Sector trends & challenges
Reduction in demand
Reduced volumes are predicted with OEMs considering their range of vehicles and manufacturing footprints focussing on the most profitable models and regions. Changes in usage models are also likely to reduce demand longer term.
The sector is seeing an innovation push towards electrification and hydrogen technologies. Momentum is only expected to accelerate given government legislation on ICE vehicles and consumers pushing a green agenda.
The shift to electrification and online selling will drive consolidation, rationalisation and new partnerships across the sector. All aspects of the value chain will be affected from OEMs to dealers, but ICE suppliers are most at risk.
Sector rating profile
The profile over recent years has demonstrated a trend upward in the volume of restructuring activity whilst the sector has geared up for major transformational change. The impact of COVID-19 in 2020 was significant with plant shutdown, parts shortages and retail demand falling. The sector is hopeful of post-pandemic rebound through at least part of 2021.
Prior to COVID-19, the automotive sector was already facing a range of challenges, including softening demand for new vehicles in established markets; a huge investment in electric, hybrid and hydrogen technologies; and potentially a longer-term move towards Mobility as a Service (MaaS).
As with most other parts of the economy, COVID-19 has added another layer of uncertainty. Volumes of new orders have broadly declined over the course of 2020 and, with the economic outlook remaining uncertain, 2021 will not return to 2019 levels. OEMs have taken strategic decisions to reduce their model ranges resulting in decisions to close less productive or non-strategic plants, creating an impact both at the plants themselves and the surrounding supply chains.
There is likely to be continued consolidation and rationalisation throughout the supply chain, with renewed focus on operational resilience with OEMs looking to decrease their exposure to smaller, less financially stable suppliers.
Issues around the current reduction in supply of semiconductors for use in vehicles have also caused problems for OEMs in recent months, which have the potential to persist throughout 2021 and beyond.
Although the traditional dealer network is likely to remain the primary sales route in the medium-term, we expect growth in alternative sales channels. Online B2C market disruptor platforms and OEM direct online sales are likely to appeal to a younger demographic and create opportunity for start-up manufacturers who will not necessarily need a dealer network in the future.
Looking ahead, manufacturers are now making massive investments into electrification of their model ranges as part of the switch to hybrid and 100% battery electric vehicles. A number of manufacturers have already announced their intentions to have full electrified ranges by 2025 and be full battery EV only by 2030.
There has been, and will continue to be, an increase in the level of partnering and alliance agreements to allow OEMs to share the costs of such developments. The impact on the wider supply chain is likely to be fast paced. The traditional manufacturer model may also be at risk as new start-up electric vehicle companies potentially look to contract manufacturing options.
Working for an OEM client, we ensured continuity of supply with a distressed powertrain supplier. After a period of several months assessing options, we developed an innovative solution whereby the OEMs involved would back-stop a sale transaction, continuing to fund the business through the transaction and commercially supporting the purchaser.
Working with a large car retailer, we helped prepare for a site rationalisation programme by analysing underlying and potential performance and alternate use values. We also assessed the ability to reduce central costs and overheads in line with the proposed reduction in dealer sites and other cost reduction and process efficiency initiatives.
Find Your Expert
The automotive team at Interpath is one of the strongest anywhere in the market. Andrew Burn, former Head of Automotive for KPMG UK, leads our expert team. Andrew is supported by a number of professionals boasting decades of automotive experience, both in practice, and as part of the industry itself. Key members of the team include Lee Swinerd, Nicky Ogden and Mark Raddan. For a full list of our senior people with experience in this sector use the button below.Our senior team