Automakers and suppliers need to adopt ‘all-new ways of doing business’ to master the conversion to electric vehicles, materials shortages, the rise of new entrants and other disruptors such as autonomy and connectivity, says AlixPartners analysis

17 June 2021

Though investments in electric vehicles have soared 41% in the past year, to $330 billion through 2025, EVs continue to have significant a variable-cost penalty of $8,000-$11,000 per vehicle
A revolution in automotive design towards software-first connected, autonomous, shared-mobility and electrified (“CASE”) vehicles is reshaping the value chain and presenting new threats and opportunities unlike ever before
Investors’ recent interest in EVs and the pivot to EVs that automotive companies are attempting have driven up expectations that now have to be lived up to, as the market capitalization of nine large traditional automakers grew 102% from June 1, 2019 to June 1, 2021
The V-shaped sales recovery has caught the industry in shortages, from semiconductors to steel, and the just-in-time nature of supply chains and ‘inadvertent specificity’ in specifications have been compounded by a lack of visibility deep into supply chains
Over half of senior auto executives surveyed worry their companies are not well-positioned to navigate industry disruption

DETROIT and LONDON (June 17, 2021) – The automotive industry has so far come through the COVID-19 pandemic well, with significant support of governments worldwide and newfound investor appetite for electric vehicles despite shortages of key components throttling growth. However, the industry now faces disruptions of a magnitude and complexity like never before, and players in the industry need to adopt and hone all-new ways of doing business at virtually every level of their organizations—and they need to do so quickly as the pace of change has accelerated. That’s the main message in a new, industrywide analysis from AlixPartners, the global consulting firm.

The 2021 edition of the AlixPartners Global Automotive Outlook finds the industry overall in a “good news/bad news” situation right now. The good news is that as a whole the industry has so far survived the pandemic in better-than-expected shape—thanks in large part to unprecedented sums of emergency public funds pumped into many economies worldwide and the ability to improve pricing and mix in the face of shortages. The bad news is that a myriad of challenges to near-term and long-term profitability for industry players not only remain, but are compounding with time.

Perhaps foremost among these challenges, says the analysis, is the industry’s historic, and monumental, transformation from internal-combustion vehicles to electric vehicles (EV)—which now appears to be at an inflection point, at least in terms of industry investments if not yet in sales.

The analysis finds that, in part due to demands by a growing list of governments worldwide, the announced value industry investments in EVs have jumped a dramatic 41% over the past year, and now total $330 billion through 2025. At the same time, however, the analysis finds that the variable cost globally of building an EV remains $8,000 to $11,000 more than the cost of building traditional internal-combustion vehicles and that the economies of scale do not appear that they will be able to approach that of traditional vehicles until the end of the decade—despite that the cost per kilowatt hour of a battery pack is expected, says the analysis, to reach the $100 mark by 2025.

The AlixPartners analysis also finds that while return on capital employed, or ROCE, a key measure of true capital efficiency, improved dramatically from the depths of the pandemic last year through the end of 2020, a fall-off in ROCE for both automakers and suppliers in the first quarter of this year indicates that materials prices and spending on EVs are taking a toll on companies. Also adding to the pressure deliver strong returns, says the analysis, is the fact that valuations of even traditional companies have soared of late. In fact, it finds that the weighted-average market capitalization for nine large automakers—BMW, BYD, Daimler, Ford, General Motors, Honda, Hyundai, Toyota and Volkswagen—grew 102% comparing June 1 of this year to June 1, 2019—no doubt fueling investors’ expectations for strong profitability in the future despite the need to spend heavily on EVs.

Meanwhile, the big near-term challenge to profitability for the industry, finds the analysis, is indeed supply-driven price increases and shortages in materials—most notably from the semiconductor shortage that has gripped the industry in recent months, which AlixPartners has forecasted will cost the industry 3.9 million vehicles of lost production globally this year, worth $110 billion. The analysis finds that the industry at large is highly susceptible not just to chip shortages but to future disruptions for many materials, from steel to packaging, due to short-term industry ordering habits and low visibility into supply chains, pus design and engineering approaches that don’t allow flexibility.

It also finds that automotive raw-materials prices are now at all-time highs—in North America, at $3,636 per vehicle, up almost double from 2020’s average of $1,875—and due to hedging and contract periods, the prices will likely begin to show up for automakers in the second half of 2021. It finds as well that “inadvertent specificity” in component specifications—such as specifying materials by brand name rather than strictly by performance parameters—is one reason companies encounter needless disruptions and costs. And regarding the current limited visibility into supply chains, it advises taking actions to achieve visibility all the way down to the tier-4 and -5 levels of supply chains for many parts and components.

Also contained in this year’s analysis is the unveiling of the automotive-industry results from the AlixPartners Disruption Index, which overall is based on a multi-industry, international survey of 3,149 senior business leaders, all director-level or above at companies with annual revenues of more than $50 million each.

The good news on this front: an average of 80% of automotive executives around the globe said they think their organizations can effectively predict the disruptive forces facing the industry, be they be the rise in EVs or demographic shifts or materials shifts or rises in protectionism. The bad news: over half, 52%, said they worry that their company is not taking the necessary steps today to ensure it can navigate disruption. And less than a third, 29%, said they are “very confident” in their company’s ability to withstand disruptive forces. (For executives in the United States and Canada combined, the responses were 86%, 48% and 33%, respectively.)

“From the once-in-a-century shifts to electric powertrains, connected vehicles and increased autonomous feature to a series of costly materials crises, automakers and suppliers today need to aggressively address unprecedented levels of disruption,” said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners and a managing director at the firm. “To win in this great shift, companies will need to adopt all-new ways of doing business at virtually every level, from the fundamental philosophy in supply-chain relationships to new corporate business models, including partnerships and revamped product and service development approaches that have software at their core. And all these new approaches need to accountable to the bottom line, as there will be little margin of error given investor expectations at current valuations.”

“Companies themselves need to be brave if they are to thrive in the brave new world that’s ahead for the auto industry over the next few years,” said Stefano Aversa, chairman of Europe, the Middle East and Africa (EMEA) at AlixPartners and a long-time auto-industry expert. “With investments in electric vehicles starting to reach an inflection point, the industry now needs to figure out how to bridge the gap until EVs arrive in volume and are more profitable. This will be a daunting task, complicated by the fact that spending on current, internal-combustion products must continue during this time as well. To meet this challenge, on top of all the other challenges today, automakers and suppliers need to cut through the clutter of competing priorities and focus like a laser on what will really matter: building and protecting profitability.”

The AlixPartners Global Automotive Outlook also contains several sales forecasts. Among them:

The firm forecasts light-vehicle sales globally to be 83 million units this year, up from 77 million in 2020 but still below 2019’s pre-pandemic total of 90 million. For 2022, AlixPartners’ forecast is 88 million units, with supply shortages and low vehicle inventories likely to keep putting a damper on sales.
In the U.S., the firm forecasts sales of 16.4 million vehicles sold this year, rising to 17.2 million in 2022.
In Europe, the firm forecasts sales of 17.6 million vehicles in 2021, rising to 19.1 million in 2022—which would still be more than a million units below pre-pandemic levels—with markets in Eastern Europe likely showing the most promise.
In China, AlixPartners forecasts 2021 vehicle sales of 25.4 million, strong by international standards, and up from 23.7 million in 2020, but more than 2 million vehicles below sales in China as recently as 2017.

Among other key findings in this year’s AlixPartners analysis:

Approximately $1,700 in average per-vehicle price increases were the largest driver of automaker profitably globally in 2020 versus 2019, based on a review of the 25 largest automakers worldwide.
To meet the European Union-mandated standard for all passenger vehicles in 2021 of 95 grams-per-kilometer of carbon-dioxide emissions, automakers will need to resort to expensive approaches to compliance, be they credits, super-credits or paying to pool credits with other automakers—putting yet more pressure on profitability there.

About AlixPartners

AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.