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Automotive 2020: 5 Approaches in a Shrinking Market

Concannon Business ConsultingStrategy Automotive 2020: 5 Approaches in a Shrinking Market

Automotive 2020: 5 Approaches in a Shrinking Market

It’s been widely reported at this point that the automotive industry is officially shrinking globally and having an especially rough time here in the US heading into 2020.  There are multiple reasons for this, from the rise of car sharing usage to student loan burdens and increasing movement toward car-free urban living, but one thing is clear: automakers are struggling to come to terms with a market that is no longer growing.  Here are five approaches different automakers are taking to weather the automotive downturn, adjust to changing demands, and try to come out ahead of the competition.

1. Cut less-profitable segments entirely

When revenues start shrinking, a classic approach to maintain profitability is to look at which product lines have the weakest margins and phase them out.  Ford has already taken this approach, cutting almost its entire passenger vehicle line in favor of focusing on the far more profitable trucks that form its core market.  This might seem like a drastic move, but the fact is that margins on non-luxury passenger vehicles often just aren’t that good and automakers have been producing an overly large number of vehicle models for several years.  Expect automakers to continue cutting less-profitable vehicles out of their lineups over the next year as they take a hard look at profits and consolidate into their cash cow models.

2. Drastically reduce costs

Another standard business reaction to lowered market prospects is to maintain profitability by cutting costs across the organization.  While never popular, this is often a necessary step for companies that have grown their expenditures too much for their market position.  This strategy is being employed by Mercedes, which is planning to reduce costs by almost $7 billion and cut 10,000 jobs as well across the entire Daimler family of companies.  This might seem like a drastic move, but key markets are shrinking by enough to make these kinds of numbers a rational play to keep the company moving forward.  If 2019’s holiday sales season is as poor as many people are expecting, look for more automakers to follow suit with their own large-scale cost cutting announcements.

3. Focus on electric vehicles (EVs)

With the Model 3, Tesla has opened the floodgates for electric vehicles to finally start seeing wide adoption, especially in markets like Europe and Asia that are heavily incentivizing EV sales.  While EVs still account for only a small percentage of all vehicles sold, EV sales are expected to grow exponentially over the next few years. And with battery costs continuing to drop year over year, manufacturing costs for EVs are also lowering to an attractive level for automakers.  Companies like VW are effectively going all-in on EVs in attempt to leapfrog their competitors and become the go-to choice for electric vehicles.  While some automakers will hold back and wait for the market to mature, expect more announcements of EV manufacturing acceleration next year.

4. Maximize existing engine technology

While some automakers are moving away from internal combustion engines and ramping up R&D and production of electric vehicles, others are betting that advancing existing tech will pay big dividends.  For example, Mazda is nearing release of its Skyactiv-X engine line, which promises 20% or more fuel efficiency increase and potentially better longevity thanks to a move to more diesel-like compression ignition.  Rather than having to spend money to significantly re-tool factories or acquire all-new electric know-how, moves like this allow automakers to squeeze more life out of their core strengths in a shrinking market.  Expect to see more technology improvements within current vehicle types for several more years before everyone switches to EV production.

5. Improve production efficiency

For many automakers, increasing the efficiency of factories and supply chains is a way to decrease their cost per vehicle without having to significantly cut spending or headcounts.  This is also one of the more difficult ways to increase profitability, but for younger and more tech-focused companies like Tesla, increasing efficiency is the name of the game.  When the automotive market was growing, there was less incentive to pursue efficiency increases in manufacturing, but now that times are getting leaner, automakers are looking to technologies like machine learning, computer vision, smart robotics, and even drones to help cut production costs.  Expect continued investment in efficiency-increasing technologies over the next several years as struggles with financial metrics continue.

Looking ahead: a time of innovation and change

When markets stop growing, innovation often blossoms as companies are forced to compete for a shrinking pool of dollars.  At the same time, change inevitably comes in the form of consolidation, new business models, and new technology adoption. The next few years for the automotive industry will without a doubt be a time of both innovation and change as automakers struggle with new market realities.

Michael Dorazio