The flow of recent press announcements from the major European car manufacturers, the new entrants, trade bodies and governments at EU and national levels all demonstrate that we are in the middle of a major reordering of the established order in the industry, one which has been fairly stable for a couple of decades since the Koreans started European production.
We all tend to focus on one factor at a time, such as electrification, or more redundancies at Volkswagen or the latest sales record from a Chinese entrant, because that tends to be how the news is served up to us. To see the whole picture, you need to step back from the headlines of a particular week and broaden the focus out to look at the industry as a whole.
If we look at the industrial news, a number of manufacturers have taken significant write-offs on their investment in BEVs, including Ford, Honda, Porsche and Stellantis. These are one-off adjustments, but it also implies that there is a catch-up of engineering effort to plug the resultant gaps in the product line-up, leaving the brands exposed to competitors who have a more competitive offer. The German ‘Big 3’ – BMW, Mercedes and VW – have all announced restructuring actions to reduce European capacity, partly because of the impact of new entrants to the European market, but also because the rise of the Chinese brands in their domestic market, enabled by changing buyer loyalties, has dented previously highly profitable sales in China. If this is the reality for the German Big 3, what is the outlook for the other brands?
Meanwhile, those same Chinese brands that have been gaining share in China are suffering from the intense competition that has been a characteristic of the market for the last few years, since the pandemic. They are offering products that are appealing to the Chinese clientele, but to win customers, discount levels have been high, with extreme levels of stock push and retail pricing below invoice in some cases. The Chinese Government has banned both of these practices and intervened to prohibit manufacturers (notably BYD) from using supplier credit as a source of working capital with maximum payment terms of 60 days. They have also instructed the trade associations representing manufacturers and dealers to come up with pricing controls that reduce the intensity of the price wars. Whilst these measures will probably reduce losses in China, they will only put more pressure on manufacturing capacity, so the push into Europe is likely to increase.
That process has been hindered by EU tariffs on Chinese BEVs – the area where the Chinese OEMs have leapfrogged established players in a decade-long industrial strategy sponsored by the Chinese Government. The OEMs have quickly responded by pivoting to PHEVs, but these are now also in the sights of the EU Competition Authorities. Initial market success and the growing tariff barriers are now causing some of the Chinese to consider options for manufacturing in Europe. Ironically, this includes the possibility of them taking over surplus capacity of the established manufacturers – Chery at Nissan Sunderland and a number of players being linked to under-utilised plants owned by Ford, Stellantis and VW, amongst others. Existing partnerships between established and Chinese brands may also be deepened, such as Renault and Dongfeng, Stellantis and Leapmotor, and Volvo and Geely. Within a very few years, we will almost certainly have several Chinese brands with large-scale manufacturing inside the EU bloc – allowing them to escape the tariffs, though we do not yet know how this will affect consumer attitudes to the ‘Chinese’ brands.
Regardless of brand and regulations, the progress to electrification will continue – this is not a genie that can be put back in the bottle, even if the targets are relaxed, particularly when geo-political events have demonstrated how the availability of fossil fuels at affordable prices is not assured. There are clearly big differences between markets, and these will remain, but natural, unforced demand will take us to the point where the majority of new car sales are of pure BEVs before 2030 in my view. This is not enough to cause major disruption in the aftersales business model – but the effect will be felt, particularly by the franchised dealer networks who work mainly on younger cars. These dealers are also voting with their wallets and their property portfolio to switch showrooms to Chinese brands, delivering a ‘double whammy’ of boosting their new partners and weakening the representation of the established manufacturers.
Taken together, this is a fundamental change in the automotive world where many of the things we take for granted today will be challenged. The value of existing investments, experience and relationships will all be affected, and they may not be replaced like-for-like with a new set that neatly drops into place. It is impossible to accurately predict the shape of the new world, so agility will be critical – being able to retain a foot in the old world at the same time as having multiple options in the new world.
