Automotive industry trends
Automotive industry megatrends – from supply chain disruption to the electric vehicle revolution: a bank's view
Insights sat down with Commerzbank’s Head of Global Sectors & German MNC, Michael Kilka, and Cedric Perlewitz, Head of Automotive and Transport, for their expert view of the key trends affecting the automotive industry, a sector undergoing unprecedented transformation in light of new technologies and market upheaval.
Why is now such an exciting time for the automotive industry?
Michael Kilka: The past decade has seen the automotive industry undergo the most profound transformation of its entire 150-year history. Demand for cleaner, smarter vehicles with a limited impact on the planet, alongside the rapid advancement of technology, has expanded the horizons of the sector.
The era of electrification and autonomous driving has triggered a total re-imagining of even the humblest family car. This has resulted in a shift in the structure of the industry as new relationships are forged and new players enter the space, all the while navigating external shockwaves like the global pandemic and critical component shortages.
Although the landscape is undoubtedly presenting challenges, never has there been a more exciting time to be part of the industry, as resilience is proven in the pursuit of innovation.
What is happening to the structure of the automotive sector in the face of new technologies and evolving demands?
Cedric Perlewitz: Partnerships and alliances are becoming much more prevalent in the industry. Meanwhile, the traditional relationships between original equipment manufacturers (OEMs) and suppliers are being completely redefined. In the past there was a clear dominance by the OEMs, dictating to their suppliers what they wanted and how much they wanted to pay for it. But now, with the development of software and advanced driver systems, there are partnerships that exist where suppliers and OEMs are on an equal footing and working much more collaboratively, particularly when it comes to research and development (R&D). The automotive sector is Europe’s biggest investor in R&D by far, and spending is set to continue as the industry delves further into the possibilities of autonomous and electric vehicles. At present, no player in the industry can meet the R&D requirements of autonomous driving alone.
Just as electrification is resulting in a major shift to the structure of the industry, in which OEMs are partnering with or acquiring minority stakes in battery producers, the same is happening in the autonomous driving space.
Old rivals are entering new alliances in a bid to keep pace with innovation and stave off competition from tech companies. Volkswagen, for example, has partnered with Ford in a global alliance comprising the development of commercial vans and pick-ups, the sharing of VW’s MEB (modular electric toolkit) platform and autonomous driving.
How are technology companies impacting the automotive sector?
Cedric Perlewitz: Big tech players are also positioning themselves through strategic acquisitions. For instance, US computer firm Intel acquired Mobileye – a supplier of advanced driver assistance technology – for around US$15 billion (2017). Samsung, meanwhile, acquired vehicle software provider Harman for US$8 billion ( 2018). Amazon is also grabbing a slice of this market with its Zoox robotaxi, and LG acquired Austrian car light maker ZKW. Recently, the end of 2021 saw Qualcomm, a wireless technology company that creates semiconductors, purchase Sweden-based automotive tech firm Veoneer for US$4.5 billion following a bidding war against Magna.
What trends are you currently seeing in the electric car space?
Cedric Perlewitz: The impact of switching from internal combustion engines to battery-powered cars cannot be overstated. An industry once heavily reliant on hydrocarbons is now having to closely evaluate and address its environmental impact, resulting in a total rethink of the very technology upon which it was founded, and a monumental shift in strategy for many businesses.
Europe is well on track to becoming the world leader in this space, with an electrification rate of above 40% expected by 2030. This trend is largely driven by regulation, in particular the EU’s net zero targets, and – increasingly – by consumer demand. The cost of ownership for a traditional vehicle is on the rise, with petrol and diesel reaching all-time highs at the pumps, prompting consumers to consider the clear price advantage of running a battery-powered electric vehicle (BEV).
How does BEV demand relate to production and costs?
Cedric Perlewitz: On the battery side, the South-East Asian market clearly dominates, with Chinese, Japanese and Korean players accounting for almost three-quarters of the market. The production capacity expectation is subsequently set to grow from 600 gigawatt-hours in 2020 to over 5000 by 2030. However, batteries are becoming more expensive to produce as prices for raw materials such as nickel, cobalt, lithium and manganese have already increased on average by 30% over the last year. Lithium alone, a core component of Tesla’s much-hyped EV battery, has already seen price increases upwards of 40% in the same period. In EV production, the battery itself therefore amounts to an additional 30-40% of total cost – and this will inevitably be felt by the consumer.
While many consumers in Europe have been shielded from price increases due to generous government-backed subsidies, the model is not viable in the long term. Several strong BEV advocates, however, argue that subsidies are no longer needed and for the consumer, the competitive cost of ownership will speak for itself.
How has the automotive sector been affected by the global pandemic?
Cedric Perlewitz: As a truly global sector, the auto industry can be extremely sensitive to external shockwaves. The Covid-19 outbreak and subsequent stoppages and closures put an end to almost a decade of solid growth. Peak production of over 90 million units in both 2017 and 2018 was closely followed by a significant fall, with production in Europe, for instance, dropping on average by more than 21% in 2020, with sharp declines across the board. The recovery expected in 2021 and forecast for 2022 has been impeded by the much-publicised semiconductor crisis and now the wiring harness shortage. And let’s not forget that the Covid-19 pandemic continues to impact global supply chains, with recent lockdowns imposed in China having a huge impact on both suppliers and OEMs.
Is the conflict in Eastern Europe impacting the automotive industry?
Cedric Perlewitz: As a key producer and exporter of wiring harnesses – complex, critical vehicle components often described as a car’s central nervous system – Ukraine accounts for around half of German OEMs’ total supply. With the Russian invasion disrupting or halting many Ukraine-based suppliers – at the time of writing, volumes are around 30-40% – this has resulted in production stoppages across European OEMs. In Germany alone, the shortage has meant an estimated half a million cars have not been produced as a direct result of the conflict. In fact, the production shortfall in Q2 and Q3 is expected to be much more pronounced than the same period last year when the industry was dealing with the semiconductor shortage. While the longer-term outlook seems more positive, however, production is not expected to return to pre-pandemic levels before 2024/2025. A widespread shortage of critical electronic components is particularly untimely for the automotive sector as it rapidly advances in the field of electrification.
What effect are production stoppages having on suppliers?
Cedric Perlewitz: There is a clear divide when it comes to how suppliers and manufacturers are impacted. Many of the larger OEMs are in a relatively comfortable position, with Volkswagen, for example, having reported €15.5 billion free cash flow at the end of 2021 by focusing on its premium brands. The supplier side, however, paints a very different picture. As seen in 2021 and at the start of 2022, suppliers are the hardest hit by production stoppages. In fact, this is perhaps the worst thing that can happen to suppliers, for whom economies of scale are essential. That means ramping up production on a constant basis and achieving the most optimised output. The current ‘stop and go’ environment is therefore detrimental to their profitability. For some larger European suppliers, the balance sheet remains strong and short-term liquidity issues from the Ukraine crisis are not expected. After all, in the last two years many have learned to cope with significant upheaval. With uncertainty regarding supply ongoing, OEMs are now working in partnership with suppliers to find a solution to the wiring harness shortage, including the reallocation of production or doubling the output of other supplying countries such as Algeria and Tunisia.
How are banks supporting suppliers and OEMs to overcome supply chain shortages and production stoppages?
Cedric Perlewitz: As a bank, we see it as our duty to limit the impact of external shockwaves on our clients and the wider market. During the start of the pandemic, for instance, our priority for manufacturers and suppliers alike was to safeguard their liquidity, meaning they were in a better position to ride out uncertainty. This proved to be an effective exercise in resilience, meaning clients were taking a closer look at cost-cutting and efficiencies, and adapting their strategy accordingly. This has continued as the pandemic progressed and other challenges arose, such as the subsequent production stoppages. At Commerzbank, we have supported fundraising efforts and tailored our credit lines to suit our corporate clients. We are also working alongside other large financial institutions to structure loans, using our in-depth knowledge of our clients and the industry to ensure they match their specific needs.
Given the degree of change taking place, how else are banks working with clients in the automotive sector to meet their needs and support business growth?
Michael Kilka: The automotive industry has always been extremely important for financial institutions due to its global capital-intensive structure. Therefore, banks tend to offer the broadest range of products to OEMs and suppliers. The relationships between automotive players and their partner banks were really put to the test during the pandemic and continue to be of importance as the automotive industry faces some of its most challenging obstacles to date.
But while the global automotive sector is undoubtedly experiencing some of the most fundamentally disruptive and challenging shifts in its history, there are opportunities to be realised. The industry is awash with innovation, and many businesses are implementing new strategies to adapt to the evolving landscape; old rivals are forming alliances, while new players are rapidly rising through the ranks.
It is essential, therefore, that banks work to provide the solutions that allow automotive players to achieve their strategic goals and facilitate transformation, whether this is through specifically tailored loans and products, bridging finance to support demand on the sell and service side, or incentivisation through favourable green bonds to help drive positive change. Banks can only do this, however, with a solid understanding of the various complex trends and movements happening within the market and the wider environment.
At Commerzbank, we strive to be experts in our clients’ businesses and the markets in which they operate. Deep knowledge of the industry and current market conditions is vital if we are to better serve clients, allowing us to structure appropriate financial products to suit each business. Nowhere is this more apparent than in the automotive sector, given the sheer scale of transformation it is currently undergoing.