Key challenges for the automotive industry 

The Covid-19 pandemic presented the automotive industry with challenges as lockdowns curbed travel and car sales stalled. In 2022, the automotive sector now faces a new set of obstacles. Customers are moving away from liabilities derived from car ownership and towards the concepts of sharing, leasing, and renting. This change makes sense when research confirms that, on average, cars are only driven 5% of the time. As consumer sentiment changes, the automotive sector is starting its own journey transitioning from being a product seller into becoming a service provider.

One of the factors behind this change is a shift in how consumers view the link between vehicles and status. In the past, cars symbolised power, importance and more; however, as societies evolve away from this locus of evaluation, possessing expensive and powerful cars becomes less relevant as a status symbol.  

The transition to electric vehicles (EVs) is a major disruptor to the industry. Consumers are still hesitant regarding the expense of EVs and the lack of charging infrastructure, but future bans on internal combustion engines and curbs on emissions are looming as a crucial issue – this legislation against conventional vehicles induces more people to consider EVs. 

Purchasing cars is harder than it used to be. Continued post-pandemic supply chain blockages and an ongoing semi-conductor crisis are holding back production and causing long delays for consumers.  

Additionally, the top car brands are reducing investments and hitting their suppliers hard as they watch their market shrink, causing further problems for the industry. 

“As consumer sentiment changes, the automotive sector is starting its own journey from selling cars to providing services.” 

 Cristóbal Colón, Partner, Madrid

How we are helping clients 

The automobile sector is on the cusp of reinvention by moving from a product-based industry to a service-based one. Transformation is a key topic for our clients, and we have reached a point where software and services have overtaken brand in importance. As transformation experts, we help clients navigate this transition. 

Many in the industry maintain that disruption caused by the pandemic is temporary, and that a return to pre-Covid conditions will resume. This is untrue, and one clear example of industry transformation is car sales in Spain - 1.3 million cars were sold in 2019, but this figure is set to half in 2022.  

The automotive industry also must prepare to face challenges from China. Emissions legislation kept Chinese OEMs out of the western market for years, but with the shift away from polluting internal combustion engines, these barriers have dissipated. The market is now likely to be flooded with cheap electric vehicles from China, leaving many big industry OEMs unable to compete.  

What does this mean for the automotive sector? One major change will be a dramatic reduction of traditional OEMs as industry players consolidate; for those that survive, the value proposition will vary as mobility, connectivity, economy, and simplicity become commercial essentials. 

Going forward, managing supply chains will be more vital than ever. The lithium and rare earths needed for EVs are finite in supply and largely controlled by Russia and China – securing what is needed continues to present a real challenge. 

Creating a strategy to face these challenges is complex. We work hard to help clients understand the road ahead and prepare for their journey to outlast the disruption. Just one of the innovative ways we are helping clients is with the creation of commercial digital twins, a method for virtually modelling business strategy and playing out scenarios without impacting day-to-day operations.

The year ahead 

We expect 2023 to bring continued uncertainty without a return to the pre-Covid environment. The Chinese OEMs will enter Europe and the US aggressively, and while this boom in Chinese vehicles should not hit premium brands too hard, it will significantly impact many of the less premium brands. We also anticipate continued disruption and turbulence in the supply chain. Additionally, rising inflation will create issues in car ownership as discretionary spend declines, but it will likely cause a boom in the cars-as-a-service model (subscription, sharing, renting, and leasing).  

Why L.E.K.?

As significant disruption drives big changes, mergers and consolidation will take centre stage. This presents good opportunities for businesses with a clear view of the road ahead and the right strategy in place. Our unique experience and expertise provide us with deep insights for empowering our clients in the automotive industry.

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