2020 Automotive Update: State of the Market, Cost Recovery, and Market Disruption Opportunities
On February 4, 2020, Ann Marie Uetz of Foley & Lardner LLP and Laura Marcero of Huron Consulting Group co-hosted a presentation featuring Michael Robinet, Executive Director at IHS Markit Automotive Advisory, to provide insights on the state of the automotive market. More than one hundred automotive executives, professionals and lenders participated. Here are the highlights:
Light Vehicle Outlook: Industry at a Crossroads
Keynote speaker Michael Robinet discussed the move toward vehicle electrification, and the immense differences between conventional, hybrid, and battery electric vehicles (“BEVs”). A conventional vehicle uses an internal combustion engine for propulsion, without assistance from an electric motor. Through the implementation of start/stop technology, OEs have been able to defer investments in full electrification while still responding in part to increased fuel-economy requirements. Nonetheless, many OEs also manufacture multi-energy vehicles, such as mild-hybrid or full-hybrid vehicles, which use a combination of gasoline and electricity to power the engine. Finally, Michael discussed the gold standard of vehicle electrification—BEVs, which are fully electric vehicles with rechargeable batteries and no gasoline engine. From a structural standpoint, the parts, modules, and technology necessary to assemble conventional vehicles, hybrids, and BEVs are radically different, and thus the ultimate move toward BEVs will impact the supplier market as it adjusts to meet this demand.
Currently, the automotive markets in China and Europe are on the leading edge of vehicle electrification, and both are at least five years ahead of the United States according to Mr. Robinet. In the European Union, mild-hybrid vehicles are expected to surpass start/stop engines in the near future. Additionally, China, a country that accounts for nearly 50% of future growth, currently purchases half the world’s BEVs. GM sells more vehicles in China than any other country, and many other OEs do an enormous amount of business in the Asian market, devoting significant resources to vehicle electrification. Michael commented on OEs’ future focus on electrification, as opposed to new launches of conventional engines and powertrains.
To be sure, the progression toward electrification poses serious challenges for traditional automotive suppliers. Nonetheless, for those suppliers willing to adapt, Michael noted the evolution toward vehicle electrification in overseas markets creates a significant source of opportunity. Moreover, suppliers that quickly find a niche in the hybrid or BEV space will secure a more certain future. He noted that vehicle electrification will eventually become more prevalent across the United States, particularly on the coasts and within large metropolitan areas. Thus, although consumer demand for vehicle electrification within the United States is still evolving, and the infrastructure needed to accommodate a large-scale shift away from conventional vehicles is far from complete, the progression is inevitable according to Mr. Robinet.
Panel Discussion: Concerns and Opportunities in a Changing Environment
Foley partners Ann Marie Uetz and Vanessa Miller, and Huron Managing Director Laura Marcero, participated in a panel discussion moderated by John Trentacosta regarding industry concerns and opportunities in a changing and at times distressed environment.
Ann Marie discussed the importance of monitoring suppliers for warning signs of distress, including missed shipments, late payments, quality issues, etc. If issues persist, companies should conduct due diligence and investigate suppliers to determine their level of risk. Ann Marie further noted that when a commercial relationship goes south, the end goal for all involved is typically the same – to maintain continuity of supply. Laura concurred, stating that, more often than not, the distressed supplier has very little leverage and finds itself shut out of negotiations. Instead, the lender and customer drive the negotiations to reach a favorable outcome. Ann Marie and Laura stated in their experience, customers are typically willing to accommodate a distressed supplier in some fashion. After all, it is in neither parties’ interest to shut down the supply chain and turn a $1 million issue into a $20 million problem.
The discussion then shifted to the intersection of two massive industries: technology and automotive. Vanessa and John, whose practices include a focus on warranty and cost recovery in the supply chain, discussed the incorporation of advanced technologies into vehicles and the significant issues related to cybersecurity and data privacy which have resulted. Indeed, some argue that cars have become the most significant computers that many of us own, filled with hundreds of sensors. As such, how are companies handling all of this data, and who is responsible for the associated risk? Vanessa stated the answers to these questions are more relevant than ever. In the summer of 2018, California enacted a statute intended to enhance privacy rights and consumer protections. Thereafter, in 2019, dozens of states introduced similar legislation. Thus, the introduction of technology into the automotive supply chain will require companies to navigate a complex web of data laws. Warranty issues will also become increasingly complex. Accordingly, it is imperative companies allocate risk through thoughtful contractual provisions and unambiguous specifications and requirements.
The keynote presentation and panel discussion provided prominent members from the automotive and financial sectors helpful insights into market trends and emerging issues. To view the 2020 Automotive Update: State of the Market, Cost Recovery, and Market Disruption Opportunities program materials, click here.
Foley and Huron look forward to hosting this annual event again in early 2021.