Andrew Marsh FIMI, Engineering Director at Automotive Industry Consulting Ltd, provides his view on why vehicle manufacturing is financially challenged, the effect of changes in taxation regimes and the impact on how vehicles are built.
The last short article looked at how recyclers are at the centre of the automotive world going forwards. Now let’s look at how the power of the vehicle manufacturers is changing.
Until about three decades ago, vehicle manufacturers created products with little or no external assistance; controlled sales of both vehicles and parts as well as usually dominating at least one national market. The control was absolute: The manufacturer chose which retail partners to use, what their allowable profit margin would be and which products they could sell.
Vehicle technology and sophistication began to mushroom, driven in part by the reduction of tailpipe emissions and then as that got into full swing, safety. To keep up, and access the best technology on offer, vehicle manufacturers engaged with suppliers – no longer did they buy products off the shelf, but worked jointly. In the last two decades, the balance of technology, therefore, power has moved from the vehicle manufacturer to the suppliers. Effectively, a vehicle manufacturer is the assembly point for lots of components created by suppliers, with less than a third by mass originating from inside the company.
The results today are super companies such as ZF which includes the giant TRW, and Samsung, which includes Harmann as well as B&O. Such companies are now as big, if not bigger than some of their clients.
If we reverse engineer a €20,000 new vehicle, we can remove around half the retail price with direct and indirect tax (the lion’s share), support for the dealer network as well as transport from the factory to a final destination. Around €2500 will pay for the design, development and manufacturing equipment investment, so we are left with €7500 to make all the parts as well as building them into the vehicle.
The proportion of cash going into the vehicle manufacturers has increased over the past three decades. The investment to make each new vehicle project happen has grown from a few hundred million dollars to more than $1 billion with carryover powertrains, or closer to $3 billion for more prominent programmes with many new powertrains. Whereas in the 1950s, the effective profit margin was more than 10 per cent, now most vehicle manufacturers struggle to make a 4 per cent margin.
The ballooning investment costs and relatively low returns have made vehicle manufacturers evolve from complete control of their destiny to an integration partner. That evolution is continuing and some of the things that might be left behind – very unwillingly – will include servicing, repair and recycling. Quite simply, a vehicle manufacturer can choose to be a ‘provider of transportation services’ which already has some serious bidders in place. Or it can ensure it has an essential position within a network of partners while only really building new vehicles.
From the start of January 2020, the vehicles sold across the EU are subject to an average CO2 figure of 95 g/km. Theoretically, all of the vehicles sold in all EU member states by a vehicle manufacturer emit no more than 95 g/km of CO2 – but if the limit is exceeded, the fine, paid directly by the manufacturer, is €95 per g/km, per vehicle over the limit. It has caused a stampede to add electric drive systems to existing powertrains or sell pure electric cars. Most vehicle manufacturers know already that even the shift to hybrid drive will reduce routine service business by 10 to 30 per cent.
Next up? Taxation of parts logistics pre-vehicle assembly is due to start rolling-out by the middle of the decade, which will cause changes in where the parts come from as well as vehicle assembly locations. That will spread to the price of parts for repair, making the argument for intelligent re-use of good quality parts stronger than it is today. Why do this? Quite simply Governments need a source of tax revenue, and if the use of petrol/diesel declines, that revenue has to be generated from somewhere.
That will drive yet more user behaviour changes, and in turn cause vehicle manufacturers as we know them today, to change shape again. It will drive the move towards standard modules shared by multiple vehicle manufacturers – such ideas only exist today inside individual manufacturers.
The next decade will see considerable changes in the way vehicles are built. Part of the whole picture is the support for vehicles once they are made, and that’s where the recycling sector can assist not only to help keep vehicles on the road but to do so with lower carbon impact. For all involved in the recycling business, the opportunities are increasing rapidly.
In the following article, we shall explore how ‘electrification’ is going to change over the next decade and the difficulties that are already evident.
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Ezi-Methods provides technical information and technical advisory services to the global collision repair industry.
