“Crisis, what crisis?”
As everyone in the UK will be only too painfully aware, we are facing turmoil in our domestic politics again. I appreciate that we are not unique in that regard, but given that we have been in a more or less constant state of chaos since the announcement of the Brexit referendum just over ten years ago, I think I could make a strong case for a gold medal in this particular discipline. If we reach further back in UK political history, almost fifty years ago, the then Prime Minister, James Callaghan, appeared to be in denial about the state of the nation, leading to a newspaper headline that summarised his attitude with the phrase “Crisis, what crisis?” A few months later, he lost power to the Conservatives led by Margaret Thatcher.
I was reminded of this by a headline in Automotive News Europe that referred to one of the many manufacturers that is currently writing-off eye-watering amounts of money as they cancel or scale back their electrification ambitions. The journalist reported that despite the write-off plunging the business into loss, there did not appear to be any sense of crisis. Might they also be facing their Margaret Thatcher moment? I’m not walking the corridors of power in any of the car manufacturers, so I am speculating as to what the real mood is behind closed doors. However, I’m happy to have a go at suggesting what their frame of mind should be, and how that should affect their business strategy.
The first mistake would be to say that after the rush to BEVs, the misinformed rush to agency and fanciful ambitions to drive huge services revenues from autonomous and connected cars, the answer now is simply a series of U-turns. However, changes in powertrains, distribution and business models are still very much on the agenda, so the future will be different.
A number of factors have driven change in customer behaviour, so to assume that there is some safe ground that you can retreat to where loyal customers will be waiting for you is almost certainly wrong. The customer now and increasingly in the future is better informed. They know the strengths and weaknesses of your products, but also the competition. They will very likely have made their choice before they visit a physical outlet – and they will still want to do that because the pace of technology change means that at every renewal cycle they will have more questions. They have no option but to accept the general direction of regulatory change, but that does not mean that they are all crying out for a BEV or a raft of ADAS features. There are also going to be relatively few (if any) who are going to choose their next car on the basis of it having built-in Karaoke or the ability to dance on the spot. Focusing on real customer needs will be critical to future success.
Cancelling BEV programmes feels like a knee-jerk reaction to me. Management have no option but to take an impairment charge if projected volumes fall below the forecast, but that does not mean that there is zero opportunity. There is probably a need to change the sourcing, manufacturing and distribution strategies, but if the product has been almost fully developed, and most of the tooling expense has been incurred, does it really make sense to kill a programme completely? The bigger issue for the established manufacturers is how they can compete with the sheer volume of product emerging from China – even the output of a single manufacturer, let alone that from the Chinese industry as a whole. It’s possible that the Chinese will stumble, but that’s a brave assumption, so the established brands definitely need to be in crisis mode to work out how they can transform the pace and scale of their product development capability.
Manufacturing is mainly a problem for European manufacturers who face the brunt of the Chinese export push at the same time that they have significant excess capacity. The Chinese cost advantage in part comes from the fact that they are not burdened with older inefficient plants. The EU tariffs are justified on the basis of Chinese state support for manufacturers, but there has not been a plant built in Europe in the last forty years that has not been subsidised in similar ways. If an established manufacturer sells or sub-contracts capacity, this brings substantial short-term benefits, as plant closures are politically tough, but it helps an ambitious competitor to get a rapid start to European manufacturing, potentially removing the cost of tariffs and making them an even stronger competitor. Pragmatically however, there are so many options, that a manufacturer who has the option to sell capacity but chooses not to is only making his own position worse, by still carrying the excess capacity but making it more likely that they will also have to carry the future cost of closure.
Given that customers will have a continuing stream of questions to resolve and features they want to experience, the dealers will remain critical, but from a manufacturer perspective, they will need to work harder to attract and retain the best dealers. Electrification and digitalisation together will force changes in the aftersales and used car business models, with reduced aftersales volumes and tighter margins on used cars, meaning that the historic reliance on cross-subsidies to prop up new car sales is going to be much weaker in the future. New car volumes and margins will be critical, so dealers will be less willing to work with brands that push volume at the expense of profitability. This in part goes back to the product itself, but also volume ambitions and channel management. The lessons of the post-Covid supply shortages where everyone made more money from lower volume need to be relearned.
Established manufacturers do face a crisis on multiple fronts. If they are in denial, then they will not take the rapid actions required on multiple fronts to secure their future, and that of their trading partners. However, speed of response does not need to mean ‘knee-jerk’, and there is little room for error. The decisions taken over the next one to two years may prove to be existential.