AlixPartners, "Automotive Industry Needs New Business Models to Address Disruptive Changes from EV Transition, Parts Shortages, and Emerging Startups"

Investor Interest in Electric Vehicles Surges and Traditional Auto Industry's Shift to EVs Drives 102% Market Cap Growth of 9 Global Auto Companies in Past Year

The global automotive industry has been recognized for weathering the COVID-19 pandemic well, despite the shortage of key components hindering industry growth, thanks to substantial financial support from governments worldwide and new investments related to electric vehicles by investors. However, global consulting firm AlixPartners forecasts that the automotive industry is undergoing a disruptive change on a scale unlike before, and as the pace of change accelerates, companies must rapidly adopt entirely new business models across virtually all organizations.

In its "2021 Global Automotive Industry Outlook Report," AlixPartners stated that the global automotive industry is experiencing both headwinds and tailwinds simultaneously. The tailwinds include large-scale financial aid provided by numerous countries to stimulate the economy and the industry’s better-than-expected resilience during the pandemic through a premiumization of the sales mix and price improvements despite parts shortages. On the other hand, numerous challenges remain to secure the industry's short- and long-term profitability, and these challenges are expected to become more complex over time, which are considered the headwinds.

According to the report, the most important and monumental challenge facing the industry is the transition from internal combustion engines to electric vehicles. In terms of investment rather than sales, the industry has already passed an inflection point, with electric vehicles leading investment. Looking in detail, global industrial investment in electric vehicles surged 41% over the past year due to increased government demand worldwide, and investment is expected to reach a total of $330 billion (KRW 368.9 trillion) by 2025. However, globally, the variable cost of producing electric vehicles is $8,000 to $11,000 higher per vehicle compared to producing traditional internal combustion engine vehicles. Although the cost per kilowatt-hour of battery packs is expected to decrease to around $100 by 2025, achieving economies of scale comparable to internal combustion engine vehicles within the next decade is unlikely.

The return on capital employed (ROCE), a key measure of capital efficiency, improved significantly from the peak of the pandemic last year through the end of the year. However, in the first quarter of this year, ROCE for both automakers and suppliers sharply declined, indicating that the automotive industry is being hit by rising raw material prices and electric vehicle-related expenditures. Additionally, the recent surge in valuations of traditional companies has increased pressure on high profitability. In fact, compared to the same period in 2019, the market capitalization of nine global automakers (BMW, BYD, Daimler, Ford, GM, Honda, Hyundai Motor, Toyota, Volkswagen, etc.) grew by 102% as of June 1 this year. AlixPartners interpreted this as having raised investors’ expectations for future profitability despite the massive spending on electric vehicles.

AlixPartners projects that global vehicle sales this year will be higher than the 77 million units in 2020 but lower than the 90 million units in 2019 before the pandemic, estimating around 83 million units. For 2022, considering potential difficulties in sales due to supply and inventory shortages, sales are forecasted to reach approximately 88 million units.

Meanwhile, a survey conducted among 25 major global automakers revealed that the biggest factor affecting profitability worldwide was the average price increase per vehicle of about $1,700 in 2020 compared to 2019. AlixPartners identified short-term challenges to profitability as the semiconductor and other parts shortages dominating the industry in recent months and supply-driven price increases. As a result, global vehicle production is expected to decrease by 3.9 million units this year, with sales declining by $110 billion (KRW 122.9 trillion). The report also raised the possibility of disruptions not only in semiconductors but also in materials ranging from steel to packaging due to short order cycles, low supply chain visibility, and lack of flexibility in design and engineering.

Currently, raw material prices for vehicles in North America have reached a record high of $3,636 per vehicle, nearly double the 2020 average of $1,875. Due to hedging and contract terms, these prices are expected to be applied to automakers starting in the second half of 2021. The report also noted that the specificity of differentiating parts by brand rather than strictly by performance standards causes unnecessary operational disruptions and costs for companies. AlixPartners recommends securing visibility of parts down to tier 4-5 suppliers amid limited supply chain transparency.

Additionally, AlixPartners disclosed the results of the "2021 Disruption Index" for the automotive sector in this year’s report. This data comes from a global survey covering various industries, conducted among 3,149 senior executives at director level or above from companies with annual revenues exceeding $50 million.

The survey results showed that on average, 80% of global automotive industry executives believe their organizations can effectively anticipate disruptive changes facing the industry, such as the increase in electric vehicles, demographic shifts, parts transitions, and the rise of protectionism. However, 52% of respondents felt their organizations have not taken the necessary actions to respond to these changes, and only 29% expressed high confidence in their companies’ ability to respond to disruption.

Mark Wakefield, Global Co-Lead of AlixPartners’ Automotive Sector, said, "From once-in-a-century transitions in electric powertrains, connected cars, and enhanced autonomous capabilities to a series of parts shortage crises, today’s automakers and suppliers must actively address unprecedented levels of disruption." He added, "To survive these changes, companies need new approaches at virtually every level?from fundamental supply chain relationships to adopting entirely new business models centered on partnerships and software-driven product and service development. Investor expectations for corporate value remain unchanged, so profitability must be ensured regardless of the new approaches adopted."

Joon Kyu Park, Vice President and Head of AlixPartners Korea Automotive Sector, stated, "To succeed in the new world the automotive industry faces over the next few years, companies must be courageous." He continued, "As investment in electric vehicles has begun to reach an inflection point, the industry must seek ways to close the gap with investments until electric vehicle production is supported and profitability improves." He added, "This will be a difficult task as spending on internal combustion engine vehicles will continue, but to address the various challenges currently faced and to build and protect profitability, automakers and suppliers must focus on the highest priorities to execute even amid disruption."