Throw out the old playbook
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It's more than just tariffs causing the auto industry to buckle at this moment.
- Carmakers face a litany of issues, including regulatory pressures, technological change, powerful Chinese competition and a stagnant sales market.
Why it matters: For decades, the answer to such challenges has been consolidation. But bigger doesn't necessarily mean better, as recent troubles at Stellantis and Volkswagen Group suggest.
- "When an organization grows to a scale of 10 million units, in selling and producing cars, it becomes really troublesome," Toyota Motor Corp. Chairman Akio Toyoda told Automotive News.
- "When you're at that scope, nothing can be decided. Mass production is focused on areas of the lowest cost, and the product becomes a commodity," he said.
Reality check: The old playbooks aren't enough anymore to ensure a sustainable, profitable auto industry, says Lenny LaRocca, U.S. auto sector leader for the consulting firm KPMG.
- "This is a watershed moment for OEMs [original equipment manufacturers] and suppliers to rethink their business models," he tells Axios.
- "The low-hanging fruit has already been done. They knew what to do with COVID, semiconductors and the slowdown in EV sales. Eventually, they have to rethink their structure."
What's next: Instead of outright mergers, carmakers are more likely to form loose alliances to share parts or supply chains, allowing more speed and flexibility, on top of shared cost savings.
- They're also furiously trying to engineer costs out of their vehicles by reducing the number of components and employing new manufacturing techniques like giga-casting, which uses high-pressure die-casting machines to produce big chunks of a car in a single piece.
- Carmakers are also adopting new business models to turn car buyers into lifetime customers — software subscriptions and services, for example, or aftermarket performance parts for car enthusiasts.
One example that's already working is Ford Pro, the automaker's growing commercial fleet business, which has nearly 650,000 subscribers that use Ford software to boost the productivity of their fleets.
- With $9 billion in EBIT profit on $67 billion in revenue last year, Ford Pro is a "hidden gem" that the rest of the industry covets, analysts say.
The bottom line, says AlixPartners' Ganguli: "You have to change to exist."
