The Global Trend Toward Banning Internal Combustion Engines and the Technologies that are Disrupting the Automotive Industry
Disruption caused by several emerging trends had a major impact on automotive suppliers last year and will continue to send shockwaves throughout the supplier sector in 2018. Starting last February, Norway became the first nation to ban the internal combustion engine (ICE) and it intends to allow only the sale of electric vehicles by 2025. Over the course of the year, India, France and the United Kingdom all made similar announcements as the trend towards the adoption of zero emission vehicles or battery electric vehicles (BEV) has started to accelerate around the globe.
Stock analysts have since started downgrading the long-term outlooks for even the world’s best suppliers that have significant involvement in the ICE ecosystem, as automakers confront intense pressure to completely shift vehicle propulsion from ICE to electric. Analysts are not suggesting that this shift will occur overnight, but they do expect it could create significant risk to many suppliers’ earnings trajectories. Understanding these headwinds and the competitive challenges ahead, suppliers such as Delphi announced in 2017 a spin-off into two separate businesses, and Honeywell, GKN, Continental and Autoliv have announced similar spin-offs given similar strategic concerns.
Thus, considering this fast-changing landscape, the top five most important stories affecting global auto suppliers for 2018 are:
China will announce the ban of the internal combustion engine (ICE) by 2030; Germany will follow
In early September, Xin Guobin, China’s vice-minister of industry and information technology, told a forum of automakers held in Tianjin that the government would ban the production and sale of fossil fuel cars. Most Chinese automotive insiders believe this ban will take place starting in 2030. BAIC Group’s (one of the largest Chinese auto manufacturers) chairman, for example, said the company’s goal is to stop sales of its conventional fuel-powered cars in Beijing by 2020 and stop their production and sales nationwide by 2025.
You can expect Germany to follow quickly with its own ban of ICE, as it strives to shift to electrification to retain technological leadership to protect the German automotive industry.
More automotive supplier spin-offs
As technological advancements create new products and business model opportunities, suppliers will continue to refocus their product portfolios away from some of their traditional mechanical products and expand their electronic/electrical offerings to position themselves for the new future. Other suppliers will follow the lead of suppliers such as Delphi, Continental and Autoliv who have completed or announced spin-offs, due to:
- The different pace of technology advancement in their two business segments
- Different market needs driving investments for growth and innovation
- Varying skill sets of people throughout the organizations (leadership, engineering, sales, purchasing, supply chain and manufacturing)
- Different sales growth rates over the near and long term with limited customer or operational synergies
- A potentially different shareholder profile due to the timing of returns
Expect these challenges to potentially drive spin-offs from companies such as Valeo who has a portfolio of both traditional mechanical products and new electrical, electronic and software-related products.
Mega-mergers will continue, led by new tech entrants
With the advent of connected and automated cars, the consumer and industrial electronics giants and new entrants from the semiconductor industry view the auto industry as an attractive growth market. Companies such as LG, Panasonic, Samsung, Toshiba, Mitsubishi and Hitachi are bringing expertise in high-volume production of lithium-ion batteries from the consumer and industrial electronics sectors, giving them the critical scale needed to compete.
Also, with this market alone having the potential to grow to over $100+ billion by 2030, expect more large-scale acquisitions of traditional suppliers by these tech players in 2018, such as Samsung’s rumored interest in acquiring Magneti Marelli.
Private equity firms will increasingly dominate automotive mid-market merger and acquisition activity
As technological advancement creates new products and business model opportunities for larger suppliers, small and mid-size suppliers who lack global reach and scale will be continually disadvantaged in a fast-paced environment that requires increasing investment and significant business transformation. New quality standards, such as IATF and ISO, and competitive forces driving the digitalization of the enterprise (Industry 4.0) add to the challenges these companies face. These mid-market companies lack the resources required to make all the necessary strategic shifts to remain competitive.
For example, one can question how a traditional mid-market manufacturer of ICE components can deal with an industry disruption like the ban of the ICE and the shift towards battery electric vehicles. This type of business transformation will require significant investment and the development of new core competencies and new products over the next several years.
Many suppliers faced with this situation will opt out and exit the business instead of taking on the risk associated with transformation. In this environment, the investors likely to have the appetite to take on these challenges will not be strategic investors but will increasingly be financial investors like private equity firms. This altered lower tier supplier environment will have a significant impact on OEMs and Tier 1 suppliers, creating supply chain, forecasting and capacity planning challenges with every exit.
Investor activist activities will increase within the automotive supplier space
In late 2016, stock analysts had already started downgrading the long-term outlooks for suppliers that have significant involvement in the ICE ecosystem. Automakers have since been confronting intense pressure to completely shift vehicle propulsion from ICE to electric.
While this shift will not occur overnight, analysts expect it could create significant risk to many suppliers’ future earnings trajectories. Understanding these headwinds and the competitive challenges ahead, some major suppliers have already undertaken strategic spinoffs to proactively address investor concerns.
Other suppliers that are not already making strategic shifts – including many of the top 100 auto suppliers – will likely face increased pressure from activist investors who seek to unlock value and raise stock valuations.
Overall, it is clear, the automotive supply chain will see more challenge and change in 2018 than the industry has witnessed in the last 50 years.
What are your predictions for Automotive? Share your thoughts in the comments section below.