars to all electric cars. There are many car companies making great strides toward this. Although some critics note that the energy that chargers will formulate will have to use gas to power the aforementioned chargers, it will most likely use less gas than a car running all day will use.
At the bottom of my reply, I have attached a link to an article from the Los Angeles times discussing Porsche’s plans for this growing part of the industry. It is interesting that you brought up Valeo’s personal predictions for electric-powered cars in the year 2025. The article that I found about Porsche plans to have twenty-five percent of their sales due to electric and plug-in cars in 2025! This is truly a huge step up and I am extremely impressed. I am also eager to see not only what the future of the car industry holds, but also, to see what each particular company has in store to adjust to this ever-changing industry.
http://www.latimes.com/business/autos/la-fi-hy-porsche-ev-investment-20180316-story.html
Nick,
From reading your post, I then thought about forecasting for driverless cars, an industry of the future that is being tested at the moment. Companies who produce and sell driverless cars will need to create inventory for an unknown market. Not only will they not know exactly who their customers are they will struggle with challenges of consumer reluctance to purchase. Specifically, after a pedestrian was killed in Arizona by a self-driving car, insurance of self driving car drivers and companies has quickly become a hot-button issue.
https://www.wsj.com/articles/uber-accident-wont-stop-insurers-from-racing-to-develop-coverage-for-driverless-cars-1521624600?mod=searchresults&page=1&pos=4
It is also interesting to think about how inventory will have to work for self driving cars. It is likely that the average American will not be able to afford their own, therefore they will rely on ride share apps like Uber and Lyft. This will cause a change in marketing and production for auto companies who are currently selling directly to consumers. Auto companies will have to forecast individual consumer demand and demand from businesses. They will also have to anticipate recalls or issues with the cars that could cause changes in inventory. Although self driving cars are likely to be the future of transportation, it can be really tricky to have to figure out the logistics of them.
The below article discusses the logistics of self driving trucks.
https://www.wired.com/story/uber-self-driving-truck-scheme-logistics-testing/
Nicholas, thanks for your post. Typically, when I think of forecasting I default to either sales forecasts for consumer products or much like you, in calculating my final grade. I cannot tell you how many times in my three years here that I have put together all of my past grades and tried to determine what I think I will receive for a final grade (and how much it will impact my GPA). However, I feel like you bring up an interesting point regarding forecasting within the automotive sector. This area would seem to have a need for accurate forecasting since there is a trend towards eco-consumerism and environmental preservation. As it stands, electric car sales will most definitely increase. One can see how there is a need to predict what will happen in the future is auto manufactures are to remain competitive. Forbes brings forward an argument that car sales in 2018 will slip, but in the following years things could get bad. According to the article, forecasts for 2018 indicate a 1.5%-5% drop in sales. Morgan Stanley has looked into 2019/2020 and feels as if the government may even have to step in to “prop up the market.” It would seem that forecasting will remain an ever-present and important tool in maintaining competency in an ever-changing market. Feel free to check out the article here: https://www.forbes.com/sites/neilwinton/2017/12/28/u-s-car-sales-will-slip-a-bit-in-2018-but-things-could-get-grim-after-that/#1fe59aea7809
Forecasting in the automotive industry is incredibly specific and very difficult. However, it is a necessary component for success in such a highly competitive market with so many different highly customized products and offerings from companies around the world. The ability for these companies to stay ahead of their competitors in the long run requires them to incorporate a wide breadth of factors into their decision making process. One of which, as you mentioned, is the implication of different government regulations surrounding carbon emissions and how various governments will treat the production and sale of internal combustion propelled engines vs. electric powered engines. One way some companies have tried to predict these changes in policy is to begin taking action towards change now. The Chinese-owned swedish automaker, Volvo, announced plans this past summer that starting in 2019, it will no longer be producing purly gas powered cars but all hybrid and fully electric vehicles. And Volvo isn’t the only one. Some of the biggest automotive companies in the world see this as a changing trend as well, evidenced by companies like GM, Ford, Toyota, Jaguar Land Rover and many others making public commitments to increasing their investment in electric vehicle production and broadening the scope of the products they offer. Not only are these decisions in the face of stricter government regulations around the world but also upon the rise of Tesla Motors. While Tesla’s sales pale in comparison to that of companies like GM, many investors find it far better positioned to continue producing electric vehicles in the future compared to some of the other major players in the industry.
When thinking about automotive forecasting, it is also not just the decisions at the corporate level that have to be considered. Franchised dealerships have many forecasting decisions of their own to make in the face of a changing industry landscape. During an internship my senior year of highschool at the local Audi dealership in my hometown of Haverford PA, I was able to see the significant choices management would have to make about the inventory they wanted to sell on their lot. Decisions about what cars to stock, which cars to trade, how to evaluate used cars returned to the dealership was rather complex and required a good deal of foresight about the local markets interests in various products. In order to have new Audi convertibles at the dealership ready to be sold in the spring, management would come together six months in advance to specifically design each and every new car they wanted to have on their lot in order to be sold. Those costs would then be paid up front to Audi Financial even prior to the sale of that car. These types of forecasting decisions are very common and it is important to understand the broad implications of these types of decisions.
https://mashable.com/2017/10/03/electric-car-development-plans-ford-gm/#nX6plU1AOiqa
https://www.theatlantic.com/news/archive/2017/07/volvos-electric-future/532659/
https://www.nbcnews.com/business/autos/gm-going-all-electric-will-ditch-gas-diesel-powered-cars-n806806
Daniel,
The issue you bring up in your blog post is one that automotive manufactures have been contemplating for a long time. Forecasting the demand for products and services can be hard enough, but electric cars are new to the automotive market. This makes forecasting demand even more difficult, and there are countless factors that could potentially influence the automotive market in the coming years.
https://www.forbes.com/sites/energyinnovation/2017/09/14/the-future-of-electric-vehicles-in-the-u-s-part-1-65-75-new-light-duty-vehicle-sales-by-2050/#7fcde15e2892
This article above details a few of the factors that will ultimately define demand for electric vehicles in the United States. It also offers models that take these factors into account and predict that, by the year 2050, 65-75% of all automotive sales in the United States will be electric. The computer model that predicts this, the Energy Policy Simulator (EPS), takes into account factors such as “rapid battery cost declines, rising commitment from major automakers, strong policy support from state and local governments, and low operational costs (including discounted charging tariffs from utilities).”
It is not surprising that gasoline is strongly negatively correlated with the sale of electric cars. Problems with climate change, while easy enough to ignore right now, will be unavoidable in the near future. People will either feel obligated to help the environment on their own or they will be forced to by government sanctions that ban gas-powered automobiles. Whatever the case, both instances will result in increasing sales of electric vehicles. The tricky part about forecasting for this inevitable change in the United States automotive market is predicting when the majority of people will begin to feel an obligation to the environment or when those government sanctions will take effect. Models that estimate these things are, at best, giving an educated guess.
Nicholas,
Great post on the relationship between electric vehicle and oil forecasts, it’s certainly an interesting dichotomy. In regards to my response, I’d like to focus on a topic related to rapid EV penetration in the United States—the charging infrastructure.
EV’s have overcome many obstacles to date: proof of concept, the stigma, and now use by early adopters. However, many experts contend that the next big obstacle facing the EV market is charging infrastructure. Charging infrastructure refers to the network of battery charging systems that will need to be implemented to charge EV’s when they are away from home.
It’s important to understand that supplying EV with energy will be quite different from supplying gas-powered cars with energy. The current model relies on a network of gas stations that consumers congregate at in order to supply their vehicle with fuel. By and large, EV’s are either charged (1) at home after drivers come home from work, or (2) at work while drivers are in the building. Given the substantial, and growing, range of EV’s (at least 200 miles in most cases), it is highly unlikely that drivers will need to charge anywhere but their home, or at work if the proper facilities exist, given that the daily commute to work or to run errands is often far less than 200 miles. The only time that EV drivers will need a “third place” to “fuel up,” will be during extend trips (such as vacations). This reality is likely to make the gas station model that we are accustomed to obsolete.
In regards to forecasting the demand for charging stations, firms and investors will need to closely watch the current adoption of and the forecasts for EVs to ensure that adequate infrastructure exists. Furthermore, given the fact that charging stations will likely only need to exist on major roadways such as highways between popular destinations, it is important to forecast where the demand for charging will be greatest. Proper forecasts will ensure that EV charging stations are built in the correct places.
Lastly, the relationship between EV adoption and charging stations is a double-edged sword. On one hand, firms looking to build charging stations want proof that there is widespread adoption before investing in these systems. However, many individuals thinking about adopting EVs (and many EV forecasts) consider the breadth, or lack thereof, of charging infrastructure to date.
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Nick,
Thanks for sharing. Like you said, forecasting is one of the most important things a business does. Inaccurate or inadequate forecasting can lead to devastating effects on sales and customer satisfaction. In the automotive industry, there has been a huge push towards electric vehicles. Though Tesla currently leads the pack, Volkswagen announced recently that it had secured roughly $25 billion in electric battery supplies to equip 16 factories to produce electric vehicles by the end of 2022. Cobalt is one of the key inputs to electric batteries, and securing long-term supply of the mineral is key in the industry.
Automotive and fuel companies will both need to update forecasts often, as markets in these industries move quickly and often drastically. To answer your last question, I would think that every industry utilizes some form of forecasting, because, like you said, there is no crystal ball that allows businesses to know ahead of time what their demand will be.
https://www.bloomberg.com/news/articles/2018-03-13/vw-secures-25-billion-battery-supplies-in-electric-car-surge
Nick,
The Auto industry demonstrates the importance of updating forecasts to keep information time relevant. As Nick has mentioned the French supplier Valeo almost doubled their 2025 projected market share for electric vehicles since last years projections. As with the “3-month moving averages” we have worked with in class, when new information is incorporated into the model the forecast changes accordingly. With a developing technology like electric vehicles the future is still quite uncertain and can fluctuate greatly anytime there is a change. This explains the significant increase in Valeo’s forecasts when new government regulation was released which favored electric vehicles. Developing technologies present an interesting field in which to test our ability to forecast and it will be interesting to see if electric vehicles will be as successful as predicted.
-Matt
Nicholas,
You are definitely right. Forecasting is a very difficult thing for a company. It is almost impossible to predict any trend changes or changes in customers wants and needs. This is why the forecast has fluctuated over the years as new information has become available. Much like you’ve already said, these fluctuations in the electric automobile forecast has changed mainly due to government regulations and increased demand. Electric car sales have increased dramatically since 2011. According to an article written by Forbes, electric vehicle sales have increased from 20,000 cars in 2011 to 160,000 cars in 2016. Therefore, the spike in the forecast makes sense as they continue to see growth in the electric car sales.
Lastly, I really find your point about gas stations’ need to adapt to the new shift interesting. Personally, I never really thought about the implications that a change to electric vehicles would have on all of the gas stations. However, the more that I think about it, I feel that gas stations won’t need to change that much in order to meet the new demand for electric cars. At the most, gas stations would have to provide charge stations next the parking spaces outside the convenience store. This would allow them to satisfy the current demand for fuel as well as the increased demand for electric charge stations without having to completely renovate the layout of the station.
With this being said, it is very difficult to forecast demand-especially for a new product line. With limited information and a lot of uncertainty regarding the future, predicting demand accurately is nearly impossible. Because of this, I don’t know if there is a better way to forecast other than keep adjusting every year as more data is made available to them.
References:
https://www.energy.gov/eere/electricvehicles/electric-vehicles-tax-credits-and-other-incentives
https://www.forbes.com/sites/rrapier/2017/02/05/u-s-electric-vehicle-sales-soared-in-2016/#3eef6f32217f
Daniel,
I agree with you that gas stations won’t need to change that much in order to meet the new, increased demand for electric cars but they might need to install charging stations outside the convenience store. While it is difficult for the auto industry to predict the number of vehicles sold that will be completely battery-powered, it is perhaps even more difficult for gas stations to predict and forecast how many charging stations they will need to install. Many owners of electric cars charge them at home and have no need to charge them at a gas station except if they are on a long road trip or drive. Charging stations are expensive to install and it is essential that gas stations use the proper forecasting methods in order to determine the number needed or else they will waste a significant amount of money.