1、The European automotive industryUnlikely to returnto normalGlobal Strategy Group2Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Has the traditional auto sector p

2、eaked?A perfect storm is brewing Recessions come and go,yet the automotive original equipment manufacturer(OEM)sector has continued to grow.And that has placed the focus on building up capacity and harnessing process efficiency.Now,growth no longer looks so certain.In fact,we believe that the automo

3、tive OEM sector has entered a period of decline and disruption.Emerging out of the pandemic is a perfect storm that threatens to change the fortunes of the automotive industry.In our view,five key factors are driving this perfect storm:Drop in demand:Increasing economic uncertainty could mean post-p

4、andemic demand never materializes.Socio-demographic change:Aging populations and declining purchasing power could slow new car sales.Shift to electric vehicles(EVs):The move to EVs is expected to reduce labor intensity and erode market value for traditional OEM suppliers.Suppliers near peak debt:The

5、 majority of traditional OEM suppliers could face financial distress.Price parity comes early:Inflation and rising costs could affect the internal combustion engine(ICE)and EV market differently.12345Market size forecast for passenger cars in Europe(excl.batteries)20192035,in constant(2010)EUR billi

6、onsStrategic implicationsThe automotive industry is expected to shrink,kicking off a period of decline.In our view,survival cannot be achieved through financial restructuring alone given the foreseeable scenario.We believe there will be a need for an operational restructuring within the automotive i

7、ndustry.Industry coordination will likely be required to decide which suppliers stay and which ones go.20192035393bn298bnSource:KPMG analysis based on Euromonitor data.Data pulled November 2022.3Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entitie

8、s.KPMG International entities provide no services to clients.All rights reserved.Five key factors driving the perfect storm for auto OEMs 01Drop in demandSales forecasts for the next decade mostly point in one direction:up.Yet,what if demand doesnt materialize?Analysts expected to see a rebound betw

9、een 2023 and 2025 as OEMs work through order backlogs and demand accumulated during the pandemic.But now,with economic uncertainty rising and recession scenarios seeming more likely,theres a high risk this demand may not materialize.02Socio-demographic change The number of new car buyers is declinin

10、g.So is their purchasing power.Indeed,statistics suggest that by 2030,the 45 to 64 age demographic will shrink by 10 percent.At the same time,real purchasing power has been in decline since 2019.And the current inflationary trends indicate that the purchasing power gap will likely continue to grow i

11、n the near to mid-term.03Shift to EVsThe trend towards EVs has the potential to fundamentally change the proportionate value of production inputs.Recent studies suggest electric drivetrains require around 25 percent fewer parts and around 65 percent less assembly time.Battery aside,the total value o

12、f parts in an EV is around 15 percent lower than in an ICE car,thus reducing the value of the traditional supplier market.04Suppliers near peak debtContinuous pressure on margins and upcoming debt repayments pose an existential threat to many suppliers.Most supplier debt is payable within 2 years.As

13、 cash reserves dwindle,an over-reliance on short-term debt and the need to service debt repayments will likely put immediate pressure on near-term profit generation and reduce suppliers ability to transform.05Price parity comes earlyWhile its expected inflation will continue to push up the cost and

14、price of traditional ICEs,EVs can mitigate some price increases and maintain margins through increased efficiencies and lower battery prices.This,in turn,could accelerate the confluence of prices and drive more rapid EV adoption in the market.4Document Classification:KPMG Public 2023 Copyright owned

15、 by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.01Drop in demand0502Socio-demographic change0603Shift to EVs0804Suppliers near peak debt1005Price parity comes early1206Next steps for the Europeanauto industry14Contents

16、5Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.What if demand fails to materialize?Drop in demandSocio-demographic changeFigure 1:Development of car sales in Eu

17、rope with forecast and adjustment for crises20052034,in#million for the EU27+1ActualsForecastPossible market development without rebound/backlog effect010202005201020152020202520302035EU debt crisisBrexitCovidWarInflationRecessionTheres a risk of backlog/on-hold demand not materializing due to globa

18、l uncertainty and the threat of an economic recession01In our view,the situation has clearly changed.Macroeconomic trends,rising inflation and economic uncertainty coupled with global geopolitical disruption suggest the anticipated rebound in demand may not materialize.If that is the case,the indust

19、ry may already be in a state of decline in Europe.OEMs and suppliers may have little time to react.The decline may be underway Even before the current economic disruption,sales forecasts for the next decade were less than enthusiastic.Most suggested a slight increase in sales over the decade.Some an

20、ticipated volume stagnation.But they all agreed that the automotive industry would enjoy a rebound between 2023 and 2025 based on existing order backlogs and accumulated demand from the pandemic period.Shift to EVsPrice parity comes earlySuppliers near peak debtAfterthoughtsSource:Actual car sales E

21、uromonitor(Passport)historical and forecast data.Data pulled on 18 October 2022.6Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Socio-demographic trends foreshad

22、ow a shift in demandDrop in demandSocio-demographic change02The key customer demographic for new passengers will likely shrink significantlyIn Europes largest market,Germany,the majority of new cars have traditionally been purchased by customers 4564 years old.While Germanys total population is expe

23、cted to grow,this cohort will shrink.In fact,over the next decade,this key demographic will drop by approximately 2.5 million people,or 10 percent of the current market size(Figure 2).Figure 2:Germany:Comparison of demographic structure in 2020 and 2030 in#months0.00.51.01.50102030405060708090203020

24、20-2.5 million(10%)456447%29%24%new car purchases 64Figure 3:Germany:Average passenger car age developmentin#years202019902000197019600198020105108.19.8The same trend,albeit to a lesser extent,can be seen on a European level(EU27)even in the most optimistic simulation,the 45-64 age cohort is project

25、ed to shrink by at least 2 percent.Whats more,younger cohorts tend to prefer alternative ownership and mobilityoptions such as renting,car-sharing,or micro-mobility over an outright purchase.Secondary market will be the norm,rather than the alternativeTen years ago,the average car in Germany was aro

26、und 8.5 years old.Today,the fleet is closer to 10 years old an increase of 20 percent(Figure 3).The average age of a car in the broader EU is even higher.This suggests the used car market is growing and gaining prominence(particularly among younger demographics)which could unlock opportunities in th

27、e aftermarket sector for both OEMs and suppliers.Shift to EVsPrice parity comes earlySuppliers near peak debtAfterthoughtsSource:New car purchases(registrations)from the German National Office for Transportation.Published in January 2021.Data pulled on 8 September 2022.Source:Demographic data from t

28、he German National Statistical Office.Data pulled on 15 September 2022.Source:European Automotive Manufacturers Association Vehicles in use Europe 2022.Data pulled on 7 September 2022.7Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG Int

29、ernational entities provide no services to clients.All rights reserved.New car buyers face growing economic challengesShift to EVsSocio-demographic change02Rising car prices coupled with decreases in real purchasing power may limit car salesFor more than a decade,there has been a strong correlation

30、between European new passenger car sales and real purchasing power.Even after accounting for the pandemic,supply chain disruptions and the chip crisis,the relationship between car sales and purchasing power remains strong.With most of Europe now facing rising energy prices and increasing rates of in

31、flation,there are growing signs that purchasing power may well decrease further as a larger proportion of real disposable income is allocated to necessities and wages fail to keep up with inflation.Yet new ICE car prices are rising:the price of an average new car increased by around 27 percent betwe

32、en 2012 and 2021.And the trend is likely to continue as the Consumer Price Index continues to rise,so too can new car prices,potentially pricing out future potential buyers.Car sales(Western Europe)Real purchasing power(EU)Car prices(EU27+UK)Figure 4:Germany:Purchasing power developmentYear-over-yea

33、r real disposable income vs.car sales263225105-5015203035201220162014201820202632+27%Corr.=0.77Drop in demandPrice parity comes earlySuppliers near peak debtAfterthoughtsSource:OECD/EIU Purchasing Power Parity.Data pulled on 7 September 2022.8Document Classification:KPMG Public 2023 Copyright owned

34、by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.The shift to EVs will likely shrink the traditional supplier market Shift to EVs03Electric vehicle production typically requires significantly fewer resourcesEVs are gener

35、ally less part-intensive than ICE cars(Figure 5)an EV engine often requires fewer moving parts to deliver similar or better performance.Consider,for example,that an average EV only needs a simple single-speed gearbox,yet delivers a higher rev range and wider powerband than an ICE car.Moreover,a larg

36、e proportion of the components for an EV come pre-assembled,thereby reducing assembly time.As the industry gains more experience and finds more efficiencies,additional time can be saved in the assembly of the drivetrain itself.While EVs are still more expensive than comparable ICE vehicles,much of t

37、hat additional cost(3050 percent)can be traced back to the battery.Minus the battery,the remaining value of the parts is actually EUR4,585 less than a traditional ICE car(see chart below).There are two things to take from this trend.One is that the total value of the OEM supplier market is likely to

38、 fall as the market shifts to EVs.The second is that the decline of battery prices could give EVs the cost edge.-27%Lower component requirement (esp.drivetrain)-67%Lower labor intensity of production-EUR4,585Reduction in part value compared to ICE carEV73%100%ICEEquipmentDrivetrainVehicle bodyOtherC

39、hassisEVDrivetrainICEEquipmentOtherVehicle bodyChassisBattery pack29,92042,561INDICATIVEFigure 5:Component-intensityin#of parts-27%Figure 6:Labor intensityin hours of assembly time3010ICEEV-67%Figure 7:Average cost split of an ICE vs.EVin EUR-4,585912%1120%1520%2224%3037%3050%49%719%515%820%1127%IND

40、ICATIVEDrop in demandSocio-demographic changePrice parity comes earlySuppliers near peak debtAfterthoughtsSource:KPMG analysis based on the:Marklines database.Data pulled on 14 September 2022.TUM Automotive Centre An Overview of Costs for Vehicle Components,Fuels,Greenhouse Gas Emissions and Total C

41、ost of Ownership(published in 2017),KPMG proprietary data.9Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.OEMs should reorganize their supply chains and restruct

42、ure their operations Shift to EVs03OEMs should restructure,not just retoolWe believe the shift from ICE vehicles to EVs will have a significant impact on OEM supply chains and operations.For one,fewer and different components are needed for EVs,requiring existing suppliers to innovate and new suppli

43、ers to be sourced.OEMs should start prioritizing EV-component suppliers,particularly as more traditional suppliers struggle to innovate and remain relevant.On the operations side,the drop in labor intensity associated withEV production is expected to be profound.The availability of quality pre-assem

44、bled components and the wider adoption of advanced automation means less complexity and less manpower on the assembly line.As a result,its anticipated that the relative proportions of labor and material will reverse dramatically(Figure 8),forcing OEMs to start moving away from decades of focus on ef

45、ficiency gains.Instead,the leaders should be focusing on restructuring their existing capabilities and reorganizing their supply networks to remain competitive in the long-run.Figure 8:Assembly split in material and laborin%Parts58%Time32%10%ValueLaborMaterial30%89%70%11%ICE assemblyEV assembly-59 p

46、pAssembling EVs requires substantially different supply chains and processes.Demand shift should force OEMs to rethink their operations in their shift to electric mobility.Javier Rodrguez Gonzlez Partner,Deal Advisory,Global Head of Elevate,Deal Strategy KPMG in Germany”INDICATIVEDrop in demandSocio

47、-demographic changeSuppliers near peak debtPrice parity comes earlyAfterthoughtsSource:KPMG proprietary data/analysis.Data pulled September 2022.10Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no service

48、s to clients.All rights reserved.More than a quarter of suppliers are at risk of distressSuppliers near peak debt04The financial health of suppliers is deteriorating rapidly with little reason for optimismLower production volumes coupled with a forced shift into a lower-value market can put signific

49、ant pressure on suppliers as they struggle with an uphill battle against revenue decline.At the same time,there is diminishing value to be squeezed from cost-cutting measures as capital expenditure is vital for innovation and working capital needs are unlikely to change.Research suggests the resulti

50、ng negative free cash flows will lead to a spike in indebtedness.Since 2017,the proportion of suppliers in a bad liquidity position rose by 9 percent(Figure 10).If you assume a commonly accepted maximum debt-equity ratio of 3,our data indicates that about a third of suppliers are at risk of immediat

51、e distress a finding confirmed by the Altman Z scores(Figure 9).The Altman Z metric considers the strength of the balance sheet and the companys ability to generate income to calculate the probability of default.The most recent data shows that about a third of suppliers are in the distress zone,with

52、 a further 34 percent in the grey zone of improvement potential.Suppliers will likely require additional fundingUnder strain themselves,banks have become much more selective about theirdistressed lending.Refinancing rates are high.And investors are looking for growth opportunities.So where will the

53、additional funding come from?Those with a bulletproof business case for transformation are attracting alternative sources of financing including credit from OEMs.20182017201920202021202214%40%Critical(8)Very good(3)Figure 10:Development of debt-equity ratio of suppliers20172022,in%+9%+33%01,79Distre

54、ss zone1,803,00Grey zone3,00+Safe zone28%34%38%Figure 9:Automotive components suppliersAltman Z score,based on LTM financial dataDrop in demandSocio-demographic changeShift to EVsPrice parity comes earlyAfterthoughtsSource:CapitalIQ.Data pulled on 16 September 2022.Source:CapitalIQ.Data pulled on 16

55、 September 2022.11Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Peak debt due is expected to hit suppliers by the end of 2023Suppliers near peak debt04There wil

56、l be a push to refinance short-term debt maturitiesThe just-in-time nature of many component categories has cultivated a financing dynamic that relies heavily on short-term debt.The average automotive supplier debt portfolio includes around 49 percent short-term debt(with less than 2 years maturity)

57、,31 percent medium-term debt(maturing in 25 years),and around 20 percent long-term debt(Figure 11).This is forcing many OEMs to consider how they can provide short-term credit facilities and other financing alternatives to priority suppliers,potentially backed by a degree of bank involvement.Many su

58、ppliers are now facing an incoming peak debt which could hit in the latter quarters of 2023.Now is a good time to act.Andrs Caballero Ponce Senior Manager,Deal Advisory,KPMG in Germany”Figure 11:Debt maturity structure of automotive suppliersin%1 year2 years3 years4 years5 yearsAfter 5 yearsDrop in

59、demandSocio-demographic changeShift to EVsPrice parity comes early”AfterthoughtsSource:CapitalIQ.Data pulled on 16 September 2022.12Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.Al

60、l rights reserved.Falling battery prices and scale efficiencies can allow EVs to offset inflationPrice parity comes early05The cost of batteries for EVs should continue to decreaseThe average price of an ICE passenger car is expected to keep growing through the next decade,mainly driven by price inf

61、lation.Yet EVs still have room to maneuver.The cost of batteries is expected to continue to fall notwithstanding further supply chain and resource constraints as a result of not only new technological improvements(such as solid-state batteries),but also from economies of scale.Figure 12:Average pric

62、e evolution for ICEs and EVs2005 to 2035,in EUR20052010201520202025203020352050253035454016,5k 2kPrice ICEPrice EVFigure 13:Development of battery cost as a%of EV cost20162030,in%49%43%37%32%28%25%22%19%Other factors should also help EVs gain price advantages.The ramp up of EV production should lead

63、 to an increase in capacity and new production efficiencies which should further drive down costs.And the introduction of additional entry-segment EV models from both traditional OEMs and startups could further drive down average prices.Even taking into account recent geopolitical developments,our c

64、onservative estimate suggests EV and ICE vehicles will reach price parity by 2035.Other estimates and observers suggest an even earlier date some as soon as 2025.20302022202820162018202020242026Drop in demandSocio-demographic changeShift to EVsSuppliers near peak debtAfterthoughtsSource:KPMG analysi

65、s based on the Marklines database.Data pulled on 14 September 2022.Source:Bloomberg New Energy Finance When will Electric Vehicles be Cheaper than Conventional Vehicles,published April 2017.13Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.K

66、PMG International entities provide no services to clients.All rights reserved.Price parity should accelerate the decline of the ICE marketPrice parity comes early05Drop in demandSocio-demographic changeShift to EVsSuppliers near peak debtFigure 14:Market size evolution for passenger cars in Europe(e

67、xcl.batteries)20052034,in#million for the EU27+1050100150200250300350400201020062012200820162014201820202022202420342026202820302032Market size(constant EUR)Market size(constant EUR)and market size(constant EUR)(only ICE)As weve noted in this document,there is little hope for a robust rebound and su

68、bsequent steady increase in sales to believe otherwise would be wishful thinking.We believe the greatest impact will be in the ICE market.Traditional suppliers unable to innovate could face challenges.And OEMs should work efficiently to help protect their supply chains.Cant see the forest for the tr

69、ees All the data and analysis seems to suggest that the European automotive market size is in decline.This is not a recessionary dip like past downturns the trends influencing the market are likely here to stay.The events of past few years have been dramatic and captivating,making it difficult to se

70、e the development of the bigger trends behind the headlines.AfterthoughtsSource:ICE market size.Data pulled on 18 October 2022.14Document Classification:KPMG Public 2023 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All r

71、ights reserved.Next steps for the European auto industry Understand and assess the trends.Diminishing demand,shifting socio-demographics,rising price pressures and supplier distress are just some of the interrelated and complex issues facing automotive OEMs and their supply chains today.Start by und

72、erstanding how these trends will influence your particular organization,markets and operations and your wider supply ecosystem.Identify the risks and opportunities.This environment is creating a myriad of new risks and opportunities for automotive OEMs and their suppliers.Yet each organization is di

73、fferent and the options available to one company could differ considerably from another in the same sector.Work with experienced professionals to identify what risks and opportunities your organization might be facing in the future.Quantify the comparative value of different options.You cant decide

74、your organizations future based on historical experiences and solutions.It takes smart data,clear insights into the relative value of each risk and opportunity,and deep multi-industry experience to help determine what move to make next.Build confidence in your decisions by quantifying the actual fin

75、ancial value of your different options.Move quickly to capture and retain value.As this report indicates,the decline in demand and margins is likely to become more apparent and steadily erode the sectors profitability.The current macroeconomic situation is showing signs of reducing the room to maneu

76、ver.Look for quick wins that can deliver in-year cost savings that can fund out-of-year transformation objectives and work with experienced professionals to help efficiently capture that value.Work as an ecosystem.In the next few years,the automotive industry is expected to face a significant disrup

77、tion.Large portions of the supply chainare likely to come under financial stress.Some can be saved others may not.Automotive OEMs and their suppliers should work as an ecosystem and collaboratively across the industry to ensure the transition is smooth and that key suppliers are not lost.Price parit

78、y comes earlyAfterthoughtsDrop in demandSocio-demographic changeShift to EVsSuppliers near peak debtTaking actionThe European automotive industry is likely to enter a period of contraction in value due to a combination of factors,including consumption/demographic trends as well as a shift to simpler

79、,less labor-intensive EV architecture.Acting exclusively on financial levers may no longer guarantee the sustainability of the supply base.In our view,a call for action is needed,as is a call to rethink the sector.06The information contained herein is of a general nature and is not intended to addre

80、ss the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information,there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.No one should act on such inform

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84、 global us for further informationJavier Rodrguez GonzlezPartner,Deal Advisory,Global Head of Elevate,Deal StrategyKPMG in GermanyT:+49 160 90373023E:Andrs Caballero PonceSenior Manager,Deal AdvisoryKPMG in GermanyT:+49 151 62434380E:Barbora DemcakovaAssistant ManagerKPMG in GermanyT:+49 151 74463869E:Document Classification:KPMG PublicSome or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.