The Global ICE Industry Cliff Is Here
As a management consultant, I spend most of my working life playing with numbers and math in the areas of business development and finance. My analysis goals have always been to make use of data and computer models to better understand industry trends. With BEVs starting to go mainstream, we now have enough information to make some fascinating predictions.
The chart above outlines actual and projected global automotive industry sales for BEVs, ICE cars, and total industry production. The production numbers are actual between 2015 and 2022, and are of course projected for 2023–2026 based on historic BEV growth data & trends. Hybrids are lumped in with ICE cars as a preference for full BEVs is becoming clear in the data.
As you can see, the overall auto industry has declined from when it peaked in 2017 due to the pandemic and chip shortage before it started to recover in 2021. This chart/model is conservative in predicting industry growth at 1.6% y/y going forward and BEV growth at 50% for 2023 (average BEV growth was 57% for the past 7 years). I also adjusted future BEV growth down starting in 2024 by 2% y/y respecting how it becomes increasingly difficult to grow a larger fleet vs. a smaller one. I think we now have enough data to show that ICE car sales are about to fall off a cliff starting right now!
The trends in internal combustion sales only began to diverge from total industry sales in 2020, with 2021 being the first year since 2017 that the overall industry grew while ICE car sales continued their decline. This trend accelerated in 2022 and the model supports how this trend will not only continue but accelerate significantly starting right now. Putting numbers on it, the drop in ICE vehicle demand will mean 2.5 million fewer vehicles this year, 4 million fewer in 2024, 6.5 million fewer in 2025, and a whopping 9.5 million fewer in 2026 for a loss of ICE sales totaling 22 million vehicles over the next 4 years. Also, keep in mind this decline was calculated allowing for 1.6% growth overall for the industry!
What does it mean?
It has been observed by many analysts that legacy automakers are in a bit of a pickle. These automakers know how to make money on ICE cars, but, for most, BEV profitability is reportedly either negative or lower than it is for their ICE products. Now that ICE vehicle sales are arguably in permanent decline, companies making ICE vehicles need to grow their BEV markets faster than they lose their ICEV market. Further, legacy companies need to be able to make their BEVs at least as profitably as the ICE vehicles they are losing lest the transition impact their financials! The fact is that many automotive companies do not appear to be very well positioned to do this at this critical moment when the market appears to be swinging fast! We are probably now entering “crunch time” for many of these companies.
So, which car companies are at risk?
In addition to collecting data and building models to project overall industry sales, I also keep data and follow what is happening at some of the top car companies. Sorry, I don’t have all of them, but maybe in the future I’ll add a few more, including the fast-growing Chinese companies, as they are clearly relevant to this conversation now. Here is a summary of what the data suggests for some of the top car manufacturers from 2015 to 2022.
Please note the growth percentages and volumes below are based on actual data. Percentages are not cumulative, but per year over the past 7 years! 2022 change vs 2015 is the difference between total cars sold in 2022 vs 2015 (not cumulatively).
The Altman Z scores in this table are based on a formula developed by Edward Altman back in 1968. The formula uses company financial metrics and was created to help predict which manufacturing companies are at risk of going bankrupt. The formula was developed using financial data from companies that went bankrupt. A good score is over 2.99, and the “danger” point is a score of less than 1.81. The model is considered to accurately predict bankruptcy 80–90% one year ahead of the bankruptcy. This does not mean a company with a low score will go bankrupt, but rather how a low score correlates with bankruptcies.
For an automotive manufacturer to be considered healthy today, they really should be starting to produce BEVs in volume faster than they are losing their ICEV sales. They should also be producing them profitably. Plus, they should have decent Altman Z scores.
As you can see from the data, Tesla is a clear outlier and is in a great position to continue its ambitious growth plans. Of the legacy companies, only Mercedes and BMW are growing, and both have relatively good Altman Z scores. Considering both companies also have decent BEV programs, it suggests they can expect continued growth and are probably not in danger of going out of business.
At the other end of the spectrum are companies that are losing significant sales y/y, and/or have weak BEV programs, and/or have low Altman Z scores.
The companies that fit this bill include pretty much the rest of the pack really. That said, it is difficult to predict which are truly in trouble since there are so many unknowns, including how quickly these companies can ramp their BEV sales, if they can do so profitably, and how deep their pockets are. I suspect 2023 and 2024 will tell us a lot, especially over at Toyota. Toyota is interesting since it has some pretty good hybrids and a loyal buyer base. Whether this will be enough to maintain its sales in the context of a quickly declining ICEV market is the question.
There were some holes in the data from the above sites, so I also scoured the internet for recent annual reports and articles on production. This included a report from Stellantis on 2022 production, plus some data from ACEA.auto and BNNBloomberg.
Featured image from Pixabay/Pexels (CC0 license)
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