The automotive industry is in the midst of a shift from internal combustion engines (ICE) to battery electric vehicles (BEV), creating significant uncertainty for auto manufacturers and suppliers. However, for those willing and able to embrace change, it presents a handful of exciting prospects.
Electrification is well on its way with increased BEV manufacturing and a commitment from the U.S. federal and state governments to bolster the breadth and reliability of our BEV charging infrastructure in partnership with the private sector. BEV ubiquity won’t happen overnight, but momentum is rapidly building for widespread market penetration. Without effective transitional prospects and strategies, many ICE auto parts manufacturers will be left behind with less time and fewer options to respond.
However, we’ve already identified several promising and creative opportunities emerging as the industry transitions from ICE vehicles to BEVs. In this article, we’ll examine the short and long-term prospects available to automotive suppliers over the course of this shift.
Embracing the Electrified Future
The shift from ICE to BEV platforms is an inevitable reality that cannot be ignored. For suppliers that have traditionally relied on ICE-related production, the imperative is clear: pivot your focus towards BEV platforms and explore non-automotive applications utilizing your core technologies. While this transition will take time, it is now a matter of when, not if. Many suppliers are already in the midst of this transition, and recently, the federal government stepped in to offer additional support.
On September 1, 2023, the Biden-Harris Administration announced $15.5 billion to assist with the transition to BEV manufacturing. That includes $2 billion in grants and up to $10 billion in loans for manufacturers converting from ICE production to BEVs while maintaining their presence in their current communities. They’re also opening up $3.5 billion in funding for battery manufacturing. This program presents opportunities for certain companies to reduce the financial burden of converting their facilities.
Still, not every company that wants those funds will get them, and some may have to adjust their plans accordingly. Despite the uncertainty of this period, the transition undoubtedly offers a variety of ways to capitalize on the displacement of certain parts production and technologies.
We’ve worked closely with companies that were deeply entrenched in the ICE market. Through strategic planning and innovative thinking, many of these companies are migrating to non-automotive applications for their core products and technologies. For example, we worked with one company that manufactured sound-dampening materials for under-the-hood noise reduction—an essential component in traditional ICE vehicles.
However, BEVs simply do not produce engine noise, so BEVs lack the need for such sound-proofing material under the hood. Instead of biding its time in the face of obsolescence, this company utilized its core technologies for non-automotive applications. By diversifying its offerings into architectural products, its noise reduction capabilities could reach new customers.
Other clients are actively pursuing light-weighting strategies to decrease the overall weight of their manufactured products, such as switching from cast iron parts to aluminum, in an effort to counterbalance the weight of hefty BEV batteries. This is particularly valuable to OEMs seeking to extend the driving range of BEVs. This savvy combination of forward and lateral thinking set these companies up for sustained success. Although others may struggle to problem-solve as effectively, many could salvage their operations by following a similar path.
Sustained Demand for ICE Parts and Alternative Pathways to Profitability
While the impending electrification of the automotive industry looms large, it’s important to recognize that ICE vehicles will not disappear overnight. In April 2023, UBS reported that global car production could outpace sales by 6% this year, leaving millions of new cars on the lots. While that expected gap has narrowed towards the end of the year per S&P Global Mobility, a surplus of new cars could drop prices back into the range reachable and attractive to more consumers for the first time could drop prices back into the range reachable and attractive to more consumers since the onset of pandemic-era supply chain restrictions. According to the Manheim Used Vehicle Value Index, the used car market is also slowly beginning to normalize, as prices decreased across multiple vehicle categories year-over-year in the first half of September 2023 compared with the same period in 2022.
These vehicles and those already owned by drivers have long lifespans and will continue to be on the road for years to come. Consequently, there will be a persistent need to produce certain ICE parts for warranty, replacement, and repair purposes well after the last new ICE vehicle leaves the lot. As ICE platform production gradually diminishes, so too will the need for large upfront tooling and machinery expenditures. This reduction in costs and capital investment will lead to increased positive cash flows on ICE production lines, which should empower automotive suppliers to fund other projects or attract opportunities for consolidation during the transition.
While the period of positive cash flows during this transition may be relatively brief, it offers a well-defined and predictable operational and financial outlook. Accordingly, opportunities will likely exist for suppliers to optimize their ICE production lines. Quick-thinking organizations can capitalize on the efficiencies and positive cash flows generated by the continued demand for ICE parts.
Then, with a more stable foundation in place, companies can choose to strategically divest their ICE production operations and monetize excess machinery and equipment (M&E) as the BEV transition takes hold. In doing so, they can direct their financial and human capital toward strengthening their foothold in the BEV market. Timing will be crucial to the implementation of this approach.
Other options include a full-throttle commitment to ICE parts manufacturing until the cows come home. Part manufacturers could specialize in producing a specific ICE component in an effort to dominate a portion of the aftermarket, or they could ramp up their current production for parts bank builds and short-term gains along the long road to obsolescence. Not every organization will want to be the consolidator in ICE parts manufacturing, so I also expect many to exit early and position their business for acquisition by other major players.
Looking Forward
Amidst marketplace volatility, evolving consumer preferences, and ever-increasing regulatory challenges, the automotive industry is standing on the brink of a new era. Embracing the transition from ICE to BEV cars brings its fair share of challenges, but for those willing to adapt and innovate, many opportunities await.
Suppliers and manufacturers should not overlook the potential advantages that may arise from discontinuing ICE platforms. Savvy industry players can take a proactive stance, strategically shaping their operations to maximize profitability during this transformative period.
By diversifying into BEV platforms, exploring non-automotive markets, and managing the gradual wind-down of ICE production lines, auto manufacturers and suppliers can position themselves for success in the electrified future of the automotive industry.
This process requires foresight, adaptability, and a commitment to progress, but it could be the best path for many companies to sustain and even grow themselves. Companies must remain vigilant and prepared to adjust their strategies as market dynamics change. Continual adaptation will be key to long-term success.
Regardless of your next steps, the electrified future is here. If your business is to be a part of it, the time to act is now. Embrace change, invest wisely, and position your company for success in the evolving automotive industry.
Getzler Henrich provides a full array of turnaround, workout, crisis, and interim management, corporate restructuring, bankruptcy, financial advisory, and distressed M&A services. We work with public and private corporations, as well as family-owned businesses, under a variety of capital and debt structures. Our worldwide client base spans the full spectrum of industries, from the healthcare and retail sectors to oil and gas, to manufacturing and distribution.
Kevin A. Krakora, CTP, is a Managing Director and Automotive Practice Leader at Getzler Henrich, with over 30 years of experience in corporate turnarounds, strategic consulting, and corporate restructurings.
Kevin specializes in advising and working with underperforming companies to develop and implement business transformation strategies, operational and financial improvements, and turnaround plans. He has served in numerous interim management positions, including as a Chief Restructuring Officer and Independent Director. He has led numerous §363 sales processes in Chapter 11 cases as well as business and assets sales in out-of-court situations.
In addition to leading the automotive and security alarm practices at Getzler Henrich, Kevin has substantial experience across numerous industries, including airline, healthcare, and industrial/manufacturing services and others, including recently serving as Chief Restructuring Officer for a major winery in Napa County. Kevin is a Certified Turnaround Professional, a frequent author and speaker on restructurings and distressed M&A, and recently served as Global President and Chair of the Turnaround Management Association.
Contact Kevin at kkrakora@getzlerhenrich.com or (312) 283-8071.