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Automotive Industry: Facing Unprecedented Challenges

April 10, 2017

Few industries have undergone as much innovation in recent years as the automotive sector. From electric and “self-driving” cars to auto connectivity and the proliferation of car-sharing services, the industry has witnessed—and will continue to witness—enormous technological developments. In the meantime, the automotive industry has had to contend with an increased focus on emissions and environmental regulations worldwide.

This constantly changing regulatory, legal, and technological landscape has created a challenging environment for the sector—one where some manufacturers see a bright future while others see the need for a new business model, said Morgan Lewis partner Jürgen Beninca.

Jürgen recently spoke to us about Morgan Lewis’s automotive practice and how the firm can help clients navigate the major trends in this rapidly evolving industry, including cybersecurity for cars, increased emissions regulations, and automated driving, among other developments.

What are some of the legal/regulatory changes that the auto industry should expect this year with a new administration in the White House? There has been talk of renegotiating the North American Free Trade Agreement (NAFTA), tariffs on cars manufactured and imported via Mexico, and environmental regulatory changes. How would these measures affect US and non-US automakers if they were, indeed, implemented?

It is still too early to tell which precise changes the new administration will implement in the auto industry. While it is widely expected that there will be some easing of environmental regulations on cars and trucks, it is entirely unclear which steps the new administration will take with respect to NAFTA. It is important to recall that prior administrations have also tried to renegotiate NAFTA. Further, it is widely believed that automotive plants in the United States rely on parts and components manufactured in Mexico in order to be competitive. It is safe to assume that the new administration will not do anything that will have a negative impact on manufacturing jobs in the United States.

Turning to the concept of the connected car, how much of a concern is cybersecurity in cars, and where do you see the legal opportunities and challenges as well as the business hurdles for auto markets worldwide?

Cybersecurity is a key concern for all automotive original equipment manufacturers (OEMs) and suppliers who are active in connectivity solutions. Sophisticated connectivity solutions are not only key for providing drivers and passengers the ability to perform daily tasks on the go or to communicate with others—they are also a key component in every attempt to develop automated cars. The US Department of Transportation’s National Highway Traffic Safety Administration recently published a best practices paper on cybersecurity for modern vehicles that highlights the need for greater cybersecurity for automated cars. Morgan Lewis lawyers assist our clients in finding the right approach to develop cybersecurity protections.

Does Brexit have an impact on the European legal/regulatory landscape for the auto industry?

The United Kingdom’s decision to leave the European Union provides significant challenges for OEMs and suppliers that are active in Europe because many supply relationships exist within or between players in the automotive industry in this respect. The fact that the automotive industry is concerned about Brexit is confirmed by the EU Commission’s opening of a state-aid investigation into promises allegedly made by the British government to secure an investment decision by Nissan regarding a British plant (see Automotive News, 4/2016, page 4). In light of the importance of the automotive industry for the British and European economies, it is expected that both sides will try to mitigate the effects of Brexit. In particular, failure to find a smooth solution for the UK’s financial industry and a resulting “hard Brexit” may have significant impacts on both sides of the Channel. Morgan Lewis lawyers in our Brexit team assist clients in planning ahead on these issues.

Which trends do you consider to be the most important in the auto industry?

The automotive industry faces unprecedented challenges today that will lead to dramatic changes within the next two decades.

First, the increased focus on car emissions by regulatory agencies around the world will lead to additional regulatory hurdles and increased costs for most OEMs, while some OEMs might see tremendous potential for their business models. On the other hand, it is safe to assume that the internal combustion engine will continue to be relevant for the foreseeable future.

Second, traditional business models under which OEMs earned revenues by selling or leasing cars will come under pressure. Particularly in densely populated areas, car-sharing services are likely to gain significant market shares, leading to lower car sales for OEMs. OEMs, therefore, will explore additional business models (such as data, payment, or also car-sharing services) to account for these expected developments.

Third, the growing electrification of cars is likely to lower the value added by traditional OEMs as electrical engines are less complex and OEMs are only starting to invest in battery technology. This trend is going to have a negative impact on the number of employees in the industry.

Fourth, automated driving is an area in which almost all OEMs and many suppliers invest tremendous resources. The regulatory landscape for automated driving is, however, developing only slowly and, even worse, diversely. It remains to be seen whether the regulatory environment will be able to catch up with technical development. Further, there is the risk that rules and regulations will make it unattractive for drivers to utilize this new technology. Morgan Lewis lawyers around the world are proud to assist our clients in this challenging environment.