Featured Insights Archive - Page 5 of 18 - Berylls

n 2022, the automotive industry was hit by major supply issues due to the worldwide shortage of microchips resulting from the production disruption caused by Covid-19, as well as an energy price crisis and the return of inflation in the wake of the war in Ukraine.

OEMs and suppliers were strongly impacted by these challenges, especially in Europe, where passenger car sales were down by 28.5% compared with 2019, falling to their lowest level since 1993.

Despite the overall market decline, sales of new battery electric vehicles (BEVs) have continued to grow strongly, with most of the countries in our ranking posting double-digit growth in 2022. However, sales of plug-in hybrid EVs lost momentum, beginning to decline in many European countries. On the infrastructure side, 2022 was a year of clear acceleration in the roll-out of new charging points.

Market leaders and laggards hold their positions

The positions in our latest E-mobility country ranking, based on the number of BEVs in each country’s total fleet, have not changed in most cases, compared with the previous year. The Scandinavian countries, China and the Netherlands still lead the way.

Here, we take a detailed look at the performance of the BEV market in Europe, the US and Asia, by fleet size, new vehicle sales and progress on charging infrastructure.

Fleet

In northern and western Europe, as well as in China, we can now confidently say e-mobility has reached the masses. In these regions, on average every fifth car sold was a BEV at the end of 2022. By comparison, in the US, the proportion was still only one BEV for every 16 cars sold.

As Figure 1 below shows, Scandinavian countries still have the highest share of BEVs in their overall fleet, significantly above 3% in Sweden, Norway, Denmark, and Iceland. They continue to fight it out amongst themselves for position in the top four. The Netherlands is also a strong performer, with BEVs also accounting for more than 3% of its fleet. However, the pace of growth in the country has stagnated since 2020.

This leading group is followed by the large western European countries – Germany ahead, followed by France and the UK, with BEVs making up between 1% and 3% of the overall fleet. Notably Portugal, which is outperforming its southern European neighbors, joins this group. Italy and Spain, along with most eastern European nations, remain at less than 0.5%.

Outside Europe, China ranks highest. The country’s BEV quota is 3.3% of the total fleet, putting it close to Scandinavian countries as a leading performer. The US however, continues to lag behind in 18th place, with a BEV share of 0.8%. Inevitably, there are significant variations within the country – California alone would rank alongside the western European cluster, with a quota of 2.7%.

Japan closes out the ranking with the lowest share of BEVs. E-mobility is not a priority for many of the country’s carmakers, especially Toyota, which has focused for many years on developing its hybrid technology. The policy landscape is also different in Japan, compared with Europe and the US – the Japanese government plans to phase out combustion engine vehicles, but will still allow the sale of hybrids.

Figure 1:

Share of BEV in the fleet in 2022, by country
(in %)

Source: Berylls Strategy Advisors

New vehicle sales

Scandinavian countries come out on top in sales of new BEVs, as well as in the overall share of fleet (Figure 2). Norway reached its highest ever result, with BEVs making up close to 80% of new vehicles sold. Other Scandinavian countries are not at such high proportions, but still show strong growth rates, with BEVs accounting for between 18% and 33% of new vehicle sales, and an overall xEV share (including BEVs and PHEVs) of 38% to 56%. Finland has lagged its Scandinavian neighbors so far, but BEVs accounted for 31.4% of new vehicle sales in the first quarter of 2023, a progression of 124% compared to the first quarter of 2022.

In the Netherlands, new BEV sales also grew strongly in the first quarter of 2023, after stagnating for the past two to three years. The country has been among the leaders in our overall ranking by share of fleet since 2019, but growth in sales of new BEVs cooled from 2020 until this year. The country is back on the fast track, which confirms that this situation was cyclical, due to the pandemic and chip shortages, rather than a long-term trend.

China comes next, with sales of new BEVs growing faster than in the large western European markets of Germany, the UK and France. China has strongly backed the development of its domestic BEV industry, with Chinese companies now controlling the whole supply chain, from raw materials for battery making to vehicle software, and government support in financing the industry. As a result, Chinese OEMs are now producing BEVs at scale, and much more cost-competitively than in countries with strong traditional automotive industries.

Their success is clear to see. For the first time, electric vehicle maker BYD has this year overtaken Volkswagen as the biggest carmaker in China, a position the German OEM held for decades. In a further sign of the way the market is changing, Tesla is the only western OEM with a vehicle in the top 10 best-selling BEVs in China.

In the US, BEV sales also show good rates of growth, but from a low base, meaning the absolute numbers are still relatively low. The share of BEVs among new vehicles sales is 5.8%, which is lower than Romania’s, at 8%, but still higher than Italy or Spain, at around 4%. California is the major growth driver, with BEVs making up 15.9% of new vehicle sales, putting the state between the proportions seen in France and Germany. Sales are also increasing fast along the rest of the Pacific coast, and in states in the northeast such as New York.

Sales are still struggling in other parts of the US, but we expect the incentives offered by the Biden administration’s Inflation Reduction Act, as well commitments by established US automakers including Ford and GM to focus on EVs, will drive growth. We expect more than 30 million EVs will have been sold in the US by 2030, when the country will be the biggest single market after China.

Closer to the bottom of the growth chart, southern and eastern European countries still lag behind. Italy and Spain are both automaking countries, with respectively the third and fourth largest populations in Europe. BEVs accounted for 3.7% of new vehicle sales in Italy and 3.8% in Spain. As EU member states, both countries will be obliged to halt the sale of combustion engine cars (with an exemption for e-fuel vehicles which we expect to have little overall effect) from 2035 onwards. For both markets, that currently looks tough to achieve.

Figure 2:

Evolution of BEV share in new sales, by country
(in %)

Source: Berylls Strategy Advisors

In focus: Peak PHEV?

Although our study focuses on BEV sales, plug-in hybrid electric vehicles (PHEVs) have been an important part of the EV transition in many countries covered by our research. As Figure 3 below shows, the share of new PHEV sales has declined in the last year in many countries, particularly in Scandinavia but also France and the UK.

In Germany, PHEV sales were still 11% higher in 2022 compared with the previous year, but subsidies for privately owned cars (although not company cars) were phased out in January 2023. As a result, PHEV sales have dropped dramatically in the first quarter of 2023, and we expect that this trend will continue.

In the US, PHEVs continue to play no role, with very low sales figures, and no sign of interest from the customer side.

However, in China last year, the opposite was the case, which is something of a surprise. There was a strong increase of more than 160% in the share of PHEVs among new vehicle sales in 2022.

Figure 3:

Evolution of PHEV share in new sales, by country
(in %)

Source: Berylls Strategy Advisors

Charging network

Concern among drivers over access to charging points, either close to home or on long cross-country trips, remains one of the key blocks to EV adoption, along with the relatively high price of vehicles. For this reason, our study also assesses the expansion of both AC and high-speed DC charging infrastructure, as well as the ratio of BEVs to charging points and fast charging coverage.

The results show that the majority of countries continue to rapidly expand their public DC charging network, with growth figures of more than 40% worldwide. The frontrunner here is China, which has successfully balanced the growth of its BEV fleet and balanced the ratio of BEVs to DC chargers.

There is an important caveat however, which is that most DC charging points in China offer less than 60 kilowatts (kW) of power, which is relatively low. It is enough to charge a BEV for 100km of driving in about 20 minutes, but too slow for long-distance trips. There are also planning issues, with charging points sometimes located in places with little traffic, including some installed in pedestrianized areas.

Western European countries including France and Germany improved their charging network significantly in 2022 (Figure 4), especially their fast-charging DC network (Figure 5). Both countries invested heavily in expansion last year, with France increasing the number of public chargers by more than 50%. The number of fast chargers more than doubled in the country. This was the result of incentives being put in place, and a political will to reach a target of 100,000 chargers by the end of 2022. Although France missed that, the target was reached in May 2023.

Germany is not to be outdone since the country, and launched the program “Deutschlandnetz” to push ahead with developing a public long-distance fast charging network along federal roads and highways. This program helped the charging network to grow by 45% in 2022 compared to the previous year, and it will be expanded further in 2023.

Interestingly, Spain and Italy have been more successful at developing their charging infrastructure than in selling electric cars, with a noticeable acceleration of the pace of new charging points available. This matters for tourism, with greater numbers of visitors coming from northern and western Europe in BEVs. Furthermore, this trend is continuing in 2023, with many operators planning to expand their networks extensively in those countries.

Charging infrastructure is where Scandinavian countries scored less highly. They were able to significantly expand their BEV fleets, but not their infrastructure to the same extent. The increase in the BEV-to-charger ratio was largely the result of high BEV sales however, as the number of charging points installed in 2022 did grow faster than in previous years.

Figure 4:

Evolution of the number of chargers, by country
(in k units)

Figure 5:

In focus: Mitigating gaps in the charging infrastructure in a multi-speed Europe

Even if many drivers are still uncertain about the EV charging network (and sometimes with good reason) especially on long-distance trips, it is certainly now possible to drive through Europe in an electric car without being anxious about finding a charging point. This is the case in western Europe at least, although less so in eastern Europe (Figure 6).

EU subsidies have mostly been used to extend the network in countries where EVs have been bought, leading to pretty good coverage in the key EV markets, such as Germany (one DC charger for 28km²), France (one for 66km²) or the Netherlands (one for 8km²). However, it seems that very few projects have benefited from EU subsidies in eastern Europe. For instance, in Poland the ratio is one DC charger for more than 300km² in Poland, and more than 450km² in Romania, compared to the western European average of one DC charger for about 50km².

To improve charging coverage and enable long-distance EV journeys everywhere in Europe, the EU this year introduced the Alternative Fuel Infrastructure Regulation (AFIR), a batch of measures to ensure, among other things, a minimum level of charging power in each country, and especially along main EU corridors. This includes a minimum of 1.3kW of charging power installed for each BEV (car or van) registered in the country, and another 0.8kW for each PHEV, as well as fast charging stations every 60km in each direction of travel across the core network (corresponding to the Trans-European Transport Network, or TEN-T) by 2025, and every 100km across the comprehensive network by 2030.

Figure 6:

Area covered by one DC fast charger in 2022, by country
(in km²)

OUTLOOK 2023

BEV-Market is still growing

Looking at the first quarter of 2023, the share of BEVs as a proportion of all new car sales has grown significantly in almost all the countries we assessed (Figure 7), compared to the first quarter of 2022. This indicates we can expect far higher numbers of BEVs in 2023’s total new sales. However, with some countries still lagging behind, the gap between leaders and laggards is also growing.

All Scandinavian countries are now following Norway on the route towards zero-emission mobility, with 4 to 5 years delay. This includes Finland, as well as Sweden, Denmark and Iceland, after Finland grew its share of BEV sales dramatically in the first quarter of 2023, to more than 30% of passenger car sales. We expect all Scandinavian countries to go beyond a 30% BEV share in 2023, and to reach more than 80% in 2030.

The major western European countries of Germany, France and the UK are also moving forward, but at a slower pace. They are expected to remain in the 15 to 20% range of BEV sales in 2023. Looking at 2030, we expect about 2 out of 3 new cars sold in those countries to be a BEV.

China’s BEV share in new vehicle sales is also growing further, supported by its domestic automotive and battery industries, although more slowly than expected so far this year (15% higher in the first quarter of 2023 compared to the first quarter of 2022). The country should still reach a BEV share of 20 to 25% of new vehicle sales in 2023, and about 75% of new passenger vehicles are expected to be all-electric by 2030.

The US is finally taking off as a BEV market after long years of stagnation outside of California. New policies such as the Inflation Reduction Act (IRA), and the need for its home industry to adapt to the BEV trend to meet customer demand in China and the EU, are fueling the transformation of the American automotive industry. As an illustration of this trend, major US carmakers have electrified some iconic models, including the Ford F-150, with a great success. We expect the overall BEV share of new car sales in 2023 will remain in single digits, but by the end of the decade, we can reasonably expect a BEV share of about 50%.

Finally, Spain and Italy, two major EU countries with large local automotive industries, are still lagging behind with no sign of change, at least in 2023. But in light of the need for carbon dioxide emission compliance with the EU’s rules by 2030 (43g/km per vehicle sold in NEDC values) and the level of penalties for exceeding this limit (95€/g per vehicle sold), we expect those countries to start catching up and reach at least a 60% BEV share by 2030.

Figure 7:

Evolution of BEV share in new sales, by country
(in %)

Source: Berylls Strategy Advisors

PHEV decline in Europe has begun

Demand for PHEVs lost momentum in Europe in the first quarter of 2023 (Figure 8), confirming a trend that began in 2022, and with no sign of improvement in sight. This is particularly true in Scandinavia, where the transition from PHEVs to BEVs is strengthening. In Germany, as expected with the phase-out of incentives for PHEVs as private cars, the share of this engine technology among new car sales has collapsed, losing about half of its volume compared with the same quarter a year ago. This shows how strongly related to transitional incentives demand for this technology is.

Since Germany and the Nordics were among the biggest markets for PHEVs, we can expect the share overall to slowly decline in Europe in the coming years, and to account for a marginal share of new vehicle sales by 2030.

Interestingly, PHEV sales are flourishing this year in China (up 83% compared to Q1 2022), partly due to the phase-out of subsidies for BEVs at the end of 2022, and a large choice of vehicles, including electric cars with range extenders. But we do not expect this trend to last long since most of Chinese OEMs (including traditional ones) are slowly moving away from ICE and unveiling numerous BEV models. As in Europe, PHEVs are likely to represent a marginal share of new vehicle sales in China by 2030.

Figure 8:

Evolution of PHEV share in new sales, by country
(in %)

Source: Berylls Strategy Advisors

Infrastructure development gradually fills gaps on long-distance axis

Western European countries are pursuing the development of EV charging infrastructure at a fast pace, although it remains slower than BEV sales development. But that does not mean that a lack of charging points will be a risk in the future. Indeed, the public charging network has grown significantly over the last few years, ahead of the boom in BEV sales, and private charging is expected to develop even faster. This will be the case for single houses and multi-party housing with private parking in particular, which together represent a significant share of European residential property. This trend also explains why governments in Europe are focusing a large share of their investments on inner-city charging points and fast chargers along main travel corridors. On the last point, private operators have plans to expand their fast charging networks dramatically in the next few years, encouraged by very good results in 2022, and the expectation the business model will be profitable very soon.

Germany offers a concrete illustration of this ongoing development. The country continues to invest heavily in its charging network, with government plans out to 2030 and a target of having one million chargers installed by then. This would represent a tenfold increase compared to the current number. Even if this is very ambitious target, it will definitely boost the BEV sector, and we expect Germany to reach at least half a million chargers by 2030. The main developments will be on long-distance axis roads (with high power chargers) and in inner cities (with AC chargers), where there is a lack of supply today.

Other western European countries are likely to follow the same route as Germany, with a fivefold increase in EV chargers expected by 2030, and a special focus on long-distance axis roads and cities.

Eastern European countries, however, will start almost from scratch, and will develop as a priority high power chargers for their long-distance network, to comply with the new European AFIR regulation. City networks, composed of AC chargers, are also expected to grow significantly, though at a slower pace since AFIR targets are proportional to the BEV fleet registered in each country.

China’s charging network is already well-developed compared to its European peers, and is expected to further expand to meet upcoming demand. But this network is also the result of the fact that most Chinese people live in large metropolitan areas, in large multi-party housing developments, and have very few opportunities to install a private charger. As a result, Chinese EV drivers have different charging patterns to their European counterparts, and require many more public chargers, which the government and the regions are partly financing. By 2030, we expect China to have more than 5 million public chargers within its borders.

In the US, the charging network is also expected to grow significantly, to more than half a million chargers by 2030. However, charging patterns in the US are quite different from Europe or China. With most people living in single houses or small apartment blocks, outside of city centers, most of the demand for chargers is also outside cities, either on long-distance trips or at destinations (for instance at the mall). This will lead the country to continue to massively invest in charging points on highways (high power chargers) and in the most popular destination areas (AC chargers).

Click here to find the full Ranking.

Authors

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Henri Parisy

Senior Consultant

henri.parisy@berylls.com

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

review of four myths on the future of car sales based on experiences of xEV buyers in Europe’s leading EV market, Norway.

Over many years, there have been many myths about the future of automotive sales. Major trends like the introduction of new drivetrain technologies, rapidly changing customer expectations, a sheer unlimited choice of sources for information and the digitalization of the sales process have continuously been quoted as the key levers for a revolution in new car sales.

So are the days numbered when auto retailers invest in large glass palaces at the outskirt of major cities, presenting a new car offering that easily covers two football fields? Is haggling for the best price and comparing individual offers from multiple dealerships of the same brand a habit of the past? Will the physical test drive be replaced by some form of revolutionary digital experience in the buyers living room?

We believe the future of sales is already here. Most of the major trends mentioned earlier have evolved for some time, some faster than others. Most automotive brands have announced their strategies towards direct sales models and are amidst a staged rollout over the next few years. Not least because of the fear of losing control of prices to online tools and online comparison platforms offering full price transparency on the click of a button. Tesla showed the direct sales path with many (new) Chinese manufacturers following) to gain more control of the customer relationship and the ability to set actual transaction prices.

Berylls wanted to hear from customers how they experienced ‘future sales’ during their last car purchases. To find a sufficiently large number of them we had to go to Norway, the market with the highest BEV share – and with it the highest share of new brands. Based on their responses we have re-assessed four popular hypotheses. Myths or reality?

FOUR MYTHS ON THE FUTURE OF CAR SALES: HYPOTHESES

The physical retailer is dead.
Elegant city showrooms in prime locations are the secret sauce for sales success.
New car buyers appreciate a multi-channel sales offering
The new market entrants set the new benchmarks in customer experience and convenience in the sales process.

QUESTIONING THE MYTHS: WHAT DO THE BUYERS SAY?

1. The physical retailer is dead.
[Answer: NO]

Where did you first notice the vehicle that you later bought?
by chosen OEM and selected new entrants, in percent

According to the survey, buyers mention the dealer website as well as the physical dealership as the two most important places where they first become aware of a car. Print advertisements as well as TV- and Radio spots are rated weakest. In general, the importance of online and offline touch points in the awareness phase is balanced.

Where did you conduct research on your vehicle before purchasing it?
by chosen OEM and selected new entrants, in percent

In the dedicated search for information, the physical retailer remains the first source of information. The percentage of buyers choosing the retailer as a primary source of information is higher among the old brands compared to the new brands, 37% vs. 31%. However, in this context it is worth mentioning that most new brands do not have classic fully fledged dealerships with a large-scale offer of new cars. Instead, they present a selection of their product line-up in centrally located city showrooms.

Concluding, the widespread myth that the retailer will become irrelevant in the future, cannot be confirmed. The dealer is and remains a major lever for brand and product awareness as well as a primary source of information during the information phase before purchase.

2. Elegant city showrooms in prime locations are the secret sauce for sales success
[Answer: NO]

Where did you first notice the vehicle that you later bought?
by chosen OEM and selected new entrants, in percent

The survey shows, centrally located city showrooms have a comparably weak effect on brand and product awareness across brands. Only 6% of buyers mention the city showroom as the place where they first became aware of a certain car. Nio is the exception to the rule: Nio’s city showroom, the so called “Nio House” does have a higher rating than all other rating factors across brands in terms of brand awareness (13%) as well as source of information (40%). Public billboards, print media and tv/ radio spots are rated equally weak (each 6%). The physical dealership, however, is way ahead of the city showroom when measuring brand awareness (dealer 12% vs. city showroom 6%).

When asked if the respective channels where helpful with regards to the purchasing decision, the city showrooms obtained weak ratings only. Only 62% of buyers rate the city showrooms as relevant. In general, buyers of new brands prefer online touch points over offline touchpoints whereas the opposite is true for buyers of old brands (measuring helpfulness). The physical dealership is among the top five channels rated along helpfulness with nearly no difference between new and old brands (new 69% vs. old 70%).

Concluding, no tendency can be found, whether city showroom in prime locations will in the future replace the large-scale dealerships. Today, city showrooms have a comparably weak effect on brand and product awareness across brands and are on average rated lower than the dealership as source of information. The exception to the rule is Nio; the “Nio House” obtains above average ratings.

3. New car buyers appreciate a multi-channel sales offering
[Answer: YES]

Online / Offline transitions along purchasing process
channel switches yes / no

Most buyers leverage multiple channels in different steps of the purchasing process. 68% of buyers chose to book a test drive online before executing the test drive at a local dealership. Even 72% of buyers chose to start a new car configuration online and finalize it together with a sales advisor at the dealership The transitions queried are used more by buyers of “new” brands e.g. the transition test drive booked online and conducted stationary is used by 81% of buyers of new brands whereas only 63% of buyers of old brands use online booking of a test drive followed by an on-site test drive. The difference between new and old brand is equally significant in the transition online to offline for finalizing the new car configuration (new 74% vs. old 51%).

Concluding, independent of customer group or brand, offering an online as well as offline channel for information search and configuration is indispensable. Even though buyers of new brands perform more process steps online, a complete waiver of the physical offer appears not feasible. The seamless interface between online and offline is and will remain essential.

4. The new market entrants set the new benchmarks in customer experience and convenience in the sales process.
[Answer: NO]

Efficiency of customer transitions between online and offline sales channels
by transition quality, in percent

During the purchasing process, transitions between the online- and offline channel are more common among new brands and are less prone to error. Still, the processes appear far from perfect. Dealers could instantly allocate a reserved appointment to a name in the dealership for 89% of buyers of new brands, whereas this was only possible for 77% of buyers of old brands. For the remaining 10% of new brand buyers however, no appointment could be allocated at all. The instant loading of a configuration prepared online was easily possible with a configuration code for 91% of buyers for both buyer types, old and new brands.

How do you rate your purchasing experience relative to previous purchases?
by chosen OEM, in percent¹

When looking at the overall quality of the purchasing experience, buyers of new brands rate the quality higher compared to prior car purchases. Nio sets the absolute benchmark with 100% of buyers stating that their purchase experience was clearly better or slightly better compared to 56% for the same rating among old brands. So what are the levers behind the improved buying experience? The observed value for money as well as the overall satisfaction are significantly higher for buyers of products from new entrant. Also the vehicle ordering process were rated better.

Concluding, the purchasing processes of new market entrants are on average of higher quality than those of established, old brands. However, the processes are far from perfect. In the interplay between online and offline buyers mention hick-ups, not surprisingly in line with old brands.

CONCLUSION

The future of car sales is now. The evolution of the car buying process is running at full speed. A review of four myths on the future of car sales along experiences from xEV buyers in Norway has yields interesting insights. Only one hypothesis out of four could be verified.

Therefore, what learning can be drawn for the future sales strategies of automotive OEMs?

A good balance of all channels is a recipe for success.

An extensive digital offering has become a hygiene factor for all brands.
But physical interaction with retailers remains really important for customer satisfaction.

Convenience is key: Easy switches between channels must be possible.

The IT backend must be stable. Interfaces between channels with one customer ID must function well, e.g. saving configurations on one device, opening on another.
The customer front-end must be intuitive and appealing.
Staff in the stores and ‘online’ must be carefully trained to make the multi-channel experience work.

A continuous review of the sales network and formats is required.

City showrooms are an effective channel to create brand awareness for new market entrants – their cost effectiveness is a different question; established OEMs, however, must continue to leverage their existing physical footprint and can plan investments wisely.

Marketing spending on TV & radio lose importance.

Changing importance of channels for product information demand a reallocation of marketing spending. Social Media continue to steal importance from Radio & TV spots.

Authors

Arthur Kipferler

Partner & MD UK

arthur.kipferler@berylls.com

Hongtao Wei

Associate Partner

hongtao.wei@berylls.com

Nils Garrelfs

Project Manager

nils.garrelfs@berylls.com

Samuel Schramm

Consultant

samuel.schramm@berylls.com

Arthur Kipferler

Arthur Kipferler (1963) started his career in 1989 at the Boston Consulting Group, where he consulted for 13 years in the automotive industry. After consulting, Arthur Kipferler held senior management positions at Toyota in Europe and the U.S. From 2013 to 2014, he was global head of the BMW Group’s Future Retail program. Subsequently, he had leading roles in strategy, corporate planning and transformation management at Jaguar Land Rover in Coventry, UK. Arthur Kipferler complements the expertise of the Berylls by AlixPartners (formerly Berylls Strategy Advisors) partner team in the fields of market & customer, technologies, sales, and digitalization, as well as in the development and implementation of corporate, product, and regional strategies.
Mechanical engineering, production engineering, at the Technical University of Munich (TUM); MBA in Strategy, Marketing and Organizational Behavior at INSEAD Business School, France.

Hongtao Wei

Hongtao Wei (1988), Associate Partner, joined Berylls Strategy Advisors in 2015, an international strategy consultancy specializing in the automotive industry, where he focuses on all issues related to the Chinese automotive market. In addition to Western manufacturers in China, his clients also include Chinese OEMs, investors, provincial governments, and state-owned enterprises.

He has profound expert knowledge in the areas of sales and aftersales. His other areas of expertise include digitalization, connectivity, and turnaround management.

He studied Sinology, Economics and Statistics at the Ludwig-Maximilians-Universität in Munich.

ales of the world’s 100 largest suppliers are up again in 2022 and confirm that the industry is recovering from the impact of the pandemic, semiconductor shortages and other major disruptions. Yet many companies are still struggling to regain pre-Covid levels of profitability due to high material and energy costs, among other factors.

As already noticeable at the end of 2021, the recovery from the pandemic and semiconductor shortages continued in 2022. However, with the war in Ukraine, inflation and the high raw material prices, the industry was further burdened. Despite all these challenges, global vehicle production still increased by 6.6% compared with 2021.

Admittedly, production has not yet returned to pre-pandemic levels. Nonetheless, it was still sufficient in 2022 to allow the combined total annual turnover of the TOP 100 suppliers to break through the €1,000bn barrier, growing 18.3% from €899bn in 2021 to €1,064bn. All but five suppliers recorded sales growth.

In particular, the 11 newcomers to the TOP 100 entered the rankings as a result of year-on-year sales growth of as much as 127%. Profitability was another matter, falling from a TOP 100 average of 6.3% in 2021 to 5.6% last year.

Looking back, four developments dominated 2022:

Renewed increase in turnover across the TOP 100, driven by (among other factors) higher vehicle production and price increases
Lower margins, despite higher sales, due to increased costs which could not be fully passed on to manufacturers
Exceptionally strong sales growth by Korean and Chinese suppliers, driven primarily by the increasing importance of electrified powertrains
Changing composition of the TOP 100 rankings due to the industry dynamic

Vehicle production and inflation drive sales growth

In 2022, several factors contributed to strong turnover growth among the world’s leading suppliers, including6.6% sales growth due to vehicle production increasing to 82 million. Rising inflation affected sales prices, with suppliers trying to pass on increased costs to manufacturers. Yet, a simple extrapolation makes it clear that the TOP 100 suppliers collectively did not quite succeed in this effort. Their total combined turnover should have been €1.071bn in 2022, rather than the actual figure of €1.064bn, assuming the same average level of profitability as in 2021. This estimation includes 6.6% sales growth due to increased vehicle production, 8.9% due to producer price increases that were passed on to OEMs and 2.6% price increases based on labor cost increases.

The difference of €7m was directly reflected in the suppliers’ margins and was mostly due to them being unable to pass on fully to manufacturers increased producer prices for energy, materials and higher wage costs.

In some cases, exchange rates had a significant effect on sales growth. For example, the Brazilian real rose more than 17% against the euro in 2022, partially explaining the year-on-year 48.4% sales growth registered by lochpe-Maxion, the country’s only TOP 100 representative. Iochpe-Maxion’s growth would have been 26.6% without this exchange-rate effect, removing the company from the TOP 100. On average, however, currency movements only boosted sales growth by 0.35% across all 100 companies and is therefore negligible.

Declining margins widen the gap between OEMs and suppliers

On the one hand, inflation and corresponding increases in producer prices ensured higher turnover where suppliers were able to pass on some of these costs to manufacturers. On the other hand, these factors reduced suppliers’ ebit margins where they could not pass on the additional costs. The widening gap in average profitability between the TOP 10 OEMs and the TOP 100 suppliers since the crisis year of 2020 is revealing (see Figure 1). In 2021, the average margin difference was around 1.1 percentage points, but it more than doubled in 2022 to 2.4 percentage points, when the TOP 10 OEMs reported an average margin of 8%, compared with 5.6% for the TOP 100 suppliers. The trend since 2020 is therefore not only continuing, but intensifying.

Historic ebit margins of TOP 10 OEMs vs. TOP 100 Suppliers
(in % of turnover)

Source: Berylls Strategy Advisors

Less than half of the TOP 100 suppliers were able to improve their margins in 2022. In some cases, they were less exposed to higher producer prices, while in others they were able to pass on some or all of the price increases to manufacturers. Higher materials and energy costs and supply-chain disruption are expected to continue into 2023, with energy prices in particular substantially increasing suppliers’ costs. In 2022, energy prices shot up as the war in Ukraine and Western sanctions against Russia disrupted gas deliveries, especially from Russia to Europe.

The impact on German suppliers was particularly marked, with producer prices rising on average by 32.9% compared with 2021, mostly driven by an average increase in energy prices of 86.2%. These included year-on-year price rises of 133% for natural gas, 95% for electricity and 40% for oil. The effect was noticeably less severe for suppliers based in other regions and countries; in China, for example, producer prices rose by an average of 4.1%, while in the US they increased by 16.3%.

TOP 100 suppliers’ changes in annual sales growth and margins, 2020-22
(in %)

1 Only companies within the margin and sales development range.

Source: Berylls Strategy Advisors

In the medium term, energy prices in Germany are expected to remain high. Due to long-standing contracts, German suppliers will have little scope to pass on the increased costs to manufacturers in future, putting them at a disadvantage compared with international competitors.

Chinese and Korean suppliers continue to gain ground

The sales shifts that have been visible in the past few years between Asian, European and US suppliers continued in 2022. Since 2012, the global market shares of Japan, Germany and the US, the world’s three leading supplier countries, have steadily declined. Japan’s share as the largest supplier, measured by total sales, fell eight percentage points from 29.8% in 2012 to 21.8% last year. In the same period, the decline for German and US suppliers was respectively 3.1 and 6.7 percentage points.

These declines are reflected by the changed regional composition of the TOP 100, with 22 fewer companies from Japan, Germany and the US in the 2022 rankings compared with 2012. Companies that have dropped out of the TOP 100 include NHK Spring (Japan) and Cooper Standard (US), with Germany’s representation falling in the past decade from 23 to 17 companies and Japan losing nine suppliers. The companies that have left the TOP 100 variously deliver drive systems for combustion engines, seats or suspension systems.

In contrast, Korean and Chinese suppliers have increased their market shares by 4.2 and 8.3 percentage points since 2012, with the total number of companies from these countries rising by 14. From China, only Weichai Power made it into the TOP 100 in 2012, but in 2022 seven other companies were represented. Meanwhile, there are now 10 companies from Korea in the TOP 100.

Given this trend, it is not surprising that the total average turnover of Chinese suppliers in the TOP 100 has increased by 31.3% annually since 2012. Many of these TOP 100 Chinese and Korean companies, including CATL, Johnson Electric and SK, produce components such as batteries, semiconductors and electric motors.

Chinese suppliers are in a particularly favorable position regarding their profitability. Between 2012 and 2022, the average profitability of Chinese suppliers was 7.8%, significantly above the global industry average of 6.8%. Only US TOP 100 suppliers outshone their Chinese competitors, with an average margin of 8% for the same period. Suppliers from Japan, Korea and Germany could not keep up, with comparatively low average margins of 6.3%, 5.7% and 5.8% respectively. However, Japanese and German suppliers’ margins have increased considerably since 2020, by 2.1 and 4.3 percentage points respectively. Nonetheless, the impact of the pandemic and increased producer prices mean their average profitability is still lower than in 2018.

We expect that over the next few years there will be a further shift in global sales and profitability in favor of Chinese suppliers, largely driven by continuing vehicle electrification and digitalization.

Market share, turnover and profitability of leading supplier countries, 2012-22

Source: Berylls Strategy Advisors

Battery and semiconductor suppliers take the leading positions

The trend in the past few years for battery and semiconductor suppliers to act as the sector’s central drivers of growth and main bulwarks of profitability continued in 2022. TOP 100 semiconductor manufacturers averaged year-on-year sales growth of 44.3% since 2015. Similarly, the TOP 100 battery manufacturers have achieved an average sales growth of 84.1% since 2017. In this context, it is striking that China’s CATL, the world’s leading battery manufacturer, only made the TOP 100 in 2018. Since then, it has increased its annual turnover by 72.7% and is now seventh in the overall rankings. The same trend is evident at major Korean battery manufacturers such as SK, Samsung SDI and LG Energy Solution. In 2022 alone, TOP 100 battery manufacturers achieved average profitability of 10.6%, almost double the supplier industry average of 5.6%.

The same pattern can be seen for semiconductor manufacturers. ST Micro, for example, ranked 112 among the world’s largest car suppliers in 2021, with a turnover of €2.5bn. A year later it had climbed to 58 in the 2022 TOP 100, with turnover of €5.675bn – an increase of 127%. Other semiconductor manufacturers such as Texas Instruments, Infineon, NXP Semiconductors, Onsemi and Renesas also recorded increases in turnover of at least 30% between 2021 and 2022. Meanwhile, TOP 100 semiconductor manufacturers achieved a notable average margin of 25.9%, helped to a large extent by the continuing worldwide shortage of chips since the start of the pandemic.

By comparison, suppliers specializing in areas such as seats and interiors, energy supply and metal processing have not been able to increase their profitability to nearly the same extent as battery and semiconductor manufacturers since 2020. Overall, batteries and semiconductors are the most profitable product group in the automobile value chain, having overtaken tire suppliers among TOP 100 companies a few years ago.

Turnover and profitability of different supplier sectors, 2012-22

Source: Berylls Strategy Advisors

The growing importance of batteries and semiconductors in future vehicle design is clear from the changed composition of the TOP 100 compared with a decade ago, reflecting the industry’s increasingly technology-driven dynamic. For example, in the decade since 2012 there have been 12 new entrants to the rankings through the technological shift towards electric, digital vehicles, accounting for 9% of the TOP 100’s total turnover by 2022. This strong performance illustrates the sheer speed at which technological innovation is transforming the car industry, bearing in mind that their total turnover in 2017 was still only about 1%.

In addition, 12 other suppliers from traditional product groups such as glass, brakes and lights have moved into the TOP 100 rankings during the past 10 years. Examples include CIE Automotive (Spain), Fuyao Glass (China) and SL Corporation (Korea). Nine further new entrants include companies resulting from M&A activities such as Aptiv, Adient and Vitesco Technologies.

Consequently, the composition of the TOP 100 has changed significantly in recent years and, due to the expected ongoing technological change in future vehicle generations, it is expected that the pace of change in the supplier industry will continue to intensify.

Changes in the composition of the TOP 100 suppliers, 2012-22

Note: Technology = companies achieving TOP 100 rank in emerging technology areas (e.g. battery, semiconductor); Improvers = companies that have moved up into the TOP 100 through sales growth in established goods (e.g. brakes, glass) and were previously ranked below 100; Transactions = companies achieving TOP 100 rank after an M&A transaction, e.g. after entering into a joint venture.

Source: Berylls Strategy Advisors

Conclusion: Korean and Chinese suppliers continue their rise, while German suppliers remain under pressure

Car suppliers confronted numerous challenges in 2022. Although the TOP 100 suppliers’ average annual sales growth was robust, many companies’ margins declined, partly due to increased producer prices. In 2023, the growing dominance of Korean and Chinese suppliers is likely to be the sector-defining theme, driven by increasing worldwide sales of battery-electric vehicles (BEVs) as the shift to E-mobility continues. Meanwhile, German suppliers appear set to remain under severe pressure, as high energy prices continue to erode their international competitiveness.

We believe the trends that have emerged in the past few years will not only continue, but strengthen. In other words, 2023 is expected to be an eventful year for suppliers in the car industry – perhaps more eventful than many would like.

Authors

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Dr. Jürgen Simon

Associate Partner

juergen.simon@berylls.com

Gereon Heitmann

Senior Consultant

gereon.heitmann@berylls.com

Jakob Rüchardt

Consultant

jakob.ruechardt@berylls.com

Dr. Alexander Timmer

Dr. Jürgen Simon

Dr. Juergen Simon (1986) is Associate Partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry. He is an expert in sales and corporate strategies as well as M&A and can look back on many years of consulting experience.
Dr. Juergen Simon has been advising automotive manufacturers and suppliers since 2011 and has in-depth expert knowledge in the areas of holistic strategy development, business models and commercial due diligence. He also focuses on market entry strategies and topics related to the “Software Defined Vehicle”.
Prior to joining Berylls Strategy Advisors, he worked as senior consultant at the Droege Group, a consulting and investment firm.
As a graduate economist from the University of Hohenheim, he completed his doctorate at the Institute of Management at the Karlsruhe Institute of Technology (KIT) before joining Berylls.

hy Europe’s suppliers must move fast as OEMs shift their global production footprintThe days when suppliers could plan for a certain, steady-growth future are over. As Europe’s carmakers transfer manufacturing capacity to North America and China, suppliers must abandon static planning models and be prepared to change their strategic direction rapidly.

“Pandemic”, “semiconductor shortages” and “rising energy and finance costs” are just a few of the reasons heard over and over to explain the crises in the global car industry in recent years. Even in 2022, managers at automobile companies were still in permanent crisis mode, making decisions and taking action in an atmosphere of continuing uncertainty the new normal. For the time being, the prospect of returning to steady growth in high single-digit percentages, as a linear updating of past growth trends, seems to have vanished.

The prevailing uncertainty affecting suppliers’ plans are reflected in auto manufacturers’ sales figures. Globally, the number of vehicles produced worldwide is still considerably less than pre-pandemic. In Germany, for example, 3.4 million vehicles were produced in 2022, by far the lowest annual volume since 1990. Meanwhile, German production forecasts for the rest of the decade are being revised downwards. Accordingly, it is expected that by 2030 only 34 million vehicles will be manufactured in Germany, a fall of 14% compared with earlier forecasts.

A similar picture is emerging for the rest of Europe, where production volumes have been revised downwards by 18%. The clear winners are North America and China; here, forecasts have been revised significantly upwards, with almost 10 million additional vehicles projected to be manufactured in these two markets by 2030. Meanwhile, government initiatives, such as the US Inflation Reduction Act, and a focused industry policy have created additional incentives for Europe’s OEMs to shift more production capacity out of the region.

Sharp increases in production prices are another factor undermining business confidence across Europe’s auto supplier industry. German suppliers have been especially hard hit by price rises of 33% for wages, energy and raw materials in 2022, compared with the previous year. Suppliers have tried to pass on at least part of these additional costs to manufacturers, but negotiations have proved extremely difficult over the past year. As a result, the average profitability of German suppliers in 2022 was 3.5%, compared with 4% in 2021 – a meagre yield when set against the global industry average of 5.7%. Meanwhile, the bleak mood among

German suppliers seems likely to persist, given continuing uncertainty over whether negotiations with the manufacturers can be concluded successfully.

Throughout Europe, banks and financial investors are also losing confidence in auto suppliers due to the downward pressure on margins and volatile sales forecasts, which in turn are increasing refinancing costs with stricter loan terms. This higher investment risk is reflected by returns on European automobile bonds, which had risen by 197% since the end of 2021.

Against this crisis-ridden backdrop, few European suppliers have sufficient liquidity to pre-finance the new developments required by the accelerating transition to electric mobility. This shortage of capital also means they lack the means to expand their own networks in North America and China as OEMs shift production out of Europe. In both cases the stakes are extremely high and even existential for suppliers, adding to the prevailing mood of uncertainty.

European suppliers with the best chance of success will be those which analyse their planning assumptions early, keep them constantly under review, and are ready to change their strategic direction rapidly at short notice. Static planning models were the model for success when forecasts were still in effect a linear updating of past growth trends. Adjustment of strategic planning assumptions within the financial year is the new order of the day.

Author

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Dr. Alexander Timmer

SUSTAINABLE CUSTOMER EXPERIENCE – WHY IT MATTERS

The automotive industry is undergoing a major transformation, as sustainability becomes a defining issue for the public as well as governments and regulators. In addition to ever-stricter environmental legislation, customers are growing increasingly aware of the environmental impact of their choices, so that OEMs must integrate sustainability into the core of their operations. It is no longer enough for manufacturers to produce electric cars and reduce their footprint in the sourcing and production of their vehicles, however. Rather, manufacturers must develop and deliver a comprehensive and cohesive customer experience that embodies sustainability, right across the first contact with the customer to the ownership lifecycle. Now that all the major OEMs have battery electric vehicles in their portfolio, manufacturers are finding it harder to differentiate their products on sustainability, even though this is becoming an important purchase criterion for customers.

What’s more, electric vehicle sales are proving to be erratic rather than on a straight upward trajectory. This is true especially in countries where governmental incentives are changing, and/or where the public charging infrastructure is still struggling to catch up with the availability and take-up of electric vehicles. A further pressure takes the form of new players in the market, particularly as Chinese manufacturers enter the electric vehicle industry with credible offerings, pushing western OEMs to rethink their strategies for attracting customers and reinforcing their brand loyalty. All of this is shifting the focus from the product to the wider customer experience as the key to sustainability-related differentiation. So, let‘s put ourselves in the customer‘s shoes…

Curious? Read the full article now!

Berylls Insight

Sustainability - What the customers say

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Authors

Dr. Jan Burgard

Berylls Group CEO

jan.burgard@berylls.com

Philipp Enderle

Associate Partner

philipp.enderle@berylls.com

Philipp Purrucker

Associate

philipp.purrucker@berylls.com

Philipp Brandner

Consultant

philipp.brandner@berylls.com

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Dr. Jan Burgard

Dr. Jan Burgard (1973) is CEO of Berylls Group, an international group of companies providing professional services to the automotive industry.

His responsibilities include accelerating the transformation of luxury and premium OEMs, with a particular focus on digitalization, big data, connectivity and artificial intelligence. Dr. Jan Burgard is also responsible for the implementation of digital products at Berylls and is a proven expert for the Chinese market.

Dr. Jan Burgard started his career at the investment bank MAN GROUP in New York. He developed a passion for the automotive industry during stopovers at an American consultancy and as manager at a German premium manufacturer. In October 2011, he became a founding partner of Berylls Strategy Advisors. The top management consultancy was the origin of today’s Group and continues to be the professional nucleus of the Group.

After studying business administration and economics, he earned his doctorate with a thesis on virtual product development in the automotive industry.

ctive shaping role for Berylls on the way to the software defined vehicle

The Berylls Group has joined the Eclipse Foundation and will support the Software Defined Vehicle (SDV) Working Group in particular. The Eclipse Foundation is dedicated to supporting open source projects where the source code of the software is available to the general public and is jointly developed, maintained and improved by the contributors.

Founders of the SDV Working Group include Microsoft, German suppliers Bosch, Continental and ZF. For Berylls, a leading company in the field of digitalization and innovation in the automotive world, it is an important step to contribute its own expertise to one of the most renowned open source organizations worldwide.

Christian Kaiser, Partner at Berylls Strategy Advisors adds: “We are convinced that the exchange of knowledge and experience within the Eclipse community will play a crucial role in shaping the digital future. We already see leading technology companies using more than 50 percent open source code, but the automotive industry is still struggling with this trend. This is something we as Berylls Group would like to actively change.”

Dr. Matthias Kempf, Partner at Berylls, said, “By joining the Foundation, we want to help drive collaboration in a cross-industry open source community, and accelerate progress in digital technologies in the automotive sector.”

As part of the Eclipse Foundation, Berylls will focus specifically on developing solutions for the automotive industry. We aim to play an intermediary role between all those companies working on SDV issues. As a neutrales Eclipse member, Berylls can play an important role in maximizing parallel efficiency and mutual collaboration. In numerous projects with leading OEMs and suppliers, Berylls has defined the value-added contributions, software architectures, and delivery and control models of modern SW organizations and put them into practice in large-scale transformation projects. The topic of Open Source Software (OSS) is the next logical and consistent step to drive transformation not only in isolated projects with individual companies, but with and for the automotive industry as a whole.

Berylls believes that the greatest leverage for incumbents lies in larger-scale collaboration rather than pursuing isolated strategies in fields with low differentiation potential and scarce developer resources.

Currently and in the past, Berylls has worked with a number of different Foundation members, including: AVL, Bosch, CARIAD, Continental, Elektrobit, ETAS, IAV, LG, Luxoft, MBTI, MSFT, Toyota, T-Systems, Vitesco, VW, ZF. Berylls’ membership in the Eclipse community will further deepen this collaboration in the future.

At this point we would like to thank Fares Mrad-Agua for the very good cooperation in the area of Open-Source and SDV.

Eclipse SDV-Group

Berylls Press Release

Pressemitteilung: Vom Vorreiter zum Zuschauer

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Dr. Matthias Kempf

Dr. Matthias Kempf (1974) was one of the founding partners of Berylls Strategy Advisors in August 2011. He began his career with Mercer Management Consulting in Munich, Germany, in 2000. After earning his doctorate degree and further consulting work at Oliver Wyman (formerly Mercer Management Consulting), he joined the management of Hilti Germany in 2008. At Berylls, his area of expertise is new mobility services and traffic concepts. In addition, he is an expert in developing and implementing new digital business models, and in the digitalization of sales and after sales.

Industrial engineering and management studies at the University of Karlsruhe, Germany, doctorate degree at Ludwig Maximilian University, Munich, Germany.

Kontakt Über Berylls

Christian Kaiser

Christian Kaiser (1978) is Partner and Head of IT at Berylls by AlixPartners (formerly Berylls Strategy Advisors), specialising in software and digitalisation. He started his career at DaimlerChrysler AG in 1997 and has 27 years of industry and consulting experience in the automotive sector and has worked as CDO, CIO and CEO in various international OEMs and software companies.
Mr Kaiser has also held roles as chairman or board member of various companies in the software industry.
At Berylls, he specialises in the areas of software defined vehicles, software development, digital business models, digital operating models and software task forces.
Christian holds a degree in ‘Business Economist (EBW)’ from the University of Applied Sciences Würzburg.

Kontakt Über Berylls

ur analysis shows Hungary remains a promising long-term bet for OEMs and suppliers - provided they conduct rigorous due diligence before investing

Since the end of the Cold War, Hungary has proved an attractive manufacturing base for some of the world’s leading automotive OEMs and suppliers. However, the selling points that first drew international companies to Hungary, such as a relatively low-cost workforce and proximity to western European markets, are no longer sufficient on their own to justify major investments by global players. Other factors that need to be considered range from Hungary’s currently problematic relations with many other EU countries to a skills shortage in sectors that are critical to electric vehicles (EVs).

We believe that Hungary will remain a significant location for international automotive companies as recent announcements and investment activities by Magna and Boysen proof. At the same time, OEMs and suppliers will need to make smart decisions that take into account Hungary’s ability to serve as a cost-efficient manufacturing base as the transition to EVs accelerates.

This location assessment analyses the advantages and possible risks of expanding or establishing manufacturing operations in the country. In all cases, OEMs and suppliers should aim to achieve the following goals when deciding whether to initiate or increase investments:

Production flexibility: Manufacturers have had to respond rapidly and cost effectively to the external shock of the Ukraine war and resulting energy crisis
Risk diversification: Continuing friction with the wider EU means businesses should avoid over-dependence on operations in Hungary
Skills sufficiency: Companies should ensure through training programs and recruitment that the local workforce has world-class electric mobility capabilities

Hungary’s automotive industry: a vibrant sector gearing up for electric mobility

In 2021, Hungary’s automotive industry included 491 companies with a combined workforce of 98,583 employees, according to data compiled by Germany Trade & Invest (GTAI), part of Germany’s economics ministry. Total production value reached €25bn, triple the equivalent figure in 2010, with around 90 percent of all vehicles exported, including 394,302 passenger cars.

Hungary’s car industry landscape includes a range of global OEMs and suppliers, led by German players, which have recently confirmed their commitment to Hungary with significant investment decisions. For example, BMW announced in November 2022 that it plans to invest more than €2bn over the next three years at its new plant in Debrecen, where it will produce around 150,000 next-generation “Neue Klasse” EVs annually, as well as high-voltage batteries for the vehicles.

Meanwhile, Mercedes-Benz will spend more than €1bn between 2022 and 2025 at its Kecskemét factory to develop two new EV platforms for more advanced, high-value vehicles; and in the same period, Audiwill invest €301 million to increase production of electric motors at its factory in Györ, one of the world’s largest engine plants.

It is not just major European automotive companies which are ramping up production in Hungary. In September 2022 NIO, one of China’s “Big Three” EV manufacturers, announced plans to supply battery swap stations to its expanding European network from the company’s first overseas plant at Biatorbagy, near Budapest, which will also serve as NIO’s regional R&D, maintenance and training center.

The common theme of all these spending programs is of course the global transition to electric mobility, which is also generating significant investment in Hungary by suppliers. Hungary will have the world’s fifth largest lithium-ion battery manufacturing capacity by 2025, according to research last year by S&P Global, with China’s CATL playing a prominent role. CATL plans to invest €7.34bn in an additional 100-gigawatt hour battery plant in Debrecen aimed at serving nearby customers’ factories, including Mercedes-Benz, BMW, Stellantis and Volkswagen.

Other major international battery manufacturers with expansion plans in Hungary include Samsung SDI, which in late 2022 was discussing an additional plant in Hungary with BMW.

At the same time, global suppliers of other EV parts and technologies are making big bets on Hungary as a manufacturing and R&D base, with German players once again in the forefront. For example, in September 2021 Schaeffler opened a new plant in the western city of Szombathely which only manufacturers electric mobility parts, with production scheduled to increase from 800,000 units in 2023 to 1.8 million units by 2029. Another illustration is Continental’s Center for Deep Machine Learning in Budapest, opened in 2018, which focuses on research into artificial intelligence (AI) applications for automated driving systems.

Just recently the Canadian Tier1 supplier Magna announced it’s plans for a new plant in Vecsés to deliver body and chassis parts to “two German premium OEMs”.

Investing in Hungary – the positives and the negatives

These are eye-catching investments, yet the full picture is more nuanced – for every “good news” press release about a new plant or R&D center in Hungary, there is often another company which has quietly decided that the country currently does not tick all the right boxes as a production base.

Hungary already has a well-developed electric mobility industry ecosystem, as the examples we have highlighted demonstrate. Yet beyond this essential precondition, investors need to weigh up the main advantages and risks associated with investing in the country.

The positives

Low corporate tax: Hungary’s current corporate tax rate of 9 percent is the lowest of any European country that is an OECD member, and less than one-third of Germany’s rate of 29.9 percent. This huge differential is a key reason why Hungary has proved such an attractive destination for German OEMs and suppliers.

Generous state subsidies: At a national and local level, Hungary’s government is committed to providing targeted assistance to foreign investors in key industries, often at the outer limit of EU state aid rules. Schaeffler’s recently opened plant at Szombathely is a typical illustration, receiving support worth around €14.9 million as a greenfield development.

Relatively low-cost labor: According to recent data compiled by the EU, an hour’s work in Hungary cost on average €10.40, compared with €37.90 in France and €37.20 in Germany. However, investors should also take note that Hungary’s average hourly labor costs rose 16.6 percent in the third quarter of 2022, the steepest increase of any EU country. In addition, there is a large disparity in wages between West and East Hungary

The negatives

Skills shortages: There is a dearth of highly qualified workers in Hungary, with some critics blaming the government’s increasingly strict anti-migration policies. The problem is compounded by the ease with which employees can move to neighboring EU countries in search of better pay and conditions. For example, Hungary’s metalworkers’ union VASAS estimates that the country’s automotive industry workers earn on average about one-quarter of the equivalent salary in Germany. As a result, there is currently hardly any qualified personnel available in western Hungary.

Political tensions with the EU: Some analysts suggest that the various ongoing disputes between Budapest and Brussels could damage Hungary’s attractiveness as a foreign investment destination, especially for EU-based companies. Within the automotive industry, investments in key electric mobility technologies could potentially be affected.

Proximity to war in Ukraine: Regardless of the Hungarian government’s equivocal position, there is no escaping the fact that, as a neighbor of Ukraine, the country is especially vulnerable to the war’s economic impact. Automotive investors will need to bear in mind the consensus among military and strategic experts that the conflict is unlikely to end soon. And in the event of an end to the conflict in Ukraine’s favour, a possible “Marshall Plan” could lead to another shift of incentives for production re-location.

Modelling risk and revenue

OEMs and suppliers that are considering whether to invest in Hungary for the first time, or expand their existing footprint there, can utilize our range of risk analysis and revenue scenario modelling tools for the country. For example, we have developed a dashboard for analyzing potential revenue scenarios when defining Hungary production footprints (see Figure 1).

Figure 1: Hungary revenue scenario dashboard for different production footprints

REVENUE SCENARIO SPOTLIGHT HUNGARY DEEP DIVE CELL CONTACTING SYSTEMS

[47°30’0.0″N 19°0’0.0″E, HUNGARY]

Our dashboard enables companies to enter specific product data, relevant production platforms and selected timelines, in order to derive detailed sales planning scenarios based on customized revenue and profitability forecasts (see Figure 2).

Figure 2: Example of revenue scenarios using the Hungary dashboard

REVENUE SCENARIO SPOTLIGHT HUNGARY DEEP DIVE CELL CONTACTING SYSTEMS

[47°30’0.0″N 19°0’0.0″E, HUNGARY]

Source: Berylls Strategy Advisors

Berylls’ overview: The outlook for Hungary’s automotive industry

In the automotive industry, as in other sectors, Hungary continues to benefit from the exodus of production capacity from western to eastern Europe, which was triggered by the end of the Cold War. Yet this is no longer a straightforward story of companies seeking a nearby source of relatively cheap, reasonably skilled labor. The world has moved on, and so has the industry, from the age of fossil fuel vehicles toward the era of electric mobility.

In this context, we believe that Hungary merits both close attention by OEMs and suppliers considering major manufacturing investments, and rigorous, comprehensive due diligence. Like its language, the country itself is not easy for foreign investors to understand. Yet with sufficient research, Hungary remains a viable, long-term base for international automotive players.

Authors

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Felix Scheb

Project Manager

felix.scheb@berylls.com

Eren Duygun

Senior Consultant

eren.duygun@berylls.com

Dr. Alexander Timmer

oftware development and deployment is emerging as one of the biggest challenges to incumbent OEMs’ dominance of the global automotive market. Established automakers need a new software innovation model, and moving to open source software is a compelling strategy.

When Chinese automakers lifted the curtain on their latest state-of-the-art digital vehicle innovations at the 2023 Shanghai Motor Show they laid down a marker for all automakers. A new breed of OEMs had arrived, and they had digital in their DNA. By building and deploying auto software faster and more efficiently than their incumbent rivals they proved that software is already one of the biggest challenges to incumbent OEMs’ dominance of the global automotive market.

Why is this, when incumbent OEMs have decades of experience in refining auto technology development cycles? Our experience with multiple established brand automakers suggests that standard innovation and supplier management practices are failing to meet the demands of rapid, iterative and collaborative software evolution. These ways of working are unable to cope with the number of software variants demanded, they result in conflict with legacy systems, they fail to deliver effective abstraction layers for simplification and to generate sufficient reusable content, and they are too slow.

Underlying these challenges is the fact is that the standard innovation model does not encourage equal-partner collaboration. Creating the software-defined vehicle demands digital-first skills, and integrated working models that reflect the collaborative ecosystem in which software development flourishes.

Incumbent OEMs have already undertaken several approaches in their attempts to gain momentum in the rapidly evolving field of automotive software. They have tried strategic alliances with big tech suppliers of proprietary software. They have tried building their own dedicated software houses. They have tried reproducing the agile working models familiar to IT businesses, grafting some elements of these onto legacy methods of planning and executing. None of these have really worked – and meanwhile, development costs are ballooning and returns on investment in data are disappointing.

It is time for a new strategy.

Why OSS?

Many established automakers gravitate naturally to the proprietary or ‘closed source’ software model. This instinct is in their manufacturing DNA, having often spent decades refining their own brand-defining proprietary technology. Patented software offered by technology companies such as Microsoft and Adobe comes with the advantage of IT development and integration support – but users are unable to modify or add to the source code. Open source software (OSS) is different: the source code is freely available for all users to inspect, improve, edit or otherwise develop, and under most OSS licenses the only limiting requirement is for the user to publish their code modifications in the software repository.

The OSS model is tested and widespread. Although users may not realize it, more than 70% of all software in use is open source. Developers and end customers often prefer OSS for its superior stability, security and capacity for rapid development and bug elimination; this is one reason why in 2019 IBM acquired Red Hat, one of the world’s largest OSS developers. In many respects, the innovation model behind OSS resembles the unstructured collaborative model that many automakers are already trying to emulate. So it is surprising that, with the exception of infotainment, where OSS operating systems such as Android are already in use, software under OSS licenses still plays a very limited role in the automotive sector.

The OSS approach can be shown to lower cost and improve innovation speed, and thereby increase competitiveness. It reduces cost because of the resource sharing that is intrinsic to OSS, and also minimizes contractual complexity through community ownership of software developments. It lessens technical complexity with better documentation through the simplification of data (usually known as abstraction) that is part of the OSS model, and it helps users to grow collaborative learning and development skills to a level that is unlikely to be achieved in proprietary software provider/user relationships.

Some automakers already understand these advantages and are deploying OSS at scale. One example is Mercedes, which has for six years now been employing an open source strategy that combines free and open source software. Auto supplier Bosch has co-created an OSS-focused ‘digital.auto’ initiative to improve adoption of digital best-practice in the automotive industry and to generate a repository of interoperable software development tools. Bosch is also involved in the ELISA (Enabling Linux In Safety Applications) project, an initiative from the OSS operating system Linux designed to develop and win certification for Linux-powered safety-critical applications with wide ranging uses in the automotive industry. And most recently, Bosch subsidiary ETAS announced a strategic collaboration with aforementioned Ret Hat on in-vehicle basic software layers. A great range of ‘mixed-criticality’ OSS applications is also being developed by the SOAFEE (Scalable Open Architecture For Embedded Edge) project supported by VW and auto supplier Continental.

A compelling risk/return equation

Many organizations see OSS as a risk to their business, and to some extent their concerns are valid. Yet the rewards for OSS adoption in an environment where companies need to shrink technology development timelines and embrace more collaborative ways of working are great, while the potential pitfalls are over-estimated. The challenge for companies is to minimize risk, and leverage the inherent advantages of an open source approach.

Companies are often unwilling to invest resources in a technology base that they do not own – but proprietary software users do not own the software they deploy either, they merely rent it. They also have questions over security, safety and regulation of OSS applications and operating systems – but addressing these issues directly through the growing number of OSS deployment initiatives may be a better strategy than outsourcing responsibility for mission-critical aspects of their technology stack.

To diminish risk, companies should consider adopting OSS as a core approach where certain conditions are in place. The levels of standardization and abstraction in the selected OSS should already be high, to control development costs and maximize usability. The potential resource savings from OSS adoption should also be high. And finally, the relevance of differentiation should be minimal, meaning that OSS adoptions should concentrate on the lower levels of the software stack, rather than on customer-facing applications where software becomes visible and differentiation is commercially important.

The path to adoption

Automakers are not short of choices for OSS development platforms. They include the Automotive Grade Linux Project, a Linux Foundation collaborative project to bring together suppliers and automakers and create a complete software stack for the connected car; Kubernetes, a software ‘container’ operating sub-system originally designed by Google engineers that is emerging as a powerful cloud application for managing multiple data hungry objects such as cars; and the Red Hat In-Vehicle Operating System, which is extending Linux to driver assistance systems.

As with all innovation choices, opportunities must be matched with real world organizational needs and capacities. Automakers will need to develop a detailed picture of where and how OSS solutions can be applied in their software stacks, and to encourage and enable suppliers to adopt OSS approaches, which include providing resources for joint projects and legal liability cover.

The supplier base cannot be fully leveraged without accepting that a degree of risk-taking is inherent in the collaborative model. Since competitive pressure from digitally native automakers will eventually enforce that model sooner or later, it makes sense for established OEMs to adopt it now and begin to benefit from a reduction in the development burden. The opportunity is there to take action before the industry’s widely-recognized strategic crisis turns into a financial one.

A narrowing window

Today, there is a growing risk that automakers begin to lose innovation capacity to both established technology companies and start-ups, as skilled employees see that the attempt to create software-defined vehicles on the old siloed and proprietary development model is failing. Yet OEMs still have know-how and structural advantages that they can leverage: the automotive industry remains dependent on domain-specific expertise and the ability to orchestrate technology and suppliers in a complex regulated environment.

Established automakers understand issues of feasibility and the real value-add of technology. They appreciate that new approaches like OSS, with its radically different concepts of both ownership and development process, demand gradual adoption with a clear vision of where the business case lies.

And that business case can be stated simply. The choice is to establish an alternative ‘automotive-born’ software environment with the potential to succeed where the standard model is clearly failing – or to run out of time and money, soon.

Authors

Dr. Matthias Kempf

Partner

matthias.kempf@berylls.com

Christian Kaiser

Partner

christian.kaiser@berylls.com

Dr. Matthias Kempf

Industrial engineering and management studies at the University of Karlsruhe, Germany, doctorate degree at Ludwig Maximilian University, Munich, Germany.

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