Until EV demand soars, they will be more costly to produce.
Ihad the opportunity to attend the Management Briefing Seminar (MBS) hosted by the Center for Automotive Research (CAR) in Traverse City, Michigan in early August.
It had been about ten years since I had last attended an MBS and given all of the flux going on in the industry it seemed like the right time to check in and get a bit of a pulse check on what is going on to see if what I think I know about what’s going on in the industry has some grounding in reality.
The MBS runs over four days and while I was wondering how they were going to fill four days with valuable content I came away pleasantly surprised that they were able to do so. While the focus is overwhelmingly on the American market, global issues like the transition to electrification, the threat posed by China, the transition towards a full software-defined vehicle and the pathways for the full exploitation of fully connected vehicles were some key themes over the course of the four days.
One of the core themes underpinning each of the four days was the amount of capital required by the industry to facilitate all of the different initiatives currently underway within the industry as alluded to above. What seems clear is that no one manufacturer can seemingly afford to advance in each of these areas without some sort of collaboration with other OEMs or suppliers to both, making the auto ecosystem a lot more connected (no pun intended) and confusing.
A larger issue for vehicle affordability for consumers is whether or not manufacturers can drive efficiencies into EV production by getting the plants to higher levels of capacity utilization and economies of scale.
Another important theme raised by Michael Robinet of S&P Global was the whole issue of capacity utilization of production facilities as it relates to product planning and product launches by vehicle manufacturers, especially with the transition to EVs.
This issue was largely flying under the radar at the conference and presentations by both Michael and Joe McCabe of Auto Forecast Solutions really put a fine point on the issue and how concerning it should be for the North American industry.
Automakers are only profitable if their capacity utilization at their production facilities is generally north of 70 per cent; capacity utilization of 80-85 per cent is normally viewed as being very good.
Robinet pointed out in his presentation that the forecast is for capacity utilization in North America to continue to tail off from 72 per cent this year to 62 per cent in 2030.
That is not a recipe for a healthy or profitable vehicle production in North America.
It was also pointed out during the conference by the Center for Automotive Research that while Tesla has sold north of 180,000 units in the U.S. all of the other EV producers combined have sold roughly around 200,000 units meaning that aside from Tesla no other traditional manufacturer has EV sales volumes above 50,000 units, and that is not just now, that is out through 2031!
This ties into the affordability issue for consumers and the capital issue for vehicle manufacturers.
Too often the cost of EVs has been tied to the battery and once battery costs drop below $100/Kwh EVs will be at parity ( or less) than ICE vehicles.
But I think a larger issue for vehicle affordability for consumers is whether or not manufacturers can drive efficiencies into EV production by getting the plants to higher levels of capacity utilization and economies of scale. This seems doubtful given the slower consumer uptake of EVs than there has been in the past.
Why has the uptake of EVs slowed? Because EVs are still too expensive. How do you get the cost of EVs down? Get higher utilization rates (volume) through the plants. How do you get higher volumes through the plants? Sell more EVs! It becomes a little bit of a circular problem.
The issue of capacity utilization for EV plants is challenging for manufacturers because unless you’re Tesla in North America it would seem that no other company is going to get the economies of scale that come from higher capacity utilization.
This is a brave new world for everyone and there is no road map for the industry.
Moreover, while traditional vehicle manufacturers are trying to figure out what the appropriate cadence is to migrate their production of ICE vehicles over to EV production — or to build a new EV facility (further adding to capacity) — they run the risk of spending a lot of capital to have inefficient EV production facilities as well as inefficient ICE assembly facilities as ICE production starts to wind down — theoretically, at least according to governments globally from 2035-2040.
We seem to be heading towards a situation where companies are spending boatloads of capital on new EV assembly capacity that can’t be — for the foreseeable — operating at utilization levels that approximate being able to be profitable, capture economies of scale and, thus, reduce costs.
This is a brave new world for everyone and there is no road map for the industry. The transition to EVs is going to be bumpy and there is no question about that and undoubtedly there will be a few casualties along the way. This is not to say that I don’t support EVs, I wholeheartedly do.
I think they are fundamentally better technology vehicles but at the end of the day this transition needs to be led by consumers.
As one panelist at the conference quipped: “We’re not anti-EV, we are pro-reality.”
The reality of the future is that the economics of vehicle production may ultimately drive even more collaborative efforts amongst manufacturers as well as driving some manufacturers out of business either through mergers or acquisitions.
