During the autumn of 2020, motor manufacturers drew up their 2021 budgets and therefore looked to the trends and predictions for the coming year. 2020 has been a brutal year for many industries, including automotive, with margins and overall profitability under severe threat. A consecutive year of such an attack on the “bottom line” will be disastrous to many organisations’ futures and that of their stakeholders.
With factory utilisation being challenged and the revenue development being uncertain, the overarching theme of 2021 will be cost reduction. Therefore, forecasting the volume of the global industry and additionally each OEM’s share, as well as the nuances and trends, has never been as significant as it is for 2021. Organisations in the supply chain have little capacity in their reserves to sustain another financially challenging year. So, let’s look more closely at some of the upcoming challenges, their impact on those in the ecosystem and on end customers, and most importantly, what the OEMs can do about it?
TIMES OF UNCERTAINTY REQUIRE A RENEWED FOCUS
2020 will see a decline in the global passenger and commercial vehicle market of approximately 23% to 70 million units. The global 2021 automotive market is anticipated to grow to around 77 million, a 10% increase. However, these figures are littered with COVID caveats.
Whilst the total volume is important, the pandemic creates too many unknowns. For this reason, the nuances and developments within the industry will be of great significance next year. The automotive market is being challenged on many fronts; these developments can be categorised as C.A.S.E.:
The industry needs to prioritise its focus, as it does not have the resources to capitalise on all these areas simultaneously.
Autonomous and Sharing Not a Priority
Autonomous vehicles were in vogue and highly anticipated during 2016-2019. However, the investment involved to escalate the technologies required are significant. Many commentators would agree that a fully autonomous car is not going to be a day-to-day reality for another 30 years. And it will not be a priority for 2021.
In 2019, car sharing was starting to gather momentum. From fractional ownership to hourly/minute rental to ride sharing. Car ownership was gradually morphing into car usage as millennials questioned the necessity to own a depreciating asset that was being used only 4% of the time. The “cliff edge” of COVID meant that sharing became an anathema overnight. Whilst this will return eventually – and when it does it will escalate at an exponential rate – it will not be a priority until a vaccine is widely available and/or the threat of a pandemic re-occurrence has passed. Therefore, it does not look like it will happen anytime soon.
This leaves electrification and connectivity, both of which will be priorities in the auto industry for 2021.
IMPACTS OF THE 2021 AUTOMOTIVE TRENDS
The move to increase the supply of battery electric vehicles (BEV) is being driven by an almost global desire and need to tackle climate change. Over the past 10 years, legislation has focused on carbon emissions to tackle the environmental issues, with CO2 from the tail pipe being the main KPI. However, this drove the industry to gravitate demand towards diesel-powered vehicles in certain territories across the world.
Whilst diesel vehicles have a lower CO2 output than their petrol counterparts, the nitrogen oxides (NOX) and particulates are usually higher. Hence, diesel engines are more detrimental to air quality and people’s health. In order to mitigate the diesel increase, regulatory intervention has been necessary to drive supply and demand towards BEVs.
These measures are penal in certain territories and will increase in 2021. Europe has set targets for 2020 of an average of 95g/km of CO2 for 90% of the vehicles, which will increase to 100% in 2021. Regulations in Canada, China, India, and many US states are escalating in 2021, employing a mixture of policies that tax more highly polluting vehicles and incentivise BEVs. However, despite such government actions, a dramatic increase in the demand for BEVs during 2021 is unlikely.
Costs for OEMs and Consumers
There are two significant reasons for the slow uptake in battery electric vehicles. Firstly, they are almost 30% more expensive to produce than their internal combustion engine (ICE) counterparts. To make these cars more accessible to the general public, motor manufacturers have had to reduce their margins substantially; some manufacturers are even taking a net loss on such cars in an effort to increase demand for BEVs.
Still, this leaves the BEV significantly more expensive than an ICE car, which means that OEMs are not keen to increase BEV production from a business perspective. However, as BEV production increases and economies of scale become a reality, price disparity with their ICE equivalent will eventually be reduced – the development of cheaper batteries will also be a contributing factor here. Yet, complete price parity is not anticipated until 2050.
Secondly, consumers are reticent about investing in BEVs because of range anxiety, charge times, charge availability, and – because of the factors shown above – their comparatively expensive price.
Impacts Across the Ecosystem
The impact to the industry is that OEMs will have to achieve the low carbon targets or suffer significant financial penalties. Thus, the margins made in 2020 will be further threatened in 2021. As a result, cost-cutting will escalate even further, factories will have to review their future, manufacturers will look to increase their joint venture developments in electrical technologies, and further manufacturer amalgamation will occur. Certain manufacturers will look at specific markets that have penal BEV targets in 2021 and will opt to vacate their presence, realising that there is no long-term business proposition (e.g. Mitsubishi in Europe).
OEMs will look to squeeze 1st-tier suppliers to cut costs, who in turn will put pressure on 2nd-tier suppliers. Any 1st- or 2nd-tier business overly reliant on one client will have little ability to rebuff such price reduction pressure from them. This will result in amalgamation or liquidation of some organisations and in a reduction of future technology investment by supply chain members.
Also, OEMs will aim to reduce dealer margins, resulting in price maintenance for the customer but in significant margin reduction for the dealer. Across various regions, this will mean a move away from the franchise business model and towards an agency structure. Commencing in 2021, this will fundamentally change the relationship with the dealer network.
The haggling process at the dealer will be removed as the margin will be too low to allow for this. In addition, greater price transparency and an increase in direct online sales could lead to the dealer becoming a handover facility. Dealers will look to increase their revenues via aftersales and used cars, and to supplement their new-car profit via multi-franchise facilities (many brands under one roof) instead of single-brand operations.
Digitisation has become key in every industry; automotive is no exception. More than 70% of all cars built in 2020 will have telematic capability and therefore the capacity to be connected to the OEM, dealer, other cars, smart cities, etc. This trend will further increase in 2021 with nearly every new car having this functionality.
Impacts on OEMs and Governments
OEMs will want to obtain data and, for example, predict car failures in order to reduce warranty costs. Governments will start to focus on compensating a decline in fuel tax due to the increasing electrification with a tax based on vehicle usage, which will require connected car technology.
Meeting Consumer Expectations
IoT is now everywhere and the car is just an extension of the consumer’s domain. The car will need to communicate with the customer’s personal digital device and have telemetry integrated into its architecture. The car will become less of a high-tech consumer environment but will become a portal for the consumer to connect with their own device. For instance, integrated navigation systems will decline, with geo-functional apps from the consumer’s phone connecting with the car instead. This trend will start to escalate in 2021.
Customer-centricity will become the driver in the auto industry in 2021. Customers will demand seamless movement between car, bike, scooter, train, and any other form of transportation via their personal devices. They will integrate leisure activities into their mobility activities, thereby eroding the silos of various industries. Customers will want – no, expect – the ability to transact entirely online and require sales and service automation.
However, OEMs are hampered by legacy systems and are not agile enough to fulfil all these needs. They will have to concentrate on their core competency: making great cars. Instead of venturing into other domains, they should leverage the expertise of third parties in those areas instead.
CONCLUSION: THE WAY FORWARD FOR 2021
2021 will be a highly customer-centric year, and they will expect greater integration between their car and personal device. In light of this demand and the cost-conscious environment of 2021, the biggest return for “smart players” in the auto industry will be in the area of connectivity. Car manufacturers should collaborate with nimble partners, as it will enable them to accelerate connectivity by quickly leveraging success stories from other industry verticals. Finding ways to facilitate agile and flexible solutions will be essential to keep pace with customer expectations and dynamic, software-led OEMs such as Tesla.
ConsultantTony has worked in the automotive industry for more than 35 years, holding senior positions with Renault, Toyota and Hyundai. He is passionate about helping businesses succeed through collaboration, embracing change and empowering their people. Tony helps our clients to assess their readiness, navigate the necessary changes and start to build on their vision of this future as it relates to mobility ecosystems. When he isn’t working, he loves playing and watching sport, volunteering with his church and spending time with his family.
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