The industry has faced less chip-related supply disruptions as of late, but COVID and other factors continue to weigh on the supply chain. Automotive inventory remains depressed as US inventory levels have remained at approximately 1 million units for the last twelve months.

In this issue, A&M analyzes how the power grid and sustainability may curb the adoption of electric vehicles (EV) as the selected topic for the June Industry Focus.

In transaction news, automakers are acquiring and partnering with companies to enhance capabilities that improve the driver and passenger experience.

In regulatory news, the investigation into Tesla’s Autopilot has expanded as the automaker continues to receive regulatory pressures regarding the safety of its vehicles.

Additional June insights are included below.

Financial Performance

Auto Forecast Solutions’ (AFS) latest numbers show that shutdowns and delays have resulted in approximately 2.3 million lost vehicles globally during calendar year 2022. In the past week, no further chip-related cuts were reported in Europe, China, South America, the Middle East or Africa. While this is positive, production continues to be hampered for alternative reasons, such as COVID restrictions in China. The latest AFS estimates suggest approximately 3.1 million total cars and trucks will be affected by chip-related disruptions in 2022.

To remain competitive in the EV transition, suppliers are adjusting how and where they make parts as the supply chain undergoes a major overhaul. Denso Corp. announced it is investing in 3D printing to help it build spare parts as it aims to “do things lighter and faster.” Aluminum supplier Novelis is developing new manufacturing technologies to provide additional value and uses to automakers in the EV era. Additionally, South Korean tire-maker Hankook tire opened a plant in the U.S. because building tires locally will be critical as the industry invests billions in EV production in the region. As the industry shifts, automakers and suppliers alike will need to consider strategic adjustments to remain competitive.

Industry Update

Automotive inventory decreased by 31,000 units in May, resulting in approximately 1.13 million total units. This translates to a days’ supply (DS) that is 48 percent below the five-year average at 25 DS. The average industry inventory level for the past 12 months sits at approximately 1 million units, while inventory has historically operated at a level nearing 3 million units. Japanese and Korean automakers have been hit the hardest, with current inventory levels approximately 70 percent below the five-year average.  The supply environment remains constrained and a meaningful restock is not expected to occur until well into 2023.

New light vehicle sales in the U.S. declined 24 percent year-over-year in May with a 12.7 million seasonally adjusted annualized rate (SAAR) of sales, representing the lowest SAAR year-to-date. The dearth of inventory is dragging on the sales environment as the industry continues to sell through every unit delivered. In addition, May marked the second consecutive month of sequential inventory decline, contrary to the typical seasonal pattern of inventory build, which will likely restrict sales in the coming months as well. The latest Bank of America 2022 forecasts expect a 7 percent year-over-year decline in sales with approximately 14 million units sold, which is even lower than 2020.

Industry Focus – Electric Vehicle Power Grid and Sustainability Initiatives

As the automotive industry is transitioning to EVs, there are a variety of obstacles to overcome for a successful shift. In recent Industry Focus sections, A&M has explored the effects of continued semiconductor shortages and heightened demand for raw materials as well as customer acceptance issues with EVs.

As the demand for electrification to power EVs continues to surge and the grid transitions to renewable sources of energy, significant concerns have arisen regarding the current power grid and its capacity. In this month’s focus section, A&M will explore the conditions of the current power grid, the impact of EVs on the environment, and sustainability initiatives within the industry.

The Power Grid: Current Landscape and Growing Concerns

According to the International Energy Agency, there are approximately 10 million EVs on the road globally, and this number is projected to grow to approximately 300 million EVs by 2030. To facilitate this growth and promote clean energy consumption, it is critical that the energy infrastructure and power grid can support the increased need for electricity consumption.

However, the U.S. electrical system is showing warning signs that the supply of electricity is not keeping up with demand. In 2000, there were fewer than 12 instances of sustained power outages across the country, but in 2020, the number of major disruptions grew to 180. Historically unusual weather patterns are also contributing to this stress and a primary reason for the increase in outages. Additionally, regulators across the country are attempting to accelerate the transition to renewable energy sources, such as President Biden’s goal of eliminating carbon emissions from the grid by 2035, and there is heightened concern that power plants will retire at faster pace than they are replaced. A report produced by the American Society of Civil Engineers (ASCE) found that approximately 70 percent of transmission and distribution lines are in the second half of their expected life spans. While utilities are increasing spending to revamp energy infrastructure, the ASCE anticipates a $200 billion shortfall in funding by 2029 for the necessary grid upgrades to meet renewable energy goals, and a Princeton University study projects the full power grid overhaul to cost approximately $2.4 trillion through 2050.

For the U.S. to successfully transition to EVs, the power grid will need to be able to keep vehicles charged and ready for use. In 2020, there were 287 million cars registered in the United States, and with each of those cars being charged at once using home chargers, they would need enough power, which is twice that of the current grid capacity. If all the cars used public chargers, which require more power than home chargers, the grid would need 12.8x the current capacity. However, this assumes all cars are charging at one time, a scenario which is highly unlikely. Given the average American drives approximately 13,500 miles per year, the calculations show that an entirely electric U.S. vehicle fleet would require approximately 27.6 percent of what the U.S. grid produced in 2020. Overall, it is feasible for the U.S. power grid to provide enough electricity to power EVs, but there are various concerns and scenarios which need to be considered to ensure reliability of supply at all times.

Electric Vehicles and the Environment

The three single largest sources for producing electricity are natural gas, coal, and nuclear. Collectively, these energy sources produce approximately 70 percent of the electricity for the U.S. power grid. While EVs aim to provide an environmentally friendly transportation alternative, the power sources that fuel them also need to be emission-free for their benefits to be maximized. Regulatory goals to transition the grid to renewable sources are under way, but EV benefits will not be maximized until this occurs as they are indirectly generating greenhouse gases.

See below for the historic breakdown of U.S. energy sources through 2021, which shows that renewable power sources are expanding in capacity, but still have a long path to becoming the primary input for the grid and EVs alike.

Additionally, EVs emit more greenhouse gases than gas-powered vehicles during the production process due to the mining of metals needed for the battery. For example, Lithium mining is a water-intensive process; lithium mining is currently concentrated in dry places and deserts, and the process may use as much as 65 percent of a region’s water. Another critical EV battery metal is cobalt, which can generate sulfuric acid in the mining process and wreak havoc on rivers and aquatic life. As it stands, batteries alone account for up to 70 percent of the greenhouse gas emissions produced during the entirety of the vehicle’s production, and a University of Toronto study found that EVs produce approximately 65 percent more emissions than gas-powered vehicles before reaching the road. Unless EVs can reduce the environmental toll they currently have in production and power-generation, their benefits will not be maximized, and adoption may be slowed.

Sustainability Initiatives

While the issues outlined above remain, regulators and the automotive industry have initiatives in place to promote a sustainable transition. As mentioned, President Biden has set a goal of 2035 to make the power grid emission free. While there is a lot of work to be done, the regulators and utilities are moving towards a grid primarily powered by renewables.

In May, the Alliance for Automotive Innovation released a framework on reusing, repurposing, and recycling the lithium-ion batteries used in EVs. The plan is expected to sustain a circular economy for EV batteries domestically as well as create manufacturing jobs, boost energy security, and reduce reliance on the imports of minerals.

Automakers are also focused on sourcing key materials domestically and finding a sustainable source of batteries. For example, Stellantis recently secured a 10-year supply of lithium from a domestic producer, a trend that is occurring industry wide. GM has a partnership with Li-Cycle for EV battery recycling which intends to reduce manufacturing waste by 90 percent by 2025.

Automakers are taking notice of the various issues that may hamper the transition to EVs and are working towards a more sustainable future. The power grid and EV production continue to have issues, but regulators and the automotive industry are working through these problems with the goal of ensuring the EV transition is a success. The transition to EVs appears to be past a point of no return, but time will tell if the issues identified in the April, May, and June Automotive Spotlights will delay its full arrival.

Transaction Activity

In recent transaction news, Lear Corporation is acquiring I.G. Bauerhin, a German automotive supplier of temperature-controlled seats and steering wheels, for $150 million. Self-driving technology company WeRide received a strategic investment from Bosch for an undisclosed amount to jointly develop autonomous driving software. Additionally, Volvo announced it will partner with global logistics provider DHL to pilot the automaker’s new hub-to-hub autonomous transport solution in North America. Lastly, self-driving truck startup Gatik is expanding operations after reaching an agreement to deliver goods to 34 Sam’s Club locations in the Dallas-Fort Worth area.

See below for additional detail on recently announced transactions.

• Volvo is partnering with video game company Epic Games to improve the role of the human-machine interface in EVs. Volvo hopes the partnership will improve driver-assistance and visualization technologies to provide more information to drivers without additional distraction and stress.
• ECARX, an automotive technology firm that that develops software and hardware for cars such as digital cockpit and infotainment systems, is going public through a SPAC merger with COVA Acquisition Corporation. The deal that values ECARX at $3.8 billion and is expected to close in the fourth quarter of 2022.
• Steering supplier Nexteer Automotive is partnering with Israeli tech startup Tactile Mobility to help vehicles detect road conditions and the health of the tire. The partnership will use a recently developed advanced road and tire detection software which enhances vehicle connectivity and safety through its vehicle management and detection capabilities.
• Meritor has agreed to acquire Siemens’ Commercial Vehicles business, which designs and develops high-performance electric drive systems, for approximately $202 million. The deal is expected to close by the end of 2022 and enhances Meritor’s electric capabilities to serve the global vehicle market.  Meritor is in the process of being acquired by Cummins.

Regulatory Landscape

E.U. ICE Vehicle Ban: The European Union voted to uphold a ban on gas-powered cars beginning in 2035, holding off a challenge that would have eased the ban to a 90 percent reduction in combustion engine vehicles by 2035. The automotive industry’s top lobbying group in Europe, ACEA, generally supports the target but has concern that the ban could cost jobs and drive up prices for consumers if the proper infrastructure is not in place.

Stellantis Settlement: Stellantis has agreed to plead guilty to criminal conduct in connection with its efforts to evade emissions requirements for over 100,000 vehicles with diesel engines. Stellantis will pay nearly $300 million in penalties as a result of the multi-year probe.

Tesla Investigation Grows: The National Highway Traffic Safety Administration (NHTSA) has upgraded the investigation into Tesla’s Autopilot diver-assistance system to an engineering analysis affecting 830,000 vehicles. The upgrade comes shortly after the NHTSA sought more info from Tesla due to reports of “phantom braking” by Autopilot.

U.S. Battery Coalition: Automakers, EV startups, and lithium producers are joining forces to seek stronger federal support for developing the U.S. battery supply chain. The Coalition for American Battery Independence (CABI) will be administered by energy lobbyist Boundary Stone Partners and is aiming for cohesive support for a variety of issues relating to the production of batteries and battery components.

Stay connected to industry financial indicators and check back in July for the latest Auto Industry Spotlight.