Get all your news in one place.
100’s of premium titles.
One app.
Start reading
Tribune News Service
Tribune News Service
Business
Breana Noble

AlixPartners warns Wall Street's 2023 auto industry profit expectations are 'heavy lift'

A consulting firm is warning Wall Street that an expected growth in profits for the automotive industry in 2023 may not come to fruition even as volumes increase from an extended semiconductor shortage.

AlixPartners LLP on Wednesday pointed to an analyst consensus predicting a near doubling in profit next year from 2021 to $89.2 billion across automakers and suppliers. That's a 91% increase from $46.8 billion last year, which was roughly stable from $47.3 billion in 2018.

But raw material cost increases haven't been fully reflected in automaker and supplier performances, said Mark Wakefield, global co-leader of the automotive and industrial practice of AlixPartners. That along with a historic transition to electric vehicles should temper expectations of profitability, he said.

"There's major, major economic profit expectations on the backs of the automakers and suppliers, and so a lot of heavy lifting to do," Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners, said during a virtual presentation.

Analyst expect automakers to represent 63% of those significant profits. They are in position to invest well above $500 million for electric vehicles over the next five years, Wakefield said. But achieving volume and profits from EVs comparable to the legacy autos business is unlikely to happen this decade.

AlixPartners predicts demand will continue to outstrip supply of vehicles until the end of 2024 because of the microchip shortage, leaving customers to pay more from shorted inventories. New EVs hitting the market require 10 times the number of chips, and it takes years to increase semiconductor fabrication capacity, Wakefield said.

Meanwhile, population and household growth plus high home values and increases in activity following pandemic-induced shutdowns are fueling demand even with increasing interest rates, higher gas prices and inflation.

"The story is really still this 4 million in pent-up demand and 2.5 million in restocking potential that sort of absorbs the depressing demand," Wakefield said.

More volume next year should help to fuel improved profits. Alix Partners is forecasting 87 million in global vehicle sales next year. That's up from an expected 79 million this year, down from 80 million in 2021. Sales aren't expected to surpass pre-pandemic levels until 2024.

The automakers representing nearly two-thirds of profits is a flip from before the pandemic. In 2018, suppliers represented almost 60% of profits. By 2021, that had dropped to 31% as they experienced the impact of raw material price increases.

"The automakers have used that tailwind to invest in electrification, to invest in this transition, but also to pay down debt and prepare their balance sheets for this time period," Wakefield said. "The suppliers haven't had that. They've stayed at a fairly high debt level, and that makes it harder for them, facing higher interest rates and into a constrained environment where production is still going to be in an inefficient environment, despite growing very strongly over the next few years. The automakers are definitely in a better position from a financial perspective."

In addition to volume, automation — particularly among suppliers — will help to increase economic profit, Wakefield said.

The result of those earnings for automakers is increasing investments in EVs. By 2024, there will be 212 models available globally. Announced global electrification investments have more than doubled over the past two years to $526 billion through 2026, according to AlixPartners.

Although automakers are insourcing more parts for EVs, 28% of the vehicle still be left to suppliers. To transition the supply base will cost $70 billion if not proactively addressed, according to the consulting firm. Supplier surveys show some already are shedding conventional business.

But it it could take years for EVs to make up those investments, said Elmar Kades, Wakefield's co-leader. Even by the end of the decade, battery-electric vehicle volumes per the platforms on which they sit won't match the volumes of conventional vehicles, according to the projection. By 2029, average production per all-electric platform is expected to be 189,000 vehicles compared to 218,000 for cars and trucks with internal combustion engines.

"That means," Kades said, "that the scale and the cost advantages are not there."

But it's the direction in which regulators are going. Some, though, may provide leniency on restrictions, particularly in parts of Europe where the European Union has banned internal combustion engines by 2035, Kades said.

Sign up to read this article
Read news from 100’s of titles, curated specifically for you.
Already a member? Sign in here
Related Stories
Top stories on inkl right now
One subscription that gives you access to news from hundreds of sites
Already a member? Sign in here
Our Picks
Fourteen days free
Download the app
One app. One membership.
100+ trusted global sources.