Supply constraints and demand pressures that have driven vehicle prices higher at lower volumes but created operational inefficiencies and distress in the supply chain are poised to continue through 2024 even though chip availability continues to improve, according to new industrywide analysis from AlixPartners, the global consulting firm. The continued trend delivers a complex backdrop for an industry committing $526 billion through 2026, AlixPartners’ analysis finds, to fund the shift to battery-electric vehicles (BEVs). The transition, taking place amid a dampened economic outlook, could cost automakers and suppliers $70 billion if not properly managed, the analysis finds.
Electric vehicle sales are expected to be 33% globally by 2028 and 54% by 2035. In Europe, AlixPartners expects 83% of new vehicles to be electric by 2035.
New-vehicle pricing has been extremely robust, and AlixPartners expects pent-up demand and employment strength to enable automakers to continue to benefit from finding a buyer for each vehicle they can make despite inflation and rising interest rates weighing on consumers. Consumers are fickle and reactive, but they still view the car market from a position of scarcity. The question of “Can I get one?” overrides the question of “How much do I have to pay?” and used-vehicle pricing suggests the consumer is a long way from feeling they can shop around for a deal.
While this demand-over-supply leverage in the marketplace is driving near-term profitability, it is not sustainable in the long term, says the study. Supply shortages and resulting frequent scheduling changes lead to operational inefficiencies, as measured by sharply rising levels of employees per thousand vehicles produced (31% rise for suppliers compared to Q3 2020; 42% rise for automakers). Inventory is likely to build once demand and supply are even, eroding pricing power. Additional costs to build resiliency into the supply chain adds to pressure that the growing BEV investment demands are placing on the industry.
The latest AlixPartners forecast calls for BEVs to be the majority vehicle type by 2035 in all major regions, surpassing internal-combustion-engine (ICE) vehicles. BEV market growth, however, will be challenged by a raw-material cost that is 125% higher than a comparable ICE vehicle; scarcity and price inflation of parts and commodities (including increased use of chips on EVs); and a lack of readiness for the “BEV era” in the supply bases of both automakers and their larger suppliers.
“Automakers and suppliers are benefiting from strong demand despite the economic clouds and are showing resolve in their commitment to shift to electric vehicles, but expectations are high for the industry to hit record economic-profit levels these next two years even while funding for the beginning of the BEV transition is taking place ahead of sufficient volumes for economies-of-scale and cost competitiveness,” said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners and a managing director at the firm. “While many companies are planning their own transition, proactive supply-chain redesign and rigorous cost management needs to be improved to avoid costly surprises down the road.”
While supply constraints have been a challenge for consumers, pushing many toward the used-car market, the study finds that automakers have been able to increase profit margins, notching a 68% jump in economic profit in 2021 vs. 2018. At the same time, OEMs have driven down net debt by $103 billion, or 11%. Analysts and investors are expecting this tailwind to continue, predicting a near-term doubling of the industry’s economic profit by 2023, to $89.2 billion, notes the study.
The expectations, however, will not be easy to meet, notes the AlixPartners analysis.
While automakers have seen a profitability windfall recently (increasing EBITDA 3.2 percentage points in 2021 over 2020), suppliers have been slower to benefit (with EBITDA growing a more moderate 1.7 points in that same timeframe). In 2018, the analysis says, 59% of the industry’s $47.3 billion in economic profit was attributable to suppliers. In just two years, however, it notes that the equation has more than entirely flipped, with OEMs’ $13.1 billion in economic profit growth more than offset by a $13.6 billion (49%) slide in supplier economic profit. And for the first time in memory, it notes, OEM EBITDA margins, of 12.6%, outperformed their 10.3% average of the last decade, as well as outperforming suppliers’ margins, which grew to just 10.8% in 2021 – below their 11.4% average of the prior decade.
Investment demands will snowball as BEV penetration accelerates and infrastructure needs mature, the analysis finds. Today, buyers remain in early-adopter mode, AlixPartners’ analysis says, but as BEVs entries grow to cover all volume segments for the top OEMs by 2024, new buyers will be more focused on purchase price, ownership costs, and charging convenience. For instance, it says, by the end of the decade, $48 billion in charging infrastructure investment would be needed in the US alone; to date, only $11 billion has been committed.
BEVs will overtake ICE vehicles in terms of representing the majority of market share in all major markets, but not until 2035, the study finds. That means that as of the end of this decade, BEVs will have yet to benefit from the economies of scale that support the ICE vehicle market.
Importantly, the AlixPartners study finds that the ICE-to-BEV transition of their supply bases will cost $70 billion between now and 2030. AlixPartners estimates between 40% and 60% of that cost, however, can be saved by automakers and suppliers alike by proactively addressing the BEV transition inside their respective supply bases. Risks that need to be considered—and avoided, if possible—include supplier distress, unplanned emergency continuity costs, and incremental expenses related to revalidation and duplicating tooling.
Suppliers are particularly vulnerable, finds the study, because the available content per vehicle drops as new entrants, including battery and technology suppliers, become competitors, and as automakers chose to make more of the new components themselves to transition plants and people skills to BEVs. Suppliers appear to have access to only 28% of new BEV powertrain production value as a result, finds the analysis. And this is taking place as many suppliers are planning to wind down or sell their ICE-related business units, according to an AlixPartners’ supplier-executive survey fielded as part of the study.
The study also forecasts that ICE-engine programs are nearing an inflection point, as the number of ICE and hybrid programs have been on the steady decline in Europe over the past four years, and flattish in North America. They are forecast to decrease by at least 33% and 12%, respectively between 2024 and 2028, the study finds.
Ultimately, says the outlook, automakers and suppliers must explore innovative models to facilitate the ICE-to-BEV transition, including potentially separating businesses. This can help ensure robust capital allocation for value creation at a time of sky-high investor expectations, while enabling new, faster clock-speed BEV businesses to grow rapidly.
Other findings in the AlixPartners study include:
- In the future, the industry’s chip shortage could disproportionately affect BEV production as BEVs require exponentially more chips than their ICE counterparts. Chip demand from BEVs will grow 55% per year, compared to a decline in demand for ICE, making chip availability a continued bottleneck for electric vehicle production despite technical efforts and investments by the industry.
- At $3,662 per vehicle (in the US), ICE raw-material content is nearly double pre-pandemic levels. This pales in comparison to BEV raw-material content, which is now $8,255 per vehicle. The disparity is driven largely by cobalt, nickel, and lithium prices.
- The task of bringing BEV costs down is complicated by the fact lithium-ion battery costs are pressured by commodity inflation and scarcity, but prices are expected to moderate as cobalt modelled recently after a run up in price.
- Incumbent suppliers battle new entrants and the OEMs themselves for the $9,000 in cost added in a BEV powertrain while seeing a decline of a full $5,000 in ICE-related powertrain components.
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical opportunities. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others.