Autos Key Themes For 2022

Fitch Solutions / Autos / Global / Fri 10 Dec, 2021

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Key View: Many of our Autos key themes for 2022 relate to the industry's response to events of 2021, including supply chain disruptions, rising costs and increasing decarbonisation goals. However, we also expect to see a growing emphasis on some areas of the industry that were deprioritised while dealing with the Covid-19 pandemic, such as autonomous vehicles and how to commercialise them

Themes Description Metrics Winners Losers
Outlook For 2022 Global vehicle sales growth will be positive in 2022, but supply chain disruptions will continue to keep sales from reaching full potential. Sales data Used car market; premium brands prioritised for chips Low-margin brands not prioritised; new sales-only dealers
Supply Chain Disruption In Response To Events Of 2021  The covid-19 pandemic has resulted in supply chain disruptions that have created problems in the autos supply chains. We believe OEMs will seek to shorten supply chains while traditional component manufacturers will ramp EV component manufacturing. Investment Round-Ups, Company announcements OEMs with more flexibility to make changes to supply chains Inflexible traditional OEMs 
Inflationary Pressure On Green Transition Rising battery costs will create downside risks for EV Adoption especially in markets that offer little to no incentives. Rising metals costs will also result in innovations in materials used for light-weighting  Metals prices  Automakers that will make the shift towards LFP batteries and utilize new innovations in materials technologies  Developing markets that offer little to no EV incentives
Autonomous Vehicles Gain More Traction Following the numerous accounts of driver shortages, logistics hub shutdowns due to Covid-19 and the drive for reduced human contact in key transport roles, we will see a renewed push to develop autonomous vehicles. Company announcements Autonomous vehicle startups and the associated supporting technology companies Potentially logistics companies as clients build their own fleet
New Players Enter The Industry After Profitable 2021 A host of new players will enter the autos industry from the technology and oil & gas industries, in addition to a number of autos start-ups. Investment Round-Ups, Company announcements Consumers will benefit from new actors offering diverse products. Long-standing Automakers
Increased Battery Regulation As Supply Chain Expands Safety regulations on lithium-ion batteries (LiBs) will need to be codified in order to manage the safety hazards particular to LiBs Government policy Consumers and governments Battery manufacturers whose cells do not meet requirements
Source: Fitch Solutions

Supply Chain Pressures Still Weigh On 2022 Sales Outlook

We forecast total global vehicle sales to grow 5.3% in 2022, which is a slowdown from the 12.8% estimated for 2021, although it should be noted that there were significant low base effects at play in 2021 from the damage caused by the Covid-19 pandemic in 2020. While growth levels will be lower in 2022, sales volumes will return to and even surpass the pre-pandemic levels. We forecast total vehicle sales of 95.5mn units in 2022, compared with 92.6mn in 2019.

While this return to growth will be a global trend and we forecast all regions to achieve positive sales growth in 2022, there will be still be relative outperformers and underperformers. Sales volumes in Latin America, for example, will remain below pre-pandemic levels as we forecast growth of just 2.3% owing to the ongoing struggles with the Covid-19 pandemic and resulting economic weakness. In contrast, we forecast sales in the Middle East and North Africa to grow by 12.4% and surpass 2019 volumes as economic recovery in key markets, particularly in the Gulf Co-operation Council, gains pace.

Supply Chain Pressures Limit Growth Potential

Global Vehicle Sales By Region, % chg y-o-y

Note: Includes territories and special administrative regions. f = Fitch Solutions Forecast. Source: Fitch Solutions

That being said, a number of the supply chain pressures that limited sales growth in 2021 will remain in place heading into 2022 and provide downside risk to this outlook if not resolved. Carmakers are reporting a gradual easing of the global semiconductor shortage. However, ramping up new capacity takes time and investment and while we have seen several announcements relating to new chip plants, many of them will not come online in 2022, and any disruption to existing capacity, such as some of the weather-related incidents of 2021, could set back the recovery. Similarly, shipping delays caused by extra Covid protocols and closures of some ports and border crossings are likely to continue, at least in the early part of the year. These and other risks to the supply chain could see the shortage of inventories that has plagued the industry and dampened sales growth in 2021 continuing to some extent in 2022.

New Players Enter The Industry After Profitable 2021

We forecast that a host of new players will enter the autos industry in 2022, the majority in the electric vehicle (EV), autonomous vehicle (AV) and fuel cell electric vehicle (FCEV) supply chains. While many businesses have been adversely impacted by the global pandemic since 2020, a few industries and sectors, such as shipping, e-commerce, mining and commodities, technology and battery manufacturing have performed well and reported record profits over 2021 (see graph below). We believe that the companies that managed to generate strong profit growth will be among the new players to invest in the automotive industry in 2022 as the industry is set to expand and develop rapidly over our 2022-2030 forecast period.

Record 2021 Profits Listed By Breadth Of Industrial Players

Semi-Annual Net Profit, USD

Source: Fitch Solutions

After a highly profitable year in 2021, EV battery manufacturers have begun to enter the autos space. One notable example is Chinese battery maker, CATL, who invested in EV startup, Aiways. We foresee other top battery producers, such as LGESPanasonic and SK Innovation expanding their presence in autos in 2022. We expect that technology companies, such as Apple, will continue investing in the industry in order to be the main provider of software and electronic components within vehicles, particularly for EV, AV and connected cars. This poses a downside risk to automakers, as business models from other industries may disrupt standard practice in the automotive industry. Mining and Commodities firms will likely continue to diversity their portfolios by investing into EV supply chains; in 2021 we have seen mining and commodities firm Glencore investing into EV Gigafactory projects, such as Britishvolt in Northern England, and the Anglo-Australian mining company Rio Tinto investing into the EV battery firm, InoBat. We also expect that increases in government subsidies will spur the arrival of new EV start-ups. Governments have re-committed themselves to national climate targets at COP26, and these targets rest on the expectation that EV penetration rates will grow exponentially in the next five years. Consequently, we expect there to be a rise in EV-related government subsidies, and as a result, an increase in new EV startups. Informing this forecast is the trend that has played out in China, where strong consumer subsidies have spurred the arrival of three EV unicorns, Li AutoNio and Xpeng that have collectively raised USD3.6bn in IPOs since 2019. We also expect to see the growth of existing luxury EV brands to cater to higher income consumers in developed markets.

We also expect that companies already operating in the EV battery supply chain will diversify their products and vertically integrate their supply chains. We’ve noted in 2021 that high-volume automakers have already begun to alter their supply chains in order to reduce their technological, geographical and geopolitical dependence on individual suppliers (see graphic below). 

Major Changes Ahead For The Global EV Supply Chain Trends, But China Will Maintain Its Dominance For Now

Electric Vehicle Supply Chain - China's Share Of Production, 2021 (%) & Fitch Solutions Outlook

Source: Benchmark Mineral Intelligence, CNBC, Fitch Solutions

Actions that automakers will take to achieve this goal include vertically integrating their upstream activity via joint ventures and partnerships with mining firms and constructing Gigafactories to self-produce lithium-ion batteries (LiBs). In particular, we expect to see an increase in automakers introducing battery recycling into their supply chains to create a 'closed loop' or 'circular economy' in order to reuse retired LiBs (see graphic below). This will be incredibly attractive to automakers as the process will enable the critical raw materials included in the LiBs to be re-supplied to automakers, which in turn reduces the risks that automakers are exposed to in the metals supply chains. Amid the rise of evermore stringent climate regulations, we expect that battery recycling will grow exponentially in 2022 and that a large number of leading automakers will increase their capacities in various locations around the world.

Players In The Battery Industry Looking To Recycling For Sustainability Boost

The Circular Economy of LiBs

Source: Fitch Solutions

Increased Battery Regulation As Supply Chain Expands

Global EV demand has risen rapidly over the past five years and the increase in EV sales will be exponential over the next decade. We expect global EV sales to reach over 26.7mn units in 2030, representing year-on-year (y-o-y) growth of 379.0% on 2021. However, we note that in 2022, safety regulations on LiBs will need to be codified in order to manage the safety hazards particular to LiBs. This will be pertinent given the string of fires that have been caused by batteries from a range of top EV battery manufacturers, including CATL and LG Energy Solution. From 2019 to 2021, AudiPorscheHyundai, Nio and General Motors have all needed to issue fleet recalls to protect consumers from potentially faulty batteries. Consequently, we expect that we will see an increase in the number of countries passing new regulation on EV batteries in 2022. We expect that regulation will provide policies on the quantity and types of metals included in battery chemistries, alongside safety labelling and testing requirements. Moreover, we expect some countries to introduce ESG regulations that require the metals included in EV batteries to be sourced sustainably.  

We expect countries with high EV adoption rates, such as Norway and Sweden, will mirror the regulation enacted by the EU in 2020. The EU’s Circular Economy Action Plan states that from January 2026, EV batteries will include an electronic record, or “battery passport”, to provide users with information about the state of health and expected lifetime of the battery, in addition to the levels of flammable metals within the battery cells. The policy also includes stringent quotas on battery recycling including quotas on recycling efficiency. For example, the policy notes that by 2030, recycling facilities must have recovery levels of 95% for cobalt, copper, lead and nickel, and 70% for lithium and provide carbon footprint declarations. While we do not expect other governments' legislation on recycling to be as stringent, it is likely that countries with pre-existing legislation on battery recycling (see graphic below) will begin to factor in sustainability and emissions concerns into their policies in 2022. 

Regulation On EV Battery Recycling Differs Across The Globe

Map Of Contrasting Regulatory Policies On Battery Recycling

Source: Fitch Solutions

Vehicle Autonomy Will Gain More Traction

Following the numerous accounts of driver shortages, logistics hub shutdowns due to Covid-19 and the need for reduced human contact, we will see a renewed push to develop autonomous vehicles over 2022. This will be further supported by our view that a host of new players will enter the autos industry in 2022. Specifically, we note that semiconductor manufacturers and developers will look to use their strong profits over 2020 and 2021 to invest in the autonomous vehicle industry as the demand for semiconductors will be greatly impacted by autonomous vehicles due to the high processing power required.

In October 2021, Taiwan Semiconductor Manufacturing Company (TSMC), the worlds largest semiconductor maker (see chart below), announced a Q321 revenue increase of 16.3% y-o-y and a net income growth of 13.8% y-o-y. Additionally, the chipmaker increased its forecast for Q421 revenue and net income growth outlook to take into account the continued strong demand for semiconductors. This same trend is playing out throughout the semiconductor industry. For example, in November both Samsung and Intel invested in an autonomous vehicle sensor start-up Trieye. Additionally, we could see more autonomous vehicle startups going public over 2022 as investors look to capitalise on the strong demand for autos related stocks. Indeed, In December 2021, Intel announced that it was going to take Mobileye public in 2022 (which Intel bought in 2017 for USD15.3bn). Mobileye is expected to be valued at over USD50bn. This high valuation will prompt further investment in the autos sector, especially relating to autonomous vehicles, which are set to be the next major shift in the automotive industry. 

TSMC Untouched By Rivals

Semiconductor Foundry Market Shares, % (Q221)

Source: Counterpoint Research, Fitch Solutions

With regards to autonomous vehicle development and testing, we expect autonomous taxis and autonomous heavy commercial vehicles to take the lead. From an autonomous taxi perspective, we believe that taxis offer the best real-world testing environment for the planned mass-market autonomous vehicles and given the need for a fast internet connection and the still relatively limited coverage of 5G networks (which we highlight as a crucial component to develop autonomous vehicles) will allow testing to take place on a pre-set taxi route. Currently, autonomous taxi development is being led by China, as over 2021 the Chinese authorities have been very accommodating when granting autonomous vehicle testing licenses. Indeed, in November 2021, the Beijing High-level Automated Driving Demonstration Area gave permission for Baidu and Pony AI to offer their autonomous taxi services to the general public. While China is not the only country attracting autonomous vehicle-related investment, it is currently leading as many other countries still have regulatory barriers to developing autonomous vehicles.

For autonomous commercial vehicles, or more specifically trucks and other logistics vehicles, we expect a more diverse development program as countries from China, to the UAE and the US are keen to boost the level of automation in their respective ports. Furthermore, we highlight that countries ranging from the UK to Australia and the US have faced quite severe truck driver shortages over 2021, which will continue to impact global logistics networks and which will see countries promote the development of autonomous long-haul trucks. In December 2021, Australia's Mineral Resources announced a partnership with Hexagon to develop an autonomous road train solution to reduce its supply chain risk. We also highlight that the Australian army's autonomous truck trials of its “leader-follower vehicle” technology will also boost the industry's development as military R&D tends to trickle down to the civilian market over time. In the US, Waymo (Google's autonomous vehicle unit) announced in November 2021 that it will be using Peterbilt semi-truck equipped with its autonomous vehicle tech will be used in delivering packages for UPS’s North American Air Freight unit between facilities in Dallas-Fort Worth and Houston starting in December 2021.

Supply Chain Disruption In Response To 2021 Events

The Covid-19 pandemic has resulted in supply chain disruptions in the autos supply chains. We believe there is a theme gaining prominence among OEMs in the strengthening of supply chains to make them more resilient to supply bottlenecks. One of these themes we believe will gain prominence in 2022 is the shortening of supply chains through the use of additive manufacturing and the proliferation of micro-factories to strengthen supply chains. Volkswagen has indicated that it will expand on its 3D printing innovation in vehicle production that would allow the automaker to manufacture components to improve on its production processes. 3D printing allows for OEMs to reach their markets faster, and bringing new products into market more swiftly while shortening supply chains. This will be especially important in 2022 as OEMs reshape their supply chains to ensure disruptions witnessed in 2020-2021 are not repeated.

Micro-factories will also play a more crucial role in the autos industry as one of the strategies to shorten the supply chain as operations that supply a particular factory are positioned close to the end destination. Instead of one major operation, OEMs can thus break down their operations into smaller factories that are able to produce a plethora of products using 3D printing and artificial intelligence to achieve flexibility and throughput without relying on larger operations that require longer shipping times. Artificial intelligence will also be deployed as this technology offers better inventory management capabilities to increase efficiency. We anticipate newly formed companies to take advantage of this production process as more established players would have to make changes to their production process and forgo any advantages of this production process amid the already large capital outlaw these firms have already committed to. Arrival, an EV start-up, will be deploying the micro-factories production process with 30 such operations planned for 2024, while it plans to retrofit an existing warehouse to begin production in Q322.

Lastly, we anticipate an acceleration in R&D and investments by traditional component manufacturers to better suit a changing demand landscape from automakers as a result of EV adoption that has accelerated in recent years. Products such as thermal management systems, electric motors and charging ports will experience more demand as automakers ramp up their EV model offerings globally. Micro-factories and additive manufacturing techniques offers some of the traditional vehicle component manufacturers more flexibility in bringing products to market. We also anticipate more partnerships, mergers and acquisitions to accelerate in 2022 as OEMs position themselves to supply the automotive industry with emerging products going forward.

Upside Risks On Battery Prices Could Slow Global EV Adoption

Battery prices will remain high in 2022 as a result of elevated battery metals prices due to increased demand amid the race to electrify the global vehicle fleet. As battery metals remain one of the largest contributors to the cost of battery manufacturing, higher prices in 2021 will squeeze the profit margins of battery manufacturers and automakers alike as more EV models are deployed. We therefore expect higher input costs to result in upside risks for battery prices in 2022 as OEMs enter into long term agreements with mining firms for the supply of key metals at substantially higher prices. However, we expect the shift towards more cost-effective Lithium Iron Phosphate (LFP) battery chemistries to tame the rising costs associated with more nickel-rich chemistries. Indeed, automakers such as Tesla and Ford have announced such plans to utilize more LFP batteries. The move towards cell-to-pack battery structures that do away with battery modules while cutting costs will also be more broadly implemented by automakers to ensure that rising costs are only limited to the battery cell level and ensure automakers can deploy more EVs amid heightened demand globally.

Automakers Will Shift To LFP Battery Chemistry As Battery Metals Prices Surge Higher

Global – EV Sales By Battery Chemistry Type, %

e/f = Fitch Solutions estimate/forecast. Source: Company Announcements, Fitch Solutions

Light-weighting Techniques Due For A Disruption

Since EVs are heavier than internal combustion engine (ICE) powered vehicles, automakers have in the past resorted to reducing the overall weight of such vehicles through light-weighting techniques through the use of aluminium. Due to rising aluminium prices, we anticipate automakers to employ a plethora of new technologies to replace metals that have experienced rising costs with more cost-effective options. Carbon-fibre reinforced thermoplastics are some of the materials being looked into as a possible substitution of aluminium amid high metals prices. We expect automakers to start looking into possibly integrating these thermoplastics to reduce the need for metals.  Indeed, we anticipate the development of battery technologies to go hand in hand with developments and innovations in new materials to reduce the overall weight of EVs.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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