The next decade is set to be a period of transition for many automotive OEMs. Oliver Bridge explains why emerging technology, sustainability and changing business models mean you can't afford to sit still.
Between innovations and regulations designed to protect the environment, the market won't be the same in 10 years' time. And original equipment manufacturers (OEMs) and suppliers will need to adapt.
We looked at the company financial and volume data of 24 major global OEMs to identify current trends in revenue, profitability and debt.
Across the last four financial years, while financial performance is varied across the sector, there are some clear trends. In particular, rising debt levels among OEMs and rising levels of R&D spending could indicate what shape the industry could take and what relationships with Tier 1 and Tier 2 suppliers will be like over the next decade.
Rising debts across the OEM sector
While Toyota and Volkswagen remain the two industry leaders with growing revenue, over half of the OEMs we looked at have seen a decline in the last two years.
Many of those with growing revenue also had a growing normalised EBITDA and EBIT, yet over 70% experienced a drop in operating profit in the last year.
There are few extremes here, with Changan seeing an 880% rise in operating income, while Nissan dropped 320% in its last financial year.
There is also a clear trend of rising debts among OEMs. As of the last financial year, total debt across the sector stood at £1.07 trillion.
Toyota, Daimler, Honda, BMW, Hyundai, Renault, Tata and Dongfeng are among those that saw a rise in debt from last financial year to the current one. Volkswagen, Ford and General Motors all saw a drop in the same period, although all had increased their debts over the preceding three financial years.
Many OEMs have a growing debt burden, which may hinder their ability to take on additional liabilities as required. While Mitsubishi and Dongfeng were the only OEMs with a negative net debt to EBITDA ratio, Honda, Toyota, Renault and Tata all showed a growing positive ratio.
So, what could be driving OEMs to take on increasing debt burdens?
Falling vehicle volumes
Another interesting feature of the current OEM landscape is that, in many markets, vehicle purchasing volumes have fallen in the last few financial years. General Motors, Ford, Honda, Tata and Mazda are just some that saw a drop in vehicle volumes in 2019, while Hero, BMW and Toyota bucked the trend by remaining steady or seeing a slight rise.
One potential factor behind this could be lower numbers of diesel vehicles, but this is unlikely to explain the entire picture. While the number of models being sold around the world dropped in 2019, the average revenue per vehicle continued to grow.
This trend is being driven by a number of factors. Vehicles are becoming more expensive for several reasons. Consumers are looking to own bigger vehicles with modern technology and more value adds.
In the US, for example, there has been a drop in small vehicles like sedans towards a favour of pickups and bigger SUVs. These larger vehicles come at a higher price point, but additional features, such as parking assist and increased mobile connectivity, are also very popular with consumers.
Another reason for higher revenues could be a growth in non-car items such as leasing and insurance.
Increased OEM R&D spending
The data also showed a substantial increase in the amount of R&D spending among OEMs.
Western and Japanese companies in particular have been dedicating more spend than ever before into developing new solutions and harnessing emerging technologies.
R&D expenditure as a percentage of revenue has increased for many OEMs over the last two financial years, with Toyota, Volkswagen and BMW all reaching around 4%. Tata and SAIC, on the other hand, are currently at between 1% and 2%.
Overall, more than 60% of the companies we looked at are investing more into R&D, with Toyota and Ford both dedicating just under £9 billion each to R&D expenditure. Total R&D spend across the 24 OEMs rose from around £51.7 billion in 2016 to around £61.9 billion in 2019.
Alongside standard development projects relating to design, comfort and vehicle lightweighting, there are a number of major focus areas for OEM R&D.
Vehicle electrification remains a priority for many, particularly in the light of evolving government policy across the world. BMW, for example, is aiming to bring 25 electrified models to market by 2025.
Mobility as a Service (MaaS) is another important area, with many OEMs looking to develop applications and architectures to allow customers to access a range of transport options.
Toyota, in particular, is looking to take ownership of this space and move its focus from being a primarily manufacturing-based company to a mobility one.
Autonomous driving is a long-term focus for many OEMs too, with General Motors emerging as an early leader. The company plans to roll out its Super Cruise hands-free highway driving feature to all its Cadillac models.
Are these increased levels of R&D spending being funded through a mixture of debt and reduced profitability?
While we can’t say for certain, the data seems to point in that direction. And it is clear that harnessing innovation will be an important element of OEM success over the coming decade.
Positioning OEMs for the next decade
The automotive industry looks set to change drastically, and OEMs are rushing to position themselves in the right way to take advantage.
Investing in technology is likely to be a key component of business success in saturated markets like the EU, as well as developing markets in other regions. OEMs could be taking on increased amounts of debts to ensure they are able to adapt to a rapidly shifting technological landscape.
For support in positioning your business in the OEM market, contact Oliver Bridge.