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023 was a highly turbulent year for the Chineseauto market, which saw it engulfed in a viciouscircle – a “rat race” with no end in sight and pricewars as the weapons of choice.
In the following insight report, we want to explore this rat race in greater detail and provide an outlook for 2024, including the challenges that lie ahead as well as the focal points of foreign OEMs in the highly complex Chinese market.
“卷” or the involution of the Chinese auto market Overall performance
The term “卷” (spelled “Juǎn” in Chinese Pinyin) was undoubtedly the prevailing expression in the Chinese automotive market in 2023. It is understood to mean “involution” or “rat race,” depicting a scenario in which all market participants are entangled in an intense battle for market share with no foreseeable conclusion.
And that exactly describes the Chinese auto market with the emergence of a price war as the ultimate solution, while favorable governmental subsidies are on the way out – a vicious circle
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Wie geht es unseren Zulieferern? Wie unterscheiden sich die Strategien der Hersteller? Funktioniert das vielfach angestrebte Agenturmodell im Zusammenspiel der OEMs und Händler? Kann man wirklich mit digitalen Services Geld verdienen? Und: ist die Intermodalität am Ende?
Darüber sprechen Jürgen Stackmann und Dr. Jan Burgard in der neuesten Mobility Pioneers #Podcast Folge.
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he transformation of the automotive industry is in full swing, encompassing both upstream and downstream aspects on national and international scales.
To paint a clear picture of this evolution, various aspects of the automotive sector are being reshaped. New strengths are being cultivated, weaknesses are being addressed.
A critical aspect deserving focused attention is “Pricing and Revenue Management.”
Fig 1: Pricing as the Ultimate Profit Lever
Source: Berylls Strategy Advisors
Pricing stands as the most potent lever for increasing profitability within the automotive sector. Consequently, it should take center stage for all Original Equipment Manufacturers (OEMs). However, it’s essential to recognize that Revenue Management extends beyond Pricing. It involves a strategic business practice adopted by companies to maximize their revenue and profitability through the optimization of product or service pricing. This discipline entails the application of diverse pricing strategies, data analysis, and forecasting techniques to make informed decisions about price setting, resource allocation, and capacity management. The primary components are depicted in the chart below. Pricing emerges as the most significant lever for enhancing profitability, making it of utmost importance for top management.
Fig 2: Revenue Management Encompasses Multifaceted Strategies
Source: Berylls Strategy Advisors
With a number of years of experience across various industries, it is evident that the automotive sector can glean valuable insights and techniques in Pricing and Revenue Management from sectors such as Fast-Moving Consumer Goods (FMCG), software, and industrial fields. Currently, many OEMs are still focusing a lot on factory utilization. This can result in cars being sold with higher discounts, because production and demand are not matching good enough. Many changes occurring in the automotive industry mirror transformations witnessed by other industries in recent years:
Considering these ongoing transformations, now is the ideal time to formulate and implement a 3-5-year development plan to fortify the Pricing & Revenue Management capabilities.
Before delving into the specific must-win-battles (MWBs) for Pricing & Revenue Management in the automotive sector, let’s explore some best practices from other industries:
Considering these examples, let’s draw some initial conclusions:
1. Pricing & Revenue Management serves as the most substantial profit lever.
2. When benchmarked against other industries, there is ample room for improvement in automotive OEMs.
3. The ongoing developments within the automotive industry underscore the rising importance of Pricing & Revenue Management.
Consequently, we strongly advocate a concentrated focus on Pricing & Revenue Management, with particular emphasis on the following 5 must-win-battles (MWBs):
A robust strategy is fundamental to success, and this holds true for Pricing & Revenue Management. Given the complexity of the automotive environment, the strategy must provide detailed answers to critical strategic questions. These include prioritizing revenue over profitability (or vice versa?), setting objectives for each Strategic Business Unit (SBU), defining target customers, understanding their value drivers and willingness to pay, positioning prices, determining channel strategies for different customer segments, and specifying pricing methods.
Developing a Pricing & Revenue Management strategy for an automotive OEM is a comprehensive exercise that necessitates in-depth insights into and transparency about markets, customers, channels, and offerings, both internally and externally. Of course, it must be mentioned that OEMs are not starting from scratch but have already developed elements or even entire Pricing & Revenue Management strategies.
Determining the organizational structure of Pricing & Revenue Management is crucial. It’s essential to decide whether the team should be centralized, decentralized, or a hybrid model. This decision should align with the overall strategy and objectives of Pricing & Revenue Management. As always, there´s not THE one solution that is always right:
*Please note that this may not correspond to the current status of the companies.
In addition to structure, harmonizing global Pricing & Revenue Management processes is crucial for automation through digitization. Technology and human resources are integral components of the Target Operating Model. As the era of direct sales is coming closer, this of particular importance, as from than on, the final pricing responsibility stays with the OEM.
A central tenet of Pricing & Revenue Management is understanding customers and aligning strategies accordingly. Effective Pricing & Revenue Management involves precise tools and concepts, with price differentiation being a significant component. Many companies successfully charge different prices to different customer segments for the same product or service, based on willingness to pay. Other industries are already successfully doing this as we speak: Just consider the practice that hotels and airlines are applying very successfully since many years. Amazon is changing the price for certain products up to 40 times a day, based on demand, competitor prices etc. Big insurance companies offer their insurance products at differentiated prices to different customers. Automotive has made recent experience with changing willingness to pay during the time of product shortages. Customers that are used to negotiating prices with their dealer where suddenly ready to even pay way above list price as for example visible in the United States. As product shortages are more and more dissolving now, the old pattern of price negotiation is coming back. A lot more examples of price differentiation exist.
To achieve this successfully, OEMs must understand the willingness to pay of their target customer segments, employing various reliable techniques for this purpose. This not only boosts profitability but also enhances revenue. And always remember that a 1% price increase already leads to a 7% increase in profitability.
Effective Performance Management hinges on knowing the right performance metrics, measuring, and reporting them accurately, and having sound performance management processes in place. Performance metrics vary based on business models, and achieving granularity across different business, customer, and product segments is often necessary. When list prices exist and discounts and rebates can be granted, you might want to use “price enforcement” as one top KPI. When you are for example in an online business, where prices are set by an AI-algorithm, a suitable KPI can be “realized price improvement”, measuring the price increase over a certain period. To add even more quality, “realized price improvement” can be measured against a market price index or internal objectives. The price waterfall can be a good input to discuss suitable KPIs. For OEMs on their way to the direct sales mode, managing price enforcement will be one of the key capabilities to be built to ensure profitability targets are met.
Fig 3: Price waterfall as food-for-thoughts about pricing KPIs.
Source: Berylls Strategy Advisors
Performance metrics should align with the pricing strategy and objectives, and data should be made available in suitable reports, despite the challenges of legacy IT systems and data quality.
Data and AI offer tremendous potential for enhancing Pricing & Revenue Management. Using AI, OEMs can optimize various facets of Revenue Management simultaneously, which is challenging with conventional methods. Additionally, understanding customer behavior and preferences from data can guide pricing strategies and offerings. However, successfully scaling AI projects in Pricing & Revenue Management requires investment in relevant data, systems, and expertise, as data quality and system readiness are often limiting factors.
In conclusion, while automotive OEMs may not be considered Pricing & Revenue Management benchmarks compared to other industries, the changing landscape demands attention. We recommend that OEMs assess their current maturity level in Pricing & Revenue Management and chart a strategic roadmap, centered around these 5 must-win-battles outlined in this paper. With the Berylls Pricing Pathfinder we combine our Pricing & Revenue Management expertise with a powerful tool to reveal what Pricing & Revenue Management excellence looks like, and how to get there.
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ew things shape modern life as much as individual mobility. Be it as an expression of freedom and individuality, or as an economic driver.
To reflect this, we have developed the WisdomTree Berylls LeanVal Global Automotive Innovators Index – the WTCAR. It tracks the performance of the 100 most relevant publicly listed automobility players worldwide.
By design, the WTCAR covers the industry’s entire value chain – from vehicle manufacturers and suppliers, to dealer groups, and providers of mobility services or infrastructure.
The automotive industry experienced a severe blow from the capital markets in 2022, and the recent decline in stock prices has wiped out most of the gains that the sector had made from the pandemic lows.
Now, there are still several major effects impacting the global capital markets. First, central banks remain committed to fighting inflationary pressures and have incrementally raised interest rates as a strategic countermeasure over the past months, slowing down the recovery of the economy. Second, supply shortages caused by the Covid-19 crisis is continuously moving into the rear-view mirror, allowing for a more opti- mized production utilization. Third, political influences like the Inflation Reduction Act in the US, the war in the Ukraine, and the pressures bet- ween China and Taiwan are continuing to influence the developments at the global capital markets.
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Nach der diesjährigen IAA ist klar: “Wir befinden uns in einem gesättigten Markt, nur das Elektrosegment wächst. Daher ergibt es Sinn, die vergleichbaren, elektrischen, Fahrzeuge für die Kunden zur Verfügung zu stellen. Das Problem der über 300 (!) Herstellen von Elektroautos alleine in China ist: Die meisten sind nicht nur bei uns vollkommen unbekannt.“
Auch dadurch dass die Produktion einfacher ist, als bei einem Verbrenner, versuchen unzählige Marken weltweit sich einen Namen zu machen. Ein Problem – auch für Anleger, die mit einem „zweiten Tesla“ den Lucky Punch suchen. Könnte ein ETF auf den WisdomTree Global Automotive Innovators Index helfen?
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he trucking industry is currently grappling with significant pressure induced by an ongoing transformation predicated on three fundamental changes to its long-standing operations.
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ie Zuliefererindustrie 2022 war geprägt von Sonderfaktoren wie dem Krieg in der Ukraine, steigender Inflation und weiterhin hohen Rohstoffpreisen.
Obwohl 95 der Top 100 Zulieferer im Geschäftsjahr 2022 steigende Umsätze verzeichnen, schrumpft die Profitabilität bei mehr als der Hälfe. Nach einem Gesamtumsatz von 899 Milliarden Euro in 2021 steigerten die Top 100 dieses Resultat um 18,3 Prozent auf 1.064 Milliarden Euro und durchbrechen damit erstmals die Schallmauer von einer Billion Euro Umsatz.
Der Beitrag der chinesischen Zulieferer an der internationalen Umsatzentwicklung steigt stetig. Im Jahr 2018 lag er noch bei fünf Prozent, 2022 können die Chinesen bereits einen neunprozentigen Anteil für sich verbuchen. Der Zuwachs geht zu Lasten der deutschen und japanischen Zulieferer. Deutschland war am Gesamtumsatz 2018 mit stolzen 23 Prozent beteiligt, Japan steuerte 28 Prozent bei. Beide Nationen verzeichnen seither schmerzhafte Rückgänge. Die deutschen Zulieferer tragen nur noch 21 Prozent zum globalen Gesamtumsatz der Branche bei, die Japaner 22 Prozent.
Dass 2022 ein gemischtes Jahr für die Branche war, zeigt sich auch darin, dass trotz starkem Umsatzwachstum die durchschnittliche Profitabilität von 6,3 Prozent auf 5,6 Prozent gefallen ist. Höhere Materialkosten, Unruhen in den Lieferketten und gestiegene Energiekosten werden voraussichtlich auch noch bis in das nächste Jahr reichen. Auf der anderen Seite sind Halbleiterhersteller die klaren Gewinner. Die drei profitabelsten Unternehmen sind in diesem Jahr allesamt in dieser Branche tätig. Und: Auch 2022 gab die allgegenwärtige Elektromobilität die Richtung vor.
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Weitere Informationen zur jährlichen TOP 100-Zuliefererstudie finden Sie unter www.berylls.com/category/top-100/
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pple's newest Vision Pro is here and brings with it the promise of reinvigorated momentum in immersive Web 3.0 applications for OEMs.
As we set out in two publications last year, the Web 3.0 applications – namely in “the Metaverse” – are high risk, uncertain reward opportunities that are not for every OEM.
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-mobility is already here. The growth of the battery-electric vehicle market around the world has been well above expectations over the past few years, with forecasts of even higher growth to come. With soaring registration figures for electric vehicles, the market for E-mobility components looks ever-more attractive – but will headline market growth turn into long-term profitability for suppliers?
Durch die rasant steigenden Zulassungszahlen für Elektrofahrzeuge steigt die vermeintliche Attraktivität des Marktes für Komponenten von Elektrofahrzeugen und damit auch der Druck für Zulieferer, in diesem Markt Fuß zu fassen.
When we asked top managers from the supplier industry how dependent they are on combustion cars now and how that will change in five years’ time, 70% of those who responded said they are currently dependent on combustion cars for more than a quarter of their turnover, with this figure expected to fall to only 51% within five years. On the one hand this underlines the huge transformation the supplier industry is already undergoing, but on the other it shows that many suppliers’ business models will remain tied to the combustion engine until the end of the decade.
Source: Berylls Supplier Executive E-Mobility Survey 2023
Most suppliers see more opportunity than risk in this transformation. Nearly one-in-eight managers surveyed see electromobility as an opportunity for their company (77%), while fewer than one-in-10 (9%) see more risks than opportunities.
Source: Berylls Supplier Executive E-Mobility Survey 2023
And despite the uncertainties ahead, a full three-quarters of respondents (75%) expect a positive influence on turnover in the next five to 10 years, with only 13% forecasting a decline in margins due to electromobility.
Source: Berylls Supplier Executive E-Mobility Survey 2023
This level of optimism is striking, not least because one consequence of E-mobility is a more competitive and less certain market. For many suppliers, E-mobility will bring challenging levels of change, with low or even negative margins, high technological uncertainty and considerable financial risk.
In the E-mobility era suppliers are confronted with high transition costs, rapid development cycles and a shortage of E-mobility skills. All these factors combine to compress margins and intensify competition.
Despite rapid growth, absolute volumes for electric vehicles remain comparatively low, limiting the opportunity to offset high development costs through volume sales. Meanwhile short E-mobility innovation cycles force suppliers to develop and launch new product generations more frequently simply to keep pace with competitors even while OEMs remain focused on efficiency increases and cost reductions. In this environment it is unsurprising to find intense competition for E-mobility engineering skills from both OEMs and suppliers, forcing up labor costs and further squeezing supplier margins. This is only likely to increase as new suppliers attract staff and volumes increase.
Such cost pressures against a background of furious competition from existing suppliers seeking to build their position in the E-mobility market and new suppliers, who may be free of the burden of legacy costs, mean that for many suppliers’ prices are too low to support margins. In some cases, margins may actually be negative. Established suppliers risk becoming trapped in a vicious circle: they need more business to increase their volumes and strengthen their own market position, but that may mean lower average margins and often higher cross-subsidization from other business areas.
In the long run this is not sustainable and sooner or later consolidations will be necessary – indeed, the first signs of this are already apparent.
Supplier optimism is good, but for this to be justified it needs to be supported by a clear transition roadmap. Strategy needs to take account not only of long-term positioning, but also of short-term market conditions and resourcing needs, and the implications for product margins.
Above all, supplier strategy needs to target considered volume increases (whether organic or inorganic) to reach a critical size and achieve necessary economies of scale, and build on and extend skills to enable production start-ups.
Strategy implies coordination and resource allocation. With increasing volumes in a product generation that is not yet fully mature, it becomes vital that all functional areas from development to production work together smoothly and efficiently. It is important to manage limited resources effectively because scaling usually requires high investment, with new production lines and sometimes entirely new production plants. Financing needs to be secured and additional technology and management expertise need to be introduced with care to encourage long-term loyalty to the company.
E-mobility is a classic case of opportunity and challenge. Although most auto suppliers are still heavily reliant on combustion engines, they fully expect this will change in the next few years. And despite struggling with low margins and high competitive pressure, most suppliers are confident that they will prosper.
Yet to make this optimism a reality, suppliers will need to position themselves properly and make strategic decisions to strengthen their market position and meet the innovation challenge.
Only then will it be clear whether their optimism is justified.
Copyright Berylls
