PWC: Can Auto Suppliers Survive Electric Vehicles?
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By Akshay Singh
Consultant, Booze and Company
February 28, 2020; The good news for suppliers is that electric vehicles (EVs) are still only a small percentage of the auto market—at least for now. The bad news is that the growth of EV adoption poses a significant challenge for auto suppliers. Since EVs have many fewer parts than vehicles with internal combustion engines (ICEs), manufacturers of exhaust systems, fuel systems, and transmissions face disruption as EVs become more mainstream.
The current EV market is being fueled by governmental emission standards and incentives, especially in England, France, Germany, and China. But EVs will not represent a significant threat to ICEs until the costs of ownership become roughly equivalent. While EV costs continue to decline as the technology improves, they are not yet competitive. Still, seeing the handwriting on the wall, auto companies have invested billions in EV related technology, which will increasingly drive sourcing decisions.
Our analysis shows that EVs may represent approximately 14% of global new vehicle sales in Europe and China by 2025 — up from 1% in 2017. Even this increase is likely to impact many suppliers that provide components for ICEs because EVs have many fewer components than ICEs and do not need turbo chargers. Also, EVs depend on lithium-ion batteries, which are primarily made by companies outside the traditional auto supply chain. Adding to the competitive threat, some EV battery suppliers are beginning to manufacture electric powertrains.
How can suppliers fortify themselves against the growth of EVs? Below are some action items to consider:
Assess the risk of EV adoption in key markets. First, you should research the markets’ technological and regulatory conditions and consumer preferences. Second, you should re-evaluate your product portfolio in light of your research and determine which components might be most affected.
Determine your digital fitness and capacity to innovate. In addition to manufacturing expertise, you will need to compete with technology firms to provide software and advanced electronics to the auto industry. This is likely to require a cultural shift as well as significant investment in acquiring technological expertise.
Re-evaluate your capital structure. Substantial debt burdens may make it more difficult to take long term risks to prepare for new market conditions. Even though interest rates and risk premiums are currently low, it may be a good time to consider deleveraging your capital structure to allow for greater financial flexibility.
Decide on your best path forward. By our calculations, suppliers have about 7-10 years to prepare for the growing threat of EVs. You might consider adding software or advanced electronics capabilities, either organically or through acquisitions, joint ventures or partnerships. You could plan to shift your product portfolio away from lines of business you think will become unprofitable as EV adoption increases.
Suppliers that fail to meet the challenges of rising EV adoption can also present a risk to automobile manufacturers. Given tightly integrated supply chains, OEMs would be wise to monitor the ability of key suppliers to maintain their viability in a changed market environment.
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