Executive Summary

The automotive market is expected to normalize this year. On the one hand, we expect car registrations to slow down following a strong rebound in 2023. On the other hand, car manufacturers face reduced pricing power and contracting margins amid intensified competition and an uncertain environment. We expect new auto sales to grow by +1.9% this year due to subdued consumer spending – especially in China and Europe – and sub-par global economic growth. EVs remain in a relative sweet spot despite major headwinds. We forecast the sale of new EV passenger cars to exceed 18mn (+32.8% y/y) in 2024, with Europe leading the way (+41.2%). On the production side, we anticipate a decline in gross and EBIT margins to 18.7% (-28pps)  and 5.2% (-164pps), and an accelerated consolidation. The expected uptick in the R&D ratio (4.5%, +14pps) and CapEx-to-sales ratios (5.4%, +33pps) shows that automakers are likely to diversify their investments and stay agile. The industry is poised to see a rise in intra-regional collaboration among automakers and stakeholders across the supply chain to gain an edge in the reshuffling.

More importantly, the global auto industry is going through a significant transformation towards electric vehicles (EVs) but the path ahead will be turbulent, shaped by geopolitical tensions, slowing demand and regulatory uncertainties. Regionally, the tectonic shift has already started. China has risen as a disruptive force, challenging traditional auto leaders. Europe and the US, wary of their dependence on Chinese components and the impact on local industries, have responded with increased trade barriers and scrutiny. The recent deceleration in EV demand, coupled with the uncertain regulatory and economic climate, further complicates the industry’s near-term trajectory. We look into regional specificities below.

First, European automakers and especially German ones are losing ground. The car industry has been the backbone of the European economy (6% of regional output), serving as an innovation (32% of EU’s R&D) and export hub (2.8% of EU’s export value) while employing a vast workforce (6.5mn direct employment). However, having long focused on their established strengths, European auto incumbents arrived late to the EV game and are struggling to produce affordable models profitably (EVs still cost 27% more than gasoline cars). Consequently, European automakers are experiencing a notable decline in market share. The transformation has already had visible impacts on the business landscape in terms of insolvencies (+13% in 2023) and employment, putting 730,000 jobs at risk, with Germany being especially affected. To catch up in the new race and boost market uptake, Europe should provide more carrots than sticks.  and take immediate actions on building up an eco-system around the EV production.

Second, Chinese EVs are on course to conquer the global market yet they face formidable hurdles. Chinese EVs have risen at an astonishing pace, with sales and production jumping almost eightfold from 2019 to 2023. Government support plays a critical role in establishing China’s undisputed dominance in the industry today. Chinese EV makers have strong cost advantages thanks to their early-mover position, lower labor costs and economies of scale, but they also excel at quality. However, several factors present potential risks that could undermine China’s current leading position, including an escalating price war, issues of overcapacity, rising geopolitical tensions and the advent of next-generation battery technologies.

Third, industrial policy is propelling the shift to EVs in the US auto industry but cost challenges and political uncertainties remain. Pragmatic industrial policies have been implemented across the supply chain. While they have boosted the EV transition and attracted significant investment (USD66bn battery and EV investment post-IRA), the high cost of EVs remains a challenge, exacerbated  by increasing labor costs (25% wage increase over the next four years) and a domestic preference for larger vehicles (70.5% market share). Political dynamics stand as the largest variable in the future of US auto industry – a potential second Trump presidency could set the path on an alternate course given the divergence in the two parties' positions on green transformation.