Tesla and Ford announce and execute significant price cuts on electric models, doubling down their bets on shifting consumer behavior. Proposals for regulation on electric vehicle (EV) tax credits may significantly limit the number of vehicles eligible for tax credits. Inventory shows signs of improvement as sales mix trends toward light trucks and larger vehicles.

In transaction news, Nissan and Renault have a preliminary agreement in place to restructure their partnership. Ford Motor Company will re-enter Formula 1 in 2026 through a partnership with Red Bull Powertrains. In the dealership services space, Reynolds & Reynolds is acquiring American Guardian Warranty Services to expand its vehicle service offering.

In regulatory news, the U.S. Justice Department’s probe into Tesla intensifies as the company disclosed investigators are seeking internal documents related to autopilot and assisted-driving technologies.

Additional February insights are included below.

Financial Performance

Automakers eliminated 11,500 vehicles from their 2023 worldwide production plans this week because of the ongoing global microchip shortage, according to AutoForecast Solutions (AFS). All of these cuts come from North American factories, bringing year-to-date total losses to 55,300 vehicles for the region. Ford’s Oakville, Ontario plant, which manufactures the Ford Edge and Lincoln Nautilus, leads the way for North American production cuts at 13,700. AFS now expects more than 2.8 million vehicles will be cut from production plans for lack of chips in 2023, down from 4.38 million in 2022 and 10.56 million in 2021. On a year-to-date basis, 316,000 vehicles have been cut from global production, with more than 55 percent of cuts coming from Asia outside of China.

Experts from PwC’s industrial manufacturing and automotive sector group predict another challenging year for automotive suppliers. Citing drops in sales volumes, rising material and labor costs and the continued microchip shortage, PwC expects a significant percentage of automotive suppliers to remain in some level of financial distress. However, PwC also suggests 2023 as a “re-positioning” year for the auto supply industry at large, believing there will be heavy M&A activity (particularly with EVs, electronics and software) and a strong focus on managing liquidity.

Industry Update

January inventory levels ended at 1.71 million units, their highest level since April 2021. Days’ supply (DS) closed at 38, approximately 25 percent below the five-year average (consistent with December results.) The Detroit 3 have nearly fully recovered to five-year historical average DS levels. While inventory conditions are primarily being driven by sales weakness, inventory mix has shown a meaningful shift toward trucks and large vehicles as OEMs prioritize higher margin segments. However, Bank of America Global Research (BofA Global Research) views the depressed inventory environment in a positive light, noting the continuous build of pent-up demand for a replacement cycle in late 2023 and beyond.

While January U.S. light vehicle sales increased 4.1 percent year over year, BofA Global Research notes cautious optimism looking forward given the critical state of inventory levels. They note that improving mix is an encouraging sign for broader sales outlook, as light trucks pick up relative share from passenger cars, as well as alternative powertrain vehicles gaining share against internal combustion engine (ICE) vehicles. While expectations for 2023 remain moderate, signs continue to point toward a steeper recovery in 2024.

Industry Focus – EV Investment

The global auto industry is experiencing a multi-generational powertrain shift that requires a massive investment from manufacturers — an event BofA Global Research is calling “the Great Re-Capitalization.” A Reuters study in October 2022 found that global auto manufacturers have committed to a total of $1.2 trillion of investment in batteries and electric vehicles through 2030.

Public policy changes continue to incentivize shifts to electric vehicle investment, but requirement thresholds for environmental impact standards continue to get tighter. Through November 2022, approximately $33 billion was committed to new auto factories in the United States, on top of the nearly $37 billion committed in 2021. The investment commitments come as major manufacturers, such as Tesla and Ford, shake up pricing strategies for electric vehicles based on anticipated demand — a move that will place further strain on domestic suppliers.

The Big Picture – 2030 Targets

The $1.2 trillion of investment by 2030 in electric vehicles, batteries and raw materials to support production amount to a collective bet by the global automotive industry on consumers shifting toward a primarily electric future. The risk of these commitments and near-term spending is heightened by current macroeconomic conditions. “You have to invest now, or you’re going to be left behind in the transition,” said John Lawler, CFO at Ford Motor Company, in an interview with the Wall Street Journal.

Strategies on investment vary between manufacturer, with focus on EV vs battery investment split. Planned annual production rates by 2030 vary greatly as well, with Tesla leading the way across the board:

U.S. Factory Investments and Policy Shifts

Recent legislation has incentivized accelerated electric vehicle development and investment, but tightened regulations put additional pressure on where the investment will be focused. Through November 2022, $33 billion was committed to new auto-factory spending on top of $37 billion committed in 2021. These figures are up from $9 billion in 2017.

With the incremental policy and investment activity, competition has grown between states to secure the jobs and growth auto makers are committing to. Roughly two-thirds of new investment commitments in the last 24 months are in the U.S. South, as opposed to traditional investment in the Midwest and Great Lakes area. However, not all states are interested in the potential investment. Virginia governor Glenn Youngkin made headlines in recent weeks after telling Ford Motor Company that his state was not interested in the company’s planned $3.5 billion battery plant that would create approximately 2,500 jobs, claiming the company Ford would partner with has ties to the Chinese Communist Party.

Strategic Shifts and Upstream Challenges

In mid-January, Tesla cut prices across its entire lineup of electric vehicles by as much as 20 percent in the U.S. As a result, the company has seen record high order rates — beyond its current manufacturing capacity. Within days of Tesla’s price cut, Ford announced price cuts to its Mustang Mach-E, citing streamlined costs as an opportunity to remain competitive in the rapidly changing EV market.

While other manufacturers such as VW have indicated they will not follow suit on price cuts, the rapidly changing EV market is creating significant efficiency issues for domestic suppliers. A recent study conducted by ABI Research showed that, given the rapid influx of new EV programs, the average supplier is 30-50 percent behind schedule, running above cost targets, or both. Predictability has become a major concern with volatility in raw material prices and part shortages.

As a result, supplier program managers face increasingly challenging conditions to meet their operational goals for quality, durability, delivery and profitability. A report from S&P Global Mobility suggests that the human element of production bottlenecks will remain a significant challenge in 2023 and beyond for suppliers running programs for both internal combustion engines and electric vehicle platforms. This is likely to become even more so for internal combustion engine programs as volumes decline.

Transaction Activity

A major change-up in the long-troubled Nissan/Renault relationship leads the way for this month’s transaction news, with a prospective restructuring agreement altering the balance of power between the two. Elsewhere, Ford Motor Company is re-entering Formula 1 through a partnership with Red Bull Powertrains. In the dealership services space, Reynolds & Reynolds has acquired American Guardian Warranty Services to expand its vehicle services offerings.

See below for additional detail on recently announced transactions.

• (2/6) Renault and Nissan have agreed to restructure their partnership. The proposed new agreement includes Renault reducing its stake in Nissan to 15 percent (down from about 43 percent), transferring the 28 percent into a French trust, and Nissan acquiring up to 15 percent of Renault’s EV business Ampere. A finalized agreement is expected by the end of the first quarter and is scheduled to close in the fourth quarter.
• (2/3) Ford is partnering with Red Bull Powertrains to reenter Formula 1 in 2026, when new regulations will take over for engine manufacturers. The partnership will supply power units for Oracle Red Bull Racing and Scuderia AlphaTauri from 2026 to at least 2030. Ford’s last venture in Formula 1 was through its Jaguar branded team that was sold to Red Bull in 2004.
• (1/27) Dealership software and service provider Reynolds & Reynolds has acquired American Guardian Warranty Services (AGWS) for an undisclosed price. AGWS, based in Chicago, provides vehicle service contracts, limited warranties and additional finance and insurance products and services. Reynolds & Reynolds plans to keep the existing AGWS leadership team in place.

Regulatory Landscape

EV Tax Credit Law: Senator Joe Manchin (D. W-VA) recently introduced a bill that would direct the U.S. Treasury to stop issuing $7,500 consumer tax credits for electric vehicles that do not meet strict mineral and battery component criteria. Nearly 40 new models are currently eligible for the credit from now until the Treasury issues its required EV battery sourcing guidance. However, under Manchin’s newly proposed bill, very few to no vehicles would qualify based on the critical minerals requirement for the credit.

Tesla Autopilot: Tesla disclosed it received requests from the U.S. Justice Department for documentation related to its self-driving and Autopilot systems. The request comes as the company faces increased scrutiny under criminal investigation over claims the company’s vehicles could drive themselves.

NHTSA Ford Explorer Probe: The National Highway Transportation Safety Administration (NHTSA) is opening a safety probe into nearly 1.9 million Ford Explorers built between 2011 and 2019. The NHTSA’s Office of Defects has received 164 complaints that the windshield trim panel detaches while driving at highway speeds. There are no reported injuries or deaths related to potential defect. If a safety-related defect is found to exist through the probe, NHTSA may send a “recall request” letter to the manufacturer.

AB Volvo: AB Volvo is facing a $130 million civilian penalty for a failure to recall heavy-duty trucks and busses in a timely fashion. The National Transportation Safety Board and the company agreed to a three-year consent order that includes regular meetings with third-party auditors on top of one of the largest financial penalties ever under recall law.

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