The European automotive industry: Unlikely return to normal

Recessions come and go. Yet the automotive OEM sector has always 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 automotive 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 forever. 

Five key factors are driving this perfect storm:

1. Drop in demand: Increasing economic uncertainty could mean post-pandemic demand never materializes.
2. Socio-demographic change: Aging populations and declining purchasing power could slow new car sales.
3. Shift to EVs: The move to EVs will reduce labor intensity and erode market value for traditional OEM suppliers.
4. Suppliers near peak debt: The majority of traditional OEM suppliers could face financial distress.
5. Price parity comes early: Inflation and rising costs could affect the ICE and EV market differently. 

For the first time in history, the automotive industry will shrink, kicking off a period of decline. Survival cannot be achieved through financial restructuring alone, given the foreseeable scenario. There will be a need for an operational restructuring within the automotive industry. Industry coordination will be required to decide which suppliers stay and which ones go.

The 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 less labor-intensive EV architecture. Acting exclusively on financial levers will no longer guarantee the sustainability of the supply base. A call for action is needed, as is a call to rethink the sector.

• Understand and asses the trends.
• Identify the risks and opportunities.
• Quantify the comparative value of different options.
• Move quickly to capture and retain value.
• Work as an ecosystem.