Dave Leggett: So, here we are in November again and thoughts are starting to turn to what’s in store for the next year coming. My feeling is that there is some optimism that the worst of the pandemic and its negatives for autos are over, but that optimism is tempered by concerns over other things – like chips and energy prices. It’s maybe a rather mixed picture…

Calum MacRae: I think it’s exactly that – a mixed picture. It seems that we’re over the worst of the chip crisis – certainly in North America that looks to be the case right now, although I note VW’s got difficulties building EVs in Germany just at this moment and Toyota’s been candid about building back aggressively in December and for the rest of its fiscal year. But, and there’s always a but, there are a couple of things to be cautious about on the horizon. In the Northern hemisphere we’re heading into winter and we’re in unknown territory on the direction of travel for COVID cases and social restrictions – things in certain European countries don’t look too healthy at the moment. And then there’s the macro picture – rising energy prices like you say and also other mounting inflationary pressures. A lot of central banks are wondering whether to stick or twist at the moment and seeing if these are transitory pressures rippling out from stretched supply chains.

DL: Oh yes, we are at a critical juncture on inflationary pressures. A big question is whether or not rising expectations change behaviours – for businesses and individuals. The central banks are hoping that we’re seeing a cost-push blip from energy prices and that low interest rates can be maintained in what is still a fragile economic environment overall. In our sector, energy prices will undoubtedly be another major supply-side concern and we’ll have to see how prices move along the supply chain. On the semiconductors front, it is sounding like the pressures will be around for a while yet even if they ease.

The second half of 2022 ought to be better and we may also be in a healthier economic situation in the world generally by then, especially if the pandemic’s trajectory continues to improve.

Consumers will be wary of spending on big ticket items for a while yet though, which makes me wonder about other ways to consume transport – like car sharing or subscription services.

CM: Yes, I think there will certainly be a few consumers pausing for thought right at this moment and waiting to see which way the wind is blowing. That’s one of the factors behind the caution in our 2022 light vehicle sales forecast. Not only can we expect to see tight supply going into the first half of next year but there’s also the prospect of consumers being more circumspect.

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Not only can we expect to see tight supply going into the first half of next year but there’s also the prospect of consumers being more circumspect.

At this moment, our forecast for 2022 stands at 84.1 million units, a 5.3% increase on what we expect will be a market just under 80 million in 2021. It’s looking a lot like markets won’t be nudging near pre-COVID numbers until at least 2023. As to other ways of being mobile, COVID’s taught us that people still want their own personal mobility and has been one of the factors behind historically high used car prices. But I’d hazard there are generational differences in attitudes to car sharing, so the market there might bounce back quicker than one would perhaps anticipate.

As to subscription services, I think conceptually they are a good idea – it’s back to the old idea in microeconomics of maximizing utility at each point in the demand curve, but I’ve not seen a really compelling offer on the market at the moment that would make me think subscriptions are heading for mass market adoption. I suspect that the majority will be prepared to accept compromised utility and hire a car for the one or two weeks a year when it might become an issue.

DL: Yeah, that’s true. One deal that caught my eye, though, was the ‘Onto’ subscription platform deal with Volkswagen in Britain. Onto specialises in electric vehicles, so that flexibility in the time period offering might be attractive to someone interested in, say, trying out an EV for 2-3 months but baulking at the high purchase price of new electric vehicles – and also personal lease contracts that last for multiple years – and still a little bit worried over the question marks surrounding public charging networks. It could be a good way to test the water before making a bigger commitment and might work well for EVs. We’ll see.

I guess the shift to more electric vehicles – pretty much everywhere around the world, albeit at varying take-up speeds – is going to continue to be a standout megatrend in 2022. The battle between the startups (let’s include Tesla in that category though there is a new wave of startups coming) and legacy players will intensify.

CM: Yes, it’s clear that EVs aren’t a flash in the pan. They never were going to be with such regulatory heft behind them. It’s just a matter of seeing if the established OEMs are going be able to catch up with the likes of Tesla and the other pure EV startups. I suspect that it’ll be much like Android versus iOS – Android (ie the established OEMs) will be the bigger market but Apple is where the market looks to for its lead and where the brand equity lies. Part of that is the legacy around infrastructure that the established OEMs have to carry with them.

We started off with the adoption of ICE platforms (more pure EV platforms on the way now) and the fitting into existing manufacturing infrastructure. We seem to be moving away from that though – we’ve got the reimagining of GM’s Hamtramck plant, Nissan’s plan in Japan, Daimler’s Factory 56 and now VW’s reimagining of Wolfsburg to build the Trinity in a bespoke EV plant.

DL: That’s a good analogy with cell phone operating systems and Apple as leader, a bit like Tesla. Besides the excellence in design that came with the iPhone, we have seen the extensive outsourcing of manufacturing model. In automotive, I think we’re at a phase in EVs where everyone is sensing that the manufacturing and process landscape is moving fast as firms look for scale.

Bolting on EV manufacturing to an existing facility could be a very expensive mistake.

Bolting on EV manufacturing to an existing facility could be a very expensive mistake. Better to bite the bullet and accept the need to invest heavily in a new plant that is purpose-built and comes with a longer life and can have flexibility designed in. The competitive field is going to be hairy and everything all along the value chain – from product design to manufacturing to market interface – has to be looked at with a very critical eye. Investors know that the established automotive firms haven’t exactly been radical tech leaders delivering great returns over the decades. Elon has shaken them out of their stupor a bit.

A new plant also brings the opportunity to look at more automation, smart systems, AI, address sustainability from the ground up and so on. And, of course, consider a reduction in size of the workforce.

CM: Yes, there are a number of concurrent themes here that make sense of new infrastructure rather than adopting what’s in place already. There’s the AI angle and Industry 4.0 as well plenty of technology themes that are applicable here. What’s as interesting in the EV space is that vertical integration is back in vogue – a way of controlling the technology as well as controlling the upstream raw materials required and there are accompanying downstream moves to control the recycling of batteries etc. Clearly the material for batteries and electric motors are scarce either because of a few firms controlling supply (ie lithium) or genuinely scarce as in the rare earth metals required for current electric motor designs. A number of OEMs have been very active in backwards integrating lithium supply. You just wonder how long this vertical integration will confer advantage without the discipline on cost and pricing that an external market brings.

DL: Yes, back to the future on vertical integration! Much to think about on the supply side, but also in terms of consumer acceptance. Range anxiety is getting dealt with now, at least. I recently drove a Kia EV6 with over 300 miles on a full charge. I have to say, the overall product experience was light years away from some of the EVs I have driven in the past. The technology is moving faster than the cost economics allows I think. There’s just the small matter of scaling up for mass adoption to get unit prices down. 2022 will see more progress on that front for sure, but we’re still on that journey.

To be continued…