Carmakers That Invest Too Much Too Soon In Advanced Tech Vehicles May Not Survive
Automakers must slow down the pace and volume of investments in advanced-technology vehicles and partner with companies with expertise in specialized areas or risk not being in business when such vehicles are in high demand, according to a report released by the business services company PwC US.
“When CASE (connected, autonomous, shared, electric) vehicles are finally ready for the mass market, too few of the automakers who invested in them along the way will be left in a position to actually take advantage of those investments,” wrote the authors of the report titled, “Facing up to the automotive innovation dilemma.”
One of the three authors, Reid Wilk, automotive partner with PwC US, explained in an interview this doesn’t mean investment in such vehicles is wrong-headed–quite the opposite. “What’s important is not that we’re saying these investments shouldn’t be made,” said Wilk. “The challenge right now is they’re making very significant investments in technologies, that, if you look at it from the consumer standpoint are not quite ready from an affordability standpoint. We spent a lot of money on electric vehicles over the last five or 10 years and in terms of cost of ownership are upside down relative to internal combustion vehicles in most places of the world right now so you’re making a lot of investments, from the customer standpoint, that are not going to be economically attractive.”
Looking at hard numbers, the report spells out just how financially shaky current investment levels are in CASE vehicles. Using return on capital (ROC) as an indicator, the report points out between 2017 and 2017 non-premium automobile manufacturers saw only a 4% ROC on their investments into CASE vehicles, while premium manufacturers did slightly better at 5%. In comparison, the report cites a 13% ROC in the information technology industry, 11% for companies producing “consumer staples and 7% for telecommunications services.
The margins are likely to shrink even further, with the report stating, “There will also be additional tooling costs for electric and autonomous vehicle production, as well as launch costs. All of this could raise OEM annual spending on new EV and AV models by as much as 140 percent by 2022.”
In terms of what the future holds, the report lays out three scenarios for the auto industry for 2023 based on investment into CASE vehicles and possible return on capital. The first scenario labeled “high investment” is the most plausible, according to the report, with high investment leading to reduced gross margins, the third. The second, labeled “delayed investment,” is considered by the authors the most optimistic. Under that scenario, automakers delay their electric vehicle plans by about half but end up with the highest ROC of the three scenarios–3%-3.4%.
“Number 2 is just saying that you’re slowing down some of the investment, or slowing down some of the unilateral nature of the investment to allow technology to catch up,” explained Wilk. “The real difference between one and two is you’re allowing other players, other industries, to drive the technology rather than trying to get there before the technology is ready.”
Indeed, automakers have not been tone deaf to the realities of attempting to go it alone–especially when it relates to electric and self-driving vehicles, forming various partnerships and investing in technology companies. Just last month Ford Motor Co. announced a $500 investment in electric vehicle startup, Rivian, Honda Motor Co. invested $2.75 billion in General Motors Corp’s Cruise autonomous car unit and rather than attempt to build its own self-driving vehicles, Fiat Chrysler Automobiles is leaving that to Google’s Waymo autonomous car unit, using FCA vehicles.
“Some of the luxury European automakers working together on a new generation of vehicles–it’s almost like Coke and Pepsi working together on a new drink. It’s shocking,” said Wilk. “That tells you they’re starting to see the handwriting of how this investment scenario plays out. They’re realizing that working together is likely to have a better outcome.”
Even with such partnerships, the reality is, according to the report, with more companies outside the traditional auto industry involved with production and development of advanced-technology vehicles automakers will likely be deprived of a large share of future profits.
“You’ve got a lot of different technology players that bring different technologies to the space, but they’re not doing it with charity in mind,” said Wilk. “They’re doing it because they think they can make a profit. It’s more profit out of the traditional pool.”
Once, however, the costs of producing and purchasing such vehicles come down to levels where consumers might feel comfortable buying them in higher volumes, increased profits are likely to follow, according to the report. But in order to take the best advantage of that hoped-for scenario, automakers and suppliers should consider what it called three “precepts”:
- Embrace specialization
- Focus your value proposition
- Manage costs zealously
The reality is, however, even if companies embrace those precepts, there likely will be casualties, with the report surmising, “Disruption always claims victims. There is likely to be further consolidation before the direction of the auto industry becomes clear. Some nameplates will be swallowed up. Today, there are more than 20 global automakers; by 2025, there may be only half that number.”
Wilk adamantly points out, however, there is no “pre-determined” level of consolidation or number of companies that won’t survive, but the message is clear.
“What we’re trying to do is say this is the handwriting on the wall,” he warned. “These are the strategies you have to start to adopt to help shape the outcome differently and here’s what happens if you don’t do that.”