FYI: The automotive industry is navigating a challenging transition from combustion engines to electric powertrains, leading to potential instability and underutilized factories.
The Auto Industry’s Balancing Act: Navigating the Combustion to Electric Transition
With the market for electric vehicles (EVs) evolving slower than anticipated, automakers are bracing for a prolonged reliance on combustion powertrains. Companies are adopting a "flexible" strategy to maintain their facilities and supply chains for Internal Combustion Engine (ICE), hybrid, and Battery Electric Vehicle (BEV) platforms. This multifaceted approach, however, might result in underutilized factories, causing instability, layoffs, or even plant closures during a crucial transition period.
The Inconstant Shift From Combustion to Battery Power
The automotive industry’s progression from traditional combustion engines to battery-powered vehicles has been anything but smooth. Forced to adapt swiftly to changing market conditions, automakers have adopted what they refer to as a "flexible" strategy. This entails positioning themselves to meet EV demand while retaining the ability to pivot back towards hybrids or combustion engines if necessary.
While this flexibility may help in the short term, it could have severe long-term consequences. According to a new analysis by Automotive News, this strategy may lead to uncertainty and instability within the industry.
The Challenge of Plant Utilization
Central to this issue is plant capacity utilization—essentially, optimizing the usage of factories to produce the right amount of the right products. Optimal plant utilization is around 80%, but in the United States, current figures hover at an average of 70%, reports GlobalData. As automakers gear up to produce both combustion-powered and battery-powered vehicles, this utilization rate is expected to drop further.
Predictions and Concerns
GlobalData forecasts that by 2030, car manufacturers adopting this flexible approach may see plant utilization plummet to below 60%, which could continue declining through 2035. This has raised significant concerns among industry experts.
Michael Robinet, the Executive Director of Automotive Consulting at S&P Global Mobility, expressed his apprehensions: "You’ve got some plants that are pigeonholed to be just BEV plants, some plants that are just ICE plants, and some that can do in between. In the old world, your ability to move vehicles back and forth between plants was a lot easier, but when you go from ICE to BEV, that flexibility really becomes difficult. It’s apples and definitely oranges."
Navigating the Unpredictable Market
Predicting the "right" situation remains a formidable challenge. With fluctuating EV sales and mainstream buyers awaiting more affordable options, automakers face tough decisions. Should they invest heavily in hybrids for the interim? How much should they invest? What if a competitor rolls out a game-changing vehicle first? Overproducing the "wrong" type of vehicle could lead to significant financial losses, as the supply chains for engines and batteries differ vastly.
The Consequences of Underutilized Plants
Not all factories will be underutilized. Some will operate near full capacity, but plants kept online merely to address specific market niches—whether combustion or battery-powered—are expected to see declines. Undoubtedly, the repercussions of an underutilized plant include worker layoffs or even complete plant closures.
No Crystal Ball for Market Trends
The automotive industry lacks a crystal ball to foresee how consumers will react to an evolving market. The uncertainty surrounding the pace of electrification is driving stakeholders, from dealers to suppliers, to the edge.
Conclusion
The flexible approach automakers are adopting may secure their footing in the immediate future, but it carries the risk of significant long-term instability. With the industry in flux and consumer preferences hard to predict, the road ahead is fraught with challenges. Automakers must navigate these turbulent times with agility and foresight to strike the right balance between combustion engines and electric powertrains.
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William Kouch, Editor of Automotive.fyi
