The double lane: Weathering economic headwinds while driving the technology transition
As automakers and their suppliers wade into 2023 and look beyond, they’re bracing against the economic headwinds of inflation, rising interest rates, the specter of recession and stubborn supply chain issues. These conditions, which intensified through 2022, have brought a second wave of distress in the industry, pressuring profit margins and revenue growth. There’s currently little doubt these challenges will persist well into 2023.
At the same time, the industry presses on in engineering new business models to support an inexorable transition to connected, autonomous, shared and electric (CASE) technologies — especially electric vehicles (EVs) — and to reimagine the customer experience.
It’s a lot to manage. Both original equipment manufacturers (OEMs) and suppliers learned hard lessons from the pandemic lockdowns and global microchip shortage about building resiliency into their operations and business models. Looking ahead, there are strategies industry executives can adopt to improve both the top and bottom lines. And, on a parallel track, companies should stay on pace to accelerate the transition to electric vehicles and to help build out a viable coast-to-coast EV-charging network.
We’ve seen a fresh wave of challenges for the automotive supplier base in 2022, which may well persist into 2023. Supplier distress levels spiked significantly in the first half of 2022, pressuring already-thin margins. According to a PwC analysis, the number of suppliers showing signs of distress increased to 42% in the first half of 2022 from 27% in 2021 — particularly in the powertrain and interior segments.
As OEMs and suppliers head into 2023, they will likely continue to face macroeconomic challenges, including stubborn inflation, rising interest rates, unpredictable fuel and commodity pricing, ongoing supply chain constraints, and labor and talent shortages.
All of these trends are squeezing supplier margins and cash reserves and that’s restricting the ability to deploy the capital needed for growth, which will likely require many companies to recalibrate their short- and mid-term plans — a playbook we call “repair, rethink and re-energize.”
Even so, there are levers companies can pull to manage a recovery. We envision a two-year blueprint that companies can follow to better protect cash liquidity and focus on bottom-line growth. Immediate measures include the “repair” phase, which focuses on increasing liquidity by generating cash through changing how working capital, invested capital and additional funding capital is managed. After liquidity is recovered, companies should focus on profitability in the “rethink” and “re-energize” phases.
We see OEMs, suppliers — and investors — progressing on the EV transition through the end of this decade, and we forecast that this will accelerate beyond 2030. OEMs will likely have committed about $500 billion (and counting) in manufacturing investments over the next decade to help jump-start the large-scale shift to EVs, according to PwC analysis. Just consider that the number of EV-only manufacturing plants in the US is set to rise from nine today to 41 in 2029, according to PwC analysis. Recent M&A activity, too, indicates a growing appetite to invest in the EV transition. In 2021, for instance, nearly 30% of all auto supply deals (66% in terms of deal value) were initiated by financial investors, with most of the biggest deals focused on EV and advanced driver assistance systems (ADAS) components, according to the same analysis.
Meanwhile, the EV components sector is poised for significant growth, with US electric powertrains and batteries alone expected to hit $128 billion by 2035, up from $10 billion in 2021 according to a recent PwC/strategy& analysis.
We can expect an overall investment momentum that should significantly alter the powertrain mix for nearly all OEMs by the end of this decade — shifting from the vast majority of vehicles being powered by internal combustion engines to the majority being electric vehicles. EV penetration in the US is expected to increase to 30% by 2030 (from about 5% currently) and hit 41% globally (from about 10% now), according to PwC’s auto industry forecast. And, by 2029, auto OEMs globally are forecast to launch over 1,000 BEV nameplates (nearly doubling the number in 2022), with North America accounting for about 170, according to the same forecast.
An expanded national public charging infrastructure will be needed for wider EV adoption. PwC expects the number of charge points nationwide to rise to 35 million by 2030, up from about four million now (including public, semi-private, private fleet, private residential and private mobile cable chargers). For most OEMs, this will mean developing a long-term strategy, perhaps forging relationships with charge point operators (CPOs) as well as local and state governments offering incentives.
The pandemic forced the auto industry to become more resilient and, going forward, the industry should demonstrate resilience on two fronts: introducing new capabilities and building new business models to accommodate the mainstreaming of EVs. Doing so will require laying out plans and strategies for the near, middle and long term while mitigating effects of macroeconomic headwinds including inflation, rising rates, supply chain issues and recessionary pressures.