Industry Trend Analysis - Detroit Auto Show: Carmakers At A Crossroads - MAR 2018


BMI View: Exhibits and announcements at the 2018 Detroit Auto Show reflect two major current trends for automakers: firstly, satisfying the current demand for big trucks and SUVs, and secondly, planning for an electric and autonomous future. The lat t er will weigh on carmakers financially until new technologies start to make money.

News coming out of the North American International Auto Show in Detroit sends mixed messages about the focus of carmakers, with launches of pick-up trucks followed by announcements of massive investments into electric vehicles (EVs). However, this is a reflection of the fine line that carmakers are being forced to tread between preparing for the industry's future transformation and fulfilling current demand. Financial projections also suggest that this balancing act is already impacting bottom lines.

'Year Of The Truck'

Some of the biggest launches so far have been pick-up trucks, with the likes of Ram and Chevrolet looking to eat into Ford Motor's stranglehold on the market. New versions of the Ram 1500 and Chevrolet Silverado are to take on the dominant F-Series, which itself has a new addition in the form of a diesel F-150. It is unsurprising that the media has referred to 2018 as 'The Year of the Truck' in response to the trends on display at this year's Detroit Auto Show.

This activity in the truck market, and also the SUV segment (which is included in the North American light truck segment), is a reflection of current market conditions. Even as the total US light vehicle market notched up its first contraction in 2017 since 2009, with sales declining 1.8%, the light truck segment grew 4.3% as a traditional preference for trucks was bolstered by an ongoing shift away from cars towards bigger crossovers and SUVs.

Carmakers Target Growth Market
US Light Vehicle Sales By Segment
Source: BMI, US Dept of Transport

We expect this trend to continue in 2018, when we forecast light truck sales to grow 0.5%. Although much slower than in previous years, this increase is still outperforming the waning passenger car market and the overall light vehicle market. As such, carmakers are looking to capitalise on this growth area with new, and more importantly, high-margin, products.

One Eye On The Future

In contrast to these heavy-duty product launches, the other big news coming out of the show surrounds plans and products for an electric future, as well as other transformative technology such as autonomy and artificial intelligence (AI). While thirstier pick-up trucks are ruling the roost for now, carmakers are aware that the tide is turning in many major markets towards cleaner transportation, with EVs at the heart of this transition. The majority of carmakers already have an electrification strategy ( see ' Product And Manufacturing Strategies Respond To Low Carbon Policies ' , September 5 2017), but this has not stopped the flow of new announcements, including ramp-ups of existing investment plans.

Ford, for example, revealed at the show that it has doubled its initial EV investment to USD11bn and plans to offer 24 plug-in hybrids and 16 full EVs in its range by 2022. Numerous brands have showcased commercially available and concept EVs to demonstrate their capabilities. This is particularly in the premium segment, where Tesla is credited with shaking up the competitive landscape. On top of this, companies have been sharing plans and concept models for their autonomous vehicle strategies, with AI being the latest new area of interest.

Automakers Need New Revenue Streams
US - Vehicles Per Capita
Source: US Department of Transportation

Much time, energy and money has, in these ways, been poured into a segment of the industry that is yet to fully take off. EV penetration rates remain low, despite exponential growth in major markets and supportive government policies; autonomous technology is still in its testing stages; and our Telecoms team notes that AI, which was also showcased widely at the Consumer Electronics Show earlier in January, still lacks a fully viable business case ( see ' CES 2018: AI, Like IoT, Needs A Business Case ' , January 16). However, in what is a very traditional heavy industry, changing very little since its inception, carmakers are keen to show the public, and more importantly, shareholders, that they are not being left behind as it becomes clear that the existing business model of building and selling cars is living on borrowed time ( see chart above).

Balancing Act Comes At A Cost

Attempting to balance current demand and an anticipated future market is being reflected in company financials. Although the growth in the truck segment is the best possible scenario for carmakers in the US market, given that these products have the highest margins, the amount of investment going into 'futureproofing' these businesses is eroding these gains to some extent.

Ford has announced that it expects to lose USD300mn from its 2017 earnings from its investments into autonomy and mobility initiatives, with increased EV investment to add further to expenditure in the coming years. Meanwhile General Motors Company has revealed it expects to spend around USD1bn on its autonomous division in 2018, up from a run rate of USD600mn. These areas of the business are not yet contributing to income for carmakers and they thus represent a gamble on long-term returns for their outlay.