A "pile-up of epic proportions" awaits auto industry as investments necessary to an electric and autonomous future balloon just as market slows, according to AlixPartners study

20 June 2018

$255 billion being spent on 200-plus electric models, many of which will lose money; $61 billion being spent as just the opening ante for autonomous vehicles; consumers in an accompanying AlixPartners survey say they’re willing to pay $2,300 extra for autonomy—10 times less than current systems costs

DETROIT (June 20, 2018) – The automotive industry faces 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, when consumers are questioning the cost and safety of some of the technologies, and just as the market itself is set to continue a cyclical downturn. That’s according to an exhaustive new study, including a pair of consumer surveys, from AlixPartners, the global consulting firm.

The AlixPartners study finds that by 2023 a whopping $255 billion in R&D and capital expenditures is being spent globally on electric vehicles, and that some 207 electric models are set to hit the market by 2022, many of them destined to be unprofitable due to currently-high systems costs, low volumes and intense competition. Meanwhile, an additional $61 billion—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 say they are willing to pay just $2,300 extra for autonomy—compared with current industry costs of around $22,900, or about 10 times consumers’ willingness to pay.

On top of that, the AlixPartners study forecasts that the global auto market will grow at an annual rate of just 2.4% through 2025, lagging expected worldwide GDP growth of 3.3%, while the US market continues its cyclical downturn this year, absorbing 16.8 million units, down from 17.2 million in 2017, and headed to a likely trough of around 15.1 million in 2020.

To be sure, the AlixPartners study also finds a lot of reasons for industry players to be optimistic about electric and autonomous vehicles, among other things predicting that full battery-electric vehicles will reach about 20% of the US market, about 30% of the European market and about 35% of the Chinese market by 2030, and that autonomous vehicles will account for 3 million in sales in the US by that date. And the second AlixPartners consumer survey also finds that almost a quarter of Americans, 22.5%, say they’re “likely” to purchase a plug-in electric vehicle as their next car.

However, by the same token, the firm’s study also finds that return on capital employed (ROCE) for automakers reached a three-year low in 2017, 3.6%, while for suppliers it reached a five-year low, 6%. It also finds that automotive-related commodity costs are now at six-year highs last year—up 70%, or $884 per vehicle, since 2015.

In addition, the study finds that the crush of upcoming electric-vehicle launches over the next few years is likely to lead to high incentives in order 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 finds 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 cannibalize retail sales in the US to the tune of 1.6 million units in 2030.

On the supplier front, the study finds that while there are great opportunities for suppliers in electrification and autonomy, there are also great risks to be overcome. For instance, the study finds that 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% of supplier revenue last year. The study also notes great risk to supplier and automaker value-chains alike in potential changes to the North American Free Trade Agreement (NAFTA) and in changes worldwide in tariffs now being discussed, noting that, for starters, $45 billion in US auto-parts exports could be impacted as well as imports currently feeding automaker and supplier value chains.

Among the other findings in the study:

The Greater China auto market is forecast to grow to 29.1 million units this year, on its way to 38.2 million in 2025 (equal to 52% of global volume growth over that period), and Chinese automakers are poised to capture almost half (46%) of their huge domestic market by 2020, on their way to becoming fierce competitors on a global scale in the not-too-distant future.
The European market is forecast to be 21.1 million units this year, up from 20.6 million in 2017, with electric vehicles predicted to capture at least 40% of that market by 2030, as diesel-vehicle sales plummet, following governmental edicts on top of the “Dieselgate” scandal of recent years.
On the M&A front, over half of the deals (55%) in automotive in 2016-17 were in some way connected to electrification or autonomy, and 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 at AlixPartners and a 30-year automotive veteran, said: “A pile-up of epic proportions awaits this 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 a number of 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 maximizing every penny of revenue, so as to have the money available to fund your future.”

About the Study

The study, 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.

About AlixPartners

In today’s fast-paced global market, timing is everything. You want to protect, grow or transform your business. To meet these challenges, we offer clients small teams of highly qualified experts with profound sector and operational insight. Our clients include corporate boards and management, law firms, investment banks, investors and others who appreciate the candor, dedication, and transformative expertise of our teams. We will ensure insight drives action at that exact moment that is critical for success. When it really matters℠