Automakers during this decade face a big challenge. They are having to invest in electric vehicles. But EVs, at least for now, won’t generate the profits of conventional vehicles, according to an annual report by consulting firm AlixPartners.
“EVs won’t be close to the scale of traditional vehicles by 2028,” Mark Wakefield, global co-leader of the firm’s automotive and industrial practice, said during a presentation about the report.
“You have to invest now in a business that’s less profitable than the one you’re replacing,” he added. “We do see this as a difficult period to go through but not one we can wait out. It’s happening.”
Automakers are under regulatory pressure to reduce greenhouse gases as part of efforts to address climate change. That has spurred EV development. But there is also increasing demand for EVs for other reasons.
Electric-car maker Tesla Inc. has marketed its models as an alternative to traditional internal combustion engines. The company has been rewarded with a high stock price and it has become profitable. However, it also faces increasing competition.
AlixPartners estimates that announced automaker EV investments rose 41 percent just between 2020 and 2021. Now, according to the consulting firm, announced EV investments total $330 billion for 2021 through 2025.
The drive toward EVs “now appears to be at an inflection point, at least in terms of industry investments if not yet in sales,” AlixPartners said in a statement about its industry survey.
All of this spending is taking place as automakers cope with higher raw material costs and a global semiconductor shortage.
“We do not live in ordinary times,” said Stefano Aversa, chair of Europe, Middle East and Africa for AlixPartners. The industry’s investments “won’t pay off for several years,” he said. Companies, he added, will need “leaders who are more visionary.”
Vision is not created by snapping your fingers and saying, “Make it so.”
Lordstown Motors Corp., an electric-truck company, this week saw its CEO and CFO depart. Despite that, Lordstown Motors said it still expects to begin limited production in September. The company’s ups and downs demonstrate an EV future may not be easy to achieve.
Other highlights in the AlixPartners report included:
--A forecast that U.S. light-vehicle sales will rise to 16.4 million this year, up from 14.6 million in 2020, when the financial impact of COVID-19 was at its peak. The consulting firm said deliveries will exceed 17 million annually after that.
--A forecast that European light-vehicle sales will increase to 17.6 million in 2021, up from 16.5 million last year. AlixPartners forecast annual sales in the region won’t reach 20 million until 2024.
--Price increases were the biggest driver of automaker profitability during the COVID-19 pandemic rather than cost control.