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The automotive industry reshuffling, a time of opportunities

The history of the electric vehicle goes back further than most people realize. In 1900, electric vehicles (EV) outsold all other types of cars on the US market: 28 percent of the 4,192 cars then produced in the US were electric. Compared to other available technologies, customer experience was simply better: easier to operate, no gear change, less noise and vibrations, no need to crank the engine up.

At its peak in 1912 the fate of electric vehicles faced a combination of three factors abruptly disrupted their fledgling car industry: the assembly-line production introduced by Henry Ford divided manufacturing costs by 3; gasoline prices dropped as the oil industry uncovered huge reserves; roads built at a healthy pace interconnected more and more cities. This enabled American citizens to transform their appetite for longer and faster travel into a reality they could afford, thanks to the newly available mass-produced Internal Combustion Engine (ICE) cars.

EV cars all but disappeared for about a whole century; although nuclear-powered cars were enthusiastically considered as a potential alternative in the 1950s, no contender was to unseat the ICE domination.

Now the EV-ICE pendulum may be swinging back, albeit in a particular manner.

Climate concerns driving the change

Climate change policies prompted the recent (October 2022) decision by the European Union to ban sales of CO2-emitting passenger cars from 2035, with a provision to reexamine associated roadmaps by 2026.

This is no doubt a major shock for the industry and European customers: battery EV (as opposed to Plug-in Hybrid Electric Vehicles (PHEV) which rely on a combination of ICE and EV technologies) car sales currently account for only about 13% of new car sales (Q1 2022) in the EU (22% including PHEV)!

If the EU is thus paving the way to zero-CO2 mobility vehicles, its market only accounts for 15% of the world passenger car market. And other mature automotive markets may carry on with conventional ICE solutions while they gradually boost their own EV industry. At the same time, worldwide unmet mobility needs are huge and growing with demographic changes in major areas of the planet – e.g., India, China or Africa. Think of farmers losing 50% of their crop on their too long unmotorized way to the grocery market.

To bring another perspective, battery EV cars still only make up for about 1% of the global worldwide car population.

In other words, global industry players are facing a major challenge, demanding capital investments to address both technologies without any certainty that the world has entered an irreversible transition: what about sustainable fuels or hydrogen in ICE powertrains or-as game-changers for EV- new solid-state electric batteries?

Changes reaching beyond the EV vs ICE powertrain battle

Climate-change roadmap and environmental consciousness are also fueling many other trends and issues for the automotive industry. Let us name a few:

  • Societal: switch from car ownership to mobility usage, enhanced frugality leading to further recycling or reuse or even reconditioned motor vehicles in the future (same as smartphones)
  • Materials and processing: steering away from oil and petrochemicals and looking beyond the automotive sector, with new materials such as bio-sourced polymers or new processes like 3D-printing.
  • Industrial: emergence of energy-frugal technologies (e.g., LED lighting), with EV cars also needing components with specifications, technologies or skills that are new to the industry (specific tires, heating systems featuring heat pumps battery maintenance)

While another mobility revolution unravels

Aside from this green revolution, another technological one is being instigated and energized by mega tech companies, combining data, processing capabilities and connectivity.

Mature markets are clearly not easily buying into revolutions; this may be why the current EV offer strongly mimics legacy ICE, with similar body shapes and interior layouts -although EV-specific packaging constraints would allow for significant differences.

The same goes for connected vehicles and autonomous vehicles, which may challenge -or reinvent- the century-long association between cars and freedom. They will in fact impact not only the product itself but also mobility services in general.  And may therefore reshape the whole industry.

A couple glimpses into related perspectives:

Connectivity:
Connectivity technologies now makes it possible to remotely gather in-service data from equipment installed on vehicles. Who will develop associated services (e.g., condition monitoring, automated ordering of replacement parts)? Will car manufacturers manage to monopolize all these data and avoid disintermediation by OEM?

Autonomous driving:
Autonomous cars are not here as fast as expected, but the first robotaxis are now being commercially operated in several cities in the USA (Phoenix, San Francisco) and China), thanks to the relentless involvement and backing of mega tech companies such as Google (Waymo claims a 20M miles driverless background) or Microsoft to name only two. And autonomous trucks are in sight, with the promises of reducing transportation and delivery costs but also mitigating shortages of truck drivers.

Combining connectivity and autonomous technologies could bring substantial collective, societal benefits as well, e.g through global, real-time, traffic control and management: many traffic jams could be avoided -with obvious gains in terms of travel time and pollution- if cars were locally all remotely dispatched, driven and controlled by an intelligent system, optimizing their routes and speeds. One big step beyond already widely adopted connected navigation systems. A bridge between freely driven automobiles and public transportation, which may support acceptability.

A shaken industry

The recent life-size stress test that the industry underwent (market plunge due to covid crisis, supply-chain hiccup, semi-conductor shortages) outlined the limits of flexibility and resilience of the automotive industrial ecosystem.

At the same time, numerous new EV car manufacturers are emerging worldwide, potentially leading them all into a red ocean since none of the major automakers has gone bust so far and all are adding EV to their offer.

This is all the more acute as current EVs -even without high-end connectivity or autonomous features- boast costs which may not be sustainable in a price-driven market (no consumer incentive will last forever), be it due to fierce competition, lack of perceived EV value, or to deteriorating short and mid-term economic perspectives in western countries.

Market trends moving from individual car ownership to mobility-as-a-service will not alleviate this as cars will have to be borne by asset companies applying even higher pressure on transaction prices.

What will happen in any case is a significant reshuffling in the automotive industrial ecosystem: changes in the value-chain, differentiated access to raw materials, technology portfolio revamping and redistribution, possibly more in-house manufacturing by car makers (reverting a long-established trend: outsourcing parts then whole modules while focusing on assembly and wholesaling), reinforced economic pressure on OEM that will not offer adequate value.

Uncertainties in the automotive industry may be at a climax now. No doubt however that all this makes for an environment conducive of major business opportunities, cross-border and cross-sector transactions.

By Gerard Payen, CDI Global

About CDI Global

CDI Global provides middle-market advisory with global reaching success. Our commitment is to deliver world class service built on long-term client relationships. The pillars on which we have built our organization are integrity, excellence, client focus, and partnerships. These core values are at the forefront of every CDI Global engagement, driving our dedication to finding the best opportunities in virtually any industry or location. Our goal is to create a lasting and positive impact through our history of successful cross-border transactions.

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