Planning with a Scenario Mindset

July 8, 2024

Michael Robinet

Across the industry, strategic planners from OEMs and suppliers alike are scratching their heads. The number of strategic directions they currently face is unprecedented. Combine global trade friction (China tariffs), high interest rates, a pausing EV transition, new OEM players and the U.S. political environment – one could build scenarios all day to cover the possibilities.

Given this rocky environment, a new approach is required. Trusting one base forecast as a basis for all strategic decisions may be inadequate in capturing the major vehicle market possibilities. A quick examination of the key variables underscores the challenge.

Variable 1: Outcome of the U.S. federal election in November

One can feel that there are several significant capital and strategic decisions that may alter the direction of several strategies. Additionally, it is not a case of whether the Democrats or the Republicans control the U.S. presidency, but how. Does the ruling party have a majority on both sides of Congress? What will U.S. foreign policy be from a tariff perspective? How will emissions and fuel economy legislation change, and when? What is the future of the California Air Resources Board (CARB) exemption? Lastly, what happens to commercial and consumer incentives under the Inflation Reduction Act (IRA)? Billions in capital hang in the balance and, as such, scores of decisions will wait until November.

Variable 2: EV growth rates

Partially dependent on variable 1, how will consumers and the industry adjust to EV acceptance that’s seemingly on the flat end of the ‘S’ curve? While any new technology experiences volume gyrations, the recent issues impacting EVs have been more extreme than expected. With many OEMs delaying EV introductions and capital outlays, suppliers are left in limbo. There are a couple of examples of viable internal combustion engine (ICE) and hybrid vehicle plants that have been idled for two-plus years as they wait to transition to producing EVs. Unheard of in our industry. Other decisions, such as continuing ICE vehicle output alongside new hybrids – plug-in or standard gas-electric models must be weighed. Can OEMs and suppliers cover the capital costs and outperform alternative strategies? How and at what rate will the industry drive scale in EVs to bring MSRPs down?

Variable 3: China’s growing BEV position

This one has several layers and is integrated into variables 1 and 2. Many Chinese OEMs have ramped up their EV design and production capabilities. Even a cursory view of the progress made with respect to cost, packaging, design and scale is head-snapping. While this author is apprised of most industry shifts and their relative impact, a recent review of the progress of Chinese-made EVs underscores the challenges the balance of the market faces. No matter what happens with tariffs or protectionist measures instituted by various governments, the competitive structure is set. As several Western OEMs have outlined, they need to learn to compete.

Variable 4: Relatively high interest rates and vehicle affordability challenges

While we have faced high interest rates before (these will eventually fall), experiencing these in the midst of several new EV offerings (with higher prices) has challenged retailers. Add in the lack of used vehicles coming off three-year leases thanks to the COVID impact and you can understand why OEMs will need to sharpen their pencil with respect to costs and incentives to drive volumes for the next couple of years.

There are more variables to consider. Some may be internal to a vehicle subsystem or a specific company. Whatever these are, suppliers need to start planning with a scenario mindset. Understanding the impacts of several “what ifs” may be more important than ever. Planning will require greater flexibility and speed. Welcome to the new automotive reality.