Low volumes can create difficult financial situations for manufacturers. However, as COVID demonstrated, such lulls also open the door for the capital expenditures that are almost impossible for most manufacturers to address when everything is running at full tilt. After all, no manufacture wants to be in a position where it is missing delivery targets. For many manufacturers, the unexpected downtime meant finally moving forward with digital transformation efforts.
For automakers, it has been an opportunity to reset long-term targets, explains Richard Kilgore, auto industry vet and now professor at Maryville University.
“The problem though is uncertainty, especially political uncertainty. Capital expenditures need some certainty around what the future is going to hold. With recent politics it is going to be a difficult path to remove uncertainty with mandates at state and federal levels changing every 2-4 years, based upon who happens to be in office,” says Kilgore. “The lack of trusting relationships we used to have between government, industry and foreign partners (including tariffs) will be incredibly difficult for those leaders and existing firms to make investments.”
The startups focused on EV solutions, however, often have a blank slate. And in some instances, they have been able to take advantage of IPO money often through SPACs. “Their funding needs are being supplied by people who can take that kind of a risk," he says.
Tesla's stock price is something to watch, explains Kilgore. “If all these other competitors actually deliver something that competes with Tesla, and the stock drops to where it should be based upon projected revenue and profit streams, it could really change the confidence people have in this being a profitable enough to support all the investment,” he says. “There's got to be a return. We are seeing Chinese companies coming out with sub $20,000 vehicles, which cannot yield very high margins.”
Kilgore anticipates, at the manufacturing level, some existing ICE companies like Ford and GM will shift to modified cell assembly lines producing both EV and ICE vehicles. “A lot of that assembly is going to be done on the same line, and then when you get to the power train, vehicle will separate into alternating assembly path,” he says. “It'll be interesting to see how they redesign the manufacturing floor.”
There will also be a tipping point for the supplier base assuming the move towards EVs continues. “The existing supply chain supporting the ICE vehicles are potentially going to be out of business, when you have a light plastic vehicle delivering the desired range,” says Kilgore. “This requires much different solutions and could result in manufacturers quickly turning to new suppliers. There's going to be disruptions there of all sorts, for all different reasons, especially if someone comes out as a new business based on their battery or assembly technologies.”
Likewise, Kilgore tells IndustryWeek, it might not be surprising to see the battery manufacturers becoming the new “big three” in the industry. “They are supplying the highest value-added component – and customer appreciated – part of the vehicle. What people are going to be buying as a battery technology, and not so much the vehicle,” he says. “If a particular battery manufacturer came out with a paradigm change it could take over the industry. If you don't have a battery manufacturer lined up, guaranteed supply, you're not going to be in this business with the volume you need to be profitable.”
What happens to the dealer network? “If we have the vehicle that everyone's promising to deliver, we will have very little demand for our service revenue. We will not need regular oil changes which leads to the flow of customers back to the dealership,” he says. “It is service revenue that makes the current business model profitable. And the consumer is getting more accustomed to the Tesla direct sale model in the industry. We are going to see similar disruptions on the demand side as to how you buy your vehicle. How you get service for that vehicle?”
Automotive innovation is one of those key technologies that a government needs to continue to support because it has such a big impact on the economy, adds Kilgore. “There's going to be a battlefield being fought between large global regions of the world. It will require the US government and industry to work together to make sure that there is still a US auto industry, and not just a US auto customer,” he says. “I could care less who I buy my next vehicle from, and I'm an old guy. My son cares even less. Today, it's just a vehicle, and innovation is the key.”
Bottom line: With all the uncertainty, decisions are going to be made based upon non-traditional decision criteria throughout the industry. “They're going to be taking chances, rather than doing analysis to develop new business models,” he says. “Typically, when that happens, there will be failures. And, because there will be failures, there'll be less certainty. It will be a great day for the winners, but a very sad day for the loser. That kind of disruption in an industry of this size has not happened since the original Model T impacted the horse industry.”
