A Fork In The Road For The Auto Industry: The Shift Towards Electric Cars Presents A Dilemma To The Industry’s Supply Chain

 

The auto industry is rapidly shifting its focus from gasoline-powered automobiles to electric vehicles (EV) for a variety of reasons.

The main driving force for this change is an increasing global focus on climate change and reducing the carbon footprint of gasoline-powered cars.

Furthermore, there has been a significant governmental shift in providing incentives and imposing regulations that favor the production of electric vehicles to support these initiatives.

And, in recent years, younger generations have expressed a heightened concern over climate change and are supporting that concern by purchasing electric cars.

 

A SLOW START …

The shift started off slowly in that there were close to zero EV cars purchased around the world in 2010. Five years later, the total had reached 500,000 cars.

Nearly every year after 2016 the number of EV cars sold worldwide has nearly doubled and topped out at 2.3 million cars in 2019. The sale of EV cars has continued to climb exponentially and in 2021 sales totaled 6.4 million and registered a 98% increase over sales in 2020.

 

GROWTH IS NOW PROJECTED AT A 21.7% CAGR  …

According to a report prepared by the research firm, Markets and Markets, the global electric vehicle market size is projected to grow from 8.1 million cars in 2022 to 39.2 million cars by 2030, at a CAGR of 21.7%.

The transition to electric vehicles and the manufacturing that supports them won’t happen overnight, however most of the major auto manufacturers have started taking steps towards the conversion and the pace of change will be rapid.

For example, Japan-based Honda said it plans to launch 30 electric vehicles by 2030 with production of 2 million vehicles per year. Stellantis (formerly Fiat Chrysler) has indicated that it has a goal of 24 battery-electric products by 2030.

And Volkswagen is planning to increase their share of electric vehicles to 50% by 2030.

 

A SEISMIC SHIFT AHEAD …

There is no question that the current and projected growth in EV cars will require a seismic shift in the way automakers and OEM manufacturers operate. They must plan to change their focus from producing parts and manufacturing from gasoline-powered cars to electric vehicles.

This shift, in fact, has already begun and will require a massive amount of investment to retool and change the way these companies operate.

This transition has the potential to seriously disrupt the legacy automobile industry in the US and across the world.

 

ADAPT OR ELSE …

A recent study conducted by Ananth Iyer, professor of management, along with a team at Purdue University’s Krannert School of Management focusing on Indiana auto manufacturers, suggests those companies could see revenue and employment drops of 32% if they don’t take steps to adapt to the electric vehicle market.

The study further revealed that an estimated 25% of the companies could see their revenue decimated.

This significant negative impact is largely attributed to the fact that some of the basic components of internal combustion vehicles—like traditional engines, fuel systems and transmissions—aren’t needed in pure-electric vehicles.

The good news is that the study also suggests that if companies take an innovative approach, the potential impact to revenue could be as little as 3.8%.

 

START PLANNING NOW …

“The earlier we get people thinking about this … the more competitive they will be, and manufacturers should not look at the electric-vehicle trend with a “doom and gloom” mindset”, Iyer said. “I really think, if they think in advance, new opportunities may open up.”

Companies should be looking at their capabilities with a wide lens—considering not just what they do now, but what they could do with their workforce, equipment and know-how.

In some cases, a company might investigate new markets in adjacent industries.

A company that makes pumps for automobiles, for instance, might be able to move into making pumps for dishwashers.

Reshoring, or the trend of bringing supply chains back to the U.S. from overseas, could provide other opportunities, according to Iyer. 

A parts-maker might be able to find new customers who are interested in having domestic-sourcing options.

 

DETERMINE YOUR CAPITAL NEEDS …

Obviously, there are many more options available to companies that are planning a transition to the electric vehicle market.

This will require extensive planning, collaboration with key suppliers and customers and a well-thought through strategy with benchmarks to evaluate progress along the way.

This transition will also require determining the amount of capital needed for investment in equipment, as well as new technology and the retraining of employees.

Furthermore, sources of capital must be identified and secured as part of the planning process.

Companies should also investigate what type of financial assistance that may be available from state and local governments.

Most states have allocated funds in the form of incentives or rebates to assist companies with this important transition, as it is important to them to ensure that the manufacturing base continues to prosper, to maintain and grow their respective tax-base.

 

A MONUMENTAL TASK …

The transition from gas-powered to electric vehicles is a monumental task and is unlike any prior changes in the automobile industry in the past.

Companies that start the planning process now will have a leg up on their competition and improve their odds of success.

Those that don’t take these steps will likely fall by the wayside with the loss of jobs and investors and lenders run the risk of losing their monetary investment.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.