In an acknowledgement that the only constant is often change, the Original Equipment Suppliers Association’s (OESA) 24th Annual Automotive Supplier Conference opened on November 7 under the headline “The Future is Calling. How Will You Answer?” Following a year fraught with supply chain delays, economic uncertainty, rising prices and global unrest, the OESA 2022 Automotive Conference brought together hundreds of mobility leaders to discuss a dynamic but complicated industry landscape.
A perennial highlight of the conference is the Outlook Panel moderated by Mike Jackson, Executive Director, Strategy & Research, at OESA. This year’s discussion gave a snapshot of the considerations that players in the mobility space will need to balance if they are to thrive in the years ahead.
This year’s panel featured Tim Mahedy, Senior Economist at KPMG, LLC; Joe McCabe, President and CEO of AutoForecast Solutions, LLC; and Colin Langan, an Automotive & Mobility Analyst with Wells Fargo N.A.
Mr. Mahedy began by providing a summary of major economic trends facing the global economy and examined how they are likely to affect consumers.
With inflation rates pushing 40-year highs and climbing at the fastest rate of interest rate hikes since the mid-1990’s, he discussed how Federal Reserve interest rates of 5.25% or higher have the potential to erode real wages domestically and temper consumer demand for new vehicles globally (calling it “a huge headwind to consumption”). Although vehicle sales appear to have stayed relatively strong in 2022, consumer sentiment indicators in rate-sensitive markets like housing suggest building headwinds to vehicle spending. Rising new vehicle inventory levels lend support this thesis. Mr. Mahedy also discussed how a strong US Dollar, shrinking labor force, climate change and European/Asian instabilities have the potential to trigger recession. Nonetheless, he stressed that there will be significant growth in the mobility space over time, and that innovations like vehicle electrification will remain in demand and essential to weathering global challenges in the long term. Moreover, he noted how portions of the economy – such as banking – appear to be less exposed to volatility or any one economy than in prior periods, including the Great Recession of 2008-2009. We are “entering a period of scarcity,” he noted.
Mr. McCabe spoke more directly on the impacts of markets volatility on suppliers, and the broader automotive and mobility industries. Ultimately, he concluded that uncertainty and changing supplier dynamics will make it so that players who offer creative ways to deliver product consistently will find room to succeed. This is in part because of the sheer amount of capital it will require to achieve global vehicle electrification; in the coming two vehicle life cycles, for example, more than 152 million vehicles will require electric infrastructure (noting “this BEV thing is not a fad”).
A shift to vehicle electrification also turns old assumptions on their head. The EV consumer appears more willing to accept different social arrangements like vehicle sharing. Formerly “impulsive” buyers also seem willing to accept new industry players who shun dealership models and rely heavily on online vehicle pre-orders. These shifts inevitably makes it hard for vehicle manufacturers and suppliers to forecast, a challenge that is magnified by global economic uncertainty.
Mr. McCabe also touched on the effect of US trade tensions with China, access to commodities and some components and incentives for domestic production like those contained in the Inflation Reduction Act of 2022. While the exact outcome of these influences on the supplier market remains to be seen, he suggested that suppliers who can achieve greater level of just-in-time delivery capabilities and ensure secondary/tertiary supply lines will be better positioned than their peers.
He also discussed how new players in the automotive and mobility industries still require expert guidance on how to navigate supplier relationships, and that some older industry players are still coming to terms with the EV space and working their way up the learning curve. This may mean there likely will be increasing demand for strategic partnerships, and increasing acquisitions of companies who can support vertical integration strategies (subject to the attendant antitrust considerations).
To conclude the discussion portion of the panel, Mr. Langan applied the considerations discussed by the other two panelists with a particular emphasis on battery procurement and the EV space. He discussed how legacy products like internal combustion engine (“ICE”) drivetrains will remain critically important to suppliers’ businesses throughout the transition to electric, and how those legacy products will keep employees busy even as transitions take place. For now, he stated, we “are not prepared for the demand that is coming [in EVs].” He also noted how drives to consolidate ICE production will likely occur as manufacturers increasingly differentiate through newer EV products and less so through ICE enhancements.
Next, Mr. Langan shared findings from major EV components tear-downs and discussed how traditional automakers are rapidly closing the gap with newer market entrants (like Tesla). He concluded that more traditional manufacturers are getting a lot better at converting electrons to miles driven. Huge costs increases in lithium and other battery-related commodities pose a real threat to margins across the industry, however. He also discussed how aggressive regulations from the National Highway Traffic Safety Administration, California Air Resources Board and the Environmental Protection Agency might make it difficult to produce EVs with higher profit margins. Instead, manufacturers need to sell “commodity” EVs to meet compliance goals. Pensions and union contract negotiations have the potential to make transitions even more difficult, meaning disciplined focus on keeping costs low and margins high will be essential.
The Q&A session following the panel focused on recession concerns, the continuing semiconductor shortage, Europe’s energy position moving into winter, China and the 2022 US midterm elections. The participants generally agreed these will all present opportunities, as well as real challenges for suppliers. Consolidation is likely given economic trends, and sovereign debt challenges are likely to trickle down to financial markets in the longer term, the panel noted. Mr. Langan noted there is “a rough road ahead for many” in the EV space, given the significant CAPEX requirements and timeline to fuller adoption of EVs.
Europe will be a big driver of prices this winter given its poor energy position, ongoing political sanctions affecting energy markets and its reliance on Russian gas. Slowing growth in China, as well as its zero COVID-19 policy will also temper demand, and prices are certain to be affected by semiconductor availability and China’s stance on Taiwan. The role of hydrogen and nuclear power was also discussed, and the panelists discussed how commercial applications could be a huge value driver not directly factored into other parts of their analyses.
All in all, the Outlook this year was more on the gloomy side than in prior periods, with more headwinds than tailwinds noted. This is confirmed by the most recent OESA Supplier Barometer, which Mike Jackson noted came in at a decidedly pessimistic 36 (14 points lower than a “neutral”/50 outlook in the industry).