The world is at an inflection point. The COVID-19 crisis is expected to catalyse a generational reset; the global pandemic is poised to rewrite global leaderboards in industrial capacity, international trade, geopolitical standing, and diplomatic might. 2020 was defined by the crisis. 2021 may be about the race to recovery.
According to the International Monetary Fund average national economic performance in 2020, excluding China, will see a 6% contraction. Automakers have struggled with suppressed demand, production challenges, supply chain fractures, and a scramble to keep pace technologically. Global economic dislocation will leave many segments of the market looking for cost reduction through consolidation. The long-awaited merger of Fiat Chrysler with Peugeot S.A. closed in January 2021. That may be the year’s largest deal, but it is unlikely to be the last of potential OEM and supplier re-groupings in the months ahead.
Today’s global market dislocation arrives at something of a complicated moment. Corporate and government leaders have made clear that the internal combustion engine is on a gradual path to the junkyard. Electrification is expected to continue to proliferate at exponential rates.
EV batteries require mineral inputs of limited, and relatively consolidated, global supply
Electric vehicle (EV) demand will foment innovation races around range and power where advances in thermal management and the relative efficacy of competing battery management systems will be priorities. At the macro level, technological pressures have already altered the market capitalisation leaderboard: Tesla, BYD, and Nio are all top ten auto manufacturers by valuation; those three have been in business for an average of 17 years apiece. Ford, in comparison, has been around for more than a century.
The push for electric drivetrains is transforming product portfolios. GM aims to produce only EVs by 2035. Ford has lent its iconic Mustang badge to its electric cornerstone, the Mustang Mach-E. The GMs and Fords of the world are well aware that the Teslas, Nios, and BYDs have stolen their thunder, also that a stable of well-capitalised upstarts are just over the horizon. Inorganic growth—acquiring pre-scale electric fledglings—may prove to be an attractive play for incumbents. 2021 is surely to feature plenty such courtship, which will bring equal doses of intrigue, hope, and risk. Regardless, OEMs have to reorient now, or never.
But in this emerging automotive landscape, reorientation will have to take into account more than just scale or product portfolio: Thanks to the nature of the competitors and the technology at play, the new automotive contest will demand vertical integration. OEMs that rely on horizontal consolidation at the brand level as their only strategy in this new environment may be in for a rude awakening.
Battle in the pack
EV batteries require mineral inputs of limited, and relatively consolidated, global supply. This electrified transition also requires a sufficient degree of new infrastructure to support mass market adoption. The different pieces of this novel landscape will come together more quickly where company-level interests throughout the value chain are streamlined and vertically integrated.
At present, China is the best endowed international player in the necessary mineral inputs and the only national ecosystem actively prioritising the new infrastructure needed for EVs to scale on par with expectations. The Chinese market for EVs accounts for more than half of global demand at present, with its battery makers accounting for at least 37% of global EV power output and climbing. Downstream, China’s battery and EV champions have forged partnerships with virtually every promising player in the EV field from Tesla to Lucid Motors to Rimac Automobili. Upstream, those battery and EV champions benefit from China’s decades-long global “Go Out” campaign and influence over consolidated mineral wealth, like the dozens of cobalt mines in the Democratic Republic of the Congo into which Chinese players have invested.
China’s OEM market may see horizontal consolidation as a part of its post-COVID reset, just as is likely to be the case in developed markets. But at the same time, China is consolidating vertically. A shrewd industrial policy programme is targeting consolidated control over an emerging, foundational industry. This creates a competitive asymmetry. The auto industry’s sprint for solvency and relevance takes place within the guardrails set by government authorities. Beijing, and only Beijing, is setting those guardrails according to a long-term, competitive national vision.
EV demand will foment innovation races around range and power where advances in thermal management and the relative efficacy of competing battery management systems will be priorities
Regulators have a say on the market dynamics, the application of technological trends, and even the immediate prospect for industry consolidation. Regulations across developed economies focus on spurring or adjusting demand, largely via consumer subsidies, and to a lesser extent through taxes and fees such as London’s Ultra-Low Emissions Zone. China pursues similar demand-side industrial policies, but Beijing pairs those with encouragement for domestic industry to pursue vertical integration. As a result, Chinese auto players orient for the long term and do so with faith in and links to Chinese industrial policy and the critical upstream inputs it provides.
Legacy players in developed markets meanwhile pursue short-term gains and gravitate toward the highest value-add segments possible. When they seize those lofty positions, they are likely to find themselves dependent on supply lines leading back to China. Developed economy governments want lower emissions. Their companies, both legacy and disruptor, answer the call for environmental action by seeking economies of scale, value from their brands, and, when possible or necessary, doubling down on this playbook. They operate according to a profit formula optimised for short-term scorekeeping and the current global layout.
China’s auto sector vertically integrates from the point of critical raw materials—spanning those in China, across the African continent, and in the Western Hemisphere—all the way through the new infrastructure needed to make EV adoption a reality. Meanwhile, Fiat Chrysler merges with Peugeot. One approach seems better suited to winning the COVID-19 induced global reset.
Nathan Picarsic is Founder and Chief Executive of US-based strategy consultancy Horizon Advisory