The Shanghai Auto Show 2023 sent shockwaves through the auto industry. It demonstrated that China – the world’s most important auto growth market – is accelerating its E-mobility transition faster than most people expected. Chinese automakers presented a compelling and innovative model range, with new features and very competitive pricing. It showed that new entrants to the auto industry can develop market-beating capacity at an astonishing rate.

Many OEMs have already launched vehicle operating systems, including Volkswagen’s VW.os, Toyota’s Arene OS, Xpeng’s Xmart OS, Mercedes-Benz’s MB.OS and Ford’s Ford.OS.

In today’s automotive world, these are often compared to the software that powers consumer goods, like “Windows” or “iOS.

While there are many differences between a consumer OS and a vehicle system, the comparison sends customers a clear message: the software-defined vehicle is a device meant to function very much like a smartphone, with regular updates, post-delivery feature enhancements and seamless integration into everyday life.

In reality, after the AD euphoria of the past decade when it was assumed that robo-taxis would be seen on the streets of every modern city by the early 2020s, the balance sheet for the autonomous revolution is now looking rather more somber. So, what are its real prospects?

In the field of AD mobility-as-a-service (AD MaaS), or autonomous on-demand passenger transport, there are currently around 110-120 notable and partially commercial pilot schemes worldwide. Around 70% of these are being run in the technology-leading markets of China and the US, with the rest distributed over Europe, the Middle East and other parts of the world. Just five companies are running around two-thirds of all autonomous fleets worldwide.

About half of all AD initiatives are autonomous shuttle operations with vehicles from companies such as Navya, Easymile or Perrone Robotics, which take on passengers at defined stops and carry them to their destination on dynamically chosen or static routes. Most of these pilots are run using small fleets of two to five vehicles.

Against a backdrop of mixed signals and deep industry changes, it is time to ask which business models will prove the way forward for auto manufacturing

Although worldwide car production for all drive systems is forecast to rise by an annual 2.2% until 2030, it is the BEV segment that is growing fastest. The BEV share is set to increase by as much as 22.4 percentage points and by 2030 will make up 40% of the market. Much of this market share is being captured by start-ups, which often drive innovation. So is the start-up model the pattern for the future?

It is therefore clear that electromobility is currently an important driving force and innovation engine for the broader car industry. This applies not only to the whole vehicle, but also to components and charging infrastructure. The fact that most start-up companies do not come from Europe is both a warning signal and a growth opportunity. While the battery technology segment is already occupied and offers only limited scope for European start-ups, the situation looks quite different in the field of enabler technologies such as power electronics, charging infrastructure or network infrastructure. And with eLeapPower, battery-design software developer Electra and automotive Internet of Things infrastructure specialist Staex, there are now plenty of candidates vying for market share in automotive’s new frontier.

During the past few years, multiple crises have left their mark on the mobility industry, from the pandemic and disrupted supply chains, to the war in Ukraine, energy price rises and wider inflation. These shocks have reverberated across the industry’s M&A (Mergers & Acquisitions) landscape, providing an incentive for companies operating in the mobility sector to find new solutions for successful deals.  

In addition, the current supply overhang requires vendors to show greater willingness to compromise, both regarding the purchase price and the financial structuring. Success-based purchase price components such as earn-out, and downstream purchase price payments such as vendor loans have become increasingly relevant, amid sector-specific risk factors and increased financing costs.  

To capture all the opportunities in this changed M&A landscape, investors need to broaden their field of vision from two perspectives:

A). Buyers also need to adapt to the new reality: A “one size fits all” approach used to be enough for all transactions involving companies in crisis. Today, a range of different solutions are necessary. All stakeholders, including customers and employees, are increasingly calling for a sustainable solution which is tailored to the company’s business model and market position.

Investors now need versatile skills for successful takeovers, given the rolling series of different crises that have afflicted the industry  in the last few years. These skills include strategy, restructuring and turnaround, financing, sector expertise and networking.  

B). Investing in start-ups is an opportunity to profit from the mobility start-up boom of the past decade: Some of these companies have already proved their future viability and market maturity and have found investors outside the venture capital sector. They offer attractive growth and innovation prospects, particularly compared with traditional mobility companies. For example, while BMW wants to accelerate innovation in an existing technologic field with its investment in the electric motor start-up DeepDrive, Continental is tapping into a completely new business model with its participation in the digital advertising start-up 4.screen.

The mobility industry’s new M&A landscape contains great value-added potential for all participants, provided they have market-leading sector knowledge and expertise covering the whole transaction range.

The automotive industry is in the grip of a change crisis and auto suppliers are among those most affected. The key trigger is the transition to electric drives, but that has been compounded by the Covid-19 pandemic and the war in Ukraine – and the stress inflicted on suppliers is already visible in high-profile supplier insolvencies, such as Dr. Schneider and Borgers. The case for holistic supplier restructuring has never been stronger. The mechanism remains the same as before, but the measures taken should be adapted to become more holistic.

Rethink necessary

As demonstrated by the insolvencies of German auto interiors specialist Dr. Schneider and auto soundproofing materials maker Borgers, the current crisis can affect even large established companies. The lesson is that it is critical for suppliers of any size to recognize and respond to problems early on. Many companies make the mistake of trying to keep their turnover constant despite falling profitability, and they operate plants at maximum capacity to maintain contribution margins or lease payments. 

This approach assumes a stable business environment, but is currently inappropriate. Instead, companies should prepare themselves for the fact that the environment will continue to remain volatile. They are often better equipped for change when they recognize this and adjust and manage their capacities flexibly. A focus on profitable core business and swift measures to reduce costs may be necessary.

Yet this kind of adjustment is not easy, creating as it does an environment in which all decisions are based on emotion. So-called IDW S6 reports – the control instruments used for many restructurings, frequently demanded by banks – can also contribute to financial stress by demanding positive turnover performance at a time when that approach may not be conducive to sustainable restructuring.

In 2022 the auto industry was buffeted by a series of macro-economic shocks, including turbulence on global raw materials and energy markets and the steepest hikes in interest rates for more than forty years. As a result, vehicle production forecasts have fallen. At the end of 2021, it was predicted that 91.9 million vehicles would be produced globally in 2023, but by the end of 2022 this forecast had been downgraded to 85.3 million vehicles. Going forward, the forecast for global vehicle production in 2029 has slipped from 102.7 million to 96.4 million units.

While this downward trend is worldwide, European car manufacturers are under exceptional pressure because various regional competitive disadvantages appear to be setting in for the long term.

Production relocations increase the challenges for suppliers

The growing number of production relocations by European OEMs presents considerable challenges for the region’s automotive supply chain, and for suppliers in particular. When OEMs decide to move some production out of Europe, suppliers can suddenly find themselves in a tight spot if the manufacturer’s projected output in the region is shifted or if production of a whole model series is shifted to a different non-European location. 

At the same time, the car industry is still in the transition to electromobility which is presenting the suppliers with more familiar problems such as margin pressure, lower volumes and higher investments. On top of this, production relocations mean that European suppliers must adjust their footprint, or at least examine it regularly. This impacts production sites and production-related functions, such as product and technology development.

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Germany’s Supply Chain Due Diligence Act (SDDA) came into force on 1 January 2023 as part of the government’s ambition to ensure that businesses comply with human rights and employment legislation, as well as environmental standards. In addition, the government hopes the SDDA will highlight Germany’s leading role in Europe on these issues and provide the opportunity to create more transparent, robust supply chains in the long term. Suppliers in the car industry will be a critical test of the law’s impact and the ability of companies to overcome the administrative challenges. However, suppliers would prefer more specific guidance about how to comply with the law’s requirements.

The SDDA will be introduced in stages. In the first instance, it will apply to companies which have their headquarters or a branch office in Germany and employ more than 3,000 people in the country. This includes about 60 car suppliers. From 2024 onward, the threshold will be reduced to 1,000 employees, covering a total of about 140 car suppliers in Germany.

Defined duties of care will apply to the company and its direct suppliers, and in specific cases to indirect suppliers. This will involve carrying out regular risk assessments relating to human rights and environmental standards, from the identification of risks to mitigating measures. Substantial fines of up to €500,000 or 2% of annual revenue can be imposed in cases of infringement.  

The SDDA is an opportunity for suppliers, despite their criticism of the additional costs

German suppliers were already under margin pressure before the SDDA and are now burdened by extra compliance costs. In this environment, it is hardly surprising that many companies are critical of the new law, which has increased their insecurity, especially given the potentially steep penalties for failing to comply. So far, suppliers are often only meeting the minimum standard for compliance with the SDDA, instead of using the law to create additional value.

Yet in the long term, the German supplier industry stands to gain from the establishment of more sustainable and ethical supply chains. Consistent implementation of the SDDA will build valuable expertise across the industry, enabling suppliers to recognize potential risks early enough to take effective action. This in turn will help them to improve their resilience, efficiency and competitiveness.  

The automotive industry is already working on standardized solutions such as Catena-X for data exchange along the entire global supply chain, while in an industry consortium funded by the German Ministry of Economics, OEMs, suppliers and digital companies are working on the first open data ecosystem. This should help harmonize the data networks of all companies in the automotive supply chain (from tier-n to recycler) through standardized, simple and secure data exchange according to the Gaia-X standard, and enable suppliers to perform ESG risk analyses with less effort.

A comparable EU-wide law is expected to be introduced after 2025 with the SDDA as the blueprint. German suppliers have the opportunity to enjoy preferential treatment over European competitors when bidding for contracts in the region as they assume responsibility along the whole supply chain for improving human and employee rights and raising environmental standards, in line with the SDDA. In the end, employees, customers and investors will reward ethical and sustainable action in the future – and that includes creating ESG-compliant supply chains.