Automotive, technology investments erode the chain’s margins

The large investments that car manufacturers have been making for new technology are eroding the chain’s margins. As the number of cars sold is already putting the industry under pressure and the alternative materials’ producers make the lives of tanners (for automotive) challenging, McKinsey sounded a new alarm for the automotive segment: the challenge of innovation and sustainability risks of being unsustainable under a financial viewpoint.

The report

The two fighting grounds are that of electric and driverless vehicles. According to what reported by McKinsey and presented by the Il Sole 24 Ore (Italian economics newspapers), the industry has spent 275 billion euro in research until today, often (254 cases since 2014) in partnership with somebody else, to limit costs. Such efforts that are made for economic gain that isn’t immediate, but potential in the future, is stressing the makers’ margins: car manufacturers have had an average EBIT of 6.3% during 2018 (120 billion USD in total), while their suppliers earned 55 billion USD (7,1% EBIT). 2018’s results will be hard to repeat. Alix Partners and Standard & Poor’s agree: the automotive segment goes towards the “desertification of profits”.

The current context

The makers themselves call out the challenging context. Ola Källenius, president of the board at Daimler, explained that it “it will take between 10 and 15 years before car manufacturers can be profitable on the electric front”, reports the Il Sole 24 Ore. Carlos Tavares, CEO of PSA Group, states that the objective of cars is to guarantee sustainability, but at the same time a good business model.

EU, prices, supply chain

Car makers aren’t just facing challenges from the technological transition. They also need to consider other elements of concern in their strategies. Which ones? The severe norms imposed by a satisfied European Union. The pushes coming from the innovation of the high-end segment (where the clients are attentive to the topic) and the lower-end one (where car makers can make important volumes) are tightening their hold. The same consequences can be felt on the list prices (for both rentals and purchases cars), as they will inevitably start to rise. And finally, the growing weight of technology suppliers, also weighing on the balance of the supply chain.




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