The German supply chain is collapsing & Legacy autos are only 10% of the way
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Part 1/5:
The Looming Collapse of Legacy Automakers
Two years ago, I discussed the impending troubles facing legacy automakers due to the electric vehicle (EV) transition. It wasn't about them losing money on EVs or their lack of expertise in software - it was about the massive costs of winding down internal combustion engine (ICE) production and refurbishing their factories to produce EVs instead.
Volkswagen's experience in 2019 showed just how costly this process can be. Refurbishing their Zwickau factory to produce EVs cost them $1.3 billion, and the factory still takes three times longer to produce an ID.3 compared to how long it takes Tesla to produce the Model 3. This is not an asset, but rather a massive expense that legacy automakers will have to bear.
The Ripple Effect Through the Supply Chain
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Part 2/5:
The winding down of ICE engines and the refurbishment of factories is now starting to play out, and it's not looking good for the legacy automakers. Their suppliers are facing a "double blow" - as the ICE market shrinks, and the automakers struggle with their EV transition, the ripple effect through the supply chain could be devastating.
A recent survey by the German Association of the Automotive Industry (VDA) reveals a concerning trend:
37% of companies are planning to move investment abroad, primarily to other EU countries, Asia, and North America.
85% of companies are reporting a significant burden from overwhelming bureaucracy.
71% are affected by rising energy costs.
45% of companies are currently reducing their workforce, despite a skills shortage.
Only 1% of companies plan to increase investment in Germany, while 13% intend to cancel investment entirely.
The Desperate Attempts to Cut Costs
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Part 3/5:
The legacy automakers are desperately trying to cut costs and raise prices on their ICE vehicles, but this is not a sustainable solution. Volkswagen and Audi have recently announced price increases on their ICE models, but this is unlikely to solve their problems.
Volkswagen is also making questionable design decisions, such as the new ID.2 EV, which is supposed to convince consumers who are in the market for a "not really low-cost electric vehicle." As Elon Musk explained back in 2012, the lack of demand for electric vehicles is not due to a lack of styling, but rather a lack of good user experience, software, and driving dynamics.
The Expensive Shift Ahead
The legacy automakers are only about 5-20% into the transition to EVs, with the majority of their production still relying on ICE vehicles. The expensive shift has hardly begun, and they are already losing profits and desperately trying to cut costs.
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Part 4/5:
Volkswagen alone has 136 factories around the world making ICE cars, and refurbishing all of these factories to produce EVs could cost them somewhere between $150-$170 billion. This is not an asset, but rather a massive expense that will add to their already substantial debt of over $200 billion.
The Looming Supplier Collapse
The legacy automakers' promise of millions of BEV production has not been fulfilled, and their ICE suppliers are being hit hard by the lower demand for ICE vehicles. As James Martin, an industry veteran, explained, even the winding down of a low-volume ICE engine can cause suppliers to go out of business before production ends.
With ICE car sales expected to fall off a cliff over the next 5-10 years, the ripple effect on the supply chain is going to be massive. The legacy automakers may not be able to get the parts they need to service the millions of ICE vehicles still on the road, further exacerbating the crisis.
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Part 5/5:
The Bleak Outlook for Legacy Automakers
The legacy automakers are in a very dark place, desperately trying to cut costs and raise prices on their ICE vehicles, while their EV plans are lagging behind industry leaders like Tesla. The expensive part of the transition has hardly begun, and they are already struggling with profitability, plant closures, and layoffs.
As the light at the end of the tunnel for the legacy automakers may just be a freight train called Tesla, the future looks bleak for these once-dominant players in the automotive industry.