Is This the End For Traditional Automotive?
Transition is not new in the world of economics and international business. Whaling gave way to petrochemicals, steam gave way to diesel, and the traditional energy system is giving way to renewables and batteries. Industries rise and industries fall – it is the wonder of economics that rewards new entry, penalises the flat footed and drives new blood into the veins of markets and customer choice.
We have written extensively about the changes and the challenges for transitioning companies – most particularly the choices that need to be made as one line of business declines and other begins. These choices are particularly difficult when the traditional declining business contributes significantly to revenue or EBIT, and where the new business is embryonic. We see this in many aspects of the net zero transition – traditional energy to new energy is the most often cited – but in the automotive world the change is really starting to bite.
For those coming in late, we are now very close to the long awaited point where the LCOE for internal combustion engine vehicles are at parity with EVs, and indeed in countries where subsidies have been provided either up-front or through operational periods (ranging from free highway tolls in Norway to rebates on vehicle purchases), we are beyond it. Our research shows that only four things are holding people back from buying EVs; they cost more upfront, people are waiting for technology break-throughs prior to their first purchase, and inventory remains low for well known brands, meaning that delivery times can be longer than most new car buyers are willing to wait.
ICE vehicle sales meanwhile are shrinking. Bloomberg NEF data shows that combustion vehicle sales fell by more than 40% between 2017 and 2022, to 69M sales globally. Meanwhile, global EV sales hit 10M for the first time in 2022. China, however, shows what can be accomplished by the EV industry with an accepting policy framework and the benefits of scale – sales of ICE passenger vehicles in China peaked in 2017 and have dropped more than 28% from that peak over the period 2017 to 2022. It is worth noting that EV’s now comprise some 26% of total passenger vehicle sales in China, and is forecast to rise to 30% by 2030.
For conventional vehicle companies which are forced to both maintain existing lines and create new EV vehicles, this is a challenging time. Two days ago, BMW announced it would cease the production of internal combustion engines in Bavaria; its main plant will be converted for the production of EVs only, while the company relocates its ICE production to the UK and Austria.
Less revenue being generated from ICE vehicle sales while needing to invest in new models increases pressure on large automotive companies to double down each quarter on a bet that is yet to fully pay off. This also increases the competitive tension with the major specialist EV companies such as Tesla and the largest EV automotive OEMs in China. It is worth taking a moment to reflect that China accounted for 64% of global new energy vehicle production in 2022. Of the 7.65 million global EV sales last year, China accounted for over 5 million, meaning that almost two out of three EVs were sold in China. BYD, the largest player in China, sold 1.85 million EVs and hybrids in 2022, an increase of 211% year-on-year, which put it far ahead of Tesla with 1.31 million units.
For traditional automotive companies, these are challenging times. The Eurpoean automotive industry is a symbol of pride in the continent’s economy; it directly accounts for four million jobs and 3% of Europe’s GDP. Classic elements of competitive advantage – technology, cost, supply chain expertise and scale - are now being directly challenged by the transition. UBS recently rated the automotive sector as ‘at risk’ for investors, and only rapid and demonstrable action will see the conventional players in the industry able to maintain market share.
So what can other industries learn from the current dilemma facing the conventional automotive industry:
Firstly, dealing with transition means shifting gears with innovation and R&D. Automotive companies are pivoting quickly to upskill and attract technology talent, and working closely with European Governments to establish hubs for excellence and joint ventures with higher education. We are also seeing a laser focus of R&D budgets into digital pathways, customer connectivity and innovation.
Secondly, supply chain dependencies are being examined, optimised and cleaned up. Critical mineral concentration is a serious issue in entering and maintaining EV market share, and net zero targets are imposing further cost pressure on automotive companies at a difficult time.
Thirdly, a relentless pursuit of efficiency and improvement, through automation and robotics. For those navigating the bridge from old to new business, every dollar must be accretive in the medium term.
Most importantly, management teams require agility. As industries transition, management must move away from what eastern religion would term “wrong view” and to embrace and plan for the range of most likely market scenarios in a clear eyed manner and with all options on the table. Markets are changing and time is of the essence.