6 Reasons why Legacy Automakers are unlikely to be in a strong position by 2030

Are the odds just stacked up too high against traditional OGMs??

This article looks at the future outlook for legacy automakers in the context of the automotive industry's evolving landscape.

We anticipate that it will offer valuable insights into the challenges these automakers are confronting and why their positioning might not be favourable by the year 2030.

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Ford CEO Jim Farley recently admitted, on the?Fully Charged Podcast,??that

"legacy car makers are struggling with the transition to electric vehicles".?

He recognized that “the?capital at risk?in the changeover to electric?was enormous and that from a commercial perspective it wasn't panning?out”.?

He also amplified an issue which most legacy?automakers are having difficulties with, namely the integration of software into their electric vehicles:?

“The problem is the software is all written by 150 different companies. They don’t talk to each other. So even though it says Ford on the front, I actually have to go to Bosch to get permission to change their C control software.”?“So even if I had a high speed modem in the vehicle and I had the ability to write the software, it’s actually their IP and I have 150 completely different software, programming languages.”

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We consider the 6 main reasons Why legacy OGMs are unlikely to be competitive before the end of this decade and, in some cases, will find it difficult to avoid bankruptcy.

In numerous instances, we have employed Tesla as a benchmark for evaluating the performance and current status of traditional automakers in their endeavours to successfully produce electric vehicles (EVs).

Tesla stands as a renowned and pioneering entity within the electric vehicle (EV) production realm, significantly contributing to the advancement of electric vehicles and the exploration of the potentials in EV technology, performance, and design.

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The principal factors contributing to the potential financial challenges faced by legacy automakers, possibly leading to bankruptcy by the decade's end, are as follows:

1.????Obsolete Business Model: Legacy automakers are grappling with business models that might not align well with changing consumer preferences and emerging technologies.?

2.????Outmoded Manufacturing Technology: The reliance on outdated manufacturing techniques and having to accommodate new EV production technology hampers their ability to efficiently produce modern, tech-integrated vehicles.?

3.????Limited Vertical Integration: Legacy automakers struggle due to a lack of vertical integration, which affects control over their supply chain, as well as crucial components and innovation.?

4.????Software Technology Gaps: Inadequate software technology adoption hinders their ability to compete in the era of connected, software-driven vehicles.?

5.????Sluggish Adaptation: An inability to quickly iterate and adapt, compounded by a general lack of agility, leaves them lagging behind nimble competitors.

6.????Burden of Debt: Significant debt obligations limit their flexibility and resources for investing in essential transformations.??

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1.???Obsolete Business Model

Legacy automakers have traditionally derived revenue from after-sales services, encompassing maintenance, repairs, parts replacements, and warranty provisions. Service centres and authorized dealerships deliver these services, which were particularly crucial for internal combustion engine (ICE) vehicles, ensuring their prolonged longevity and optimal performance.

Inefficient Dealership Model: Traditional dealerships, while integral to the automotive industry's history, are also part of the problem. Dealerships operate under a franchised model, where automakers sell vehicles to dealers who then sell them to consumers. This model can lead to inefficiencies, increased costs, and a lack of direct control over customer experience.

Direct-to-consumer sales models, as being explored by some newer companies, can streamline distribution and potentially reduce costs. Legacy automakers may struggle to transition away from the dealership model due to existing contracts and relationships.?

Spare Parts and Accessories: Selling spare parts, components, and accessories is a significant revenue source for OEMs.

However, as evidenced by current trends, maintenance for electric vehicles (EVs) is significantly more cost-effective compared to traditional internal combustion engines, typically ranging from 40% to 50% lower. This translates to fewer parts requiring replacement and numerous maintenance tasks being efficiently addressed through over-the-air updates. Consequently, the revenue generated from servicing—previously a substantial income source for original equipment manufacturers (OEMs)—is diminished or even eliminated.?Companies that neglect to pivot towards these emerging technologies run the risk of losing market share and encountering financial challenges.

High Fixed Costs and Legacy Liabilities: Legacy automakers might be burdened by high fixed costs associated with maintaining ICE (internal combustion engine) manufacturing facilities, labour contracts, and legacy liabilities like pensions and healthcare benefits. Transitioning to new technologies can necessitate significant capital investments, which could strain their financial health.?

Competition from Tech Companies: Tech companies entering the automotive sector bring fresh perspectives and digital expertise. They are more likely to integrate cutting-edge technology seamlessly into their business models. Legacy automakers may find it challenging to compete with these newcomers, especially if they don't evolve their business models accordingly.?

To survive and thrive, legacy automakers need to embrace innovation, reevaluate their distribution strategies, invest in electric and autonomous technologies, and become more adaptable to changing consumer preferences. This requires a fundamental shift in their business models and corporate cultures, and those that fail to do so could indeed face financial challenges, potentially leading to bankruptcy.

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2.???Outdated Manufacturing technology

According to Bloomberg, Herbert Diess , Volkswagen CEO from 2015-2022, Diess told a group of workers at a VW German plant at the Gruenheide factory (Berlin) that “Tesla is currently trucking along and set to achieve the goal of making an electric vehicle in under 10 hours. At this time, Volkswagen’s main Zwickau plant requires 30 hours per vehicle”.

World leader in reverse engineering and?teardown?benchmarking,?Munro and Associates, have also highlighted Tesla’s technology advantages over competitors in the EV?market:

?Mega Casting: “The mega casting represents a significant jump in innovation when it comes to body structure,” says Sandy Munro .?“We’ve seen many other OEMS use smaller cast notes throughout a vehicle, specifically in the rear quarter and front shock towers but nothing at this scale”. Similar observations were made about the welding & heat pump used in the model Y.

Munro’s major takeaway is the computer board for the Model Y: “everything electronic for Tesla is absolutely stunning.”

Outdated Infrastructure/Manufacturing Techniques

The second factor involves existing production lines and the infrastructure surrounding them. Most manufacturers have supply chains and production facilities optimized for traditional combustion engine vehicles. Transitioning these systems to accommodate EVs and autonomous technologies is a mammoth task.

All this comes fraught with significant costs and complexities. Not only will legacy automakers have to revamp their physical infrastructures, but they will also have to make substantial changes to their supply chains, which could lead to disruptions and inefficiencies if not done right.

Flexibility and Customization: Modern manufacturing technologies, such as 3D printing, additive manufacturing, and advanced robotics, offer greater flexibility and customization in vehicle production. Legacy automakers might struggle to implement these technologies effectively due to their established production lines built around mass-producing standardized vehicles. Newer entrants in the industry, unburdened by legacy processes, can take advantage of these technologies to respond more swiftly to market demands and offer tailored solutions to consumers.?

Efficiency and Cost Reduction: Advanced manufacturing techniques can lead to improved efficiency, reduced waste, and lower production costs. Legacy automakers, often weighed down by legacy infrastructure, might find it challenging to transition to these new methods. This puts them at a disadvantage when competing against companies that have embraced lean and efficient manufacturing from the outset.?

Integration of Digital Technologies: The convergence of manufacturing and digital technologies is reshaping the automotive landscape. Legacy automakers may struggle to seamlessly integrate digital solutions, such as the Internet of Things (IoT), data analytics, and real-time monitoring, into their manufacturing processes. This integration is crucial for achieving higher levels of automation, quality control, and predictive maintenance.?

(Also see 4. Software Technology Gaps below)

Supply Chain Disruption: Antiquated manufacturing models may also hinder legacy automakers' ability to respond to supply chain disruptions effectively. Modern manufacturing technologies can provide more resilience through decentralized production, local sourcing, and on-demand manufacturing. These factors can become critical during global disruptions, such as pandemics or geopolitical events.?

Human-Machine Collaboration: Advanced manufacturing technologies allow for increased collaboration between humans and robots, enhancing productivity and safety. Legacy manufacturing facilities might struggle to incorporate such collaboration due to their existing layouts and workflows, limiting their ability to optimize processes and maximize output.?

In summary, legacy automakers' resistance or sluggishness in adopting modern manufacturing technologies can exacerbate the challenges posed by their antiquated business models, potentially leading to financial difficulties and even bankruptcy. To ensure their survival and competitiveness in the changing automotive landscape, legacy automakers must embrace advanced manufacturing techniques that are aligned with the requirements of electric and autonomous vehicles, allowing them to adapt to evolving consumer demands and industry trends.

3.????Limited Vertical Integration

The legacy auto industry typically exemplifies vertical disintegration. Traditionally, many legacy automakers have relied on a network of suppliers and partners for various components, parts, and materials needed in vehicle manufacturing, as exemplified well by Jim Farley’s (Ford CEO) comments at the beginning of this article.

This contrasts with a fully vertically integrated model where a company would control and produce the majority of these components in-house, such as Tesla.?

Diverse Partnerships: Legacy automakers frequently collaborate with external technology companies, research institutions, and startups for innovation, rather than developing every technology in-house.?

While vertical disintegration has allowed legacy automakers to focus on core competencies and take advantage of specialized expertise, it also poses challenges in terms of supply chain coordination, quality control, and adapting to rapidly evolving technologies.

In contrast, newer entrants in the automotive industry, like Tesla, have explored more vertically integrated models, manufacturing key components and systems in-house to gain greater control over innovation, quality, and production timelines.

Dependency on Suppliers: Legacy automakers often rely heavily on a vast network of suppliers for components, parts, and materials required in vehicle manufacturing. This reliance can lead to supply chain vulnerabilities, including disruptions due to factors like geopolitical issues, natural disasters, or production bottlenecks. A lack of vertical integration makes legacy automakers susceptible to these disruptions, which can affect their ability to produce and deliver vehicles in a timely and cost-effective manner.?

Innovation and Design Control: Vertical integration allows companies to have direct control over the design and engineering of their vehicles. This control is crucial for staying competitive in an industry that's rapidly evolving with advancements in electric and autonomous technologies. Legacy automakers that lack vertical integration might struggle to innovate quickly, relying on external suppliers for critical components like batteries or advanced electronics. This can result in delays, higher costs, and an inability to keep up with more agile competitors.?

Quality Control and Standardization: Vertical integration enables companies to maintain consistent quality standards throughout the production process. Legacy automakers that rely heavily on external suppliers might face challenges in ensuring uniform quality across different suppliers. This can lead to variations in the quality of components, affecting the overall reliability and reputation of the vehicles they produce.?

Distribution and Retail Challenges: The lack of vertical integration also extends to the distribution and retail aspects of the business. Traditional dealerships, which legacy automakers rely on for sales, can introduce inefficiencies and complexities into the sales process. Direct-to-consumer models, made more feasible by vertical integration, can provide a more streamlined and cost-effective approach to vehicle sales and customer engagement.?

Adaptation to Changing Market Dynamics: The automotive industry is undergoing a transformation with changing consumer preferences, new mobility models, and technological advancements. Legacy automakers with limited vertical integration might struggle to adapt to these changes quickly. Companies that control more aspects of their operations can pivot more effectively to address shifts in market dynamics.?

Reduced Margins and Profitability: A lack of vertical integration can lead to higher costs associated with outsourcing various stages of production and distribution. This can erode profit margins, especially if legacy automakers face pricing pressures due to competition from newer entrants or economic downturns.?

In conclusion, the lack of vertical integration leaves legacy automakers vulnerable to supply chain disruptions, inhibits innovation and design control, challenges quality assurance efforts, and limits their ability to adapt to changing market conditions.

As the automotive industry evolves, companies with a more integrated approach are better positioned to remain competitive and agile. To avoid the potential of bankruptcy, legacy automakers need to reconsider and modernize their business models by embracing greater vertical integration and taking control over critical aspects of their operations.

4.???Software Technology Gaps

Legacy automakers facing potential bankruptcy by the end of the century can indeed attribute a significant portion of their challenges to deficient software technology and a lack of advanced technical expertise (AT) in comparison to competitors like Tesla and emerging Chinese automotive companies.

Here's why this aspect is crucial:?

Software-Driven Innovation: The automotive industry is undergoing a rapid transformation driven by software advancements. Modern vehicles are not just mechanical machines; they are sophisticated computer systems on wheels. Features like advanced driver-assistance systems (ADAS), autonomous driving capabilities, infotainment systems, and over-the-air updates require robust software development expertise. Legacy automakers, traditionally focused on mechanical engineering, might lag behind in the software domain, limiting their ability to offer cutting-edge features and experiences that consumers increasingly demand.?

Electric and Autonomous Vehicles: The shift toward electric and autonomous vehicles requires a high level of software integration. Electric vehicles (EVs) depend on complex battery management systems and energy management algorithms. Autonomous vehicles rely on intricate sensor fusion, machine learning, and AI-driven decision-making. Companies like Tesla have demonstrated a deep understanding of these technologies, while legacy automakers might struggle to catch up due to their historical focus on internal combustion engines and traditional manufacturing methods.?

Innovation Speed and Adaptability: Legacy automakers often have established workflows and structures that are optimized for traditional vehicle development cycles. The software development process, especially in the context of EVs and autonomous systems, requires iterative and agile approaches. Tesla's ability to quickly push software updates, introduce new features, and refine existing ones has set a new standard for the industry. Legacy automakers might find it challenging to match this level of innovation speed and adaptability.?

Talent Acquisition and Retention: Attracting and retaining top software engineering talent is crucial for staying competitive in the modern automotive landscape. Companies like Tesla have become magnets for tech-savvy professionals due to their reputation for pushing boundaries and working on cutting-edge technologies. Legacy automakers might struggle to entice these professionals away from companies with a more tech-focused image.?

Consumer Experience and Connectivity: Consumer expectations for seamless connectivity, user-friendly interfaces, and personalized experiences are increasing. Tesla and other tech-oriented competitors excel in offering integrated ecosystems that combine vehicles, apps, and services. Legacy automakers might find it challenging to provide a comparable level of connectivity and user experience without robust software expertise.?

Cybersecurity and Data Privacy: As vehicles become more connected, cybersecurity and data privacy become paramount. Legacy automakers might face challenges in developing and implementing robust cybersecurity measures to protect vehicles from potential hacks and breaches.?

China's Growing Influence: Chinese automakers and technology companies are rapidly entering the global automotive market. They are often more agile in adopting new technologies and have a strong focus on software-driven innovation. The competition from Chinese players could further intensify the pressure on legacy automakers that are slow to adapt.?

In summary, the deficiency in software technology and advanced technical expertise puts legacy automakers at a disadvantage in an industry where software-driven innovation is becoming increasingly crucial. The convergence of electric, autonomous, and software technologies demands a new approach to vehicle development. Legacy automakers that fail to bridge the software gap risk losing relevance, market share, and ultimately facing financial challenges that could lead to bankruptcy. To avoid this outcome, legacy automakers must invest heavily in software development, foster a tech-driven culture, and build the expertise necessary to navigate the future of the automotive industry.

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5.???Sluggish Adaptation v Tesla’s High Rate Iteration

By incorporating a high frequency of changes in production per day, Tesla reaffirms its identity as a software-centric rather than hardware-centric company, as this method and organization of work were invented in the software industry. The remarkable benefits of this approach are evident, and despite scepticism from legacy automakers asserting its inapplicability to mass-produced vehicles, Tesla has effectively demonstrated its viability.

Tesla adheres to a continuous timeline approach, which distinguishes it from most other manufacturers. Their strategy involves iterative enhancements and improvements undertaken within short, successive timeframes, positioning the company at the forefront of innovation.

World leader in reverse engineering and?teardown?benchmarking,?Munro and Associates, wrapped up their Model Y teardown by concluding that?Tesla’s latest electric car is, quite simply, “absolutely stunning” and a testament to the continuous improvement and innovation the EV maker is achieving.

Lack of Agility: Established automakers often have layers of bureaucracy and a history of adhering to traditional processes. This can hinder quick decision-making and innovation, especially in comparison to newer, more agile entrants in the industry. Rapid technological advancements require nimble responses, and legacy companies might struggle to keep up.?

An agile approach refers to a flexible and adaptive way of operating that enables companies to respond swiftly to changes in the market, technology, and consumer preferences.

Here's why the absence of such an approach can be detrimental to legacy automakers:?

Rapid Technological Changes: The automotive industry is undergoing rapid technological transformations, particularly in areas such as electric vehicles, autonomous driving, connectivity, and mobility services. Legacy automakers with traditional, rigid business models might struggle to keep pace with these changes. An agile approach allows companies to quickly pivot, experiment with new technologies, and integrate innovations into their offerings.?

Changing Consumer Preferences: Modern consumers are increasingly seeking personalized, connected, and sustainable mobility solutions. Legacy automakers that rely on traditional vehicle ownership models might struggle to adapt to evolving consumer preferences. An agile approach enables companies to gather real-time feedback from customers and adjust their products and services accordingly.?

Competition from New Entrants: Tech companies and startups are entering the automotive industry with fresh perspectives and agile mindsets. These newcomers are unburdened by legacy processes and can quickly adopt innovative business models. Legacy automakers risk losing market share to these competitors if they are unable to match their agility.?

Long Product Development Cycles: Traditional automakers often have long product development cycles due to their complex decision-making processes, extensive testing, and manufacturing considerations. In contrast, an agile approach involves iterative development and rapid prototyping. Legacy automakers without agility might struggle to launch new models and features quickly, leading to a lag in responding to market demands.?

Inefficient Resource Allocation: Legacy automakers may allocate resources based on historical practices, rather than adapting to emerging opportunities and challenges. An agile approach involves continuously evaluating resource allocation based on changing priorities and market dynamics, ensuring optimal resource utilization.?

Complex Organizational Structures: Legacy automakers often have hierarchical and siloed organizational structures that hinder communication and collaboration across departments. An agile approach promotes cross-functional teams, open communication, and a culture of innovation, facilitating faster decision-making and problem-solving.?

Resistance to Change: Established companies may face internal resistance to change due to employees' attachment to existing processes and systems. An agile approach requires a shift in mindset, with an emphasis on experimentation, learning from failures, and embracing continuous improvement.?

Market Disruption: Market disruptions, such as economic downturns or unforeseen events like the COVID-19 pandemic, can expose the vulnerabilities of inflexible business models. An agile approach equips companies to adapt swiftly during turbulent times and explore alternative revenue streams.?

To mitigate the risk of bankruptcy and thrive in the evolving automotive landscape, legacy automakers must adopt an agile approach that prioritizes flexibility, customer-centricity, innovation, and the ability to adapt to changing circumstances. By fostering a culture of agility and incorporating agile practices into their business model, legacy automakers can position themselves for long-term success and resilience in the face of uncertainty.

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6.???Burden of Debt

Legacy automakers facing potential bankruptcy by the end of the century indeed have a significant challenge in the form of their substantial debt. Here's why this aspect is crucial:?

High Capital Intensity: The automotive industry is capital-intensive, requiring significant investments in research and development, manufacturing facilities, supply chains, and distribution networks. Legacy automakers, with their long history and complex operations, might have accumulated substantial debt over the years to finance these endeavours.?

Shift to New Technologies: The automotive industry is undergoing a massive transformation driven by electric and autonomous technologies. Transitioning from internal combustion engines to electric powertrains and developing autonomous capabilities requires substantial investments in R&D, retooling manufacturing facilities, and retraining the workforce. If legacy automakers are burdened with a high debt load, they might struggle to allocate sufficient resources to fund these necessary transformations.?

Market Competition: Intense competition in the automotive industry can lead to pricing pressures and narrower profit margins. Legacy automakers might find themselves in a situation where they need to invest in new technologies and models to stay competitive, while simultaneously contending with the financial strain of debt payments.?

Market Volatility and Economic Downturns: The automotive industry is sensitive to economic fluctuations. In times of economic downturn, consumer demand for vehicles can decrease, leading to reduced revenue. If legacy automakers are already dealing with high levels of debt, reduced cash flow during these periods can exacerbate financial difficulties.?

Interest Payments: High debt levels often come with substantial interest payments. These payments can eat into the company's profits and cash flow, limiting their ability to invest in growth initiatives, research, and development of new technologies.?

Limited Flexibility: Debt obligations can restrict a company's flexibility in responding to changing market conditions. If legacy automakers need to pivot quickly in response to shifts in consumer preferences or technological advancements, their debt burden might hinder their agility.?

Credit Rating and Investor Confidence: High debt levels can negatively impact a company's credit rating and investor confidence. A lower credit rating can lead to higher borrowing costs and reduced access to capital, further straining the company's financial health.?

To address these challenges and avoid potential bankruptcy, legacy automakers need to carefully manage their debt, streamline operations, focus on cost efficiencies, and allocate resources strategically to support technological transitions. This might involve refinancing debt, divesting non-core assets, exploring partnerships, and finding ways to improve cash flow.

The?EV Economics?newsletter is published every fortnight and is open to admitting & publishing data-based articles forwarded by subscribers. We would like to acknowledge Munro & Associates?for their valuable information/material used in this week's edition of EV Economics.

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