The recent news from Bosch was colored in doom and gloom for the auto industry.
The world’s largest auto supplier just announced a 44 percent plunge in annual operating profits. Over the past year, it laid off 6,800 workers. And it isn’t expecting any sunshine soon. Bosch predicts that 2020 will mark the third straight year of global production declines, down 10 million units from 2017.
“It could well be that we have passed the peak of automotive production,” warned CEO Volkmar Denner.
And although we may hear other negative news during this earnings season’s announcements, one company’s misfortunes rarely speak for an industry at large. Nor do short-term trends make for solid forecasts for ongoing health. Drill deeper into the numbers, and you won’t just find an industry on a steady, 20-year ascent. You’ll find conditions that welcome prosperity for the next decade and beyond.
Begin with the unique factors behind Bosch’s troubles. While the industry hustles toward electrification, much of Bosch’s revenues still come from internal combustion engine parts. It’s also the premier supplier for diesel engine components, in an age when automakers are phasing them out. In other words, Bosch, like many suppliers, is a bit like an energy company still too reliant on coal.
Then comes that alarming indicator: global production.
Yes, worldwide growth has slipped in the past two years. Yet Bosch predicts that 89 million vehicles will be made this year. Left unmentioned is that this figure is more than double the 41 million produced in 2000.
In fact, if you examined a 20-year graph, you’d find an industry consistently marching onward and upward for two decades, save for recent setbacks and a recessionary dip in 2009.
There’s also the question of placing unwarranted importance on a single number. Most of the recent slump comes courtesy of just two countries, China and India. Talk to many mid-market suppliers, and they’ll tell you they’re far more interested in production data from their own regions — and the individual health of their customers.
Here’s where that sky-is-falling thesis tumbles apart.
Despite tariff wars, rising finance rates, and pressure from used car demand, North American production remains stable. The same goes for Europe with potentially a slight decline.
So, while it’s human nature for Bosch to attribute its woes to outside forces, there’s plenty of reason for optimism if one cares to look.
Start with world population growth, which shows no end in sight. All these people will want transportation.
Critics counter with doomsday scenarios about things like ride-sharing. But this only changes the way cars are used, doing little to alter how often people want to drive or be driven. In fact, individual travel is expected to increase even more.
Though the standard family might drive 10,000 miles a year, a ride-sharing vehicle might approach 100,000. This turns a 15-year car-life into something closer to three or four.
In essence, ride-sharing simply accelerates the vehicle life cycle and purchasing frequency — while diminishing competition from used-car inventory. It’s hard to envision a day when people line up at dealerships to buy cars with 350,000 miles on them, just to be able to own them.
All these new people — and all these more frequent buyers — will be greeted by an industry investing heavily in the growing demand for greener vehicles, where steady advancements are taking place in everything from batteries to power trains. Over 100 new electric models are expected to be introduced over the next three years.
Even fears of cratering sales in China and India appear overblown. In fact, they could well become the world’s leading electric vehicle markets of the future.
China is the primary force behind the global production dive. Yet this has been largely driven by factors unique to China, not the auto industry. And despite the current coronavirus disruption, most signs would point to a rally on the horizon this year.
The country has indeed suffered an economic slowdown. But the greater problem has been the purposeful lapse of incentive programs for the purchase of electric, hybrid, and fuel cell cars. Prices naturally rose, and customers began looking elsewhere. In October of last year alone, country-wide sales of these vehicles fell 45 percent.
The Chinese government may be just trying to weed out an overpopulation of automakers. As of last year, 486 new energy vehicle manufacturers were registered in the country, some of which have raised billions of dollars in funding.
Fearing a bubble, the government slashed incentives “to promote the survival of the fittest,” as the state news agency put it. But it’s doubtful this will last.
The government’s goal is to have new energy cars compose 20 percent of Chinese auto sales within the next five years. The likely return of incentives will not only reinvigorate sales to meet this promise, but will offer needed aid to the greater economy, which will face damage from the disruptions of the coronavirus health scare. (Oddly enough, the outbreak could boost auto production as well. During the SARS outbreak in 2002, sales rose from consumer desire to avoid mass transit.)
Finally, China has an even more pressing reason to pump electric car production: Its cities suffer from some of the worst air pollution on the planet. The same goes for India. If Earth’s two most populated countries hope to keep their cities livable, they have no choice but to encourage electric vehicle adoption in any way possible.
No one is suggesting the future will be without hiccups. Much like the tech industry, the auto market is now in the throes of wholesale transition.
Untold billions are being invested in technology that won’t pay off for years to come. These grand movements of new ideas and methods have a history of making for roller coaster rides.
Yet just like tech, they tend to make for markets continually on the rise. Short-term numbers or the troubles of a few companies don’t change that. After all, the indicators of promise are far more bountiful.
Daron Gifford leads Plante Moran’s automotive industry consulting services.