Cars and components: the great transformation – Let’s get out of balance

There are few and almost all Chinese car manufacturers that are able to respond to the challenges of the electric and self-driving car. An increasingly leased auto-commodity that now also affects Gigeconomy companies. In Italy, most of the components will especially suffer.

A few weeks ago we published an article on the same page highlighting some of the transformations taking place in the automotive sector (the text is dated July 6 and is entitled “Cars and harmful emissions: a summer story”), which underlines in this framework, in particular the Italian government’s fortunately unsuccessful attempt to stem new EU legislation aimed at speeding up the introduction of electric vehicles. The legislation then passed by a wide margin.

With these notes, we address the subject of the major changes taking place in the vehicle sector in more general terms, and is among other things the very important question for the future of a good part of the European industry. To emphasize the point, in the previous article we reminded, among other things, how the automotive sector in Germany directly or indirectly employs around 15 million people, while it also constitutes an important commercial outlet for our component manufacturers. country, and by far, our most important export market in the sector. On the other hand, the total activity relating to vehicles on the roads contributes approx. 10% to Italian GDP.

The electric, digitized, self-driving car

The most important transformations taking place at the product level are, as you know, the introduction of the electric car, its progressive digitization with the inclusion in the cars of increasing hardware and software components, the landing of autonomous driving. Ultimately, we will have driverless cars, electric and full of electronics. Meanwhile, the passage of the sector’s center of the world market from the West to Asia, especially to China, has already been completed.

As you know, electric cars have been in production for some time; in 2021, according to one of the available estimates, around 5.6 million units were sold, of which 54% (2.9 million) were in China, while in 2022 10 million cars were marketed, of which 6 million were always in China alone.

Digitization is also galloping; on the contrary, the inclusion of an increasing number of chips in the cars has led, among other things, to a shortage of related products, which causes a slowdown in the sales of the same cars compared to what the market could have absorbed.

Especially on the one hand with technologies regardinginternet of things the technical progress and performance of the cars are monitored from a distance, as the individual cars communicate with each other, with the car manufacturers and with the service centers, and with infrastructures such as traffic lights, toll booths and pedestrian crossings, while on the other hand, with software programs, we are arriving at what with a quaint term is called “four-wheel mobile phone”, with applications that are actually similar to those found in smartphone more advanced.

The strategic part of the vehicle is no longer made up of the engine, but of the data management software. As someone wrote: the software eats the whole world and cars are next on the menu.

China also remains the leading country in this sector: in 2021, nine of the top ten electric car manufacturers were Chinese, while the American Tesla was only in third place, and German manufacturers were currently out of the game. Chinese companies have been able to predict the trend of the market to demand software penetration. In any case, all the big corporations in the world are creating huge software workshops that will soon employ thousands of people.

Finally, the self-driving car; its introduction on the market turns out to be slower than expected a few years ago, as it is an extremely complex product from a technological point of view, although progress does not stop and on the streets of some Chinese cities, but also in the United States , now circulate the first examples of these cars, albeit in a relatively protected environment.

What happens

The consequences of these transformations appear very relevant.

Meanwhile, consider that around 40% of the total cost in electric cars currently consists of batteries, while software tends to represent another 40% of the same cost. At this point, there is very little left for the mechanical part, including the pride and pride of the German automotive tradition premium, also in relation to the fact that, according to the forecasts, with the introduction of automatic driving, it will no longer be natural to buy the car, but to rent it when necessary, thus significantly reducing the number of cars produced and especially the demand. for quality cars. The medium essentially becomes one merchandise. Finally, we will have cars with Chinese batteries and Chinese or American software for rent.

With the advent of the electric car, many new companies are establishing themselves, which tend to conquer the main roles in the market, from the American Tesla and smaller companies always in the United States to the Chinese BYD (currently the most important manufacturer in the sector together with Tesla itself), Nio, Catl (leading battery manufacturer).

Meanwhile, some large digital and component groups are trying to fit into the vacant spaces.

As for the first category, this happens to several large American (including Google, Amazon, Microsoft) and Chinese (Baidu, Huawei, Tencent, Alibaba and others) companies.

Regarding the second mentioned category, we can recall the cases of Foxconn and Bosch. The Taiwanese company has brought together around 1,200 companies in the sector and is able to offer everything needed to produce a new type of car, while Germany’s Bosch, currently the most important producer of components, is undertaking a gigantic rescheduling in the digital sense which will bring it back to offering a very high selection of productions. The space for small producers also seems to be significantly reduced on this side.

The advent of the electric also means that the number of parts in a vehicle tends to decrease drastically, while with the self-driving vehicle, the production of cars is also significantly reduced. The consequences for the component industry appear to be very negative.

It should be remembered that there is a tendency in the car manufacturers in the sector to bring an important number of previously outsourced components into the interior in order to try to get a bigger part of the value chain of the electric car, from the extraction of minerals to chip design, to the aforementioned internal creation of large software workshops, even if mineral extraction, battery production, software production are not part of the traditional know how of the same, and therefore this strategy poses significant risks. A pioneer in this trend is Elon Musk’s Tesla.

At the same time, especially in Europe, a conflict is developing between car manufacturers and component manufacturers about how the increasing cost increases on materials and energy should be distributed, where the houses are also trying to exploit the increasing strategic weakness of the suppliers due to the transformations that are taking place, in order to their advantage to change the balance of power, which until yesterday saw average profits in the same component sector exceed those of car manufacturers. The relationship is about to reverse.

To complete the picture, we tell how the Italian car factories, the legacy of the old Fiat, have been in deep difficulties for many years due to lack of production, and how they have been kept going over time only through the massive use of redundancies and other public benefits. In the 1990s, 1.7 million cars were produced in our country, while in 2021 we had dropped to 674,000 (only 400,000 excluding commercial vehicles).

The fate of the national component industry

Faced with this scenario, even dramatic in some respects, one would be led to believe that the seats of national component companies will shrink sharply until they almost disappear.

To then analyze the situation with greater optimism, it can be seen that there are in fact different segments of the national component reality with different possible perspectives. Meanwhile, there are some, unfortunately few, large national and semi-national groups (from Brembo to Pirelli, the latter company with Chinese capital but essentially nationally run) which are able to weather the storm. A large group of companies with foreign capital can be registered, and in this case an active intervention on the part of the government seems to be necessary to negotiate their stay in our country on a case-by-case basis; just think of the reality that Magneti Marelli, a strategic company in the sector, created but suddenly left to foreign hands at that time. Finally, there is the large group of national small and medium-sized enterprises, for which a support action can be attempted to facilitate mergers and acquisitions, financial strengthening, development of research activities, as well as internationalization processes and diversification, both internally. and outside the sector. In the end, we must have no great illusions. The sector will lose businesses and employees. A proper transformation would require a gargantuan effort, which our precarious and inefficient national governments, we fear, are in no way capable of carrying out.

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