We are now into a new decade and 2020 arrived seemingly way too soon. From what we hear throughout the supply base, it will probably be a decade that presents serious challenges for companies that supply automotive OEMs. Advanced technology, such as electrification and autonomous mobility, is – and will continue to be – disruptive to existing business models.
The internal combustion engine is not going away, but there will be a continuing shift to electrification. There will be 125 million vehicles on the road by 20301 and the resulting technology and related manufacturing restructuring, along with decisions to be made in resourcing, will be greatly impacted as budgets are aligned with the new technology. Mercedes and Audi both recently announced layoffs due to the dramatic shift in their portfolios from combustion power to electric vehicles and their combined reduction-in-force in the next year is anticipated to be approximately 20,000 workers. This shift to electrification is already having a significant impact on Germany’s economy, which is expected to continue.2
Currently, vehicles powered by electric technology are generally more expensive to produce. Suppliers of powertrain components will have to shift part of their product offering(s) to electric componentry and must have the available capital and resources to do so. Over the last 24 months, our experience at Amherst has shown us that few suppliers have been able to invest the necessary capital for the required capital expenditures for their current production, let alone investing in new technology for their products and manufacturing.
Critics of electric vehicles are claiming that electric vehicles are killing employment in the auto industry. Unfortunately, it’s not that simple. Electric vehicle sales have not yet caused a sales decline of individual vehicles and they seem to be the OEMs’ key hope in complying with CAFÉ standards in the United States and the new regulations in both Europe and China. If these new standards are not met globally, the fines associated with them may reach several hundred million dollars.
The major impacts over an as yet unknown time period for auto industry employment and suppliers will be to the unit supply volumes of individual components in the vehicles, engines, and drivetrains. The causal factors for these decreases will be the replacement of piston driven engines by electric motors and the corresponding decrease in the numbers of parts required in the drivetrain.
The days where the OEMs could simply roll out the next generation of vehicles, with some alteration utilizing tooling and factories that were amortized long before this next decade begins, is long gone. The challenge for the OEMs and their suppliers is to innovate quickly with safe and reliable products that can eventually be afforded by the masses. This is, and will continue to be, an expensive and difficult challenge.
We would be pleased to provide you with a more in-depth presentation on these trends or help answer any specific questions you might have in this area.
Please contact us if we can help you or your clients prepare for this impending shift in the industry’s future.
Insights provided by:
Sheldon Stone, Partner
Restructuring Practice Leader
Bruce Goldstein, Managing Director
Restructuring Advisory Services
1 CNBC, May 2019
2 New York Times, “Electric Cars Threaten the Heart of Germany’s Economy,” December 2019