Hundreds of players, including non-traditional ones, are spending hundreds of billions of dollars on electric and autonomous technologies as they rush to stake a claim on the biggest change to hit the automotive industry in a hundred years.
While $255 billion (Rs 1,610,835 crore) is being spent on over 200 electric vehicles globally, many of them will lose money due to high systems costs, low volumes and intense competition.
Globally the automotive industry is undergoing a paradigm transformation – from decades-old internal combustion engines to alternate energy-driven vehicles. The legacy driven industry is witnessing one of the highly competitive races to introduce future tech-laden electric vehicles that not only satisfy consumer demands but are also capable of dealing with the limited charging infrastructure.
AlixPartners, a US-based consultancy firm, recently undertook a study on the global automotive market. The findings of the study reveal that by 2022, around 207 electric vehicles will be introduced with many of them destined to be unprofitable due to high systems costs, low volumes and intense competition.
The study titled 'The AlixPartners Global Automotive Outlook', was based on months-long analysis of data from both public and proprietary sources, and included two online consumer surveys of Americans age 18 and older possessing driver’s licenses – one survey regarding attitudes toward autonomous vehicles, conducted May 21-23 of 2,024 people; and one regarding electric vehicles, conducted May 30-31 of 1,500 people.
Nissan has been testing its ProPilot tech on a modified Infiniti Q50 sports sedan on Tokyo streets
The study states that the global automotive industry runs the possibility of a monumental capital drain in the near term as hundreds of players, including non-traditional ones, are all pouring unprecedented sums into electric and autonomous vehicles years before those technologies are fully cost-competitive in the market. It states that the consumers are still questioning the cost and safety of some of the technologies, and just as the market itself is set to continue a cyclical downturn.
The study finds that by 2023 around $255 billion (Rs 1,610,835 crore) in R&D and capital expenditure will be spent globally on EVs. Meanwhile, an additional $61 billion (Rs 385,337 crore) – just the opening ante on that front – has been earmarked for autonomous-vehicle technologies, even though, according to one of the AlixPartners’ consumer surveys, consumers are willing to pay just $2,300 (Rs 145,291) extra for autonomy – compared with current industry costs of around $22,900 (Rs 14.46 lakh), or about 10 times consumers’ willingness to pay.
The AlixPartners study forecasts that the global auto market will grow at an annual rate of just 2.4 percent through 2025, lagging expected worldwide GDP growth of 3.3 percent.
It found a number of reasons for industry players’ optimism on electric and autonomous vehicles. The study predicts full battery-EVs to reach about 20 percent of the US market, about 30 percent of the European market and about 35 percent of the Chinese market by 2030, and that autonomous vehicle will account for 3 million units in sales in the US by that date.
However, the study also finds that the return on capital employed (ROCE) for OEMs reached a three-year low in 2017, 3.6 percent, while for suppliers it reached a five-year low of 6 percent. This, along with automotive-related commodity costs at six-year highs last year – up 70 percent, or $884 per vehicle (Rs 55,842) since 2015.
In addition, the study finds that the rush of upcoming EV launches over the next few years is likely to lead to witnessing higher incentives to sell them, thus also leading to greatly depressed used-vehicle residual values and, in turn, a continuing spiral of lower new-vehicle sales. It also states that there is a downside to eventual consumer adoption of autonomous vehicles, predicting that ‘Robotaxis’—self-driving vehicles sold to companies such as Uber or Lyft, usually at lower profit margins than if sold at retail – will cannibalise retail sales in the US alone to the tune of 1.6 million units in 2030.
On the supplier front, it finds that while there are great opportunities for suppliers in electrification and autonomy, there are also great risks to overcome. For instance, a quarter or more of supplier revenues are at risk due just to the transition to electrification, particularly in powertrain and exhaust systems – which together represented 26 percent of supplier revenue last year.
China to lead the EV market
China, the largest EV market in the world, not surprisingly the Chinese auto market is forecast to grow to 29.1 million units this year, on its way to 38.2 million units in 2025.
Meanwhile, the European market is estimated to reach 21.1 million units this year, up from 20.6 million in 2017, with EVs predicted to capture at least 40 percent of that market by 2030, as diesel-vehicle sales plummet, following governmental edicts on top of the ‘Dieselgate’ scandal of recent years and which still continues to make news.
On the M&A front, over half of the deals (55 percent) in automotive in 2016-17 were in some way connected to electrification or autonomy. AlixPartners predicts that going forward there will be an increase in private equity deals in the industry and a continued shift in focus toward Asia and Europe.
John Hoffecker, global vice-chairman, AlixPartners said: “A pile-up of epic proportions awaits industry as hundreds of players are spending hundreds of billions of dollars on electric and autonomous technologies as they rush to stake a claim on the biggest change to hit this industry in a hundred years. The winners in this free-for-all will be those who have the right strategies and, equally important, execute on those strategies to their fullest potential – as billions will be lost by many.”
Mark Wakefield, global co-head of the Automotive and Industrial Practice at AlixPartners, said: “This is not the time for industry players to be leaving anything at all on the table, be it in terms of picking a growth strategy for the future or figuring out a bridge strategy so as not to run out of money before you get there. And that has to be accomplished in the midst of what is already the beginnings of a cyclical downturn in the market. In truth, this industry has been operating ‘above the clouds’ in terms of industry volumes for many years now, but those volumes are likely to edge down further, just as spending for things like electrification and autonomy need to ramp up.”
Shiv Shivaraman, Americas co-head of the Automotive and Industrial Practice at AlixPartners, said: “Industry players are sort of caught between a rock and a hard place: If they don’t participate in some way in the ‘new-mobility’ revolution that’s coming, they stand to lose out on what might be the biggest thing ever in this industry. If they do participate, as so many are, they have the chance of benefitting from first-mover advantages, but they also face the possibility of going broke in the process. The solution is to leverage your company’s existing operations to their absolute fullest, including wringing out every penny of unnecessary cost and maximising every penny of revenue, so as to have the money available to fund your future.”
(This article was first published in the 1 July 2018 issue of Autocar Professional)