Draft information report



1. Conclusions and recommendations

1. The survey initiated by the EESC on the automotive industry and its value chain was inspired by the GEAR 2030 initiative and the changes taking place in this sector.It is expected that the new challenges of electrification, digitisation, connectivity and mobility will define the structural transformation of traditional automobile manufacturing. During the next decade, innovation and transformation will take place much more quickly than they have done over the course of the last century.

2. Four big technological trends are affecting the automotive supply chain: electrification and de-carbonisation of transport;digitalisation of the production process; autonomous driving; and connected cars, as part of a new mobility concept. The technological and software breakthroughs of the 5G revolution, Industry 4.0, such as new materials, hydrogen fuel cells, IT, 3D printing, etc. may shift the supply chain towardsthe sale of mobility rather than vehicles in the near future. Creating a regulatory framework for autonomous driving andencouraging investment in road infrastructure could synchronise the legal framework with technological developments (the Vienna Convention on Road Traffic still identifies the driver as being responsible for driving a car).

3. The inevitable structural changes will disrupt all elements of the existing value chain. Traditional automotive manufacturing is likely to be strongly influenced by IT and other industries and this may lead to the implementation of new business models. This could change the automotive sector’s attitude towards the circular economy and adapt it to the challenges of sustainable development.

4. The new trends are already creating challenges for the workforce in the sector and for the subcontracting SMEs, and the attempt to find a responsible social transition requires increased social dialogue between employers and trade unions. It is very important that the GEAR 2030 High Level Group and project teams develop a vision that is shared by all stakeholders about the future of the automotive industry and propose an ambitious industrial policy roadmap, addressing the new challenges along with the qualitative and quantitative impact on employment and the environment.

5. The EESC recommends that the European Commission shouldput together a legal and regulatory framework that allows for the rapid use of support schemes in the restructuring process. Setting up new national skills observatories for the sector could support social transition, employment and skills planning at national, regional and company levels.

6. A comprehensive industrial policy,in combination with a balanced climate, environmental and energy policy, would be needed to support the transition to electro-mobility and the development of connected cars and autonomous driving. The EU's leadership in eco-technologies may secure a strong market presence, due to the high growth potential of top quality high technology vehicles. Encouraging public and private investments in R&D would be of great importance for the European automotive industry and for the SMEs in adapting to the new production cycles.

7. Industrial policies should allow the automotive industry to maintain and develop a sophisticated industrial network, based on a strongly integrated supply chain that is present in all its key elements,as well as well-developed regional automotive clusters. The burden of tax policies should be gradually shifted from excise duties on fuel to taxation on roads, ecology and infrastructure.

8. The importance of the automotive sector for the European economy, the implementation of new manufacturing trends and the continuous monitoring of employment issues all require systematic follow-up, which could be carried out by a permanent study group within the EESC.

2. European automotive industry background

1. The European car industry,including the motorcycle industry¹, currently employs around 2.3 million workers, accounting for 8% of total value added. 10 millionworkers are indirectly employedin thissector, which is highly innovative as it accounts for 20% of industrial research funding in Europe. The EU is among the world’s biggest producers of motor vehicles and the automotive industryrepresents the largest private investor in research and development (R&D). The industry is also a world leader in terms of product innovation, production technologies, premium design and alternative powertrains, among others. As a result,one out of three cars worldwide is produced in European assembly plants and the automotive sector accounts for 4% of European GDP.

2. By 2008, the European automotive industry had achieved a record level of sales. After being strongly affected by the financial crisis in 2008, the automotive sector suffered from a significant decline in sales in Europe, bringing the number of car registrations in the EU down to 12 million in 2013 (compared with 15.7 million in 2007). This resulted in a number of high-profile plant closures: Ford in Genk Belgium, Opel in Bochum and Antwerp, Nedcar in the Netherlands, Karmann in Germany, Saab in Sweden, Fiat in Sicily, and PSA in Aulnay, France.Sales are slowly recovering, but the European automotive industryfaces fierce price competition, reduced margins, capacity reductions and pressure to cut costs.

3. Structural challenges

1. The car industry is currently facing a large number of economic and social challenges: climate change, increasing urbanisation, technological disruptions, globalisation, information technologies that penetrate all aspects of people's lives, and the need to shift to a circular economy. These new structural challenges could bring about a new industrial paradigm in the sector, dominated by complementary trends such as connected cars, automated driving, electrification, low-carbon powertrains, ride sharing services, etc. The sector will need to adapt to changing conditions and turn these challenges into opportunities.

2. Ongoing globalisation will have an impact on the industry. As global sales grow at 4% per year, the share of cars produced in the Newly Industrialised Countries (NIC) will also gradually increase (it already stands at 50%). This creates a risk that not only production facilities will be relocated, but also R&D centres and the supply sector, while producers from these emerging economies will try to enter the European market.

3. The increase in regulations regarding environmental (CO2-standards) and safety standards will increase costs and require huge investment. But stricter environmental regulations would also support European leadership in eco-technologies and could create plenty of opportunities for innovative companies in the supply sector.

4. Consumer demand and preferences are shifting towards smaller cars with lower profit margins. This raises the question of how to achieve price premiums in small segments. Furthermore, the demand for cars is negatively impacted by the ageing of the population and by the fact that millennials (18-34) are less interested in owning a car - instead of having one car for each mobility need, they look for a different mobility solution for each specific mobility need. Consumer preferences will also be heavily driven by regulations: congestion fees, emission standards, affordable parking sites, eventual restrictions on internal combustion engines in cities, such as diesel-powered vehicles, etc.

5. Innovation will bring fundamental changes to the automotive industry. The gradual automation of the car, for instance, as part of the long-term evolution towards self-driving cars, results froma combination of hardware (radars, sensors, transponders, cameras, etc.) and software (for automatic steering and braking, where software replaces the driver in making the connection between the steering wheel and the brakes).Cars will become permanently connected to the Internet, GPS and mobile networks. Mobile devices will be integrated into the information backbone of the car. Cars will be equipped with infotainment and traffic information services and will be able to monitor their own working parts as well as the safety of the conditions around them, by maintaining permanent vehicle-to-vehicle and vehicle-to-infrastructure communication. All this has motivatedcompanies in the automotive sector to complete 16% more digital deals in 2015 than they did in 2011². Specific regulations might be required for automated and connected cars.

6. As automated cars generate huge flows of data, the issues of data protection, internet safety and data ownership give rise to the need for broad political debate. Guaranteeing the safety of networks is another highly important challenge.

7. Following the invention of the production chain, the application of the principles of lean manufacturing, the modularisation of parts and the introduction of global manufacturing systems (shared global production platforms), the car industry is now on the brink of a new revolution: the digitisation of operations resulting from advanced robotisation, digitally integrated production systems between assembly plants and their supplier base, advanced manufacturing systems in which machines communicate with each other without a human interface, etc. Connectivity and interaction among parts, machines and humans will boost speed, productivity and quality and bring mass customisation to new levels. At the same time new materials are entering the sector: nano-materials (self-cleaning paints), aluminium, composites and carbon fibre, which all require special production technologies, such as 3D printing (demonstrated by Honda in October 2016).

8. The diesel-gate scandal shows that the technological challenges putting pressure on the automobile sector regarding more eco-friendly alternative drivetrains will notreduce over time. A significant reduction in CO₂ emissions might only be possible by means of a breakthrough inelectric cars. The lack of charging infrastructure and the so-called "range anxiety" are the most important hurdles preventing a take-off. In the next few years, new players will enter the market place. Battery prices are nevertheless decreasing and a tipping point should be reached by around 2025.

9. As a result of these trends, the automotive industry is facing a major shift, although we do not yet know when and how these disruptions will take place; however, the countdown has undoubtedly started. The pace will depend on future technological progress, the reduction in the cost of new technologies, the development of the necessary regulations, and a change in the consumer mind-set. Digitisation has already revolutionised other industries such as consumer electronics, telecommunications and lighting. The automotive sector is no exception.

4. Impact on the supply chain

1. Globalisation is likely tolead to a complete overhaul of the automotive supply chain and the division of value added between the various stages of the production process. Maintaining decision centres, R&D, and high-end suppliers inside Europe will be critical for the future of the industry.

2. The value chain will extend as the borders between the automotive sector and the IT sector are starting to blur. Information technology will penetrate all stages of the supply chain and data is becoming a new raw material.

3. New players from outside the sector are entering the automotive industry: mobility providers, IT-companies, battery producers, emerging Original Equipment Manufacturers - OEMs, telecom operators, etc. At the same time, automakers areexamining possibilities for collaboration amid fear that innovators will overtake them. Former competitors in the sector worldwide are being driven toward alliances³.

4. The share of electronic components as a percentage of the total cost of a vehicle has risen to nearly 40% during 2015 compared with 20% in 2004⁴. OEMs will also have to shift from commodity mechanical components to higher value-added electronics.

5. More and more value added will be created in car sharing and mobility services such as mobile applications, navigation, entertainment, social media, remote services and software upgrades. Growth in revenue from mobility services and other content will supplement the slowing growth of revenue from one-time vehicle sales.

6. At the same time,a growing market for smart transportation systems is emerging: new toll systems, new traffic control systems, charging stations, utilities, and car parking monitoring systems.

7. Digital platforms for e-commerce, autonomous driving, automated production systems, connected vehicles, navigation and car sharing are expected to capture between 30% and 40% of the automotive value chains over time. As these platforms manage and control strategic client data, they are in a position to capture monopoly rents and to change the power relations in the sector. The role of OEMs could be reduced to just being brand owners and contract manufacturers for ITcompanies, and cars could become commodity products that would act as B2B markets for the providers of mobility services.

5. Employment issues

1. The digitisation of the workplace would have an impact on jobs and necessary skills. Electric cars, for instance, would have fewer complex parts and components (e.g. carburetor, alternator, oil pump, water pump, etc.) and would require less maintenance, while automated driving would reduce the need for body repair. This could have a serious impact on employment, but also on the supply chain, resulting in a significant social impact on low-skilled workers and auto mechanics (private garages, repairing services, etc.).The aftermarket will be confronted with a shorter distribution chain because of online sales and social media. At the same time, the growing use of software, connectivity and robots will most likely increase the demand for ITspecialists and robotics experts.

2. The decline in the number of jobs requiring low- and medium-level qualifications will be partly compensated by additional jobs created in mobility services, in the changing infrastructure of low-carbon vehicles, and in the energy sector (smart grids). Also, the circular economy could create jobs in the automotive supply chain (e.g. recycling, re-manufacturing, re-use).

3. Management and employees’ representatives have a key role in proactively dealing with structural adjustment. In order to anticipate change, it is important that managers and employees engage in social dialogue and in discussions on a long-term strategy, linked to long-term planning of quantitative and qualitative employment and skills needs. Restructuring processes should be performed in a way that minimises any negative social impact and actively supports the professional reconversion of the workforce and a swift re-industrialisation of affected regions.

4. The European Union Funds (EGF, ERDF, ESF) should fully support the promotion of new skills and jobs, maximising re-employment opportunities, supporting professional transitions and developing regional re-industrialisation projects. Ensuring appropriate development of the competencies and skills of the workforce would increase its employability and thus soften the social impact of restructuring processes.

5. Aside from the restructuring and training reconversion process itself, due attention should be paid to secondary and tertiary education of young people in order to adapt them to the needs of a rapidly developing automotive industry. Education must take the lead in preparing specialists for this segment of the national economy. The structural changes in the sector will increase the demand for high-skilled job profiles. This requires a growing supply of (post) graduates in science, engineering, mathematics, and information technologies.

6. To maintain leadership in the automotive sector, Europe needs to invest strongly in training and education. Young engineers need to be attracted to the automotive industry and, for this reason, research and knowledge centres of excellence should work with universities in order to design and develop the core competences that need to be taught in universities, addressing themedium/long term technical challenges of the automotive industries, including robots.

6. Current policy framework - CARS 2020 and GEAR 2030 action plans⁵

1. The CARS 2020: action plan for a competitive and sustainable automotive industry in Europe is built on four pillars: "investing in advanced technologies and financing innovation through a range of regulatory initiatives and support to research and innovation; improving market conditions through a stronger internal market and the consistent implementation of smart regulation; enhancing competitiveness in global markets through an effective trade policy and the international harmonisation of vehicle regulations; anticipating adaptation by investing in human capital and skills and softening the social impacts of restructuring". Furthermore, the action plan aims to bring the industry’s share of the European GDP up to 20% by 2020.

2. The recent aim of the EU’s policy in the automotive sector is to establish an internal market for vehicles, ensure a high level of environmental protection and safety, strengthen competitiveness, and provide a stable level playing field for the industry. For that purpose and in order to boost competitiveness and growth in the automotive sector, the European Commission has launched GEAR 2030⁶.

3. To remain competitive, the European automotive industry will have to quickly adapt to challenges from globalisation, changing mobility patterns, digitisation and consumer expectations. Europe is no longer an absolute leader in terms of regulatory standards and its market access benefits, stemming from free trade agreements and multilateral frameworks, are increasingly being challenged.

4. The GEAR 2030 High Level Group will focus on three areas of work: the adaptation of the value chain to new global challenges; automated and connected vehicles; trade, international harmonisation and global competitiveness.Since 90% of road accidents are the result of human error, the automated and connected vehicles roadmap could help to drastically reduce road fatalities.

5. By addressing the new global challenges to the supply chain, the European automobile manufacturers could reinforce their technological leadership, which has been challenged by rapidly evolving markets.

7. Funding and financial issues

1. The EU’s efforts should focus on concluding and enforcing preferential trade and investment agreements. These will make it easier for European companies to access third markets and continue benefiting from economies of scale.Due to its specialisation in high-quality and high-technology vehicles, the EU has a large export surplus in the automotive sector.

2. Global technical harmonisation, common technical requirements (UNECE framework), etc. may help to reduce development costs and avoid duplication of administrative procedures. Harmonisation and standardisationarekey to strengthening the competitiveness of the EU automotive industry.

3. The Commission has more than doubled the funds available for cooperative research and innovation in the automotive sector for the period 2014-2020. The funding focuses on green vehicles, decarbonisation of conventional engines, safety, and information technology infrastructure. The aim is to preserve the EU’s technological leadership in the automotive sector. Innovation needs to be promoted at all levels of the supply chain. Technological disruptions require industries to maintain high levels of investments in R&D, engineering and product development. Therefore substantial, effective and coordinated funding is crucial for the future of the industry. Financing by Horizon 2020, the Green Vehicles Initiatives, EIB, COSME, the Fuel Cells and Hydrogen JTI and public-private partnerships (PPP) like "Factories of the Future" should be encouraged and reinforced. A PPP on autonomous driving should be envisaged. Greater support for the development of intelligent transport systems is important for the future of the European automotive industry.

4. Electrification is probably on the brink of a breakthrough in solving the problem of "range anxiety" and "affordability". The uptake of electric cars could be widely supported by:

1. Preliminary incentives, which cover the price difference compared to internal combustion engine cars (ICE), such as subsidies, tax breaks, VAT rebates;

2. Non-financial incentives, such as priority lanes, access to city centres, preferential parking spaces;

3. Public and private funding of battery charging and harmonising standards for charging infrastructure.

8. Challenges related to the industrial policy and the environment

1. The automotive industry will have to play its part in de-carbonising transport and contributing to the establishment of CO2 regulations and environmental standards. However, the ability to provide solutions to this demand for low-carbon transport will improve the competitiveness of the sector.

2. In order to support industry in this transition and maintain a strong and thriving automotive industry in Europe, clear, long-term roadmaps are needed,so as to respect the need for this very complex sector, with its extended supply chain. It is important to invest in planning security and reach its objectives in a cost-effective way. This can be achievedby creating positive synergies between environmental objectives, promotion of investments, enhancing innovation, maintaining technological leadership and thus generating a positive impact on employment.

3. Road transport emissions continue to represent the main source of air pollution. The transportation sector in the European Union accounts for 23% of CO2 emissions, 72% of which is emitted by road transport⁷. Ambitious emission standards for the automotive sector are therefore required. These should be achieved without endangering the competitiveness of the sector. Synergies between electrification and energy policy should be exploited, e.g. by connecting batteries to solar energy produced at home, in order to avoid electrification increasing the demand for energy from fossil fuels. A steady increase in the share of renewables will likely be necessary.

4. In order to reduce its ecological footprint, the automotive sector will have to embrace a lifecycle approach to its production process by developing circular business models and by promoting the recyclability and re-use of parts, batteries, precious metals, and plastics.

5. More stringent regulations on CO2 emissions have raised consumer demand and increased the number of government incentive programmes for electric vehicles, meaning that electrification has affected the automotive supply chain, as well as technologies based on hydrogen in a less tangible way. The market share of electric vehicles (including hybrids) is thereby progressively increasing.