Embracing innovation: what’s next for downstream automotive?

The world’s automotive companies are facing a transformative moment, argued industry leaders at Investec’s first conference devoted to the sector on 7 November 2023. Participants agreed that the rise of electric vehicles, long-anticipated structural overhauls and increasing international competition – driven by Chinese firms in particular – has created a highly complex environment for the incumbent players of the car industry, known as OEMs (original equipment manufacturers). Across a discussion-filled afternoon, conference participants shared insights from their work and their predictions for the future of the sector.

After an introduction from Investec’s Dan Sheahan, the first presentation of the event was given by Johannes Stoffel, founder and CEO of the German firm 2trde, a platform designed to simplify the process of auctioning second-hand commercial vehicles. The sections of the market 2trde targets remain decidedly low-tech, Stoffel said, pointing out that just 12% of the business-to-business (b2b) used-car market is currently digitised.

“Some of the old-fashioned auction houses haven’t invested in software,” Stoffel said, touching on what would become one of the event’s main themes: the need for the auto industry to move and adapt to changing conditions more swiftly.  “OEMs are heavily under pressure, and far too costly when it comes to production,” Stoffel added. “They’ve got to race with China, with new car brands rapidly entering the EU. It’s already over for the Germans – we see ourselves as a partner for the new entrants.”

The China question

Indeed, the impact of China’s comparatively young auto giants on European manufacturers came up repeatedly. China is far and away the market leader in electric cars, speakers noted; Chinese manufacturer BYD, for example, continues to grow explosively, overtaking Tesla and selling 1.5 million electric vehicles (EVs) in 2022.

Attendees pointed out that Chinese firms can design and produce EVs at a lower cost than most western manufacturers. And due to the widespread automation and massive scales of the Chinese EV industry, the market in the country is now over capacity. It was also noted that Europe would be the next destination for many Chinese firms in the space; BYD has already launched on the continent, with plans for a manufacturing plant in Hungary recently announced. The EU is unlikely to act quickly enough to protect the continent’s incumbent manufacturers from being undercut by low-cost Chinese firms, one attendee suggested.

Capitalmind Investec’s Jurgen Schwarz echoed the sentiment, speaking of the inevitability of the disruption that Chinese firms will introduce, arguing that some OEMs would find themselves on the back foot with the arrival of new competitors.

“It’s evolution, and brands and companies that are missing the trend can’t hold on forever,” Schwarz said, noting that European manufacturers will struggle to match the prices offered by Chinese EV suppliers. “Parts of the old OEMs could vanish, and quite a bit of the lower-price segment will probably be Chinese suppliers. But where people are willing to pay a premium on quality – which is still a huge segment – the OEMs that survive can remain competitive.”

European OEMs do have some remaining advantages, however, noted Peer Gunther, also of Capitalmind Investec.

“The Chinese firms are good at getting cars into the market, but the after-sale services are nonexistent,” Gunther said. “European consumers expect these services from manufacturers, so once people have used Chinese EVs for a few years we might start to see some problems.”

A new approach to retail

Complicating matters further for established firms is the industry-sweeping trend towards revamping sales practices. Manufacturers are currently pursuing an ‘agency’ approach which, companies hope, will enable them to take control of the retail process and boost revenues. But that’s easier said than done, as Tom Brennan of National Vehicle Distribution, explained during his presentation.

The major manufacturers of the global auto industry, which is currently worth around 2.86 trillion USD overall, have typically relied on a wholesale approach to retailing, where cars are purchased by dealerships which then do the work of selling to customers. Under the ‘agency’ models settled upon by many of the best-known firms – like Volvo, BMW, Mercedes and Volkswagen – the manufacturer itself becomes the retailer, allowing for standardised pricing and access to valuable customer data.

“In the non-agency model, all the risks and stock are with the dealer,” explained Brennan, who previously worked on the switch to the agency approach in Audi’s fleet division. The change to direct sales is a “very dangerous” process, Brennan continued, adding that franchise model has been the default for OEMs since the time of Henry Ford.

“It’s a different culture,” he said of the direct-to-consumer approach. “OEMs have no practice in this area – it’s like jumping off a cliff.” Brands should expect some friction as they proceed, Brennan added. “OEMs will of course learn to retail,” he said. “But there will be difficult transition periods. Reducing the amount of dealers will save money, but manufacturers will need to support the ones they keep. You will also have to spend more to get to the customer, and you’ll have to be prepared for reductions in volume.”

Consumer habits

OC&C associate partner John Evison’s presentation focused on an annual piece of consumer research published by the company, providing a valuable dose of data to support the day’s discussion. OC&C identified a range of consumer trends in 2023, including customer spending impeded by the elevated cost of living; a slight dip in online consumption; and high-but-slowing traction in EVs. While EVs are incredibly popular, Evison noted that some ‘carservatives’ remain, with the most popular concerns relating to battery quality in used vehicles and still-immature charging networks.

Evison also pointed to the increasing value of data for manufacturers, sharing Stoffel’s view that some industry players have not invested sufficiently in technology and data capabilities.

“Vehicles are getting more complex, with advanced driver assistance systems, stealth autonomy, connectivity and electric vehicles,” Evison said, noting that more data is generated as cars become more advanced. “But as a sector, automotive is underweight [in its investment] in tech. If you look at the percentages of revenues large dealer groups spend on technology, it’s significantly below some other sectors.”