Banks can be the critical link in supporting the auto sector

Viewpoint by Pierre Palmieri, Deputy CEO of the Group posted on LinkedIn on October 2024.

From giga-factories to infrastructure, from fleet leasing to consumer finance, from in-car technology to local regulations… the automotive players need deep insights across the whole value chain to overcome their challenges.

The Mondial de l'Auto 2024, which drew to a close in Paris on 20 October, was an overwhelming success. It also put a spotlight on an industry that is at a crossroads. Car makers, their suppliers, dealers and financiers, indeed, the sector’s entire value chain, are facing unprecedented competition, cost pressures and regulatory evolution – just as they embark on the industry’s most fundamental transformation since Henry Ford started mass production.

The opportunities are huge, but so are the challenges: the way cars are powered, what drivers can do with them, how people own them and finance them… the entire concept of mobility is changing.

The challenges: electrification and automation

Electrification is the primary challenge facing the sector. The switch to electric vehicles (EVs) is proving more complex than anticipated for the industry. Designing new models, creating different supply chains and securing enough critical minerals and batteries at an acceptable cost is just the start.

On top of that, western car makers (or, OEMs) face intense, subsidised, competition from China as well as a fast-evolving regulatory environment at home.

All of this has slowed the industry’s ability to scale quickly, so the cost of EVs remains higher than most people want to pay. Coupled with a lack of charging infrastructure, consumer adoption has slowed over the past year, with EVs making up just 10-15% of new car sales in Europe and the United States.

At the same time, car makers need to figure out how to make vehicles smart. Cars already contain a lot of software but the development of autonomous driving and the prospect of integrating artificial intelligence (AI) add new levels of complexity – as well as a fresh set of competitors. While western OEMs are still figuring out how to go electric, their Chinese counterparts and the likes of Google are spending significant time and money figuring out how AI will influence the future of the car.

Transformation is hard enough when demand is rising. But after decades of expansion, the car market has gone ex-growth. Global auto production peaked at just over 95 million units in 2017 and remains almost a tenth below that level.

That helps explain some recent profit warnings by European car makers. Most OEMs, at least, have strong balance sheets following their post-pandemic recovery. Many Tier 1 and smaller suppliers, as well as battery startups face greater difficulties and are being forced to restructure and mothball facilities, including planned gigafactories.

The industry response: costs and scale

In the face of what appear to be overwhelming challenges, the worst course would be to change long-term strategy. Despite experiencing the growing pains common to most new products, EVs will reach mass adoption in time – the trick will be to bridge the gap until that point.

To do so, OEMs must bear down on their costs. The reality is that most EV models in most markets are still not profitable enough and certainly less so than combustion engine (ICE) vehicles. The obvious issue is the lack of scale.

Reaching scale will require more investment in value chains, including upstream battery technologies, with car makers needing to spread their bets between lithium, nickel and solid-state versions.

Car makers also need to overhaul research & development and augment traditional mechanical engineers with software experts and user interface designers, hiring outside traditional channels, for example from the smartphone industry. Cost is not the only issue behind EVs’ lukewarm appeal; the user experience also needs to be improved.

Public sector support

Simultaneously, charging infrastructure will need to be built out much more rapidly. 

Currently, Europe is adding 2,000 charging points a week; this needs to rise to 14,000 to hit Brussels’ own 2030 targets. Much of this can be handled by private companies and there are innovative business models emerging. But it will require a level of government support.
This is true much more widely, as we cannot ignore the sector’s outsized economic and social contribution – roughly 10% of GDP and 13 million jobs in Europe.

There is also a need for regulatory consistency. Environmental standards that are subject to change and conflict with industrial policy are adding to volatility and raising costs and complexity. The industry needs a holistic and consistent regulation approach and a measure of protection while it transforms itself.

The financial industry across the value chain

Banks like Societe Generale, with a leading car leasing business, can and are playing an active role. Beyond financing electrification and new in-car technologies at scale, and advising on partnership and consolidation opportunities, we have the expertise, upstream and downstream, to support players in their transition. This includes energy and infrastructure, but also car ownership and use, with leasing and consumer finance solutions – which are also ways of boosting EV adoption. 

Even if the task at hand is high, I truly believe there is a path for a bright future with new and profitable business opportunities.