The future of the automotive supply chain will create new opportunities – but not without risk – for original equipment manufacturers (OEMs), suppliers and investors. How they navigate this investment, legal and regulatory landscape, which has been heavily affected by the Covid-19 pandemic, and mitigate risks will be crucial for the development of these supply chains.
Transformation of the automotive value chain was the focus of a webinar hosted by Ricardo Strategic Consulting (RSC). Simon Arbuthnot, regional managing director for RSC Europe, was joined by guest speakers from RSC, Osborne Clarke and Transport for London (TfL) to assess the investment, legal and regulatory challenges and opportunities this will create.
Mike Blyth, a principal consultant at RSC, who heads up its global mobility practice, suggested there are still opportunities to maximise investment return in a market that has experienced unprecedented disruption due to the Covid-19 pandemic. With automotive technology in a state of rapid change, value can be found at all stages of the technology life cycle.
However, there has been "hype", which often surrounds "boom growth" and early stage equity investment. There was extensive early-stage investment in a variety of autonomous driving-based technologies, but, since the market has caught up with the reality of the technical and regulatory challenges, there has been a decline in investor interest, particularly from those looking for immediate returns, with share prices now only just coming out of a low.
The future mobility value chain will be a wider network than traditional supply chains and oriented around operators of vehicle fleets, with strong data and supporting services, he added. This includes the built infrastructure, as well as legal frameworks that allow the operation of fleets, supported by other services like insurance needed to enable technology adoption "on the road". Future investment in this more complex and diverse landscape may be in a wider "ecosystem" of mobility products and services and will mean there is a move from the traditional automotive sales-based value chain, to one of “mobility on demand” or “mobility as a service”.
Timing and allowing technologies to mature and develop while navigating the hype is an important aspect of managing risks. In terms of the automotive market, mainstream electric vehicle technology is coming up towards the profitable and productive side of its life cycle, he said, while internal combustion engines have their reached the end of a "plateau of productivity".
While vehicle production levels have slowly recovered over the past six months, volume is still down among the "big three" – US, Europe and China – and fell by 20% in 2020. China, with its rapid recovery from the effect of the Covid-19 pandemic, has regained its production volumes and is expected to be back on track to growth within the next twelve months. However, Europe is forecast to only recover to pre-2019 vehicle production volumes by 2024, while the US that is more likely to have to wait until towards the end of the decade.
Conventional powertrain volumes, specifically internal combustion engines, are unlikely to recover to pre-2019 levels, as changing consumer habits and preferences have brought a sharp increase in the uptake of hybrid and electric vehicle technologies. With increased investments and incentives in and around a "green recovery", hybrid and electric vehicles are on the path to displacing internal combustion engines as the powertrain of choice, if not quite by the end of this decade.
Undervalued companies in a declining sector may still have the scope for growth with the right investment and guidance. If a business has been mismanaged, perhaps, but has transferable assets and competencies, there is potential to "pivot" or realign in the market – and turn decline into future growth. High-growth areas, in terms of volume and value, that offer potential positive returns on capital include powertrain electrification, high-voltage batteries and electric motors.
Risk will increase for technology companies whether they are in growth or decline, however, as the automotive sector faces disruption and participants look to manoeuvre into new technology and products (as well into new geographical markets and supply chain strategies). Companies with the option to pivot towards a more prosperous trajectory generally require investment to enable the shift.
Technology is rapidly blurring the traditional industrial boundaries, observed Simon Spooner, head of Osborne Clarke's international transport and automotive sector. This is creating new opportunities for businesses to pivot, which requires sophisticated and slicker due diligence. Buyers need to be aware of the risks in a target company and the wider potential application of assets that they are looking to buy. For example, when looking at the assets of an electric charging-point operator – could there be opportunities to expand to cover parking enforcements or mobility hire? How transferable are the assets of a target company? Can the charge point target data and IP be re-engineered to look at other curb-side opportunities? "All due diligence – whether legal, financial, commercial – is valuable at the moment," he added.
Another development on the legal landscape that will have an indirect influence on managing risk in the automotive supply chain is the National Security and Investment Bill, which is expected to become UK law later this year. This will create a new standalone system for governmental control and intervention in transactions giving rise to a national security risk. While not ostensibly an issue for the automotive industry, areas such as artificial intelligence, data infrastructure and autonomous technologies have all been identified as having a national security interest. Transactions of this nature will be subject to notifications and clearance requirements, or face potentially significant fines and/or the transaction itself being void. An understanding of these processes to enable an early assessment of the risks posed by a given transaction will soon be indispensable.
Michael Hurwitz, director of transport innovation at TfL, looked at issues surrounding mobility in increasingly crowded city and urban environments and offered a perspective on the regulatory challenges faced by a transport authority like TfL. Authorities need to consider the consumer, the product and the risks when looking to adopt new technologies. From electrification of public transport to kerb-side charging solutions, change is not possible without transport authorities like TfL leading by example and providing the necessary infrastructure.
TfL looks to ensure that these developments remain inclusive, which can be often overlooked in the excitement that surrounds new technologies. The solution is driven by data, he argued, and operators need to ensure that inclusivity is maintained while returns are made. Those willing to adopt a collaborative approach to data-sharing opportunities – monetising the output but also understanding the risks – are most likely to come out on top. The same goes for any automotive manufacturer or supplier where the adoption of new technologies is dependent on balancing the needs of consumer, the solution itself and the risks involved.
The automotive industry is arguably entering its most transformative phase in history: from this, fundamental changes to the supply chain will inevitably follow. This will create new opportunities for OEMs, suppliers and investors, but all will need to find a way to manage the risks involved. While the future is far from certain, change will be driven by the uptake of new technology and mobility solutions.