As the birthplace of the internal combustion engine (ICE), Europe has long been at the forefront of the global automotive industry. Its past, present and future significance to the region cannot be understated. With EU sources estimating total employment at almost 14 million across manufacturing, retail and transportation with a combined GDP contribution of some 7%, the economic and societal influence the industry exerts is clear to see.
After generations of worldwide growth, during which several European manufacturers have assumed the role of global titans, the industry now faces its most significant challenges yet. A perfect storm of disruptive technologies—which at AlixPartners we term CASE (Connected, Autonomous, Shared and Electrified)—along with economic headwinds and changing consumer preferences have put the brakes on growth and threaten to stall future prospects. To put this in numerical context, AlixPartners predicts a global growth rate of just 1.6% between now and 2026, with the European market flat, North America and Japan in slow decline and the hitherto booming Chinese marketing dipping significantly before a potential rebound to current levels in 2023.
The challenges ahead for automotive companies in Europe are significant, both short and long term, but the opportunity (and threat) must not be ignored. Now is the time to bet big, and to bet brave
Clearly, these prevailing conditions impact the industry as a whole, but crucially, having led the way for much of the industry’s lifetime to date, Europe now finds itself playing catch up and needs to take bold steps to secure a position at the top table for the next iteration of global transport and mobility.
So, where does the European industry go next, and what role can it play in the new future of mobility? In its 2019 five-year manifesto, the European industry’s trade body ACEA lays out the challenges ahead and talks of addressing them via pursuit of “a unique European way forward”, one which should leverage the region’s “technological and market strengths”. How might this bold ambition manifest itself?
Firstly, in powertrains, the region’s manufacturers need to accelerate adoption and proliferation of new technologies. AlixPartners 2019 Global Auto Study predicts that by 2030, driven in part by legislation, ICE sales in Europe will have dwindled from 96% of total sales in 2018 to just 42%. The majority of passenger vehicles sold in the region at this time will be using either hybrid (19%) plug-in hybrid (13%) or full battery propulsion (27%). By comparison, the Chinese market is anticipated to be 50% ICE versus hybrid or battery. Whilst China is expected to continue its rollout of EV as a major part of its future automotive strategy, announced launches demonstrate that Europe will play a major part in global EV volumes over the next few years.
Many consumers remain uncomfortable with the idea of using Level 4/Level 5 autonomous vehicle technology when available
Clearly, this represents an opportunity and would position the EU as a world leader in the adoption of EVs by proportion. To reach these goals, significant investment is required both operationally and commercially. Operationally, we anticipate greater collaboration between manufacturers and suppliers on battery technology. Elsewhere, massive capital investment is required in new plants dedicated wholly to the production of non-ICE vehicles as automakers are forced into managing their European mix to help meet the challenging emissions targets that so heavily rely on alternative fuel vehicle sales.
Volkswagen’s US$1bn-plus investment in wholly reconfiguring its Zwickau plant for an EV future is currently gathering headlines for the scale and audacity of the exercise. In the next few years, however, this bold level of commitment will have to become the norm, and will be replicated by all the leading players as old sites are either repurposed or decommissioned. The ripples will be acutely felt further down the supply chain, given that there is an estimated 40%-plus overcapacity in ICE component manufacturing for an electrified future.
Commercially, manufacturers still have a significant distance to travel to convince customers to switch. Crucially, they need to improve operations such that the current cost to purchase versus comparably sized ICE offerings is addressed. In doing so, expect to see revisions to the traditional selling model and a growing emphasis on provision of mobility as opposed to the legacy selling of a unit of production. Existing investments in mobility providers will be increased to drive proliferation, and governments throughout the region will be required to play a significant role in encouraging adoption through both increased financial incentives and support for a charging infrastructure. This latter point is crucial for consumers, many of whom are currently open to the idea of an electrically powered vehicle but for whom, ultimately, “range anxiety”, cost and lack of access to charging, in particular high-speed charging, are the most cited barriers to purchase.
Whilst China is expected to continue its rollout of EV as a major part of its future automotive strategy, announced launches demonstrate that Europe will play a major part in global EV volumes over the next few years. Clearly, this represents an opportunity and would position the EU as a world leader in the adoption of EVs by proportion
Elsewhere on the CASE spectrum, particularly in the area of autonomy, the landscape is perhaps more challenging. The economic and societal benefits of autonomy are increasingly heralded with much future gazing available extolling the potential uplifts in productivity, long-term decrease in cost to serve for transport providers and reduction in passenger and pedestrian injury. At a consumer level, we see that adoption will lag that of EVs driven by two factors: firstly, consumers are currently less likely to pay a sufficient premium to cover development costs; and secondly, many (42-57% across the largest European markets) remain uncomfortable with the idea of using Level 4/Level 5 autonomous vehicle technology when available.
What we anticipate instead is a significant push from manufacturers towards marketing and customer education. This will likely manifest itself in commercial arrangements with transport providers of both goods and, in time, people to increase awareness. In the course of this, the manufacturers will become an integral part of the growing European Mobility as a Service (MaaS) market out of necessity as autonomous becomes a catalyst for converting the high levels of growth in services into profitable business models. As part of this we envisage that several of the automakers will move to establish separate units or even brands for fully autonomous vehicles within their portfolios as they seek to beat the tech companies to market and establish MAAS.
AlixPartners predicts a global growth rate of just 1.6% between now and 2026, with the European market flat, North America and Japan in slow decline and the hitherto booming Chinese marketing dipping significantly before a potential rebound to current levels in 2023
Finally, and given where we started in referring to the industry’s importance to the social fabric of the region, we should acknowledge the underlying importance of macro-economic issues. Today’s political environment is creating both risk and opportunity, with unpredictability seemingly the only constant. Will the long-term impacts of recent key moves such as the EU/Japan trade deal—which may by itself remove more than €1bn (US$1.1bn) of duties on European exports—be offset or possibly dwarfed by fall-out elsewhere? Clearly, the shape of any future UK trade deal with the EU and the outcome of ongoing China/US trading hostilities will have significant repercussions. It is clear that the industry is lobbying hard and seeking to exert positive influence wherever it can, and both national and European governments must continue to support the industry to navigate the present turbulence without damaging the industry’s prospects of meeting its longer-term challenges.
Europe’s engineers founded the automotive industry and have led the world for much of the 130 or so years since. To cement their place at the top table for the next iteration of mobility, being the best engineers is not enough. The leading proponents of this new wave of transportation will combine the skills of technologists, data scientists, economists, politicians, investors and of course excellence in design and engineering. The challenges ahead for automotive companies in Europe are significant, both short and long term, but the opportunity (and threat) must not be ignored. Now is the time to bet big, and to bet brave.
Sean O’Flynn is a Director in the automotive practice at AlixPartners
This article is part of Automotive World’s special report, ‘The evolution of Europe’s auto industry‘, which is available now to download