Ready or not, the auto industry gears up for the electric vehicle onslaught.
For the automotive supply chain and the consumers they serve, there exists a considerable number of questions about the viability and readiness of the electric vehicle revolution.
“Electrification is the great divider,” said Brett Smith, a research fellow for the Center for Automotive Research at last month’s FMA Annual Meeting. “You either believe in it or you don’t.”
One thing is for certain. Based on their public comments and their very real monetary commitments, the majority of the automakers have faith in its future.
While the world’s carmakers continue to deal with a number of challenges that have vexed them over the past few years, they largely remain full steam ahead on the transition to vehicles that are powered in a way Henry Ford never imagined.
There was a time when the automakers would spend more money on marketing and public relations than engineering. That’s no longer the case. In 2022, the domestic auto industry invested more than $50 billion on research and development, almost all of it going to EV technology (only $4 billion was allocated for internal combustion engine vehicle projects). The previous year, the industry spent $38 billion on EV efforts.
“I don’t know how viable they are,” Smith said, “but the industry has made this investment.”
Consumers may be slower to come on board, but they are getting there. In 2020, approximately 2 percent of sales went to plug-in hybrids or battery electric vehicles. That jumped to 4.3 percent in 2021 and 6.7 percent in 2022. Adding conventional hybrid vehicles (non plug-in), the market share was over 12 percent last year.
“Are we really at that hockey stick moment we’ve been talking about for decades in the EV world?” asked Chicago Fed auto analyst Kristin Dziczek at the Reserve Bank’s Automotive Insights Symposium in January. “I think we are.”
Though all are making headway in some fashion, the automakers’ approaches to EVs have varied. Some, such as GM, are all in, as the company’s CFO Paul Jacobson explained at the auto giant’s most recent conference call. “We expect capital spend to be in the $11 billion to $13 billion range, inclusive of $1 billion invested in our Ultium Cells JV. We continue to shift resources to EVs, with around 75 percent of our product-specific capital dedicated to EVs and AVs (autonomous vehicles).”
GM’s efforts are truly vertical, developing large battery partnerships with LG for the construction of plants. Ford was a little slower getting going but is following a similar path with its creation of the BlueOval City campus near Stanton, Tenn., an “automotive manufacturing ecosystem” dedicated to EVs.
Fellow Big 3 automaker Stellantis has taken a much more cautious approach, which isn’t necessarily a bad thing, said Mike Wall, executive director of automotive analysis for S&P Global. “It’s OK to be late to the game when you don’t know the full rules of the game yet. There may be some wisdom to the strategy.”
The story is similar among the transplant automakers. Toyota has been cautious, comfortable with its plug-in hybrid line rather than dive headfirst into full BEV immersion. Hyundai, in contrast, is committing to BEV investments not just in its home base of Korea, but in the U.S. as well.
That stands to reason, as the push to EVs is not a phenomenon limited to one geographic region, but a global makeover. Europe is even further along in its movement to BEVs, even if the continent is struggling to cost-effectively produce the smaller-sized EVs. They may look to China to fill that void.
All of these investments reflect a growing number of options for consumers. In 2020, North American plants produced 20 plug-in vehicles. By 2030, if current projections are met, that number will have grown tenfold.
That can create its own set of problems, noted Wall at the West Michigan PMA’s Automotive Insights event in January. Automakers, both traditional and EV-only companies such as market leader Tesla and fledging enterprises such as Rivian, have plans to launch 30 to 40 new models annually, on top of any existing ICE nameplates. But there isn’t going to be a corresponding increase in overall consumption.
Thus, whereas today the average vehicle count for an ICE model is 85,000 units produced, the newer models will be looking at an average of 30,000 vehicles produced per nameplate. That has significant consequences for the automotive supply chain.
“You’re going to be a bit in the wilderness for the next few years, as 30,000 units per nameplate has huge implications,” Wall said to the audience of automotive suppliers. “You’re talking about tooling changes, talking about trying to flex out a line. You’re going to have to be creative in your manufacturing because you’re not going to be building hundreds of thousands of parts.”
Of course, not every one of these vehicles will be a hit with consumers. “Always in the case of automotive, there is irrational exuberance on behalf of the automakers. From their perspective, no babies are ugly. Every vehicle is going to sell,” he said.
“There are going to be some ugly babies out there. You’re going to want to protect your volume planning on that front.”
And all of this will happen while the traditional model remains a part of the automotive calculus. “We’re not forecasting the death of the internal combustion engine, this year, next year, five years or even 10 years,” Wall said. “It will still be out there.”
The continued role of the ICE vehicle will be buoyed by many of the challenges facing the transformation to EVs. As much as some consumers may want to take advantage of the attributes of the electric vehicle, it’s not exactly in reach for all of them at the moment.
Affordability is one of the big issues hanging over the electric vehicle transition, Dziczek said. EVs remain pricey, often out of budget for many consumers. Current EV ownership is concentrated in households on the coasts and the mountain states.
On top of that, the charging grid remains a work in progress. ICE vehicle operators know a gas station is awaiting not far up the road in most places in America. The same isn’t true of EVs.
Right now, there are 940,000 charging stations in the United States. That number will need to grow to 15.3 million in the coming years.
The infrastructure bill contains money for the construction of 500,000 new chargers. “That’s just the first ante. We need eight times the growth in public chargers between now and 2030 to make this work at speed,” Wall said.
Even that doesn’t answer all the questions. Household chargers will be a big part of the solution, but many Americans, particularly those in urban areas, do not own a garage. “Again, we have a lot of work ahead of us on this front,” said Wall.
But whatever the challenges, groups such as his continue to project major gains in the electric vehicle space in the coming years.
“Why are we forecasting what we are for BEV?” Wall asked. “The California Air Resources Board is aiming toward the zero emission vehicle. We can debate whether it’s going to be 2035 or 2040, or when it becomes one-third of the market, but seeing this ongoing march toward more electrification at the state level is informing our own expectations.”
Of course, the electrification of the industry is only one topic of interest in what is shaping up to be a better year for the auto sector after the incredible challenges of the past three years.
The auto industry, like others, suffered an immediate jolt to production with the arrival of COVID-19 and the production shutdowns that followed. But that was just a mere precursor to even greater difficulties driven by the supply chain shortages, most notably in the production of semiconductors. Globally, though not as much at home, the Russian invasion of Ukraine produced a further shock in 2022.
Most of COVID is now behind us, though China dealt with significant pandemic-related shutdowns in 2022. And the Russian-Ukraine war continues to affect Europe, and will turn Eastern Europe from a potential hot spot for both production and demand into an area of sluggish activity for the foreseeable future.
That leaves the supply chain issues, with semiconductors representing the most significant, but not only, source of shortages. This year figures to be much closer to normal on that front.
“I wouldn’t say we’re in the clear as far as supply chain, but we’re getting there. As we come around to spring, the condition of the consumer will be more important,” Wall said.
The supply chain issues of the past had many effects, most notably the absence of cars on vehicle lots. Historically, the industry has tried to maintain stocks of approximately 60 to 70 days at dealerships. But at the absolute nadir of the crisis, auto lots had inventories of fewer than one week.
Those inventory levels have begun to climb back up, but they may never reach traditional numbers again.
“What’s happened in that time period, companies realized if we don’t have any product on the inventory, people will order it, and that keeps inventory off the lot. And if we don’t have excess inventory, we can charge higher prices,” Smith said.
That solution only works as long as all of the car companies are on board, however. “If somebody goes back to flooding the market, then everybody is in trouble,” he added.
Still, it wouldn’t be a surprise if the industry recognized it didn’t need to keep as many vehicles on lots – and the costs associated with such a strategy – in the coming years.
The lack of cars on lots over the past few years has been felt in the sales numbers. While traditionally demand propelled sales figures, it was supply driving the consumption bus in 2021 and 2022.
U.S. light vehicle sales declined 8.1 percent in 2022, with passenger car sales down 14.9 percent and light trucks off 6.2 percent. That breakdown reinforces Smith’s assessment of the U.S. “Instead of a sedan market, it’s a CUV market and pickup market.”
In many ways, yesterday’s passenger car is today’s CUV. Middle CUVs are the largest selling segment in the U.S., just edging out pickup trucks with a 19.7 percent share. Luxury CUVs and SUVs take up a little more than 10 percent.
Overall, U.S. light vehicle sales have been below 15 million units the past three years, well below what was expected given demand. “There were six million units of foregone sales,” Wall said.
Where did it go? Well, it’s not completely lost, nor is it simply pent-up demand. Some buyers exited the market entirely, while others found relief in the used car market. Wall estimated about 2 to 2.5 million of those lost sales would constitute remaining pent-up demand.
“We still have some wood to chop to get back to pre-crisis levels. The reality is, we think 16.1, 16.2 million is going to be more of that steady state level of demand,” he said. “In normal times, when you go through a recession, or disruptive events, you see a snapback, volumes come back because pent-up demand is released.
“We think this time is a little different.”
The slowdown hasn’t been limited to North America. Globally, light vehicle sales the past three years have averaged just under 80 million units, including 79 million vehicles sold in 2022. In contrast, pre-pandemic the world was averaging 90 million vehicles sold per year, and the number is still expected to grow to just short of 100 million units by 2030, Platts forecasts.
In addition to the role EVs are playing in that different environment, there’s also the simple reality that the supply chain-driven downturn is relenting just as the macroeconomy is creating some headwinds to a robust rebound. In addition to a possible recession, or at the very least a period of slowing growth, inflation may price some potential car buyers out of the market altogether. “We think pricing and other considerations are going to limit us,” Wall said.
Ford is optimistic that won’t be the case, believing that the drop in commodity prices, a cut in dealer margins and some incentives will “drive average transaction prices down,” Ford CFO John Lawler said at his company’s most recent conference call. He described the overall pricing environment as “neutral.”
The average monthly car payment hit a 20-year high in November 2022 at $762 per month. While that price was influenced by a higher-value mix of vehicles being sold during the supply shortages and the pricing has plateaued and may even back up some, Dziczek noted, the financing costs being paid have been climbing as a result of the Fed’s interest rate hikes.
Though the stronger than anticipated start to 2023 for the automakers may change things, observers believe the industry will generally experience a modest rebound this year.
The consensus among forecasters is that manufacturers will sell more cars in 2023 than they did in 2022, although still significantly fewer than they did in 2019, Dziczek said.[Caption:]
A $2.2 billion investment will lead to resumption of production of all-electric vehicles at the former Detroit-Hamtramck assembly plant. (Photo courtesy General Motors)