The automotive industry's shift towards electrification is proving to be a more treacherous journey than anticipated, with actual performance falling short of expectations and investments yielding disappointing returns. What was once seen as a transformative opportunity has now become an "investment trap" for many supply chain companies struggling to keep pace with the trend.
According to consultancy firm Falkensteg, the first half of 2024 saw 20 German automotive parts suppliers with annual revenues exceeding 10 million euros (approximately US$10.9 million) file for bankruptcy. This represents a staggering year-on-year increase of over 60%.
The situation is particularly alarming given that in 2023, bankruptcies had decreased by 2% due to subsidies, inflation compensation, and manufacturers successfully raising prices in response to inflationary pressures.
The current crisis echoes the peak of bankruptcies seen during the pandemic in 2020 when 28 companies exited the market. While the situation for small and medium-sized suppliers has somewhat stabilized in recent years, it remains precarious. With automakers continuing to cancel and delay orders, the second half of the year will be crucial in monitoring exit rates.
Global competition and technological challenges
The lower-than-expected demand for electric vehicles (EVs) in Europe and the US is the primary factor behind the struggles of parts suppliers. Many local suppliers, hoping to capitalize on growth opportunities from the transformation, have instead found themselves trapped by their investments and facing immense pressure. Even large car manufacturers are grappling with challenges, particularly when confronted with the rapidly rising and cost-competitive Chinese supply chain.
European lithium battery manufacturers have also faced setbacks. Northvolt recently lost a US$2 billion order from BMW due to insufficient process yield rates, while Volkswagen is reportedly reassessing its orders. The joint venture lithium battery plant between Stellantis and BMW, ACC, has even paused construction.
In contrast, Chinese companies have been actively increasing their presence in Europe, leveraging their competitive edge in manufacturing and cost. This has prompted European automakers to reconsider their partnerships, especially in the lithium iron phosphate (LFP) battery sector where Chinese companies excel.
The implementation of V2X (Vehicle-to-Everything) technology and software-defined hardware has also fallen short of the optimistic forecasts made before 2020. European carmakers, having invested heavily in these areas, are now facing results far below expectations and are turning to specialized software providers for solutions.
Interestingly, new automakers like Tesla and other Chinese manufacturers have seen relatively better results and faster progress in software deployment, possibly due to their origins being rooted in electrification. Meanwhile, mainstream automakers in Europe, the US, Japan, and South Korea, burdened by numerous safety concerns accumulated during the era of fuel vehicles, are proceeding more cautiously in their transformation.
As the industry continues to evolve, the semiconductor supply chain is also undergoing restructuring, with Taiwanese manufacturers being invited to set up factories and participate in this shifting landscape. The coming months and years will be critical in determining which companies can successfully navigate this challenging transition and emerge as leaders in the new automotive era.
