A critical year for global automotive - our 2023 predictions

Global auto sector is rising – again

Production of new vehicles in the auto industry is still down and below pre-pandemic levels - but it will recover, albeit slowly. The transition to electric vehicles is building momentum. The auto industry has always been exceptionally resilient and dynamic – and it will bounce back.

We’re in a new world. The bad news is that globally over the last three years, we have lost around 46 million new vehicles out of production. We’re not going to get those vehicles back. For the time being, it’s a deficit that is only increasing. It equates to a loss of around 10.7 million new vehicle registrations in Europe. In the UK, approximately two and a half million.

Yet, as many of us have learned, this is a sector with the capacity and resolve to adapt and thrive when faced with volatility. It is hard to predict an exact direction of travel with certainty, but here are our expectations for the year ahead:

Supply shortages will continue

There is no instant remedy to return production volumes for new vehicles to anything we might call ‘normal’. So, while vehicle manufacturing is once again showing an upward trend and we can expect lead-in times to continue to shorten, we’re in an era of significant change.

There’s no doubt the type of vehicle that consumers can access – and how they access it – is undergoing transformation. Vehicles remain a necessity, but higher interest rates and affordability present a growing challenge. As a result, the types of ownership will keep changing and it’s more than likely we’ll see a continued preference towards affordable used cars as the new car replacement cycle that has been enjoyed over recent years, may become out of reach for many.

Subscription models haven’t quite taken off, and many still favour a two- or three-year Personal Contract Purchase (PCP). And although the high demand for used cars has somewhat levelled, it’s a market that remains very safe for now.

Manufacturers, not consumers, will accelerate the transition to EV and Net Zero

The cost of producing any type of vehicle – and battery vehicles especially - is increasing. Essential materials like cobalt, magnesium, platinum and lithium are becoming more expensive and notwithstanding a geographical challenge. China, for example, is ring-fencing some key products and making them harder to source for markets outside of their country borders.

Add to this high interest rates and levels of inflation, with financial challenges facing most EU nations right now, and there are understandable issues around both business and consumer confidence.

These circumstances are dampening a consumer-led demand for new electric vehicles. They could justifiably slow down the supply side too; however, EV remains a high priority for most leading automotive brands. This is being driven by legislation, nationally and globally. There are pressing targets to be met, from the outright ban of new petrol and diesel car sales from 2030 in the UK and 2035 across the EU to the race to achieve Net Zero carbon by 2050. Policies like these, combined with a real threat of fines and sanctions, are driving the pace of change.

Hydrogen vehicle production will likely remain on the fringes for the time being. As such, EV will continue to be an investment heavy market in 2023, although infrastructure still has some catching up to do.

New entrants and new brands will emerge victorious

The game has changed when it comes to popular automotive brands. Consumers are proving to be open-minded and less swayed by brand heritage in the emerging electric vehicle space. With new contenders arriving - including independent start-ups as well as those who are fully backed by global conglomerates - we’re likely to see a very different ‘brandscape’ in automotive over the next couple of decades.

Newer brands from China are looking to gain ground internationally. We will see Chinese manufacturers start to fill the void left by established OEMs as they step away from affordable but ultimately unprofitable legacy models. This means for now at least, many Chinese manufacturers will be focussed on offering ICE and hybrid models, as well as electric.

China has huge acceleration plans in the EV space, but there are barriers from Europe and US if they don’t have any local manufacturing. So, the UK may become an important route to market if it continues this way.

A key year for the agency model

The agency model, or direct consumer model, has been a major talking point over the past couple of years. This makes lots of sense in a world where reputation is everything for business, and a positive experience is so important for consumers. OEMs want to own their consumer relationships without the dealer acting as the middleman. The benefit of the model is that it allows organisations to retain brand loyalty, have fuller control over pricing and profitability, and focus on a better showroom experience.

The landscape of the dealership is changing but if manufacturers get it right, consumers are unlikely to notice much has changed.

2023 presents an opportunity for more manufacturers to take advantage of ongoing supply challenges and recalibrate how they interact with their customers. For example, Mercedes is going live with its agency model in agreement with retailers this year. Our prediction is this will be a catalyst for many others to follow suit.

It has been debated whether our industry has arrived at a Valley of Death when it comes to manufacturing at least. It is correct that overall sales (and therefore production) has dropped off a cliff compared with pre-pandemic levels. But let’s not be so pessimistic. We’re in a situation where it is no longer viable to try and repeat the former successes of the automotive industry as we know it. There is plenty of change afoot and with this, comes uncertainty. But we need a glass half-full mentality. We’re in a valley of opportunity, and 2023 could prove to be a critical year in terms of reaching new horizons.