What to expect in ‘rapidly changing' auto industry

FAIRLAWN, Ohio—The automotive industry is transitioning faster than ever before as auto makers target ambitious goals of electrification amidst the market's recovery from a global semiconductor shortage.

Looking ahead, AutoForecast Solutions L.L.C.'s Casey Selecman, director of powertrain forecasts, hit on several key topics impacting this evolving industry during the Rubber in Automotive Conference May 10, organized by Rubber News.

In his presentation, "The Rapidly Changing Automotive Market," Selecman brought attendees' attention to a rebound in auto manufacturing, China's growth in the industry, a realistic perspective on EVs, consumer considerations and more.

"The world is weird," Selecman said. "Things are changing fast."

A couple years ago, AutoForecast Solutions began tracking the shortage of semiconductors and how it has impacted vehicle production.

What it found is a loss of about 8.8 million vehicles across the industry from January 2021 to April of this year.

North America was the most heavily impacted by the semiconductor shortage, Selecman said, noting that China wasn't impacted as much—relative to its size—and Europe is "in between."

This includes nearly 3.5 million vehicles in North America, 360,000 in South America, 2.6 million in Europe, 1.1 million in China, 1.1 million in the rest of Asia, and 32,000 in the Middle East and Africa.

"Those are never coming back," Selecman said, adding that the losses will get smaller as we go forward.

"The automotive industry, in my opinion, has been maybe—a little bit—sandbagging on their efficiency to get back the high levels of chips," he said.

From 2015-19, the automotive industry was in a state of growth, as each region reached its peak production in this time frame. Once the pandemic hit, production dropped off, but ever since, production has been ramping up steadily and is predicted to continue to do so.

In 2016, North America was at its peak with nearly 17.8 million units of light vehicle production. Europe and China saw their peaks in 2017 with 22.38 million units and 27.72 million units, respectively. And Asia-Pacific, less China, saw its peak in 2018 at 23.14 million units, according to data by AutoForecast Solutions.

Selecman said while the numbers looked great leading up to the pandemic, a drop was expected regardless.

"We think about leading up to 2019 and how everything's great, everything's rosy, everybody's making tons of money, this is fantastic. Then the pandemic hits and, 'Oh no!' " Selecman said.

"But we were already coming down before that," he added. "We already hit market saturation in a lot of markets. The 2008 crisis (was) starting to work its way through the replacement cycle, and so there was going to be a natural reduction in vehicle sales in the market anyway."

Selecman said that while the market has returned to a growth phase, we're not likely to see the peaks from the late-2010s until about 2030.

"We're not going to see those peaks again, outside of China, in a really long time," he said.

One of the things AutoForecast looks at when making its predictions is who is making the most vehicles.

Today, that's Toyota, Volkswagen, Stellantis and Hyundai Motor, among other well-known auto makers in the top 10 like General Motors, Ford Motor and Honda.

These makers are likely to stay at the top through 2030, Selecman showed in a list of about 25 auto makers, but not forever.

"The next tier down, we start to see a few (auto makers) that are new to the market," he said, pointing out companies like BYD Co. Ltd., Great Wall Motor Co. Ltd. and Changan Automobile Co. Ltd., among others.

Of the vehicles on this list of top auto producers, "almost all of them that have been introduced in the last 10 years are from China," Selecman said.

"China's still going to be growing. There's going to be consolidations, there's going to be mega-corporations. I don't know that Toyota and Volkswagen are going to be the biggest manufacturers on the planet forever."

Just like Japanese, South Korean and European cars became more popular in the automotive market and climbed their way to the top, China, too, will grow in popularity, Selecman said.

"They'll be here," he said. "There will be new markets, there'll be new products, there'll be all new OEMs to serve, and they're going to grow because they're new and different and that's what the customers want."

The U.S. is pushing for 80 percent of the American auto market to be made up of EVs by 2050, Selecman said.

When he asked the audience who currently owned an EV, however, only one person raised their hand.

"That's about right," Selecman said, noting that EVs make up only about 1-2 percent of the market today.

Yet in just 30 years, the U.S. government is pushing to jump this market share to 80 percent.

Selecman said this is a radical ambition. "Radical like never been done before, never heard of before."

And this isn't just in the U.S., he said. It's in China and Europe, too. "Everywhere in the world changing all at once."

In North America, light vehicle EVs and hybrids are expected to make up nearly 60 percent of the market, by 2030, with about 7 million EVs and 3.3 million hybrids, according to AutoForecast estimates, with an electrification tipping point projected in 2028.

The projection is "going from what essentially is now zero … to 7 million EVs in what amounts to essentially one vehicle cycle. Six years," Selecman said.

"I was back in the six-speed transmission transition back in the 2000s/late '90s, and watching those numbers roll in over 12- or 15-year cycles," he said. "OEMs rolling out technology at that speed, this is faster than that and 10 times the cost."

But OEMs, on the other hand, seem to be even more ambitious—from a global perspective—as they come forward with announcements that they'll be, on average, 92-percent EV by 2040.

AutoForecast's projection is about 55 percent by 2040, globally.

"Ninety-two percent by 2040 is a crazy number. That's impossible," Selecman said. "It's not going to happen. It literally is physically impossible to get to these numbers."

This is due to several reasons, including range anxiety from consumers, infrastructure concerns to support EV charging, the cost of production and, most importantly, limitation of materials.

"Nobody's really talking about (resource limitation) yet," he said.

"The thing that's going to be really, really impactful on electric vehicles is we don't have enough materials to make them. They don't exist, and they take a long time to exist," Selecman said.

For example, to meet the pace of change, he said, we'll need "millions and millions of tons of nickel and copper."

Essentially the amount of nickel and copper used across all industries worldwide today would be needed in the next 10-15 years for cars alone, he said.

"So we need to double the nickel industry by 2032. Just double it in 10 years," Selecman said. "Good luck."

Selecman has an EV himself. And while he enjoys the vehicle, he said he recognizes the concerns of taking such a vehicle long distances.

"It gets really scary when you've got like 30 miles left of energy, and you have no idea where you're going to charge," he said, noting he drove his EV from Detroit to Akron for the RIA conference. "And when you do find something, it's going to take 10 hours to charge it back up."

Not an ideal situation in the middle of the night for a driver on a dark road, he said, joking this is especially the case as a driver with Michigan plates in Ohio.

And these are the kinds of things customers think about when considering the purchase of an EV.

"We talk about politics, we talk about the government's position, what the economic position is," Selecman said. "The thing that's never really talked about is the customer experience and how that customer's experience shapes how they buy cars."

Also critical to the discussion is how much a customer is willing to pay.

Yes, for EVs, but also for any vehicle, as many consumers are getting squeezed out of the new vehicle market.

In 2016, North America had its peak year in vehicle production. At this time, there were 14 auto makers in the region. By 2030, when North America is predicted to hit this peak again, AutoForecast estimates there will be 28 manufacturers in the region.

"We're going to double the amount of manufacturers, and we're not going to increase the amount of vehicles sold," Selecman said.

"So, what does this mean? It means our amount of volume per manufacturer is going down, so your customers are getting weaker over time."

And while vehicle production has lagged since the onset of the semiconductor shortage, auto makers' profits per vehicle have skyrocketed.

"I think there's been the highest profits for vehicles in history for all the auto makers," Selecman said.

And the data reflects this. Monthly payments for new vehicles have jumped significantly in the last 10 years.

In 2008, the average monthly payment for a new vehicle was about $460, according to data from the Federal Reserve. While this jumped to about $500 in 2009, it remained around $460 from 2010-14. Since 2014, the monthly payment for new vehicles has risen to over $700 as of the second quarter of 2022.

Multiple factors have contributed to this, Selecman said.

This includes when the EPA passed CO2 legislation in 2012, causing new technology to hit the market (like turbo engines; six-, eight- and 10-speed engines; and hybrids), as well as "cash problems" and the pandemic.

Selecman noted that the average term for new vehicles was about 60 months, or five years, until between 2012-18.

As the price of vehicles has gone up, the average term for new vehicles has bumped up to about 72 months.

"We added a whole year to the term. Why? Because the cars are getting more expensive. People couldn't afford it," he said, noting these numbers have yet to even factor EVs, which contain additional under-the-hood costs of about $10,000 for their batteries.

And this is a serious issue for consumers.

"If this affordability problem is not solved, people won't be able to buy cars," Selecman said. "We'll bleed out all the people that can't afford cars and put them into something else."

That "something else" is used vehicles. And the used vehicle market responded.

But even the cost of used vehicles has gone "through the roof," Selecman said, noting today's used vehicle costs about as much as a new vehicle did 10 years ago.

And the government knows pricing is a serious problem.

"The IRA (Inflation Reduction Act) is for solving that problem," Selecman said.

The federal government came up with the IRA to solve the EV affordability problem, Selecman said, but in reality it doesn't address it.

"The coolest part of the Inflation Reduction Act is it doesn't solve it. It doesn't solve it at all," he added.

The IRA is a 10-year plan enacted in 2022 that "changed a wide range of tax laws," according to the Internal Revenue Service. One of the more significant aspects of this act, however, is the ability to "claim tax credits for clean vehicles."

Through the IRA, Selecman said, OEMs could receive tax credits per electric vehicle up to $7,500. The act intended to lower upfront costs for consumers by making EVs more affordable to produce for manufacturers.

"But the OEMs are not going to drop the price. They know what the price is. They're going to raise the price. So that when the incentive comes in, it comes down to the market price that they know you will pay as a customer," Selecman said.

Initially, however, the act had a 200,000 vehicle-per-manufacturer cap, so when OEMs lost the tax credit, they did drop the prices of their EVs.

Two examples of this are GM's Chevy Bolt and Ford's Mach E.

"The Bolt, they canceled it, but before they said they were going to cancel it, they dropped the price of that vehicle by about $6,000," Selecman said.

"They dropped it because they ran out of tax incentives," he speculated. "GM knows what the market will pay for that car … $6,000 or $7,000 less than what they were charging on the sticker."

Ford did the same with the Mach E, he said. "They lost $3,700 on the credit. Then, strangely, all the prices dropped by $3,700."

This cap has since been removed, bringing more vehicles under the tax credit eligibility.

Meaning the prices on EVs will climb again. Meaning the IRA is just extra profit to OEMs.

"All this IRA is, is extra profit," Selecman said. "… It's obvious to me that the IRA is going to have really no impact on EV sales in this country."