Automobiles and Components
Villanova Consulting Group Automobiles and Components Industry Report 2024Written by: Eric Darrow Overview
The Automobiles and Components industry group stands as a cornerstone within the global economy, holding significant influence on the consumer discretionary sector and representing a crucial component of consumer demand and industrial production. This industry group consists of everything from sports cars and semi-trucks to sparkplugs and lug nuts. The automotive industry is heavily regulated, having to design products differently depending on the country of sale. China has the leading global market share in car sales, buying nearly half the world's cars.
Inputs of the automobile industry include the mass production of parts, engineering of safety systems, creating prototypes, and crafting designs. Producers must be adaptive in this industry, as they are often faced with new regulations, supply chain disruptions, and shifts in consumer preferences.
History
The first automobile powered by a gas combustion engine was produced in 1885 by Karl Benz. From that time until World War I, the automobile industry was comprised of small producers who handmade their cars. Mass production of automobiles spread throughout the world due to the invention of the moving assembly line, which led to more availability of affordable cars.
By 1929, the "Big Three" (Ford, GM, Chrysler) dominated the American market and smaller manufacturers were later wiped out by the great depression. During World War II, automakers all over the world switched production to tanks and aircrafts to help the war efforts. Post-World War II, there was a mass expansion of the automotive industry, with Japan emerging as the leading global producer by 1980.
By the early 21st century, concerns over environmental safety forced the production of more fuel-efficient cars, including electric vehicles. Industry consolidation has led to a few large firms dominating the automotive industry in major producing countries, mostly due to increased mass production. Automotive manufacturing has transformed into mostly automated systems, with equipment being guided by computer systems.
Sector Overview
Within the Consumer Discretionary sector, Automobiles and Components hold the smallest market share, with just 5.15% of the group weight. The industry group is less than half the size of the second smallest group in the sector, Consumer Apparel and Durables. Automobiles hold 3.80% and Auto Components hold 1.35% of the group weight. Breaking it down further:
Auto Parts & Equipment = 1.12%
Tires & Rubber = 0.23%
Automobile Manufacturers = 3.53%
Motorcycle Manufacturers = 0.27%
Porters 5 Forces
Threat of New Entrants: The Automotive industry has little threat of new entrants due to many reasons. First, there is a very high cost of entry, stemming from the high volume of labor, raw materials, advertising, and manufacturing needed. The industry has also been made up of the same companies for decades, which have established loyal customer bases. These larger companies will almost always be able to beat a newcomer in price due to economies of scale in the industry.
Bargaining Power of Suppliers: There is a large quantity of suppliers in the auto manufacturing industry, leading to a low bargaining power. Manufacturers can easily switch to another supplier if their needs are not met.
Bargaining Power of Buyers: Buyers have relatively high bargaining power in the industry. Customer concentration is extremely low, as most buyers make a one-time purchase every few years. Buyers in this market are sensitive to price and mostly prefer the cheaper option. The availability of financing options also influences a buyer’s bargaining power.
Threat of Substitutes: The automobile industry has a weak threat of alternatives. While in cities there is a strong threat of public transportation, life outside of a city is extremely car-dependent and will be for the foreseeable future. Owning an automobile also provides a sense of convenience and accessibility that cannot be found in public transportation.
Competitive Rivalry: There are a large number of competitors in both the automobile and components industries. The industry growth rate is 6.39% from 2021 to 2027 for automobiles and 4.1% from 2022 to 2031 for components. For both industries, there is little product differentiation, leading companies to compete with prices.
Impact of Government Regulations
Safety Features Decrease Creativity
Several decades ago, customers could easily identify a car’s make and model simply by its design. Auto manufacturers would churn out new body styles yearly for every car in the 1950s and 1960s. The creativity of the designs played a huge part in their sales and brand image.
In today’s market, the same body styles are typically sold for 3-6 years at a time and are sometimes repeatedly sold for up to 10 years. However, cars today are much safer than those of the 50s and 60s. Most cars then had hard metal dashboards, no airbags, no seatbelts, and no crumple zones. When governments started to mandate these safety features to be included in every car, the focus of automobile producers shifted from design to safety. Many of the cars on the road started to look the same to accommodate for the safety features that they had in common. Every safety feature comes with its design limitations, as they must be located in the same place across all vehicles and can take up significant space, limiting creative options when designing concepts.
Fuel Efficiency Requirements
In more recent years, the U.S. government has increased regulations on the fuel efficiency of new automobiles. In 1975, the Corporate Average Fuel Economy (CAFE) was enacted as the set of standards for automotive fuel efficiency, following the Arab oil embargo. Fuel economy standards are developed by the National Highway Traffic Safety Administration (NHTSA), an agency within the US Department of Transportation. It initially set the standard for cars at 18 miles per gallon.
The standards were updated in 2012 by the Obama Administration to gradually raise fuel efficiency targets each year until reaching 54.5 mpg by 2025 (this target was later revoked by President Trump). However, the development and deployment of new technologies to meet these targets requires significant investments from automakers to make new car models more fuel-efficient and safer for our environment.
Emissions Laws Increase Cost
Regulations regarding emissions can have a significant impact on a manufacturer’s earnings. New parts that help decrease emissions such as air filters and catalytic converters are costly to design, test, and produce. In the U.S. the Clean Air Act gives the EPA the authority to regulate engine emissions and the air quality in general.
However, global government regulations impact automotive companies beyond the United States. Since most automakers distribute vehicles worldwide, they create standardized designs to avoid modifications for different markets. Consequently, vehicles often comply with regulations from multiple countries, not just the U.S. This adds costs and complexities to the design process, as meeting various criteria for street-legal status globally requires substantial planning and adaptation.
Key Industry Players
Toyota Group
Toyota is an auto manufacturer based in Toyota City, Japan. It is the world’s best selling brand and has been for 10 years. The Toyota group produces four brands: Toyota, Lexus, Hino, and Daihatsu. Toyota is its highest revenue driver, producing cars, trucks, SUVs, and compacts. Lexus produces luxury cars and SUVs. Hino produces commercial vehicles and diesel engines, and Daihatsu produces compact cars, sold in East Asia. The Toyota group’s top seller, Toyota, holds 10.7% of the world market share. Toyota's design process involves global collaboration across studios in Japan, Europe, and North America, incorporating customer feedback and market research to develop vehicles tailored to regional needs and preferences. The company's design philosophy aims to balance functionality, aesthetics, and emotional appeal in creating their vehicles. The company employs a multi-channel distribution strategy, including dealerships, online sales platforms, and fleet sales. Toyota’s primary method of distribution is through dealerships.
Competitive Strengths:
Brand Reputation: Toyota is renowned for its reliability. Customers buy from Toyota because they expect a durable and quality product that will outlast any other brands. From this, Toyota has developed a loyal customer base.
Innovation: Toyota has been the industry leader with its hybrid technology. The Toyota Prius paved the way for the presence of hybrid vehicles in the market today.
Diversified Product Portfolio: The company offers a diverse range of vehicles catering to different consumer preferences and market segments, from fuel-efficient compact cars to rugged off-road vehicles.
Global Presence: Toyota has a strong global footprint with production facilities and sales networks in numerous countries, allowing it to adapt to regional market demands effectively.
Volkswagen Group
Volkswagen is an auto manufacturer based in Wolfsburg, Germany. The Volkswagen group sold the second most vehicles in the world, with 6.5 million vehicles sold. The group is made up of Volkswagen, Volkswagen Commercial Vehicles, ŠKODA, SEAT, CUPRA, Audi, Lamborghini, Bentley, Porsche and Ducati. Volkswagon is the group’s top-performing company, with 6% of all auto sales worldwide. The Volkswagon group utilizes economies of scale in their design, with integrated design centers and manufacturing that shares parts among brands. Volkswagen uses dealerships and online custom ordering to distribute their vehicles.
Competitive Strengths:
Portfolio: With such a wide range of brands, Volkswagon Group sells everything from elite luxury vehicles to cheap, bottom-of-the-line options. This allows them to touch nearly every customer base.
Brand Image: Volkswagen Group's brands, such as Volkswagen, Audi, and Porsche, have longlived reputations for quality, engineering excellence, and performance. These brands enjoy loyal customer bases and attract automotive enthusiasts worldwide.
Research and Development: The Volkswagon group is a world leader in developing new automotive technology to enhance vehicle performance, improve vehicle efficiency, and address environmental concerns.
Stellantis
Stellantis is a multinational auto manufacturer, created in 2021 through the merger of the Italian-American Fiat Chrysler and the French PSA Group. The conglomerate owns Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, and Vauxhall. Fiat is the group’s most popular brand, holding a market share of 0.8%. The merger allowed for increased worldwide manufacturing of their car models and greater ease of distribution through dealerships in other nations.
Competitive Strengths
Manufacturing Efficiency: The merger between Fiat-Chrysler and the PSA Group has created synergies from the sharing of resources among previously regional brands to create a global company. This includes sharing parts, technology, and production plants, which all serve to reduce manufacturing costs and lower selling prices.
Heritage: Many of Stellantis' brands, such as Dodge, Jeep, Fiat, Peugeot, and Alfa Romeo, have strong associations with their home country. This alone builds strong customer loyalty to the brands from consumers who take pride in their home country.
Market Diversity: Stellantis operates in a wide range of market segments, including passenger cars, SUVs, trucks, and commercial vehicles. This diversified product portfolio helps the company mitigate risks associated with fluctuations in demand within specific segments and allows it to capture opportunities in different market conditions.
The Electric Future
Regulation Driving Change: Governments and cities globally are enacting strict regulations and offering incentives to promote sustainable mobility. Programs like the EU's "Fit for 55" and the Biden administration's 2030 50% EV target are two of the major commitments to reducing emissions through transportation policies. Cities are also investing in alternative mobility infrastructure like expanded bicycle networks to combat congestion and encourage cleaner transportation options.
Consumers Want Sustainability: Consumer behavior is shifting towards embracing sustainable mobility options, with a significant increase in inner-city usage of shared bicycles and e-scooters, up by 60 percent year-over-year. Additionally, more than 20 percent of Germans opt to use ride-pooling services, contributing to reduced vehicle miles traveled and emissions.
Technological Advancements: Automakers are rapidly innovating automotive technology with a focus on electric, connected, autonomous, and shared mobility concepts. Over the last decade, they have gained over $400 billion in investments, with $100 billion since 2020, targeting electrifying different transportation modes and autonomous driving. Electrification will present major opportunities in all vehicle segments.
Accelerated EV Adoption: In late 2020, there was a significant increase in passenger EV purchases despite the COVID-19 pandemic's economic impact, especially in Europe where purchases reached 8 percent. In 2021, discussions focused on ending internal combustion engine (ICE) vehicle sales, with regulatory targets aiming for a 50 percent EV share by 2030 and ICE sales bans planned for 2030 or 2035 in several countries.
Supply Chain Implications: The shift towards electrification will disrupt the supply chain significantly by 2030, with automobile components like batteries, electric drives, and sensors making up 52% of the market, while internal combustion engine vehicle components will decline sharply. This transformation will require traditional component manufacturers to adapt quickly to offset revenue decreases. Over 100,000 jobs in the German automotive sector are expected to change by 2030, a scale much larger than Germany's planned phaseout of coal power by 2038.
Challenges in Infrastructure: To support EV growth, rapid expansion of charging infrastructure is needed, especially for those living in city apartments without private chargers. Simplifying regulatory processes for charger installation and scaling up production will help with this. By 2030, around 15,000 chargers per week are needed in the EU to ensure access to all. EVs are projected to use over 5% of Europe's electricity by 2030, highlighting the importance of managed charging to balance grid demand.
Decarbonization of EV Production: Switching to electric vehicles can significantly reduce CO2 emissions by up to 65% with the current energy mix or 83% with green electricity. To lower emissions from EV production, strategies include increasing recycled content (saving 15-25% of emissions) and using green raw materials like aluminum from hydroelectricity or hydrogen-based steel processes (aiming to cut 80-90% of material emissions by 2030). Achieving these reductions requires substantial plant upgrades and long-term commitment between suppliers and buyers. This decarbonization of the supply chain is critical for sustainability goals but may impact vehicle costs.
Global Implications and Opportunities: Regulations alone won't meet 2030 emissions targets in road transport. Electric vehicles are becoming a cheaper zero-emissions alternative to internal combustion engine cars, but it will take time for EV adoption to significantly impact emissions due to Europe's aging car fleet. Additional measures like reducing private car use, promoting shared mobility, and incentivizing gas vehicle turnover are needed. Bio- and e-fuel use can help reduce gas vehicle emissions, but these fuels are urgently needed in other sectors.
Decline of ICE components: As the transition to electric vehicles keeps expanding, the demand for components related to internal combustion engines, such as engine blocks, pistons, fuel injection systems, and exhaust systems, continues to decline. By 2030, it is estimated that ICE vehicle components will make up only 48% of the automotive components market, a substantial decrease from their current dominance. New components like batteries, electric motors, and sensors are becoming increasingly important.
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