Chemical suppliers will be affected by the chaos in the automotive industry. Those who want to thrive in the next normal must confront these changes and respond to three key trends.
For chemical suppliers, the future of liquidity is particularly important. Historically, automobile has been an important terminal industry of chemicals, accounting for more than 10% of the total sales, and the share of specific substances is significantly higher. However, uncertainty in the automotive market has increased dramatically over the past decade.
Even before the covid-19 crisis, many chemical suppliers felt the pressure of the decline in vehicle sales (global light vehicle sales in 2019 was 90 million, compared with 94 million in the previous year) and the decline in profit margin of the automotive industry (from 7% in 2017 to 6% in 2019). These figures are the result of several factors, including fluctuating import tariffs, rising R & D and regulatory costs, and a slowdown in the auto markets in North America and China. In response to covid-19, it is expected that the industry’s profit margin will decline significantly in 2020 and beyond. More complicated, OEM may face more serious damage in the next few years, which requires chemical enterprises to adjust their business models to adapt to the changing market.
Much of this turmoil is due to the emergence of autonomous driving, connected vehicles, electric vehicles and shared mobility (ACES). The automotive industry is also grappling with increasingly stringent scrutiny of sustainability and changing customer expectations. These forces can lead to unforeseen changes that affect the entire value chain, including companies that supply chemicals for many automotive applications in modern cars.
However, our research shows that, on average, chemical companies will be less affected by future mobility than auto companies themselves. Despite technological advances in electrification and interconnection, chemical components and automotive applications are unlikely to be radically transformed. Depending on the portfolio, some chemical companies may even benefit from the turmoil. Companies that want to thrive in the next normal must respond to changes in the materials and automotive markets, seek new value chain opportunities, and remain agile to remain competitive.
The auto industry is in a mess
From 2009 to 2018, the global automobile industry has experienced an unprecedented period of uninterrupted growth, with profits reaching a record high. This trend is reversed in 2019, and the decline has accelerated since covid-19. Although the downturn caused by coronavirus is expected to be alleviated in the medium term, the increasingly stringent regulations on urban private car ownership and the growth of shared transportation modes are expected to have a negative impact on car sales in the long term. According to our expectation, the sales volume of light vehicles will only increase moderately. However, given that major cities around the world are expected to introduce policies to limit private car ownership, under more moderate circumstances, global sales in 2030 may be comparable to today’s levels.
New customers and competitors are making the larger automotive ecosystem more and more dynamic. Take electric vehicles (EVS), for example, which are much more complex than internal combustion engine vehicles (ice), so it is easier for new entrants to produce. Tesla is undoubtedly the most prominent example of the new “pure player” electric vehicle OEM; even the electronics company Sony recently launched an electric vehicle concept car. In addition, China has experienced explosive growth of electric vehicle start-ups, with about 500 registered electric vehicle manufacturers. Although these new enterprises are unlikely to survive, their number proves the speed of new enterprises entering the OEM market. The same is true for mobile services: companies such as didi travel, Uber and waymo compete fiercely with existing mobile service providers (such as taxis) and new mobile services launched by traditional OEM.
These new entrants influence chemical suppliers in three ways. First, existing OEMs and tier 0.5 or 1.0 suppliers may be in trouble, affecting lower tier companies. Second, new customers can enter the market, including Electric Vehicle OEMs or mobile start-ups, as well as fleet customers who require vehicles with special features. Third, even where customers remain unchanged, changes in the market may open a window of opportunity for partnership, which was not possible before.