9 minute read
Disruption in the Automotive Industry
By Dennis Cuneo
THE PANDEMIC IS YET ANOTHER OF A SERIES OF DISRUPTIVE EVENTS THAT HAVE IMPACTED THE AUTO INDUSTRY, BUT THE OUTLOOK IS BRIGHTER.
Nikola will build electric semi-trucks in a plant under construction in Arizona that will employ 2,000 people.
he COVID-19 pandemic shut down the entire U.S. auto industry in the second quarter of 2020 — the most dramatic decline in vehicle production since World War II. For automakers and their suppliers, preserving cash and enhancing liquidity became primary concerns, and discretionary capital expenditures were put on hold. That’s the bad news. The good news is that most of the plants have reopened, and pent-up demand — especially for trucks and SUVs — has brightened the outlook for the industry.
For example, Ford recently announced a surprise profit for the second quarter (counting a one-time gain from an investment in an autonomous driving technology company), and its overall results were better than projected. In general, many of the automakers and parts suppliers reporting earnings for the second quarter have a consistent story: the worst is over, and they are cautiously optimistic that sales will increase, but it will take some time for sales to reach pre-pandemic levels.
Even as the pandemic has disrupted the industry, automakers continue to move forward on vehicle electrification and the development of autonomous vehicles. They are also taking a hard look at their supply chains for their North American operations because of pandemic-related concerns about relying on overseas supply and the impact of the new trade agreement, the USMCA, that replaces NAFTA.
The most valuable automaker in the world today, based on the value of its publicly traded stock, is the electric-vehiclemaker Tesla. While the stock prices of the traditional automakers fell during the pandemic, Tesla’s soared.
Electrification of vehicles has reached the tipping point. Although the transition from internal combustion engine vehicles (ICEs) to electric vehicles (EVs) will take time, the adoption of EVs will accelerate as the technology improves and becomes cheaper, and as governments around the world carry out plans to eliminate the ICE.
In a recent forecast, BloombergNEF 1 projected that EVs will hit 10 percent of global passenger vehicle sales in five years and rise to 58 percent in two decades. EV sales in the United States will likely rise at a slower rate — with projections ranging between 10 percent to 15 percent over the next decade. But even at the low end of the projection range, by 2030, over 1.5 million EVs will be sold here — increasing the demand for battery plants, chargers, inverters, electric motors, and all of the other parts and infrastructure required to support those sales.
All of the major automakers have announced plans to spend billions to electrify their fleets and are rapidly adding new EV models. Well-funded new entrants, such as Rivian, Nikola, and Lucid Motors, are constructing new EV plants. There are EV assembly and battery plants either in production or under construction in 11 states: Alabama, Arizona, California, Georgia,
Illinois, Michigan, Nevada, Ohio, Tennessee, Texas, and South Carolina.
More EV assembly plants and battery plants are on the way, and the economic impact will be substantial. Automotive News 2 calls the battery the “billion dollar” automotive part. The largest battery plant in the United States — the Tesla/ Panasonic Gigafactory in northern Nevada — employs more than 7,000 people and represents an investment in excess of $6 billion. It has transformed the economy of the Reno area. and in the process are opening up opportunities for communities with formerly shuttered auto plants (e.g., Rivian and Lordstown Motors) and in states that previously weren’t players in the vehicle industry (Nevada and Arizona).
AUTONOMOUS VEHICLE DEVELOPMENT CONTINUES
In addition to electrification, traditional automakers and high-tech companies continue to move forward on developing autonomous vehicle systems. While the pandemic may have temporarily slowed down some of these efforts, Here’s a summary of the major EV assembly including the interruption of testing efforts and suspension of and battery plants under construction: capital expenditures to conserve cash, there is little question
Tesla is building a $1 billion factory in Texas that will prothat the move toward autonomy will continue. duce its new Cybertruck and will employ 5,000 Autonomous vehicles have quickly moved people. Together with its Nevada Gigafactory and from novelty items developed by Silicon Valley its Fremont assembly plant, Tesla will eventually tech companies to mainstream products under employ over 20,000 people building EVs and development by the traditional automakers. batteries. Silicon Valley giants, such as Apple and Google’s
SK Innovation, a Korean battery company, Waymo division, are spending billions and using is building a $2.6 billion battery plant in Georgia their software expertise to accelerate the develthat will employ 2,000. opment of autonomous vehicle systems.
Ultium, a joint venture between General Numerous startup companies are working on Motors and LG Chem, is building a $2.3 bilELECTRIFICATION, various aspects of autonomous hardware and lion battery plant in Ohio that will house 1,100 AUTOMATION, software. Self-driving startup Argo AI, based in employees. AND THE NEW Pittsburgh, Pa., was recently valued at $7.5 billion
Lordstown Motors will begin building USMCA PRESENT — and its largest investors are Ford and Volkswaelectric pickup trucks at the former GM LordCHALLENGES gen. Argo is focused on developing an autonostown assembly plant and will eventually employ AS WELL AS mous driver system, including the hardware and 1,000 people. The company entered into a $1.6 OPPORTUNITIES software for self-driving vehicles. billion merger agreement with a Special Purpose FOR AUTOThe speed with which autonomous vehicles Acquisition Company (SPAC) and expects to go MAKERS, THEIR will be adopted is a hot topic in the industry. public on the NASDAQ later this year. P ARTS MAKERS, Several of the traditional automakers and tech
Rivian will build electric pickups and SUVs in AND THE companies working on autonomous systems have the former Mitsubishi plant in Illinois, with a tarCOMMUNITIES cautioned that full autonomy — Level 5 autonget employment of 1,000 by 2024. The company THAT HOST omy — will be a long journey. But development has raised close to $5 billion and counts Amazon THEM. efforts have accelerated. Waymo’s autonomous and Ford as major investors. vehicle technology has logged over 20 million
Lucid Motors began construction of its miles of real driving testing and 10 billion miles $700 million plant in Arizona last December of simulated testing. Waymo’s fleet of self-driving to build an all-electric sedan. Last year, Lucid received $1 billion in funding from Saudi Arabia’s sovereign wealth fund.
Nikola will build electric semi-trucks in a Chrysler Pacifica minivans are chauffeuring passengers in the Phoenix area, without a person behind the wheel, as featured on a recent YouTube video. 3
plant under construction in Arizona that will employ 2,000 individuals. After being acquired by a SPAC in June, Nikola began trading on the NASDAQ. At one point, its stock market capitalization exceeded Ford and FCA, but has since dropped to a still impressive $14 billion in early August.
Investors are pouring billions of dollars into EV startups,
Amazon recently upped the ante in the self-driving race by acquiring Zoox, a self-driving startup that has developed a bi-directional vehicle with no steering wheel. Amazon has made other investments in the self-driving space and reportedly is experimenting with self-driving trucks to ship cargo. GM’s Cruise unit recently unveiled a self-driving vehicle, and
as mentioned above, Ford and VW are major investors in Argo AI.
Automated vehicles may one day alleviate projected labor shortages in the over-the-road trucking industry and can curb the spread of disease in future pandemics by enabling deliveries without human contact. The primary benefit of autonomous driving is the reduction of accidents, injuries, and deaths caused by vehicles driven by distracted or impaired drivers.
REGIONALIZING SUPPLY CHAINS
The combination of the pandemic and the newly enacted USMCA is causing automakers in North America to rethink their global supply chains. The pandemic put global supply chains at risk, as parts plants around the world shut down. The USMCA, the successor trade agreement to NAFTA, is expected to increase vehicle parts sourcing within North America. The new agreement, one of the milestones of the
The New Normal
Part of that planning to boost preparedness ahead of what seems to be inevitable supply chain disruptions will be mapping out your supply chain. Think not only about where you acquire your parts and materials, but where the companies that you buy parts from will buy their parts. The first time around, this analytical effort will require significant research, but subsequent updates will become easier thanks to that initial heavy lift. The key is to reach out directly to your suppliers to identify the layers in the supply chain, finding out what parts are sourced and from whom and where. The results can be surprising, especially when you discover the tier 2 or 3 suppliers are not in the same countries.
Hope is not a plan, and all businesses are wise to think about their worst-case scenarios regularly, but even doing that can still leave you exposed, albeit less vulnerable to disruptions.
THE NEW NORMAL OF SUPPLY CHAIN
In the meantime, the auto industry will remain in a state of flux. We’re already seeing how shortages have reduced vehicle inventories, elevated auto prices, and killed off incentive programs that were ubiquitous just a few months ago. Even with reduced production, suppliers have not been able to keep up. Add in unemployment and shaky consumer confiTrump administration, took effect in July.
Under the USMCA, to qualify for tariff-free trade among the three countries, 75 percent of the finished vehicle content must be sourced in North America — an increase from NAFTA’s 62.5 percent content requirement. At least 40 percent of the manufacturing labor of the finished vehicles (45 percent for trucks) must be made at a wage rate of at least $16 per hour. In addition, 70 percent of the steel and aluminum used in auto production must be made in North America. The wage and metals requirements are new provisions that weren’t in NAFTA. The expected impact of the USMCA is that more auto parts and materials will be sourced within North America and the United States. For economic developers in the United States, this likely means more investment and jobs in the auto
1 https://about.bnef.com/electric-vehicle-outlook/ 2 https://www.autonews.com/suppliers/billion-dollar-part 3 https://www.youtube.com/watch?v=2hqTnmn51Fg
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sector. <> dence, and the COVID-19 era is bound to favor companies that can adjust to the new environment. OEMs like Toyota, Honda, and Hyundai, which have more integrated supply chains and a track record of less expensive vehicles, will have an advantage over their competitors.
Expect supplier consolidation to rise in the coming months. Lean manufacturing was built on the concepts of level, stable, and smooth. Nothing about the current climate meets that criteria. Suppliers must now operate at lower volume and higher labor costs, further burdened by the expense of shutting down and cleaning when outbreaks occur.
Some have been temporarily propped up by government aid. But as that money dissipates and financial pressures heighten, lower valuations will mean discount shopping for strategic buyers seeking to expand their footprint. Auto supplier leadership will need to consider the uncomfortable calculus of how their business’ valuation might degrade in a variety of possible scenarios.
No one can be certain how long all this will last, but to assume the industry will return to normal next year is unrealistic. That means now is the time to start making plans to position yourself for whatever’s to come. After months of outbreak with little sign of reprieve, this will be the new normal for some time to come. <>
