Industry turbulence: how can automakers weather the storm?

The automotive industry is in the midst of a full-scale transformation driven by electrification, autonomous driving, and software-defined vehicles. By 2030, electric vehicles will account for around 40% of global new car sales, while about 50% of new vehicles sold will have advanced driving assistance system capability of Level 2 or greater, offering features like autonomous obstacle avoidance, parking, and many others. Boston Consulting Group (BCG) expects that 90% of future differentiating car features will be software based by 2030, too.

Although many insiders anticipated smoother sailing in 2022, last year saw unrelenting obstacles to this transformation, with supply-side challenges, labour shortages, ongoing lockdowns, and increased geopolitical instability creating a perfect storm, resulting in sales falling by nearly 12% in the first half of the year alone.

The storm won’t pass in 2023 either, with BCG forecasting continued turbulence. As auto suppliers address pent-up demand for vehicles, the industry will increasingly feel the effects of the broader macroeconomic challenges. The bottom line? The automotive market is unlikely to revert to pre-pandemic volumes before 2025, with forecasted global production of light vehicles of around 88 million by 2025; just one million above 2019 production volume (89 million).

The situation in Europe is particularly acute, with the continent experiencing high inflation, energy challenges, and rising interest rates. The region also faces several structural obstacles, which raise more questions about its outlook over the long term compared to other regions. These include unfavourable demographic trends, productivity declines, fiscal tightening, and ongoing weakness in the bloc’s eastern countries—resulting in real GDP forecast for 2023 standing at 0.8%, less than a fourth of the growth reported for 2022 (3.5%)

To weather this storm, automakers should take four key actions.

Firstly, industry players must adapt their operating models to a lower-volume, higher-uncertainty environment. This will include taking a zero-based budget approach to cost structure, planning for worst-case scenarios, and dramatically reducing the break-even point. Savings can be made by developing digital capabilities such as AI and automation. To better capture value created with end consumers and between OEMs and suppliers, companies should consider realigning pricing and commercial structures.

Next, businesses must consider the resilience of supply chains in the face of existing and emerging risks and geopolitical uncertainty. This can be done by reconfiguring demand- and supply-planning processes to drive greater accuracy and better evaluation of trade-offs. Players should also be leveraging data and AI to unlock efficiencies and respond to risks in new ways.

The automotive market is unlikely to revert to pre-pandemic volumes before 2025

Thirdly, automakers would do well to embrace their supplier relationships and forge targeted partnerships. This involves developing more robust longer-term demand and supply forecasts and increasing transparency throughout the value chain. Players should also balance the need to push for incremental cost efficiencies with maintaining long-term relationships and incentives for co-investment. Additionally, they should consider new types of strategic partnerships to create scale, secure new technologies, and ensure security throughout the supply chain.

Finally, now is the time to accelerate innovation and optimise operations for the current and future environments. Automakers should take this opportunity to focus on what they stand for and how they intend to create sustained value. This means challenging the status quo and reinventing ruthlessly. Break free from traditional talent models, ways of working, and cultural constraints, and double down on redesign efforts to reduce reliance on scare resources.

The climate is undoubtedly adverse, but it also presents an opportunity for automotive companies that aggressively tackle near-term challenges. Confronting new realities, reducing costs, improving supply chain stability, and repositioning for the future are all Herculean tasks. However, those companies who can successfully navigate these turbulent times with purpose and decisiveness stand to come out stronger once the storm has passed.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Arturs Smilkstins is Managing Director and Partner and Victor Silonov is Project Leader at Boston Consulting Group

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