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Opinion: Forces shaping the global automotive industry

Dr Martyn Davies

Dr Martyn Davies

24th October 2022

     

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Ahead of the South African Auto Week, Deloitte Africa automotive industry Lead Dr Martyn Davies writes about the trends that are shaping the global automotive industry.

When listening to our clients spread across the world in the automotive ecosystem – the original-equipment manufacturers (OEMs), leading suppliers, retailers and technology providers, we have identified a number of key trends that are currently impacting and shaping the industry.

The globally wide-spread and complex value chain of the automotive industry has been dramatically impacted in recent months. What then is the outlook for the global automotive industry – trends which of these indirectly impact the South African marketplace?

MANAGING DISRUPTIONS IN THE SUPPLY CHAIN
The ongoing industry megatrend is supply chain disruption. The ongoing chip shortage has had a major effect on the automotive industry, cutting production by roughly 7.7-million units and caused $210 in revenue loss last year.

Previous confused information within the supply chain resulted in inaccurate or exaggerated demand forecasts. And with only weak links between automakers and foundries, it has become extremely difficult for the overall industry to react to changes in demand.

Automakers have largely relied on just-in-time sourcing strategies using short-term forecasts which offer little to no buffer - despite an average 26-week lead time for semiconductors. Many components are also sourced from a single producer and subject to strict quality requirements. All these factors have limited the flexibility of the supply chain during the recent shortages.

OEMs have allocated scarce chip stocks to premium and luxury vehicles with historically higher profit margins. As a result, production volumes of smaller vehicles (A and B segment) have been disproportionally impacted. The chip shortage has put a significant strain on automotive suppliers - especially for the volume segment - which were already hurting from lockdowns and pandemic-related closures.

But constant high-cost pressures due to the ongoing shortage of raw materials is undoubtedly constraining investment opportunities.

THE IMPORTANCE OF SEMICONDUCTORS
Semiconductors have become an integral part of the supply chain for many industries. Chips power everything from cars and smartphones to industrial equipment and are also a key enabler for widespread adoption of emerging technologies such as artificial intelligence, quantum computing and advanced wireless networks like 5G.

This is one key reason why all six of the major end-use categories for semiconductors continue to grow, whether it is automotive, industrial, consumer, data processing, military/civil aerospace or communication. According to Gartner, the automotive segment is expected to see annual growth of 15.6% from 2020 through 2024, the highest of all six categories.

Owning factories is a costly investment which is why so many semiconductor firms prefer to outsource production to major foundries overseas, particularly in Taiwan. Taiwanese contract manufacturers (such as TSMC) dominate the semiconductor manufacturing sector accounting for over 60% of total global foundry revenue in 2020. To diversify and to address shortages, chip manufacturers recently announced significant new investments that include:

*TSMC will spend $100-billion over the next three years to expand its chip production capacity;

*Intel dedicated a portion of the production at one of its largest non-US foundries for the automotive sector;

*Sony Group invested $500-million in a joint venture with TSMC to build a $7-billion chip plant in Japan; and

*Samsung is also planning a $116-billion investment over the next decade.

Chips have now become of major strategic interest to states, in particular the United States with significant investment no being directed into the industry. It will, however, take a few quarters to get production going and many of these investments are targeted toward high-end chips, a future demand, even though it is low-end chips - especially those for the automotive sector - that are in short supply at present. We at Deloitte expect the automotive chip shortage to continue until mid-2023.

DECARBONISATION & ESG
Climate change and tighter regulation of carbon dioxide emissions is a global imperative that will prevail for decades to come. It is the key driver of what is referred to as the “transformation of the industry”.

The fact that leading OEMs use their key market regions as a differentiator is an additional factor. European OEMs tend to focus on Europe and China, while Japanese OEMs tend to prioritize the North American and Japanese markets. North American OEMs primarily target their own home market, often with one additional region in the mix. Suppliers are thus facing very different challenges depending on the region they are active in and the OEMs they supply.

The automotive supplier sector has not agreed on a single reporting standard for environmental, social and governance (ESG) compliance, and many are even using multiple standards. Adding more complexity, several top auto suppliers lack a common format or approach to reporting – running the gamut from sustainability reports to integrated reports with financial details and from corporate social responsibility to combined reports.

Suppliers have largely been waiting for further direction from OEMs before aligning their own mid-to-long-term strategies. With OEMs having now (mostly) committed to electric vehicle (EV) powertrains into the future, suppliers will increasingly focus on how fast consumer sentiment will shift from internal combustion engines (ICE) to EVs. We have seen a huge rise in enquiries from both suppliers and OEMs related to strategies seeking to reduce their carbon footprints following last year’s COP26 climate summit held in Glasgow. This momentum will only increase.

Suppliers in Europe face the strictest carbon dioxide regulations. We expect ICE vehicles to disappear from the European market by 2035. Suppliers with a strong focus on ICE-related products will need to shift their business towards other products or face extinction. This will have significant implications for South Africa’s auto sector considering its primary export markets are in Europe.

As a result, we are seeing many companies look to carve-out or spin-off strategies for their ICE-related product ranges. However, selling businesses with a high ICE exposure has increasingly become a challenge if not an impossible task. The (ESG and carbon) regulatory environment in Africa is very lax in comparison with low to zero control of carbon and sustainability targets.

DIGITISATION AND CORPORATE TRANSFORMATION
Global suppliers are now revamping their businesses for the future and focusing on key disruptors such as electrification, software-as-a-service, connectivity and autonomy. The focus of automotive suppliers is very much on making value chains more flexible to be able to react more quickly to uncertainties, but also to drive forward the development of new products and services gaining additional profitability.

The adoption of digital technologies is supporting this transformation. Whether it is a smart factory or distribution centre with automated product and picking lines, a shift to cloud-based systems to unlock business efficiencies or the move to online spare parts sales, digital technology is enabling these processes. 

The increasing share of software in vehicles and the associated necessity to build up own software development capacity is clearly in focus. Much opportunity lies in analytics in the wider automotive and mobility space and how data is effectively utilised by both consumers and companies. Data and how it is effectively used to better service the customer is fast becoming the new value driver and provider in the auto industry.

Overall, the challenges remain over the short-to-medium term, even if successes are clearly beginning to emerge. The increasing complexity of supplier & industry transformation is being driven by digitization and commitments toward sustainability. The new automotive ecosystem will have to be built around these two imperatives and will have a significant impact on how automotive supplier value chains are configured going forward.

Edited by Creamer Media Reporter

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