Will your franchise win in the NEV wars? Part 2: Seven global carmakers compared – Results.

This entry is part 2 of 9 in the series New Energy Vehicles

Click on images or tables to enlarge.

The first post in the series concluded by asking how auto-makers would get the money to fund the transition  from traditional, internal combustion engines (ICE) to new energy vehicles (NEV’s). Based on their 2018 financial results, this post summarises the results of forecasts showing how much cumulative profit they might retain under each of three scenarios and offers some explanations of why they perform differently. The scenarios change five variables depending on the speed at which the OEM switches from ICE to NEV’s – Slow, Moderate or Fast.

So why is it important to answer this question?

The Covid-19 Pandemic taught the global public many lessons. One was the resilience – or lack of it – in national health systems. Another was the weakness of global political leadership when faced with the need for a co-ordinated approach. But above all, it showed us the effects of a rapid shift in our economic system. Day labourers in India faced with lock-down began to walk hundreds of miles to reach their families. Workers in the so-called ‘gig economy’ across Europe and the US found themselves jobless and homeless within weeks. Those in the so-called ‘Real Economy’ found themselves sleeping in their cars to avoid the bills that could lead to personal bankruptcy. It’s not only the activists that advocate swift transition to a carbon-free, net zero economy by 2025 who should take careful note. We all should. While the case for Net Zero Emissions is clear, without substantial planning and significant shifts of capital, we risk plunging much of the world and many of our fellow citizens into poverty in the transition to it.

Method and Results

This post draws its results and conclusions from two sets of data for each of seven global auto-makers. The first data set contains historical financial and operating KPI’s and is used to assess the financial resilience of selected auto-makers since 2007, focusing specifically on the period from 2013 – 2018. The second data set is a series of financial forecasts for the same manufacturers under three future scenarios for a transition to electric vehicles – Slow, Moderate and Fast – using similar timings to Adam Whitmore’s study shown in Part 1 of this series. Within each scenario, five variables can change: The mix of ICE and NEV’s; R&D expense; Depreciation of Existing Assets; Sales G&A Expense; and, Unit Sales lost due to consumers preference for ICE or NEV.

The forecast model makes the following assumptions. New energy vehicles are assumed to have a lower

Where does the money come from? OEM Margins in ICE and NEV’s:

margin than ICE products, as has been generally acknowledged by auto-makers, but the gap diminishes over time. In addition, the reduced after-market content of NEV’s is assumed to allow auto-makers to use direct distribution, so progressively lowering their Sales G&A costs up to a maximum saving of 20% over 2018 levels, depending on the mix of ICE/NEV products. Switching to NEV’s is expected to require increased R&D investment as well as accelerated write-off of existing ICE production ‘legacy’ assets. Finally, depending on the scenario timing, OEM’s are expected to lose sales, as their product offer is increasingly likely to be out of step with consumer opinion. If the FAST track is selected lost sales are lowest; if the SLOW track is taken, lost sales are at their highest. None of these assumptions are beyond challenge. For example, BMW have based their strategy on offering a range of ICE and NEV versions according to local market conditions, such as the lack of charging infrastructure in states such as Russia, Africa and the Middle East. The starting point for each forecast is the auto-makers financial results in 2018 – the latest full year data available for all OEM’s.

The seven auto-makers reviewed are Daimler and BMW, Ford and GM, Volkswagen, Toyota and PSA. Morningstar and the car makers own published figures provided the financial statements for the period 2007 to 2018 which, for the forecasting purposes, were restated on a consistent basis to provide additional data on, for example, R &D expenditure and retained profits. In addition,  the figures were configured to reveal operating leverage: the degree to which a change in sales volume and contribution margin would impact on retained profit.

Each firm was assessed first in terms of their financial strengths and weaknesses using the standard financial performance ratios. This data is collated to provide the first ranking of financial resilience based on six categories: Sales Revenue and Growth; Cash Flow; Profitability; Liquidity and Debt, Operating Efficiency and, finally, Shareholder Return. Next, Forecast Income Statements and Balance Sheets were calculated for each firm for the period 2020 to 2045, in five year tranches. The assumptions of each scenario were applied individually to each firm and the results collated to produce a second ranking reflecting the ability to absorb the financial stresses of the transition. Specifically, the forecasts predict future retained profits under each scenario in comparison to financial equity in 2018. The results from both these data sets are summarised below. For all the Financial Resilience KPI’s click on the thumbnail image:

Note: Fiat-Chrysler Auto is only included in the first, historical data set while its possible new owners, PSA, France are included in the second, forecasted data set.


Financial Resilience 2013 – 2018

While its clear that the Japanese and European marques delivered better KPI’s than their US counterparts, a significant reason is likely to be FX rates as much as operational efficiency or compelling products. That’s not to say that operating efficiency results at Toyota, who led the pack overall, aren’t impressive. They are. But what truly propels their achievement, and that of their European competitors, appears to be a long term exchange rate advantage. FX advantages, for Japan and the EU and disadvantages, for the US$ and GBP£, contribute to the top scores in Revenue and Growth, Profitability and Liquidity and Debt. Between 2011 and 2018, the Japanese Yen depreciated against every other major world currency, ending almost 20% lower than its 2011 level against the Euro and 30% lower against the US$. Add into the mix that Toyota sell 24% of their product in Europe and another 24% in the US, this will have helped their Revenue, Growth and Profitability. Their spectacular growth in China – 31% of volume in 2018, up from 10% of volume in 2016 – may be, in part FX related as well.


Although this is not shown in the table, in relation to the Chinese Yen, the Japanese Yen has been nearly 30% lower or more than its 2011 level since 2013. The Euro also consistently depreciated against the US$ since 2011. By 2016 it was down 19% and ended almost 12% down by the close of 2018. The GBP£ was another currency to suffer from FX turbulence. It appreciated against both the Euro and the US$.

The implication is that, currency management and associated fiscal issues, such as interest rates, weigh more heavily on the results of firms, such as auto-makers, who have high exposure to foreign markets, high break-even points and heavy debt burdens, than they do on other global businesses. This in turn implies that jurisdiction and location may be an enduring factor in business location decisions through the transition to NEV’s.

Financial Forecasts 2020 – 2045

Table 3: Cumulative Retained Profits 2020 – 2045 under Forecast Scenarios compared to Business As Usual ad 2018 Net Worth

So, how did the individual auto-makers rank in the financial forecasts? The tables give the summary results. Table 3 shows the cumulative retained profits for the period 2020 – 2045 under each scenario and compared with ‘Business As Usual’ – a scenario in which there are no changes made. The figures use the local currency for each firm. To create the forecast it starts from the actual performance of the firm in 2018. Under the SLOW ADOPTION scenario only Daimler and BMW make a cumulative profit by 2045, although both experience a 5-year period of losses. The rest experience increasing losses after an initial period of profitability. Under both the MODERATE ADOPTION and the the FAST ADOPTION scenarios all firms except Ford end the period with cumulative positive retained profits. But, Ford does experience positive cumulative retained profits from 2040 onwards. They’re just not adequate to erase prior losses.

Table 4: Cumulative Retained Profit as % of 2018 Net Worth

Table 4 re-states the cumulative retained profit data for each firm as a % of its 2018 net worth under each of the three scenarios and ‘Business As Usual’. The figures show that the forecast cumulative  net worth for some firms is negative under one or more scenarios. But, more importantly, all firms are accruing retained profits from 2040 whichever scenario they follow. Under the FAST ADOPTION scenario, all firms except Ford have accrued a net positive increase in cumulative retained profits. This assumes that they are able to generate enough cash to arrive at that point. From a shareholders viewpoint a persistent decline in net worth would be an adverse signal unless the funds were being returned to shareholders in some way, e.g a share buy-back programme.

Table 5 ranks each firm on its overall net worth based on all three scenarios and re-

Table 5: Rank in Net Worth in Forecast Scenarios (Scenario Value as % of Net Worth 2018)

states it as an overall ranking, with Rank 1 being the best overall performance, 2 the second-best, and so on. The ranking only reflects the capacity of the business to cope with the financial stress of a transition at different implementation speeds relative to its own financial resources. It does not provide an insight into the firm’s technical, marketing or organizational capability to successfully make the transition from ICE to NEV products. Nonetheless, it may indicate to an investor or dealer the depth of financial resilience in the business.

Two factors explain much of the difference in performance between the OEM’s forecasts: Operating Leverage and Profitability. Those firms with a lower Operating leverage, such as Daimler, make smaller losses when volumes fall and vice versa. In contrast, those with high operating leverage, such as PSA and Ford, make larger losses when volumes fall and vice versa. However, firms with both above average margins and low leverage make lower losses when volumes fall but make above average profits when volumes rise. These are the main factors underpinning the ranking based on the OEM forecasts.

What OEM’s Need To Make a Success of NEV’s

Few will be surprised that the  OEM’s with the greatest financial strength are likely to cope best with the financial stresses of the transition. But money is only one of a number of strategic, production and technical resources needed by each firm. Political risks, the size of the market opportunity, their government’s fiscal policy and attitudes to environmental policy will also be important. Taking FX rates as an example, is the US government going to sit idle while their OEMS complain that they are disadvantaged by interest rates? The IMF agrees with the OEM’s, suggesting that the US$ is overvalued by 6-12%, while the Euro is undervalued by a similar, or even larger margin. Chinese car-makers too, while not part of this review, are likely to be major actors in the transition phase. Many partners of EU and US auto-makers, are state-owned enterprises. In effect, the partnership is with the Chinese Government.

Governments have already shown that they will act to protect jobs and subsidise sectors of the automotive industry. These are both helpful and hurtful to OEM’s. In the US, for example, most states legally enforce the role of independent dealers. This may limit the savings that US OEM’s can make quickly in their Sales G&A Expenses. In Europe governments subsidise or frustrate attempts to close production plants, usually to save jobs. This has led to over-capacity and long-term marginal profitability, particularly for OEM’s producing smaller vehicles. The profitability of Ford, GM, Fiat and PSA have all been restricted as an outcome of this policy in Europe. Governments use a variety of non-tariff barriers, from FX rates to local content quotas to financial bail-outs to emissions policy, to protect their domestic OEM’s from the full effects of competition and protect jobs. Whatever, the resources of an OEM, its ultimate success in the transition to NEV’s may depend on its government’s actions as much as its own.

OEM Readiness for NEV’s compared to Tesla and Geely. Tesla are already 100% BEV; Geely Automotive plan to offer 90% NEV products by 2025

There are four ‘must-have’ elements for a conventional auto-maker who wants to adopt electric vehicles: first, the senior management must be committed and aligned with the strategy. Second, they need the money to fund the technology and the transition. Third, the OEM requires control of battery production and technology. Otherwise, much of the potential profit is in the hands of the battery supplier. A number of Giga-factories might be needed in PSA’s case. Finally, a dedicated EV platform is required. It costs more but, without it, the vehicles produced are, at best, an acceptable compromise. For a manufacturer aiming at the mass-market, such as Ford, VW or Toyota, two additional factors are critical: low vehicle build cost and volume market access. The table summarises how the OEM’s in the survey match up to each other on these ‘Must Haves’ and how they compare to Tesla and Geely Automotive.

To find out more, see the rest of the posts in this series which assesses each OEM’s chances of success individually.












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