First in the series

Dave Leggett: There has been an interesting disconnect in 2021 between constrained output and sales, but companies still able to record healthy profits due to adjustments to mix and high transaction prices – especially in the US. If manufacturers could get the product to market and make the mix richer, they were rewarded with big margins. The big question is how long that can continue and what other measures they can put in place to offset chips shortages?

Calum MacRae: Yes, if you look at the OEMs they’ve largely held their guidance for the year end results throughout the chip shortage. In our forecasts we see that particularly in North America, as you say, where the share of full-sized pickups in production schedules has increased nearly 3% on what it ordinarily would have been. In total full-size pickup volume has increased over 8% year-on-year in a market where total build volume is going to be off over 2% year-on-year. I think they should be aiming for a richer mix as long as they can, but there’ll always be a temptation to turn on the production taps and revert to the push model of the past and escalating incentives. Once chip supply is back in alignment it might be a case of watching to see who blinks first and that would be a trigger movement for others in the industry. What’s not been covered so much in the reporting is the ramifications for the suppliers: stop-start production, increasing input prices and fixed-price contracts is a poisonous cocktail for many in the supply base and they are the ones bearing the brunt at the moment.

DL: Yes. I think it’s still a very dynamic situation in terms of companies grappling for levers and tools to deal with the challenges present in the supply chain. Toyota raised a few eyebrows recently when managers there appeared to say that they are prepared to change their quality standards – at least in terms of cosmetics – to accept ‘blemished’ parts that would previously have been rejected. Now, it can be argued that it makes no difference to do that with ‘under the hood’ components and that no compromises are made on the performance of a part, but it can also be argued that a line has been crossed in terms of quality standards and that crossing that line – albeit in the context of broader aims – sets a slightly dangerous precedent. That was an interesting thing to see in the public domain, but I would guess OEMs and suppliers have had to do much ‘on the hoof’ thinking as circumstances change to navigate supply chain shortages. At least they have had something of a wake-up call over the last few years and are looking for greater transparency and effective risk management as a starting point. It’s probably a good time to be a supply chain specialist!

CM: I think it’s Toyota just demonstrating once again their flexibility. We saw it early in the chip crisis when there was a lot of discussion that they’d gone away from their JIT principles on chips after realising in the wake of Fukushima that there were certain strategic components and systems where their lean principles could be forsaken. Now they’re just showing their pragmatism once again – it’s a bit like the supermarkets going away from insisting on having perfect fruit and veg all the time! In Toyota’s case, if it’s going to do the same job, is not visible to the customer and doesn’t present a warranty risk just go with the flow. I think it’s important to mention that Toyota have probably got one eye on ESG principles here too – there’s an increasing focus on reducing waste and this is just another way of drawing attention to applying those principles.

DL: Ah yes, ESG. That’s a reminder that there is a broader framework of industry megatrends that are very much still in play, despite the front-of-mind operational pressures wrought by the pandemic. Stakeholders and investors are still looking at how companies are negotiating the CASE megatrends and the threats posed by disrupters. It is interesting to note how Chinese startups – like NIO and Xpeng – but also established companies like SAIC (through MG brand) are targeting export markets, especially Europe. The US, as ever, is a tough market for any new player to dip into, but the Chinese auto industry seems to have already done a good job building sales in diverse markets across the world.

I was looking at Xpeng product the other day. The P7 looks very Tesla influenced in its design, but Xpeng models are competitively priced and come loaded with features. That little SAIC-GM-Wuling Hong Guang baby electric car is also one to watch. The big advantage for Chinese companies of course, is that they have a huge domestic market base to exploit for scale and lower unit costs. That can be especially significant in electric vehicles. Not sure I would completely trust a $4,500 China-made electric car to have all the features and robustness I am after, but there again, while I wouldn’t buy one I would happily hop in one for a quick journey around a city. Last mile mobility and how we move around urban areas is still very much up for grabs. There’s sustainability to consider, but also what works best given economic requirements and societal needs. Where automotive products will be in the modal mix and which way policy makers jump will vary across the world.

CM: We’ve been there before with little electric cars being used to get round congestion charging? Do you remember the little Reva G-wiz electric cars that were all over London a decade or so ago? Your broader point about Chinese OEMs turning their attention to cracking export markets is valid. They’ve been nibbling around peripheral markets for years, but NEV revolution they’ve undergone in China could be set to put them on an altogether different competitive footing. China’s already home to some battery powerhouses and they probably have some of the most interesting EV startups outside of Tesla. We’re seeing that the Chinese EV manufacturers are strategically targeting the highest volume EV markets in Europe already, but thus far I’ve not seen many of them make substantial inroads into those markets.

DL: It will be interesting to see how the Chinese OEMs perform in Europe – especially in EV-leading Norway – in 2022. Electric commercial vehicles is also going to be a sector to keep an eye on. There’s plenty of product coming to market now and demand from the big fleet operators looks strong, especially with the boom in online retail that the pandemic has encouraged. Just on that subject of online retail, I wonder if 2022 will see more new car sales going online. The success of online platforms such as Cazoo for used car sales suggests to me that there may be more acceptance coming for buying new cars online, too. That’s been a slow train coming for many years and raises questions about the industry’s fundamental sales model and whether it will be radically changed or just modified. People will obviously do more online, that’s a given, but many will still want to see the product up close, talk to a human about the features, arrange a finance package, do a test drive. The stakes are a bit higher when buying a new car as opposed to a used one, which is always a bit of a lottery anyway, so click and go comes with no more perceived risk and considerably less hassle than physically going to see a potential lemon you have seen in AutoTrader.

CM: I think online is completely embedded in the new vehicle process now in most countries. If it wasn’t already, the pandemic has completely accelerated that. So many shop for a new vehicle now just on price – that’s particularly the case with leasing – that it’s just a matter of an online order and wait for delivery. But certainly some of the dealers who were forced to reevaluate processes due to the pandemic will be grateful they went through that pain as at least it gives them a chance to compete with the online only merchants. Also, with all the possibilities that Omicron brings to further disruption in markets in 2022, they’ll be even more thankful they made those changes. One difference for this coming wave might be that we won’t see the strictness of lockdowns we saw in the past, but there’s a lot hinging on the efficacy of vaccines in that scenario and it’s very early days in that respect.

DL: Another critical sector development to watch in 2022 is powertrain batteries. It strikes me there are two main issues: (1) building the capacity to supply the OEMs and (2) the technologies – and both of them have the capability to significantly lower – in combination with greater scale from higher sales – EV manufacturing costs over the next 3-5 years.

On the tech side, Panasonic has shown a prototype of a new 4680-format cylindrical battery cell and hopes to fit it to Teslas from sometime late 2022. That could yield significant incremental improvements to battery performance and save some manufacturing cost, we’ll see. There’s also going to be more talk of solid-state batteries as a ‘game changer’ because of the step-change performance benefits they promise. But they are further away and there are still some technical hurdles to be overcome.

CM: Yes, batteries and the accompanying gigafactories are front and central of any auto discussion at the moment. I think the scale of investment should ensure there’s enough capacity coming on line – we did some recent research that shows a CAGR in GWh capacity of over 25% between 2020 and 2030. That investment in capacity is obviously going to be a big part in BEVs achieving the holy grail of price parity with their ICE counterparts. On current trajectories that looks set to be achieved around 2025. There are a couple of flies in the ointment around this. Not least around commodity prices and the old ESG angle again.

We’ve seen a spike in lithium prices recently and that’s something to keep an eye on. The issue’s not one of scarcity; it’s more to do with the dominance of a few mining companies in the field, increasing demand and the investment in time (about seven years to set up a new lithium mine) and money. And from the ESG point of view there are several external factors at play. First there’s the issue of cobalt in batteries, where it’s sourced from, how ethically it’s mined and the geopolitical issue that China holds control over the supply due to investments in DRC. This is prompting a move back to older LFP technology, that’s a bit cheaper but less energy dense. Then there’s the whole circular economy angle – the EC’s just published their ESG taxonomy on the subject (an interesting read if you’ve got a few hours to spare!) – which is going to introduce additional costs into batteries. From looking at some of the upstream and downstream investments, OEMs have been making lately it seems they’re only too aware of these issues.

DL: Another intriguing thing is how the car designers go with EVs. At the top end, for example, the BMW iX is certainly bold and it’s interesting to see such a design as an electric flagship, whereas Mercedes has gone for something a bit more sedate with the EQS. But neither is very far removed from what we would expect if they were ICEs. I guess it shows that EVs are well on the way to being mainstream now. They don’t look ‘different’ in the same way that some of the first purpose-built ones did many years ago.

CM: The iX ‘bold’ – that’s an understatement! I think many designs of EVs were compromised by their having to stick to existing ICE architectures. This brought packaging compromises – something that Jaguar’s iPace notably didn’t have as a clean sheet EV design – but that will change as we shift to bespoke EV architectures that will see designers freed from design constraints. It will be interesting to see what direction vehicle silhouettes head with designers allowed to get more creative. Although it could be a case of careful what you wish for with the creative shackles removed!