Although car lots are fuller and volumes are rising in 2023, the automotive industry is still battling the multiple headwinds of ongoing supply shortages, rising inflation and interest rates, compounded by pressure to transition to electric vehicles (EVs). So how can automakers recalibrate, become more resilient and advance to what’s next? The key lies in three steps: repair, re-think, re-energize.
Where the Industry Stands
Both OEMs and suppliers learned hard lessons from the pandemic lockdowns and global microchip shortages. Most importantly, they realize the need to create more resilient operations and business models. While the extreme conditions have eased, inflation remains high, fuel and commodity prices are unpredictable and labor, as well as supplies in certain areas, are still low, pressuring profit margins and revenue growth.
The number of suppliers showing signs of distress increased to 42% in the first half of 2022 from 27% in 2021 — particularly in the powertrain and interior segments, according to a PwC analysis. There’s currently little doubt these challenges will persist. Concurrently, the industry is readying for the imminent transition to connected, autonomous, shared and electric (CASE) technologies — especially the move to electric vehicles (EVs) — a shift that will reach new heights by the end of the decade and accelerate even more thereafter.
OEMs, suppliers and investors are progressing on the EV transition, as OEMs will likely have committed about $500 billion (and counting) over the next 10 years in manufacturing investments to help jump-start the large-scale movement.
This intention becomes apparent when considering the rise of EV-only manufacturing plants in the US. PwC data shows the number will jump from nine today to 41 by 2029. Recent M&A activity is more evidence of a growing appetite to invest in the EV transition. Nearly 30% of all auto supply deals in 2021 were initiated by financial investors, with most of the biggest deals focused on EV and advanced driver assistance systems (ADAS) components.
Of course, there can be no growth without components, and this area of the EV sector is on a precipice. US electric powertrains and batteries alone will hit $128 billion by 2035 —a remarkable jump from $10 billion in 2021.
EVs to Overtake Combustion by 2030
Considering the first EVs were conceived in the mid-19th century, the shift to being the vast majority by 2030 is a long time coming. By the numbers, EV penetration in the U.S. is expected to increase 35% by 2030 (from about 6% currently) and close to 50% globally (from about 10% now), according to PwC’s auto industry forecast.
Key to adoption, however, is a national EV charging infrastructure build-out. Today, the number of public charge points amount to about 130,000, including about 30,000 DC fast charge points. PwC expects that public charging infrastructure needs will increase to more than 1 million charge points by 2030, out of which 300 thousand will be DC fast chargers. Another factor for success, most OEMs, will need to develop relationships with charge-point operators (CPOs) as well as local and state governments offering incentives.
Getting from Here to There
To get from where the industry stands today to the next era of vehicles, companies need to recalibrate their short- and mid-term plans to reach their long-term goals. Market trends are squeezing supplier margins and cash reserves, which is restricting the capital needed for growth. Three key steps – repair, re-think, re-energize – during about a two-year time period will help companies overcome challenges, no matter the conditions.
First, the repair step. Companies need to generate cash fast through a strict and central capital management approach. This involves shrewdly managing covenants, examining financing instruments and reviewing lenders. A “yes we can” culture should underpin these actions to help mobilize the workforce.
After liquidity is recovered, companies should eye improved profitability by rethinking and re-energizing. The rethink step is a good time to conduct a risk assessment, plan for the worst, be honest about the impact and determine the rolling effect. Ultimately, it’s defining what the organization’s new normal looks like.
Re-energizing means keeping an eye on transformation. Headwinds won't last forever. By focusing on acquiring resources, technology and the right partners, companies can leverage crises to come out stronger.
Akshay Singh is Industrial and Automotive Industries leader, PwC.
