OESA 2021 Automotive Conference – Beyond Disruption – Obstacles Have Been Overcome but New Ones Emerge on the Horizon

The Original Equipment Suppliers Association (OESA) 2021 annual automotive conference was held this year on November 11^th and in a shift back to normalcy, was conducted in-person and virtually, under the theme “Beyond Disruption.”  After more than 18 months of unprecedented disruption, the industry is experiencing more groundbreaking disruption than ever before.  Following a couple months of non-production in the Spring of 2020, the industry played a leading role in bringing the U.S. economy back closer to the footing in the 2^nd half of 2020, but automotive global light vehicle sales saw substantial downward pressure through 2021 as various shocks impacted sales compared to 2020’s second half historical sales recovery. While the industry is expected to face numerous headwinds as it enters 2022, long term prospects for the industry remain bright as new technologies and industry players drive growth through the COVID recovery.

The Industry Outlook panel, moderated by Mike Jackson, Executive Director, Strategy & Research, at OESA, featured John Murphy, Managing Director, Bank of America Merrill Lynch; and Jeff Schuster, President, Americas Operation and Global Vehicle Forecasting, LMC Automotive.   Jeff began with a 30,000 foot overview, showcasing the SAR for global light vehicles over the past 12 months, and comparing the current trend back through 1998. Jeff noted that the period we’re in now is that of an “unknown period,” after the industry experienced strong recovery in the 2^nd half of 2020, hitting a SAR of 92 million in December 2020, but since falling to 73 million as of September 2021. Jeff noted they are expecting this rate to level out by the end of 2021 at a SAR of approximately 73-75 million. 

Jeff highlighted how forecasting for the automotive industry has become increasingly more challenging over the past few years, driven largely by novel uncertainties and disruptive inputs. Of these inputs, supply constraints are a leading factor impacting the industry today, but economic factors such as interest rate hikes, decreasing incentive values, increased transaction prices, and increased used-vehicle residual values have also impacted forecasting and estimating year end results. Although total vehicle volume has been reduced by supply constraints in 2021, in 2022 Jeff expects positive growth to settle in by the latter half of 2022, but he cautions risk will remain high in the industry. Although 2021 is expected to produce negative industry wide growth in both North America and Europe relative to 2020 and less than 1% industry wide growth worldwide, even when pairing back for supply and economic constraints, forecasters are expecting to see substantial global industry wide growth in 2022, with North America and Europe each seeing up to 17% industry wide growth and globally, light vehicle production expected to grow 12% industry wide compared to 2021. Nonetheless, current forecasts remain approximately 10% below the same period forecasts generated in December 2020, driven largely by current supply constraints in the microchip sector and other raw materials.

Through 2021 year end, forecasters are expecting the chip shortage and other factors to have reduced planned production by approximately 10.5 million units, with the chip shortage being cited for approximately 90% of production disruption, and COVID-19, other material and parts shortages, weather, labor disruptions, and other factors being cited for the other 10%. Of the major OEMs, Jeff noted Ford, GM, and Toyota all experienced nearly 1m in lost unit productions, each, with other OEMs seeing less than 1m in lost production levels.

In contrast, through 2025, forecasters are expecting production to allow inventory levels to recover with an 11% compound average growth rate, in part driven by Battery Electric Vehicle Production (BEV). By 2033, forecasters are expecting BEV production to account for over 40% of vehicle production, driven largely by a favorable regulatory environment with demand driven by consumer preference not currently being seen as a significant factor. While current forecasts for BEV production remain below those developed in 2020, it is expected they will remain below 2020 forecasts until 2025, when forecasts begin to predict accelerated BEV production as regulatory pressures begin to drive quicker transitions to BEV.

John Murphy then provided Bank of America’s perspective on the uncertainty in the short and long term of the automotive industry. John noted that the “cyclical versus secular tug of war” persists in the marketplace and has over the past few years. John highlighted that the automotive industry, from a fundamental perspective, is a “capital goods replacement with a consumer overlay”, a notion that originated in the summer of 2008 when, for the first time in history, the number of vehicles on US roads shrank.

Noting that analysts expected COVID to drive a large contraction in the US economy in 2020 and the periods that followed, the 2020 V-shape recovery caught many off-guard. As a result, the supply shock was not on the radar of many in the industry, and coupled with the supply pressure presented by materials shortages, John expects the industry to take a significant period of time to recover to pre-pandemic levels. John noted that, ironically enough, depressed inventory levels being seen today are actually a positive in the medium and long term. John noted that they are expected to drive growth and recovery as the capital replacement cycles evolve with inventory levels improving over the next few years. With this in mind, current US inventory is hovering around 20-day supply levels (approximately 1m units), which is lower than we’ve seen over the last 20 years. In large part due to the supply being less than demand (as well as reduced incentive values), average transaction prices for new and used vehicles remain at all-time highs, after flat lining in early 2021. Although new vehicle have seen rising prices, the increase in used vehicle prices has helped offset new vehicle prices and allowed new vehicle sales to remain strong (when supply allows it). John later noted that as OEMs continue to build connectivity with the consumer and their vehicles through automotive 2.0 technology, such as Over The Air Updates and incorporation of 5G technology, OEMs will be able to monetize vehicles through their third and later owners, past the initial vehicle sale (or certified pre-owned sale).

John cautioned that there are number of tail risks present in the industry, including COVID-19’s continued impact, inflation/deflation, the EV revolution, and many other factors. Although some believe inflation to be a transitory event, John notes that inflation is likely to stay at a level above 2%. At a higher level of inflation, John noted this drives questions about the industry’s ability to increase prices to compensate for inflationary pressures in their inputs (labor and raw materials being major factors). Additionally, John noted an interesting trend has been developing in the last five years with outside capital investment driving new entrants to enter the automotive industry. John notes that many of these new entrants are raising large levels of capital and though many are expected to fail, some will succeed in a space that largely has seen little outside capital investment from a historical perspective. John further noted that, in line with Jeff’s analysis, regulatory drivers are the catalyst for drastic BEV market penetration in the US over the next 20 years. 

In a slightly cynical take, John concluded that although many of the major OEMs are investing billions in BEV platforms and production, this investment is simply a reallocation of existing CAPEX and R&D budgets, but not enough to effectively compete with new entrants at their current level. When taken from this perspective, John noted that in order for traditional OEMs to remain competitive against the “Auto is the new BioTech” market entrants, they need to invest more capital, going above and beyond their existing plans and extract more funding from core businesses into these emerging technologies and platforms. Increasing their capital spend will allow OEMs to more effectively compete with these new entrants. This is largely driven from the obstacles traditional OEMs face with raising capital in the public markets where profitability and ROI are expectations, rather than good to haves.