Transition To Electric And Autonomous Vehicles Will Cost Auto Industry Hundreds Of Billions
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 a new study, including a pair of consumer surveys, from AlixPartners, the global consulting firm.
The AlixPartners study finds that by 2023 $255 billion in R&D and capital expenditures will be 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 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.
The AlixPartners study forecasts that the global auto market will grow at an annual rate of 2.4 percent through 2025, lagging expected worldwide GDP growth of 3.3percent, while the U.S. 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.
The 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 percent of the U.S. market, about 30 percent of the European market and about 35 percent of the Chinese market by 2030, and that autonomous vehicles will account for 3 million in sales in the United States by that date. And the second AlixPartners consumer survey also finds that almost a quarter of Americans, 22.5 percent, 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 percent, while for suppliers it reached a five-year low, 6 percent. It also finds that automotive-related commodity costs are now at six-year highs last year-up 70 percent, 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 United States 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 percent 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 U.S. auto-parts exports could be impacted as well as imports currently feeding automaker and supplier value chains.
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 percent of global volume growth over that period), and Chinese automakers are poised to capture almost half (46 percent) 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 percent of that market by 2030, as diesel-vehicle sales plummet, following governmental edicts on top of the “Dieselgate” scandal of recent years.
“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” said John Hoffecker, global vice chairman at AlixPartners and a 30-year automotive veteran. “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.”