UK (Commonwealth) _ The European automobile sector has influenced the continent’s economy for many years. It directly contributes 3% of Europe’s GDP and four million employment. Additionally, the sector is a prime example of Europe’s industrial success, since four of the top 10 worldwide automakers by revenue—BMW, Mercedes-Benz, Volkswagen, and Stellantis—are European companies. But the conventional sources of the car industry’s continuously outstanding performance are under grave danger.
In response, BCG examined the historical strengths and new vulnerabilities of the European car sector, as well as its current state and future prospects. We looked at potential changes to its crucial role in the European economy, especially the potential changes to GDP, employment, tax payments, and equity value within the industry.
Changing Risks
The European car sector has historically profited from five factors: the value of brands, stable geopolitics, cost leadership, technology leadership, and access to the Chinese auto market. Right now, they’re all in danger.
First Risk: Technological Leadership
The automotive cluster in Europe gained extensive knowledge in intricate vehicles powered by internal combustion engines (ICEs). High performance, fuel economy, robustness, handling, and design are their distinguishing qualities that allowed European Original Equipment Manufacturers to stand out from the competition and improve their brands. But as the shift to electric and software-defined cars quickens, the advantages European OEMs enjoyed in ICE design and superior engineering are becoming less significant.
The European car industry is finding it challenging to stay up with other major participants in the world of electric vehicles (EVs) when it comes to battery cell design, power electronics, expanding battery range, and cutting-edge quick charging technology. For traditional OEMs, the transition to software-defined cars presents even more of a hurdle. Software is becoming the unique selling point of cars, driving infotainment, performance, and connection, autonomous driving, in-cabin experiences, and regular vehicle upgrades. As a result, businesses who can design software first and hardware second will have a greater advantage in the market.
Risk 2. Cost
European automakers have long taken pride in their superior industrial operations, which include highly trained labor, significant automation, and economies of scale. This is especially true of German OEMs. Industrial exceptionalism, when combined with Europe’s cheap energy costs, has made it possible for European manufacturers to produce cars at prices that are competitive worldwide.
These benefits might be jeopardized as robotics are being quickly adopted by US and Chinese firms, bringing them closer to more advanced automation. Furthermore, because labor costs are cheaper at these firms because there is little to no unionization at their operations, many of them have more flexible cost structures. Furthermore, the volatility of energy prices is probably here to stay due to resource scarcity and geopolitical tensions, which will hurt European automakers more than those in other areas.
Risk 3: Brand
European original equipment manufacturers have historically had great brand recognition, partly due to long-term sponsorship relationships with prestigious international athletic events. In the US, high-end European brands are regarded as symbols of wealth, and Western automakers are well-liked in China. In fact, in the Chinese vehicle market, Volkswagen, BMW, Mercedes-Benz, and Audi collectively account for one-fifth of unit sales.
But with the 2015 diesel emissions crisis, attitudes started to shift. As technology continues to evolve at a rapid rate, marginally lagging conventional OEMs, European automakers run the risk of being perceived as stuffy and corporate rather than trendy, vibrant, youthful, contemporary, or environmentally conscious like the new EV OEMs. In a major strategic move, China is elevating the Made in China brand to represent more than just low-cost manufacturing while showcasing its technical prowess and independence.
Risk 4: Geopolitics
European OEMs profited from the expansion of worldwide supply networks and value creation brought forth by free trade agreements and stable political settings. Imported materials and supplies from emerging nations helped European automakers retain relatively cheap car pricing and high manufacturing efficiency. These nations welcomed the business from Western automakers and soon embraced just-in-time delivery systems.
The political winds of decoupling and de-risking are blowing those heady days into the past. Deglobalization plans are becoming commonplace these days to prevent political unpredictability and disturbance. Because automakers in wealthy nations are incentivized to source components and materials domestically, supply chains are becoming shorter.
Risk 5: Chinese Market
Over the past thirty years, China’s economy has grown at an accelerated rate, propelling many people into the middle class and beyond. Many of these people have chosen to flaunt their newfound riches by driving expensive European cars. No local carmaker was able to create cars with the same level of quality or appeal as those in Europe for a very long period. This was a very profitable time for certain European OEMs; for some manufacturers, earnings from Chinese sales exceeded 50% of total sales.
