Brand and Ownership Concentration in the European Automotive Industry - Possible Scenarios for 2025

KPMG Europe LLP

This is the third and concluding part of the report published in the previous issues.

2.5 The correlation between manufacturer and brand concentration

Manufacturer and brand concentration are not necessarily connected with one another. A manufacturers market exit leads to the disappearance of one or more brands if they are not taken over by another manufacturer. Such an incorporation of brands into the brand portfolio of another manufacturer is, as many examples demonstrate, extremely frequent. Brands can be acquired in a way that allows a manufacturer to merge them with their own brands, or sell one or more brands on to other manufacturers.

Conversely, however, brands can also die off without the manufacturer disappearing as a result. In recent times, the automotive industry has seen a multitude of cases in which brand portfolios have been shaken out with the complete elimination of one brand (for example, GM, Ford).

The reason for the possible divergence of manufacturer and brand concentration is that company survival capability depends on different economic factors from those required for brand survival. Whether a brand survives ultimately depends on whether brand specific revenue is higher than the respective brand-specific costs.

The manufacturer concentration process tends to be stronger in the automotive industry than the brand concentration process, which enlarges brand portfolios. This development can be explained by market differentiation on the one hand and by restricted brand expansibility on the other.

However, with the rising number of brands and expansion of the model ranges within these brands, cannibalization risks also increase, and brand specific additional revenues fall. The pressure to perform a brand portfolio shake-out in the automotive industry, therefore, increases.

3. Concentration process perspectives in the automotive industry

3.1 Scenario I: "Green Revolution"

Two scenarios based on the proposed industry model will be illustrated in the following, focusing on the future consolidation process in the European automotive industry. The two scenarios run up to 2025.

The main driving force in this scenario is the increasing political pressure to make motor vehicles environmentally friendly. It is assumed that political decision makers will push for the accelerated development of "green" technology, both with tightened auto emissions limits and with penalties.

Electric motors will be the dominant drive technology here - whether with fuel cells or battery-operated electric cars. The political pressure is increased by changes in social values, which will lead to growing acceptance and demand for innovative and alternative drive concepts.

In this scenario, the European automotive industry is moving towards the following critical development wave: the technical maturity period of the politically required "green" technologies is between 10 and 15 years. This means that in the coming years, motor vehicle manufacturers will have to make significant financial investments in research and development, as well as in the adjustment of production concepts and the reorganization of their value chains. These investments will only gradually result in an adequate injection of funds into the respective automakers. Funding needs of motor vehicle manufacturers will therefore, be high in the next few years, and these needs will have to be covered despite a continuingly strained situation on capital markets. But since the investors' decision horizon is considerably shorter than the financial maturity period of the new technologies, the industry will also experience growing financing problems.

In this scenario the critical development wave therefore, consists of the incongruity of the time horizon between the maturing and amortization of the new technologies and those of the investors on the capital markets, so that financing these new technologies becomes a real bottleneck factor for the company. Access to the capital market therefore, becomes one of the most important survival factors for motor vehicle manufacturers, all of whom are consequently, endangered by a weak equity capital base and low earning power.

There are no specific market exit barriers in this scenario. Companies that can no longer procure the necessary resources on the capital market to adapt the respective model ranges would have to withdraw. The market entry barriers on the other hand are high because of the required investments. Potential entrants must have substantial financial resources to successfully implement a market entry. From today's point of view, the Chinese motor vehicle manufacturers that could be in a position to bring competitive electric automobiles to the market with state support are the most likely candidates for market entry.

It is also conceivable, however, that power supply companies might enter the market, which would allow them to extend their value chains. The manufacture of finished vehicles would, however, require vehicle manufacturing expertise, which power suppliers do not have. An entry by acquiring an established motor vehicle manufacturer would, therefore, be an option.

The actual consolidation could be quite low in this scenario, as established manufacturers are faced with the entry of new competitors. But the degree to which the European automotive industry would be affected would be high, as almost all European manufacturers would have to battle substantial financing problems, partially because of their shareholder structure and partially because of their low profitability.

Should the "Green Revolution" scenario materialize, we would have to expect a restructuring of the entire European automotive industry in the next few years.

3.2 Scenario II : "Mobility Revolution"

The drivers in the "Mobility Revolution" are the customers. This scenario assumes that a growing number of motorists in the future will no longer own cars but rather use them temporarily and in specific situations. In addition to ecological motives, financial factors also play a role here. The rising cost of ownership means that for more and more people it will be increasingly difficult to buy and maintain their own car. This trend will be accelerated by growing urbanization, which constantly reduces the benefits of owning your own car. In urban centres, a high level of mobility is possible with well-developed public transport systems or alternative vehicles such as electric bicycles. The "remaining" mobility is then covered by the temporary use of motor vehicles or some other transport carrier (train or plane).

In this scenario, the critical development for motor vehicle manufacturers is due to the industry having to be completely restructured. While motor vehicle manufacturers have been the system leaders in the automotive industry value chain so far, this role would fall in the future to the mobility providers, because they would have the direct contact with end customers. The acquisition potential in the market would no longer be with the automotive brands, but rather with the mobility brands.

Mobility providers would give their customers cross-traffic carrier mobility offers, which they could use as needed. The basis of the business relationship between mobility providers and customers would be a mobility card, which would provide the customer access to the various traffic carriers. Mobility providers would set up and operate vehicle pools, which customers could use with an appropriate access technology. The vehicles would be bought from automakers.

An even more extensive variant of this basic model would emerge if the mobility providers were to build vehicles themselves from pre-produced modules. In this case, the traditional role of the motor vehicle manufacturer (that is, the production of finished vehicles) would go to the mobility provider, while a certain number of module producers would also be established at the supplier level.

It appears obvious that the motor vehicle manufacturers would have to attempt in this scenario to become mobility providers in order to maintain their system leadership. Otherwise, they would be degraded to module manufacturers. The motor vehicle manufacturers would, therefore, have to completely re-organize their current business model.

Important factors that would be critical to survival are the brand image and access to human resources in the field of services, a high level of process and IT expertise, and high quality management to control and implement this kind of transformation process.

A complete market exit by motor vehicle manufacturers is not necessarily to be expected in this scenario, as motor vehicle manufacturers that do make the transformation into mobility providers as module manufacturers (for example, for the drive train) could stay in the market.

The most important market entry barrier in this scenario would not be the capital requirement. Mobility providers would have to be able to set up and operate a network of cross traffic carrier mobility offers. The brand development would also be an indispensable requirement. In this scenario, the sale of mobility services and the respective customer management could be performed via the Internet.

The range of new companies entering the market in this scenario is also rather extensive. This might include public transport system operators (such as Deutsche Bahn), car hire companies, IT operators with a high level of CRM expertise, or even banks and financial service providers.

4. Conclusion: Turning point in the automotive industry - who will survive?

The automotive industry has reached a critical development threshold. As in the past, staying on top of this wave requires a consolidation process.

Excursus New business models provided by electric mobility - The future role of power suppliers in the automotive industry value chain In addition to battery manufacturers, power suppliers will also play a key role in the automotive industry value chain of the future. They are not just power generators - they also have a major influence on the development of the necessary infrastructure for refueling electric motor vehicles. Could this result in motor vehicle manufacturers being displaced from their role as system leader in the automotive industry value chain? The power supplier, RWE, has been providing a package for motor vehicle fleet operators since autumn 2009. The package consists of electric vehicles (Mikro-Vett 500 E and Micro-Vett Fiorino E), a charging station, and an RWE car electricity contract. Effectively this means that the power supplier is slotted into the value chain between the manufacturer and its customers. Or to put it another way: the motor vehicle manufacturer is pushed out of its role as a supplier for the power provider. The example given here is of course only a pilot example. The logic of the RWE strategy is, however, quite clear: a forward integration and the assumption of a gatekeeper function will generate additional value chain and results potential. If the power suppliers can take this step, they can build up purchasing power against the motor vehicle manufacturers, at the expense of their profit margins in the sales area. The automotive trade is completely displaced from the value chain, and could at most take on a service function. The consolidation path in this scenario is more complex than that in the "Green Revolution" scenario. The latter is still based on the traditional structure of the automotive industry value chain. The "Mobility Revolution" scenario, by contrast, implies that the market and the industry would be redefined. Not all European motor vehicle manufacturers would be able to position themselves here as mobility providers.

 
So, which manufacturers will reach the next evolutionary stage in this industry?

The European automotive industry has an exceptionally heterogeneous structure in terms of size, product and brand portfolio, and of course ownership structures. This diversity makes it difficult, if not impossible, to find a generalized answer to the question of how European motor vehicle manufacturers can secure their long-term survival in the market.

Essentially, every manufacturer must find new answers to old questions: What products and services do we want to use to position ourselves on the market in the future? What sources will we generate our revenue from in the future? And how do we have to organize our value chain to be successful?

These are the obvious questions that motor vehicle manufacturers must answer in search of a business model that will be sustainable in the long term. And, of course, we must also ask how today's business model can be transformed into one for the future.

The answers for a business model in the "Green Revolution" scenario appear to be quite simple. Essentially, you might say that this is an evolutionary further development of today's business model. Front and centre stage is the product, the "car", which will be marketed via the usual sales channels and produced in a modified value chain structure with new suppliers.

But, of course, the world is not as simple as it might appear in this scenario: Will the value chain structure shift completely with the electric car? Will it become more profitable, for example, to produce batteries internally in the future, and outsource the engine? Or, will the operation of electricity filling stations on the basis of regenerative energies be a bigger competitive factor than presenting cars in exclusive showrooms?

There are even more basic questions that arise regarding the future for motor vehicle manufacturers in scenario "Mobility Revolution." Are motor vehicle manufacturers -which are traditionally characterized by development and production culturally and structurally in any kind of position to develop into service provision companies? Where is the internal potential for such a transformation process? Or does this scenario offer the challenge to join forces with service providers outside the industry?

Paradoxical as it might sound, the current situation of many motor vehicle manufacturers, with intensive efforts to quickly return to the profitability zone, is not an ideal position for focusing on the long-term challenges. Anyone who does not know how they can survive the next year quite possibly will not be thinking about the more distant future. And that may be why the companies that think ahead anyway whatever their situation will be the ones that survive.