Trade credit insurer Atradius has released an in-depth report on the automotive sector. The report provides a sector-wide analysis and takes a deep dive into the performance and outlook of the sector in China, France, Germany, Italy, the UK, and the U.S. It also provides snapshots for the Czech Republic, Japan, Mexico, Poland, Spain, and Sweden.
Among the major insights include the fact that the automotive industry is facing structural challenges that could lead to upheaval, including a shakeout with many companies leaving the market. The main issues include the switch away from combustion engines, new technologies including autonomous driving and digitalization, and changing consumer habits and new mobility services.
While it is still not clear what the future of mobility will look like, i.e. which technologies and innovations will prevail, it is clear that huge investments are necessary to adapt to the changing market conditions. It is estimated that globally, investments in the electric vehicle segment will amount to about $300 billion over the next five to ten years.
Currently the ratio of production of combustion engine vehicles versus electric vehicles/plug-in hybrids is still 50:1; however, it is expected that electric vehicle sales will account for about 15% of global sales by 2025.
Additionally, new players from outside the industry have entered the market, many of them with a technological edge and financially strong. This concerns not only new technologies like autonomous driving, but also e-mobility. The relative simplicity of electric engines (which use far fewer parts than combustion engines) is attracting businesses from outside (for example, the British household appliances producer Dyson has started to build electric vehicles).
Adding to the major challenges, the moment for change and substantial investments seems mistimed, as years of robust growth are over. Global car sales are forecast to decrease 5% in 2019, and the ongoing global economic uncertainty does not bode well for a rebound in 2020. In the U.S., the outlook remains fair, but the credit risk outlook has deteriorated, and import tariffs continue to fuel uncertainty and lower demand. After years of steady growth, it is expected that annual car sales will decrease below 17 million units in 2019.
While the U.S. imposition of punitive tariffs on vehicles and vehicle parts has been suspended for the time being, the issue remains a dark cloud on the horizon. The impact of the Sino-U.S. trade dispute has already been felt, and uncertainty over the Brexit outcome is still looming. All those economic policy issues have led to decreasing production and sales, shrinking profits, and liquidity issues for original equipment manufacturers (OEMs) and suppliers alike.
Within the industry the competitive race for innovation is well underway. This poses a major challenge for the bulk of small and medium-sized suppliers. Many of them are seriously affected by the current downturn, as sales have deteriorated and already thin margins further squeezed.
Climbing up the value chain and investing in new technologies is key, as electric cars have much simpler engines with fewer parts, do not need fuel systems, exhaust systems, or gear boxes. However, given the technological and/or financial constraints that many suppliers face, the future seems to be uncertain. Payment delays and insolvencies have already started to increase in this segment, especially for those businesses that deliver less valuable car components and parts, are often heavily dependent on just one OEM, and which are active in a highly competitive environment.
In the coming five years, the credit risk of many of the structurally weaker automotive suppliers is expected to increase, leading to strained liquidity, more payment delays, and business failures—even if the currently looming issues related to rising protectionism and limitations of free trade do not materialize. In the worst case of a massive industry shake-up, many small suppliers will have to leave the market.
The fate of many automotive businesses depends heavily on the speed and scope of the market shift. While concerns about climate change and air pollution are prompting governments around the world to consider phasing out new gasoline and diesel engines in the coming decade, the speed of change away from combustion engines will heavily depend on the amount of government subsidies for R&D and electric vehicle purchase.
Other major points are the availability of charging infrastructure and of rare earth elements used in the production of batteries, and the relation of prices between electric and gas vehicles. Should consumers in the future reject buying e-vehicles at a larger scale, this, combined with the large upfront investments, could lead to a serious deterioration of the financials for all automotive businesses along the value chain, including OEMs.