Sharing insight on the latest trends and opportunities in the sector
2022 SPRING EDITION
Disruption is leading to transformation in both upstream and downstream automotive. How will this affect you?
In our Q1 automotive review, discover how net zero is revolutionising traditional car retail as OEMs (Original Equipment Manufacturers) seek new ways to help fund EV production. Government support for the move to alternative fuel is available – if you get the funding process right. Plus, getting to grips with supply chain emissions and profit margins to help futureproof your business.
The automotive downstream industry (distribution and retailing of vehicles) will see more change in the next five years than in the last 50.
This won’t be caused by one single factor – the agency model or battery electric vehicles (BEVs), for example – but by numerous, interlinked factors taking place simultaneously over years. As all these changes start to converge, automotive downstream is set for a significant shift in gear.
Consumer interest in electric vehicles (EV) is increasing, which is generating demand for BEVs. On top of this, intensifying emission regulations and significant fines imposed on the original equipment manufacturers (OEMs), especially in Europe and China, help drive the focus on increasing supply with a large number of BEVs launching in 2022 and beyond.
In the UK, the market share of BEVs reached c25% in December 2021(source SMMT),more than double that of diesel vehicles. But the retail price and production costs of BEVs remain high and this will constrain an even faster take-up of BEVs in the short term.
To reduce the impacts of emission fines and still maintain a BEV retail price that is affordable, the OEMs have had to invest heavily in BEV and low-emission vehicle technology. This has impacted earnings and led OEMs to strive to reduce costs elsewhere in order to meet financial targets.
In the face of increasing operating and development costs, many OEMs are reassessing their B2C retail model. A growing number set out publicly their intention to use a direct sales model process for the B2C market. In particular, Stellantis, Mercedes-Benz and VW have said they’ll be implementing a direct B2C process, also known as the agency model.
It’s unclear if this will be the full agency model, in which all transactions are undertaken online with the dealer receiving a handover fee. Or if it will be a derivative model that includes some current franchise model characteristics, but the OEM still sells directly to the consumer, and the dealer takes some part in the sales process. Compare the current franchise sales process with the full agency model in our graphic below.
We believe that the agency derivative model will be the popular option with few OEMs implementing a full agency model. This is because all OEMs and their dealer networks are different and to fulfil the required growth strategy of each would require a different model – no single standard agency model fits all.
In both agency and derivative models, the customer is far more central in the sales process, providing the OEM with significantly more insight into customer buying habits. Having direct connectivity to the customer also gives the OEM greater scope to provide extra omnichannel services from vehicle sales to service and repair. It remains unclear at present, however, who will control other potentially lucrative channels the OEMs themselves, or their dealer networks, or a combination of both.
Direct B2C connectivity also creates the potential to upsell thanks to a greater understanding of what a customer needs. The OEM would also partake in the part-exchange transaction when the customer returns to purchase their next new vehicle.
It’s widely understood that many OEMs want to play a larger part in the used car market as this would generate more profits through the sales of additional car finance and spare parts, which are profitable for both the OEMs and their national sales companies. This raises the question: could OEMs go down the direct sale route for used vehicles? We believe that this is possible if done correctly, but it will take time and careful planning.
If these changes are not significant enough, we also believe that subscription will play a part in changes to the automotive downstream industry. Volvo has indicated that half of its vehicle production will be on subscription by 2025 (source AutoCar).
The definition of subscription can include both short term, highly flexible options (SUV for weekdays, sports car for the weekend etc.) and also the more traditional, monthly all-inclusive models.
Either way, the subscription market remains small at present and fits well with the agency model and customer omnichannel process. We believe that the growth of subscriptions will be slow, but provide the opportunity for OEMs, dealers and independent used car operators to provide another flexible service to their customers.
There is no single catalyst responsible for this acceleration of change in the automotive downstream market. What we know, is that there are many contributory factors at play and that where there is change, there is both tremendous opportunity and risk. Readiness, for both, is critical.
Helen Dale, Industrials and Automotive restructuring partner at Grant Thornton, commented that ‘As these dynamics play out, companies in the downstream automotive industry will be driven hard to adapt to change. Those unable to adapt quickly enough risk a heavy price.’
De-risking business models and adapting to these new and evolving opportunities will be key for businesses both to survive and to thrive. We are already working with a number of major OEMs and dealer groups around the implications and opportunities laid out here. If you would like to discuss further any of the points in this article, please get in touch with Owen Edwards.
Few automotive businesses will escape the increasing level of regulation around environmental, social and governance (ESG) responsibilities. The Task Force on Climate-related Financial Disclosure (TCFD) is one example, EU regulations another, while automotive suppliers may also be asked to support the compliance needs of their customers.
ESG impact within the supply chain varies with the complexity of goods and services provided. As the supply chain is generally considered external to an organisation’s direct operation, it tends to be overlooked in relation to carbon emissions impact. But with reporting frameworks such as TCFD, businesses will soon need to get to grips with their complete emissions output to the environment as a result of products and services offered.
The automotive industry presents a particularly complex supply chain market. We believe it’s critical that automotive tier one-four parts providers, as well as original equipment manufacturers (OEMs), act swiftly to meet these new emissions reporting requirements.
TCFD is primarily designed to assess the impact on climate, prioritising the ‘E’ within ESG. From April 2022 within the UK, it will be mandatory for more than 1,300 of the largest UK-registered companies to disclose climate-related financial information in line with TCFD. This includes banks, insurers, and private companies with over 500 employees and £500 million in turnover. It’s critical that businesses start to plan for TCFD implementation now, as this process is extensive and challenging.
The TCFD framework helps organisations to disclose climate-related opportunities and risks through a reporting structure based on the four pillars: governance, strategy, risk management, and metrics and targets.
Most businesses are already working towards generating an accurate understanding of internal environmental impact through measuring scope 1 and scope 2 emissions:
Scope 1 and scope 2 both have related emissions which directly impact a business’s day-to-day operations. On average, for a manufacturing business, the internal scope 1 and 2 contributes to between 15% and 30% of the overall emissions.
But by far, the largest contributor to environmental emissions within automotive and manufacturing is scope 3 related emissions. On average, these contribute to between 70% and 85% of all emissions to the environment from upstream and downstream-related supply and value chains.
The new priority for any business is to understand the complete risk it poses to the environment – from both internal and external activities. This means that organisations need to get full data-driven clarity on the environmental impact of their supply chain.
Use the diagram below to determine your scope 1, 2 and 3 emissions. Using this breakdown, you can start to collect data and calculate lesser-known Scope 3 indirect emissions from the list of eight upstream and seven downstream activities that contribute to environmental emissions.
The benefits of understanding the entire emissions contributions across all three scopes are extensive. It brings transparency on environmental impacts and areas for improvements, provides informed investment decisions to gain a competitive advantage, improves understanding of risk and mitigation options, futureproofs for climate change responsibilities – and, of course, achieves compliance with regulation.
A number of OEMs and automotive businesses are also considering the impact of ESG on their brand. For example, Volvo has indicated that by 2040 it will be a climate-neutral company. Acting swiftly to understand your environmental emissions impact will be key.
Do you need support to navigate the complexities of TCFD? Your next action points, following our work supporting clients, involve:
To discuss TCFD requirements further, please get in touch with Raj Kumar or Oliver Bridge.
The path to alternative fuel vehicles is costly for an industry that employs nearly 800,000 people in the UK and exports around 80% of the vehicles made here. The UK needs to adapt or change its existing supply chain, manufacturing processes, distribution methods and charging networks.
The UK government is contributing through grants, primarily the Automotive Transformation Fund (ATF). The ATF is administered by both BEIS (Department for Business, Energy and Industrial Strategy) and the APC (Advanced Propulsion Centre). But the journey to a ‘yes’ can be daunting, even though the application process is straightforward.
We’ve been speaking and working with a growing number of businesses that are applying for funding. This can be small amounts for R&D acceleration or large amounts to support new infrastructure and facilities. The process itself is relatively simple:
Having completed many of these applications, discussed them with BEIS and worked with them, we understand the pitfalls you may face. Some applications appear to sail through, while others get buried in requests for more information.
We've identified seven ‘deadly sins’ that can add significant bumps on the road to automotive funding:
If you are looking to submit an application for ATF or other government automotive funding in the UK or abroad, please contact Oliver Bridge Owen Edwards– we’d be happy to talk you through the process.
How well are the components of profit margin truly understood? Without a more granular understanding of margin by region, division, sales channel product category, customer or product, companies will struggle to make best informed decisions.
In the latest of our making best informed decisions series, Oliver Bridge explores some of the ways you can understand the true profitability of your commercial and operational activities.
