Auto Industry Needs to Adopt the ‘Ruthless Prioritization’ Demonstrated by Chinese Automakers to Avoid a Repeat of China’s Domestic Electric-vehicle Dominance Globally

Sales to increase 5% globally this year, and 10% in the U.S., but at lower profitability as ICE volumes plateau then recede due to pent-up demand being fulfilled through 2024; Chinese brands to out-sell foreign brands in China for all of 2023 for the first time in decades, displaying an operating model that could win in Western markets; to compete, automakers must make customer-focused tradeoffs that favor technological features, speed to market, cost, and the higher risk that goes along with those pursuits

DETROIT (June 26, 2023) – After years of substantial government support, many new entrants chasing new-energy vehicle (NEV) growth, and with higher attention to the design and customer-oriented technological features, Chinese automotive companies are poised to become the shaping force in the global automotive industry in coming years, says an industrywide analysis from AlixPartners, the global consulting firm. While this disruption will not be immediately be felt outside of China, and the traditional industry has awakened to the disruption of Tesla’s innovations, traditional industry approaches must radically change to address this next source of disruption and seize opportunity, says the report.

The 2023 edition of the AlixPartners Global Automotive Outlook finds that pandemic-era pricing power is eroding (for instance, the Outlook forecasts that average transaction prices in the U.S. will decline 7% by 2025) and that while global sales have crept back to near 2019 levels (it forecasts a 5% year-over-year increase in 2023), Europe will not be reaching pre-pandemic levels.

“Pandemic-related forces may have receded, but the industry is under unprecedented pressure to urgently address technological and competitive forces that threaten to reshape the competitive playing field and the underlying business model that has been in place for decades,” said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners. “Responding requires more than a pivot – companies need to overhaul their core product-development and manufacturing philosophies, including adopting a ruthless prioritization in the tradeoffs related to the features that will truly appeal to tomorrow’s customers. This needs to be done with a newfound speed to market and with higher appetite for risk.”

Wakefield urged companies to pay specific attention to “CASE” (connected, autonomous, shared-mobility, electric/electrified) technologies – whether alone or in partnerships with other companies.

“China’s homegrown brands have been laser-focused on integrating CASE into vehicles at attractive price points and at a faster pace than traditional automakers,” Wakefield said. “To compete, automotive companies need to become ‘New Tech’-driven, and adopt a challenger mindset with the risk appetite of a start-up company.”

There are several key findings in this year’s AlixPartners analysis reinforcing the need for urgency:

• ICE is “melting” fast: Sales of non-battery-electric vehicles, which is mainly ICE (internal-combustion-engine) vehicles, will rise 6% in the U.S. this year, due to pent-up demand, forecasts the analysis, but they will then plateau and decline 4% per year through 2027. This creates near-term pressure on margins and cash flows to fund electric-vehicle (EV) investments, says the AlixPartners analysis.
• Chinese brands are setting the pace: The analysis forecasts that Chinese brands will, for the first time in decades, outsell foreign brands in China in 2023, and be 65% of that market by 2030 -- on the way to a market of more than 50 million vehicles per year by 2050. Increasingly, says the analysis, what’s winning in China could be a template for what wins globally with consumers.
• The auto business isn’t getting any simpler: The analysis finds that the U.S. industry will remain squeezed by 3.5% labor inflation in 2023, and that a lack of pricing power led to a $30 billion year-over-year increase last year in the net debt of the largest 300 suppliers globally. Additionally, the analysis finds, interest coverage is down 18% for those suppliers, increasing the need for suppliers to be laser-focused on cash. At the same time, finds the analysis, the net debt of the world’s 25 largest automakers has fallen, as automakers used record profits and excess cash to pay down revolving loans and other debt. However, finds the analysis, automakers’ productivity has yet to recover to pre-pandemic levels, as U.S. automakers now need 25% more employees per 1,000 vehicles produced than before Covid-19 hit.

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

• Sales in Europe will increase 6% in 2023, yet remain far below the pre-Covid levels through 2027.
• Sales in China will increase 3% in 2023, on their way to choppy but strong growth leading to over 50-million-unit sales volume in 2050.
• Semiconductor-company allocations and efficiencies have increased their supply to auto companies, despite the larger amount of chips inside EVs, allowing global vehicle production of up to 85 million units this year and unconstrainted vehicle production by 2025.
• 2023 U.S. sales will rise 10%, to 15.2 million, absent a prolonged labor strike; but affordability will mute long-term growth to below pre-pandemic levels
• Battery-electric vehicles (BEV) will account for the majority of sales in all major regions of the world by 2035

Chinese auto companies: The “new Tesla” to chase?

As Chinese brands continue to rise, says the AlixPartners analysis, their example in the global marketplace will become a much larger influence, potentially displacing Tesla Inc. as the competitive target in the auto industry.

“The industry has been rightly focused on Tesla’s innovations for several years, but now is the time to devote far more attention to the lesson of the success of China’s homegrown NEV brands,” Wakefield said. “These companies deliver a different value proposition to a maturing consumer, prioritizing new technologies, digital customer engagement, speed to market, and appealing designs at an affordable price. Incumbent companies that ignore this future disruptive force do so at their own peril, no matter what country they are in.”

The AlixPartners analysis characterizes the traditional approaches needing transformation as:

• Being “engineering-driven,” rather than truly customer-driven – including having a difficulty breaking from traditional product-development processes and challenging the incumbent industry’s hundred years of built-up requirements
• Taking a too-cautious approach to new technology and speed to market
• Hampered by constraints that new entrants do not have, such as intermediaries to their end-customer (versus direct-to-consumer sales models) and high sunk costs in existing manufacturing capacity that’s geared towards ICE vehicles
• Allowing vehicle delays and over-spending in pursuit of attributes that today’s customers do not highly value

These traditional ways of thinking, says the analysis, lead to a too-heavy focus on perfecting vehicle attributes like ride-and-handling and NVH (noise, vibration, and harshness minimization) – all of which are important, but aren’t as highly valued by today’s buyers as consumer-electronics technologies and assisted-driving features. In addition, says the analysis, traditional approaches to product development and sourcing have led to inflexible and slow product launches, characterized by suboptimal designs – which come from asking traditional teams to develop software-defined vehicles that have radically more manufacturing alternatives. 

Inside China today, Chinese EV brands are much better than non-Chinese brands at delivering what new and tech-savvy customers want at a price they can afford, with higher digital engagement in the sales and ownership process, says the analysis. This is seen, for instance, in 11 percentage points higher (68% vs. 57%) penetration of ADAS (advanced driver-assistance systems) features for Chinese brands than their non-Chinese counterparts in the highest-volume mid-range price segment in China, says the analysis. Furthermore, Chinese brand NEV models are “fresher”, averaging a mere 1.3 years in the market, compared to 4.2 years for non-China brands with predominantly ICE offerings, finds the analysis.   

Financial markets are rewarding EV players

The financial markets value companies that are poised to profit most from the EV transition, says the analysis. It finds, for instance, that 78% of EV-battery suppliers’ worth lies in their terminal value (sometimes called “horizon value,” and indicating worth beyond the present value of consensus expectations for a company’s three-year future cash flows), compared to the low or negative terminal values currently assigned to commodity and ICE suppliers.

The analysis also finds that U.S. BEV-specific raw-materials costs are now $4,500 per vehicle, down 38% from their 2022 peak but still double 2020 levels.

“It’s imperative for companies to radically change their business models to prepare for the Chinese-style competition eventually coming to their markets,” Wakefield said. “A mastery of CASE issues and a true customer-focus will be critical for automakers, while suppliers need to find a future in EVs and manage cash to restore their financials.”

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.