We provide the latest trends and insights into what's happening across the sector
2021 WINTER EDITION
Is the automotive industry geared up for the shift to electric? The government's climate change targets depend on it.
In our Q4 automotive review, our experts look at the electric vehicle market forecasts and analyse five potential strategies to support this transition. We're also sharing insight on other aspects of the industry's future: from how vehicle shortages and rising production costs will impact OEM margins, to the changing skill requirements of its workforce.
Battery electric vehicles (BEVs) make up just over 10% of the market share of new vehicles registered in the UK as of July 2021, according to the Society of Motor Manufacturers and Traders (SMMT). It’s a figure that’s set to increase rapidly as the UK moves towards its target of zero tailpipe emissions by 2035.
To meet this target, consumers will need encouragement to buy BEVs. The strong take-up of hybrids shows that consumers are willing to adapt. But they remain concerned over battery range and a lack of domestic, public and private EV charging infrastructure in the UK. The government will need to overcome these anxieties to make its climate change targets feasible.
The UK transport sector accounted for 27% of total greenhouse gases emitted in 2019. Reducing this is a now key focus for the government and a crucial driver for the 2035 zero tailpipe emissions target.
The next 10 years should see significant take-up of EVs with the SMMT estimating 14 million EVs on the UK roads by 2030 and 49 million by 2050. This will also increase energy demands, of course. The Climate Change Committee (CCC), the government’s independent adviser, suggests an annual increase in demand for electricity of 20-30% over today’s levels at 65-100TWh.
Surveys by the AA and Zap-Maps indicate two key consumer concerns about purchasing an EV.
The number of public charging points versus the number of plug-in hybrid electric vehicles (PHEV) and BEVs on the road brings this into sharp focus. At present there are an estimated 306,954 PHEVs on the road and 298,190 BEVs (Competition and Markets Authority Electric Vehicle Charging 2021): on average, 23.5 cars per public charging point – clearly not enough to meet demand but this is growing at a rapid rate.
The situation is exacerbated by the uneven spread of these charging points across the UK. London has the densest level of charging points with 80 charging points per 100,000 population versus an average across Great Britain of 35 per 100,000 population.
People’s experience of charging points is also not ideal. There are concerns around whether the charging point works, the payment process, the use of minimal apps to find and pay for charging, and so on.
Only nine percent of all charging points offer contactless payment and only 50% are rapid/ultra-rapid charging points. An average of one in 25 charging points and one in 10 rapid charging points are out of service at any given time.
An ambitious rollout strategy to 2030 and beyond is needed to build up consumer confidence in the charging network. This strategy is expected to include the following five points.
The private and public sectors need to work together to generate a strategy and the government needs to support it. There has already been a public announcement of financial support.
The government’s rapid charging fund is set to deliver 6,000 high-power charging points with an investment of £950 million. Ofgem has announced £300 million for additional network investment and half of this will go to EV charging infrastructure, which will support 1,800 rapid chargers and a further 1,700 rapid public chargers.
And the cost to consumers? In most cases, domestic consumers won’t need to pay for upgrade works. Non-domestic customers, however, will have to pay for most of their upgrades. These could be sizeable, involving the installation of substations and other infrastructure requirements.
The cost to meet the public charging infrastructure for 2030 is estimated to be £3-5 billion, which does not include network and commissioning costs.
En-route charging provision is critical if EVs are to be used successfully for longer journeys. Currently there is a lack of choice of such charging infrastructure, a lack of chargers and limited competition on the motorway charging points.
Electric Highway is the largest motorway operator of EV charging points, accounting for approximately 80% of all rapid and ultra-rapid chargers on UK motorways. Including a small range of amenities, such as hotels, Electric Highways still has 59% market share. More rapid, and ultra-rapid, chargers owned by different operators are needed.
Furthermore, Electric Highways has long-term contracts on many of these motorway charging points. Investment to generate the required charging infrastructure to meet demand is expected to cost a minimum of £7 million for each site, which includes the charging points and the required infrastructure. But this could be as high as £27 million for the largest motorway sites.
Both the poor EV charging infrastructure and Electric Highways’ long-term agreements need to be resolved before motorway charging can start to grow strongly. The high cost of investment for charging infrastructure also carries the risk that low-density population areas would not generate the investment returns required to install a satisfactory EV charging infrastructure.
A significant proportion of potential EV owners don’t have the ability to charge their vehicles at home. The lack of driveway or having to park vehicles in the street means they must rely mainly on public or workplace charging.
Fifty-seven percent of households in social sector housing do not have off-street parking and 86% of households in social sector flats do not have off-street parking. Without an increase in on-street charging, take-up of EVs is expected to remain limited.
In Great Britain, street furniture – which includes road signs and streetlamp posts – is owned by the local authorities. It is down to the local authority how and where street charging points are located. According to research by Zap-Map in February this year, there are relatively few on-street charging points (5,737) with 4,594 of those located in London.
More on-street charging is needed. The Climate Change Committee (CCC) estimates that 50,000 3-7kW charge points will be needed while energy consultancy Delta-EE suggests the number is far higher – 275,000 charge points (22kW and below).
Either way, there will need to be significant investment in the number of on-street charging points.
Of the number of EV home chargers in the UK, Pod Point has the highest market share of 50-60% followed by BP Pulse with 10-20% and Rolec with 5-10%.
The home charging market is supported by the government’s £350 Electric Vehicle Homecharge Scheme (EVHS) grant but from April 2022 only those in rented or leased accommodation qualify for this. The decision on which charging company they use when installing a charger depends on the advice consumers receive from the EV manufacturer or car dealerships.
The biggest risk is that some customers may not be fully informed and may not be purchasing smart chargers that could provide a better long-term service – adjusting the speed of charge and charging at times when electricity is cheaper, for example.
The home charging network is expected to grow strongly, in line with the sale of both new and used EVs. Access to better information will give consumers choice in deciding which charger best suits their needs.
While the lack of charging infrastructure is a concern for potential BEV purchases, the charging process needs to be as simple and convenient as filling up for petrol or diesel. Evidence shows that this is not the case for EV charging:
To meet the target of zero tailpipe emissions, the cost of BEVs needs to fall in parity with internal combustion engine (ICE) vehicles. In the short term, government or original equipment manufacturer (OEM) support can help achieve this. In the longer term, improvements in battery technology will help to drive down prices.
Price alone won’t ensure uptake. EV charging infrastructure needs to be scaled up rapidly and distributed evenly, rather than just where demand is high. Without government or local authority intervention, less densely populated areas will be EV charging deserts. And the usability of EV charging points needs serious work – whether the charging points are working, ease of payment, standard software for charging points, and so on.
There’s a difficult road ahead. If the government’s 2035 targets are to be met and consumers successfully encouraged to buy EVs, private and public bodies will have to ensure the quality and growth of the charging infrastructure in the UK. It is critical that the UK charging network is well planned and structured to provide this BEV growth.
The third quarter of 2021 (Q3) proved successful for all the OEMs, although this is from most of the businesses making a loss in 2020 due to the impact of COVID and global lockdowns. Although the semiconductor shortage has slowed production of vehicles across the globe – and the shortage of vehicles continues to be an area of medium-term concern – there is clear evidence in the short-term that lower car sales have pushed up profits. Tesla has proved to be an exception, having continued to generate more units and more profits.
Costs for raw materials and logistics have increased. In both cases, rises will either have to be absorbed by the OEMs or passed on to distributors, retailers or consumers. It is likely that we will see further price increases in cars over the coming 12 months as a result. Added to the shortage of semiconductors we are also starting to see the disruption of the supply chain due to COVID as OEM employees and tier 1-4 parts suppliers isolate on catching COVID.
As the chart below shows, normalised EBIT (earnings before interest) has grown over the last four quarters with a continued strengthening of profits in Q2 2021 and some softening in Q3 2021 as disruption in the supply chain start to impact profits(final year-end 2021 figures are not currently available). All brands are now profitable – even the likes of Nissan and Ford, which generated sizeable losses in Q2 2020. As expected, VW and Toyota continue to lead the pack with increased growth, reaping the benefits from higher prices and improved margins despite a backdrop of intensifying vehicle shortages. Even Nissan, which struggled to generate profits in Q1-Q4 2020, has now started to perform well, shipping vehicles and gaining the benefits of higher retail priced vehicles.
VW saw a strong rise in both revenue and profits YoY in Q2 2021, which was to be expected following its poor performance in Q2 2020. Although revenue was strong in H1 2021, there were signs of weakness in revenue growth in Q3 2021 as the impact of the semiconductor shortages continued to bite.
Vehicle stock levels across the VW Group, as well as VW dealers, was very low – lower than year-end 2020 and prior years. VW Group's management outlook has indicated concerns over:
Management believes that this could affect future profits but would continue to work towards improving profits.
Toyota's Q2 calendar/Q1 financial year (year-end March) was strong, with revenues up 185.4% YoY. Performance for 2021 was down only marginally at 7% on the same period in 2019 – a strong performance considering COVID-19's impact in 2020. However, interestingly, Toyota in Q3 2021 generated a strong set of results; this was the only company that exceeded its Q3 2020 numbers
Growth was strong in Japan, North America and Asia; less so in Europe. Total group operating profits rose, underpinned by increased marketing efforts (especially those relating to the financial services business), a reduction in selling expenses, and efforts to reduce other expenses across Toyota Motor Corporation.
Much like VW Group, Toyota is also suffering from a lack of vehicle stock, with North American vehicle stocks just above 150,000 units in June 2021. Toyota indicated in its outlook for the rest of 2021 that further COVID-19 issues, problems in the supply chain, and soaring material prices could impact the profit of the company in the future.
Tesla has once again surprised with a strong increase in profits. Normalised EBIT (Income from operations), even without environmental credits, increased substantially, rising to USD 1,765 million – another record for Tesla.
This increase in normalised EBIT was underpinned by improvements in revenue from the automotive business of 58% YoY (Q3 2021) against a backdrop of 6% YoY in average selling prices due to lower sales of the model S and X. Improvements in gross profit margins were also up to 14.6% Q3 2021.
The large increase in normalised EBIT can't be attributed solely to the automotive business, however. Tesla's other businesses – solar operations, storage and service locations, and supercharger station – also experienced strong growth in revenue and profits.
Quarterly Normalised EBIT for Tesla Q1 2020 to Q2 2021 (USD million)
The cost of raw materials has risen strongly. Both steel and natural rubber have seen significant price increases caused by high levels of demand and, in the case of natural rubber, a shortage of production.
The price of steel has risen significantly, driven up by changes in taxation in China and increased demand for steel from Europe. The Chinese government introduced a VAT rebate on steel in a bid to reduce steel production and carbon emissions on steel generated for the export market. This move is having only a limited impact on steel manufacturers for the home market, however.
Natural rubber has also suffered from the effects of lower production caused by labour shortages and rubber tree blight. Demand has continued to outstrip the level of supply in 2021 as a result.
Logistics costs are also being driven up. There are a number of reasons behind this:
The sharp prices of container freight rates are shown in the following chart.
Container freight rates USD per forty-foot equivalent units
The weak supply of vehicles is expected to continue well into 2022, followed by higher vehicle prices as higher raw material and logistics costs are passed on to the end consumer.
The risk for OEM companies is that volumes decline while their ability to push up prices is weakened. Together with rising raw material and logistics costs, this situation is likely to have some impact on profits in 2022
If you would like more information on what's happening in the automotive industry, get in touch with Owen Edwards.
National automotive output fell 29% in 2021 compared with 2020, reaching the lowest level since 1984. New figures from the Society of Motor Manufacturers and Traders (SMMT) also show that we are producing less than one million cars for the first time since 2009.
The UK is not alone. Germany, Italy and Russia saw the 2021 production of new cars fall 35%, 25% and 18%, respectively.
Brexit may be less prevalent in the public eye, but it is still contributing to dim production figures behind the scenes. At least partially in response to uncertain terms of trade, evolving levels of border controls and difficult market conditions combined to impede production, manufacturers’ movements to mainland Europe continued recently as Honda closed its Swindon site last summer, following Nissan’s decision to relocate SUV production from Sunderland to Japan.
However, the pandemic continues to dominate the economic landscape. Globalised production chains remain susceptible to significant disruptions, including mismatched international re-emergences from lockdowns and confusing cross-border restrictions. Supply issues are also being driven by upstream exposures (including persistent semiconductor shortages, the so-called ‘chip shortage’) and considerable labour shortages, particularly of HGV drivers and factory workers.
With fewer new vehicles coming on to the market, consumers have turned to second-hand vehicles, where transactions grew 16.4% year on year. Consequently, used car prices rose by 28% in 2021, which adds up to 21 consecutive months of increasing prices in this sector.
Changing consumer preferences towards greener alternatives also generated second-hand transaction growth. Plug-in and hybrid registrations grew 65.4% and 82.5%, respectively, in 2021, compared with 22.1% fewer petrol and diesel car registrations. This is expected to continue, as SMMT forecasts a further 18% increase in UK vehicle registrations this year, in which electric vehicles (EV) registrations will grow a further 40%. Similarly, AutoTrader forecasts sustained second-hand sales growth driven by the shift from fossil fuels.
Despite the clear potential of EVs, several factors are restricting EV market growth and subsequent automotive industry recovery. Nearly half (47.9%) of customers cite uncertainty and insufficient charging facilities as preventing an EV purchase by 2030. Consequently, consumers cling to familiarity, reducing demand for new vehicles (particularly EVs). Instead, petrol and diesel cars comprised 96.4% of second-hand transactions in 2021.
Consumers are warming to the concept by degrees – used EV transactions grew 31% in 2021, and private buyers grew 20%. This is especially promising given 7.3% fewer used petrol and diesel vehicle transactions.
It seems likely that the EV sector of the market will accelerate faster than the rest of automotive. Most forecasters agree that significant EV registration growth internationally is likely to continue and that Europe will lead the market. Furthermore, there may be unmet demand from consumers in this market that can lead to enhanced growth. However, the electric trend in the UK may be somewhat slowed by the reduction in EV grants and the increased eligibility criteria that apply.
Alongside this, 2022 should see supply chain disruptions starting to ease. Semiconductor producers continue to receive significant investment, and many firms are diversifying to reduce dependence on individual countries (particularly China) for automotive components. This should create the potential conditions for a supply-side recovery this year, although second-hand prices are expected to remain high.
Notwithstanding, macroeconomic conditions are key to the extent to which any such recovery is actually achieved. 2022 is likely to be characterised by rising and high inflation levels, higher energy bills and increased National Insurance costs; taken together, these factors are likely to reduce consumer affordability in the coming months. As such, the pace of any immediate recovery in sales for the sector seems likely to be staged and may be significantly affected by the financial prospects of consumers.
To discuss this topic further, get in touch with
With the industry undergoing radical change, the automotive industry needs to keep on top of the evolving skills that organisations need to remain relevant and competitive. Having the right processes and systems in place will also be key to developing the workforce of tomorrow.
New skills and ways of working are being driven by innovation and changing consumer behaviour – from electric vehicles (EVs) replacing the internal combustion engine (ICE) to 'usership' replacing ownership as mobility as a service (MaaS) becomes more viable, to the uptake of Android Auto or Apple Car Play and connected autonomous vehicles (CAV).
Some organisations have already made significant decisions on this front. German component manufacturer Schaeffler, for example, is closing one ICE-focused plant and consolidating its workforce –a clear sign of Schaeffler looking at its future skills forecast in line with business demand.
Planning and forecasting the people skills you'll need to meet these changes is growing in importance. But where do you start? Follow our five-part plan to kickstart your thinking in this area.
The first step is to get a full picture of the skills you currently have in your organisation and how they are used to ensure organisational success:
It's also important to understand if skills are coordinated centrally or done on a departmental level. And to consider what various skills mean in different parts of the organisation, for example, one skill around customer focus will look very different in head office, a dealership or a service centre.
New sales channels, a broadening skill set for technicians and mechanics, and the increase of big data collected from cars herald new opportunities for businesses. Original equipment manufacturers (OEMs) and dealers need to start forecasting the skills their people will need to maximise sales, increase customer satisfaction and generate new streams of revenue. Questions to ask include the following:
The need for a particular skill set might change over time which could leave a surplus of talent in a particular area. For example, ICE technicians and mechanics are expected to be underemployed on EVs – could they be reskilled in software and diagnostic implementation or another process? Creating a workforce fit for the future means reviewing upskilling options, asking who might fill the predicted skills gaps and deciding on a plan of action.
Steven Ingram, a manager in our people consulting team, says, "Changes to skills in the automotive industry aren't exclusive to manufacturing or technical; they will also apply to people who interact with and sell to customers. Organisations must create and agree on realistic timelines and allow for contingency across all areas. A great example of this is the move by customers from ownership to usership. In China, VW Group is projecting growth of up to 358% in MaaS spend by 2040. While changes are happening now, longer-term, we believe MaaS will be a significant change and will require new skills and ways of working."
Governance structures and KPIs should be carefully set up with regular reviews of the skills and the results they are generating for the organisation. Don't be afraid to explore something new and correct course, making small, incremental refinements against your original plans.
It's vital that automotive businesses identify new relationships and collaborations between teams, as well as have the correct processes and systems in place to facilitate the large-scale changes ahead. Answering the following questions will help support the change and collaboration required, and continue building your framework for effective reskilling:
Reflecting on your organisation's talent pool will lead to a deeper set of questions around whether to retrain existing staff or hire new talent, as well as questions of how workplace culture might develop with new ways of thinking.
On this last point, for example, think about where your ideal candidate might come from. Would it matter if they didn't have automotive experience if they brought in the new skills you need? Is your organisation willing to make the changes you need to bring the success you expect?
Finally, you need to be conscious of how external influences can drive new beliefs and ways of working in your organisation. For example, the global environment, social and governance (ESG) agenda is a frequent topic of discussion with our clients. What skills might you need to embed the strategic and operational benefits of ESG into your ways of working? What is the return on investment (ROI), both financial and cultural, of adopting new methods when reacting to significant external influences?
Establishing new, organisation-wide skills will play a vital role towards helping embed these changes in the DNA of the company. Organisations that take the time to understand, carefully design and implement these new skills are the ones who are able to better maximise their ROI.
For more people insights on setting strategic direction or implementing skills and competency frameworks, contact Justin Rix.
