Automotive: weakened by successive crises, manufacturers forced to rethink their industrial model

The year got off to a bad start for the automotive industry… While news on the semiconductor front once again dashed hopes of a rapid recovery, the war in Ukraine threw a huge chill on the Already alarmist forecasts from automakers: disruption of supply chains, tensions over critical raw materials produced in Ukraine or Russia, loss of the Russian market… Automakers didn’t need that. While they have still not returned to pre-health crisis volumes due to the shortage of electronic chips, the schedule of environmental regulations requires them to invest colossal sums in the energy transition. Not to mention investments in connectivity, software or even the autonomous car… More than a health crisis, more than a conflict, the global automotive industry is subject to an upheaval in its industrial model.

A 2022 financial year worse than expected

Car manufacturers did not expect 2022 to be a great vintage in Europe: between zero and 5% growth compared to a year 2021 down 22% compared to the pre-crisis level. Recent events are likely to pull volumes down: -3% according to new PwC projections.

In the first quarter, registrations fell by 12% in Europe. In March, the first full month after the outbreak of war in Ukraine on February 24, the decline was much sharper: -20%. In April, (while waiting for the European figures), the French market showed a new acceleration of its contraction: -23%. For manufacturers, this decline is mainly linked to the unavailability of semiconductors now amplified by ruptures in other parts. The main factory of the Volkswagen group in Wolfsburg had thus suspended its production for a few weeks due to a lack of cable from a Ukrainian supplier. But analysts are also worried about a cautious buying reflex from households, quite classic in times of war.

“We have seen a drop in confidence indicators in the first quarter. Moreover, we are already observing that demand in Europe for the first quarter does not correspond to our forecasts for the end of 2021”, explains José Baghdad, partner. head of the automotive sector at PwC France.

Skyrocketing costs…

The other major concern of builders is linked to tensions on the cost structure, which is already under great tension. While Carlos Tavares, CEO of Stellantis, has calculated that switching to the electric car could increase the purchase price by 50%… The sharp rise in raw materials, or the resurgent inflation, could still pull prices up. Inflationary expectations should moreover get the better of ultra-low interest rates, which for the past ten years have favored the purchase of new, well-equipped cars.

Faced with these challenges, car manufacturers are considering changing several paradigms of their industrial model. “Builders have suffered greatly in recent years from geopolitical, climatic or epidemic hazards. They now want to prevent these risks”, confirms José Baghdad. “Manufacturers will be forced to review their industrial model by seeking more resilience,” he underlines.

First of all, the principle of zero stock could be immediately called into question. Production suspensions are explained by the day-to-day management of stocks. At best, a factory has a week’s worth of parts… Except that restocking risks being extremely expensive for car manufacturers: in terms of space, logistics, energy… Secondly, that’s all the supply chain which is likely to be reviewed in order to better secure it. This week, Tesla reached an agreement with the global mining giant, the Brazilian Vale, in order to secure its nickel supplies, in particular its mines in Canada.

This is the third pillar, that of the regionalization of supply chains in order to reduce transport times, favor short circuits and lower risks. The maritime transport crisis has left its mark.

After Ukraine, Taiwan… The colossal cost of geopolitical risk

But this logic must also solve the fourth subject that torments car manufacturers: the anticipation of geopolitical hazards. The war in Ukraine sent back the confrontation of several antagonistic geopolitical blocs like a boomerang. If Russia is a small market with its 2 million cars annually (except for Renault for which it was the second market in the world), no one dares to imagine the same scenario on sanctions applied to China. And yet, the world’s leading automotive market (28 million cars per year) is not without warlike intentions vis-à-vis its neighbours. What would happen if Beijing decided to invade Taiwan? “We are moving towards greater regional integration of production and even relocation”, concludes José Baghdad.

“Europeans will have to protect themselves more against the ESG dumping that Asian manufacturers are organizing. If they don’t do this, it risks being very complicated for European manufacturers”, he also warns.

Because, while European manufacturers are subject to a sharp increase in their cost structure, Chinese manufacturers are multiplying ultra-competitive models for the European market.

In their misfortune, European automakers managed to save their financial accounts with a lucrative 2021, record operating margins despite falling revenues. In the first quarter, the first figures published indicate that they managed to increase their turnover despite a drop in sales volumes. All is well then, as long as consumers are willing to pay more…