AN AUTOMOTIVE DOWNTURN IS COMING- IT'S TIME TO PREPARE - Boston Consulting Group
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AN AUTOMOTIVE
DOWNTURN IS COMING—
IT’S TIME TO PREPARE
By Brian Collie, Jonathan Van Wyck, Carsten Schaetzberger, and Katie Milliken
A uto OEMs and suppliers have
recorded their longest stretch of
continuous growth in history. That’s worth
Navigating the next downturn will require
a very different playbook from the ones
that worked in the past. Strong funda
celebrating. But a number of indicators mentals such as managing cash and
suggest that momentum has slowed. Sales inventory will continue to be important,
of new vehicles are down this year from but the winning companies will also back
last year’s figures across the US and Europe, bold plays and commit to growth. Leaders
consumer sentiment has weakened, and need to act now to develop a clear plan,
loan delinquencies are on the rise. As Mike build downturn-ready processes, and invest
Jackson, the executive chairman of Auto to win by doubling down on strategic bets
Nation noted, “It’s getting harder to sell that will secure their future.
cars, and that signals the auto industry is
about to enter a period of decline.”
Economic Momentum Is
The precise timing of the next downturn is Weakening in the US and
difficult to predict, but when it hits, the Europe
impact will be unlike anything the auto in Although the US and Europe continue to
dustry has experienced. In addition to enjoy economic growth, a number of signs
managing falling volume, auto OEMs and suggest that the business cycle may be
suppliers will have to deal with massive reaching its peak. Globally, GDP forecasts
shifts in mobility and digital transforma show signs of softening, with China expect
tion. Business models and markets are ed to lose 60 basis points in growth be
changing, and so is the competitive land tween 2018 and 2020; the EU, 40 basis
scape, as tech and other nonautomotive points; and the US, 100 basis points. The
entrants look to press their natural advan Asian auto market appears to have storm
tages and capture market share in this new clouds of its own, but our clients are in
environment. creasingly asking us about the outlook forthe US and the EU, amid growing specula years in 2019—older than at any other
tion that a downturn there may be immi time in recent memory. Over the past ten
nent. Meanwhile, global trade uncertainty years, auto financing levels have increased
and increasing trade restrictions threaten at nearly three times the rate of median
to destabilize economies around the world. household incomes (19% versus 7%), and
Total trade volume in North America is auto interest rates are ticking upward, al
projected to decline, according to the though they remain low by historical stan
World Trade Organization. dards. The third driver is that higher incen
tives seem not to be generating higher
To address the question of what’s in store sales, despite growing from 15% of MSRP
for the US and European auto markets, to 22% from 2010 to 2019.
BCG examined macroeconomic and auto
motive industry variables for each region.1 All told, auto sales for the period from Jan
Our modeling found that although auto uary to April 2019 are down by roughly 2%
markets on both sides of the Atlantic have to 3% compared with the same period in
enjoyed unprecedented growth in recent 2018. Our analysis suggests that this trend
years, the ground is starting to shift. (See will continue, with sales likely to end the
Exhibits 1 and 2.) year 4% to 5% lower than in 2018. By 2020,
the entire US economy is expected to slow.
Between 2010 and 2018, vehicle sales in We project that the impending slowdown,
the United States grew from 11.7 million combined with a number of auto-specific
units to 17.7 million units, an increase of factors, will result in a cumulative drop in
50% (approximately 5% CAGR). Not since auto sales of 9% to 15% by 2021. That said,
the 1950s have US automakers experienced even though financial pressure is growing,
a similar, nearly decade-long run of strong OEMs still have some time to prepare, since
sales growth. But three drivers underlie a the trough of the downturn won’t arrive for
potential automotive downturn. One is a at least another year. Moreover, the down
weakening economic outlook, as GDP is ex turn is unlikely to be as severe or protract
pected to decline between 2018 and 2020 ed as the 2008 recession. GDP, unemploy
and consumer sentiment is likely to remain ment, and consumer prices should all
mixed. A second driver is the possibility of bounce back without the reaching ex
an oversold market. The average age of a tremes of the Great Recession, and we an
car in the US is projected to inch above ten ticipate that OEMs, suppliers, and the econ
Exhibit 1 | The Auto Industry Has Enjoyed an Unprecedented Period of Growth
Nine years is the US’s longest stretch of growth since 1950 Five years is the EU’s longest stretch of
without a >2% drop or multiyear stagnation growth since 1999 without a >2%
3 years 3 years 5 years
drop or multiyear stagnation
(1971–1973) (1983–1985) (1996– 2000)
4 years 3 years 3 years 9 years+ 5 years 2 years 5 years+
(1962–1965) (1976–1978) (1992–1994) (2010–2018) (1994–1999) (2006–2007 (2014–2018)
20 20
Europe Union vehicle sales
United States vehicle sales
15 15
(millions of units)
(millions of units)
10 10
5 5
0 0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010 2018
Sources: IHS Markit; US Bureau of Economic Analysis.
Boston Consulting Group | An Automotive Downturn Is Coming—It’s Time to Prepare 2Exhibit 2 | Car Sales Are Likely to Fall by 9% to 15% in the US and by 5% to 10% in the EU by 2021
US total new car sales 2003–2023 EU total new car sales 2003–2023
(millions of units) (millions of units)
20 ~10% drop in car 20 ~5% drop in car
sales under average sales under average
downturn conditions downturn conditions
15 15
Decrease initially fueled by
weakening auto demand and
accelerated due to macro downturn
10 10
2014 2016 2018 2020 2022 2014 2016 2018 2020 2022
Historic Average downturn Major downturn
Sources: IMF; US Bureau of Economic Analysis; Federal Reserve; CBO; US Census Bureau; EIA; BCG analysis.
omy as a whole will return to growth by hicles usually take less of a hit during a
2022 to 2023. contraction—because their buyers tend to
be less price sensitive—and that pattern is
Meanwhile, car sales across the EU have expected to remain true this time around,
also been robust. Over the past five years, as well. The downturn is unlikely to halt
new car volume has grown by roughly 4% the massive shift away from cars toward
year over year, from 14.1 million units sold SUVs and trucks, a shift that is more pro
in 2014 to 17.3 million in 2018. That five- nounced in the US than in Europe. Volume
year stretch marks the longest period of in that segment will slow as market condi
unbroken growth in Europe since 1999. tions weaken, but in-segment substitutions
Although market dynamics tend to be less will offset the slide to some extent, as
cyclical in the EU than in the US, regional value-conscious consumers embrace cross
patterns suggest that the fundamentals overs. Although shared autonomous elec
have deteriorated. Our data revealed a ma tric vehicles (SAEVs) are not likely to con
jor decrease in consumer optimism, with stitute a meaningful portion of new car
specific auto indicators weakening as well. sales for another decade or more, OEMs
Auto loan default rates are on the rise, and and tech players that cut back on their in
demand for driver’s licenses among young vestments in this area during the downturn
people has fallen. In England, road tests could harm their long-term growth.
are at record lows—having fallen almost
30% since 2008. Our modeling suggests that
growth will flatten in the next 12 to 16 The Next Downturn Will Come
months, with an actual decline likely to oc Amidst Massive Industry
cur around 2021—meaning that OEMs and Disruption
suppliers still have time to act. We expect Although forecast details vary, one thing is
the downturn to eventually lead to a 5% certain: this downturn will be very differ
drop in sales, although more-severe condi ent from anything we’ve seen before. Over
tions could worsen that figure to 10%. As the next 15 years, three converging trends
with our US forecast, however, we expect will permanently reshape the automotive
core model inputs in the EU to remain sta landscape: vehicle electrification, autono
ble and sales levels to return to positive mous driving, and shared mobility.
growth by 2022 or 2023.
As the market moves from cars to SUVs
Regional variations aside, all automobile and trucks—and from traditional internal
segments will see a drop in sales during the combustion engine (ICE) vehicles to elec
downturn, but some segments will fare bet tric vehicles (EVs) to SAEVs—companies
ter than others. For instance, premium ve must transform their product offerings and
Boston Consulting Group | An Automotive Downturn Is Coming—It’s Time to Prepare 3their production capabilities to meet shift make aggressive market moves, leveraging
ing consumer preferences. Ford and GM their heightened valuations by using equity
have publicly committed to significant in as currency. The growing field includes big
vestment in this segment in 2019. They and tech companies, specialty OEMs such as
other major OEMs must stick to these com Tesla, mobility providers such as Uber,
mitments if they want to be ready to capi on-demand platforms, and niche startups.
talize on the expected timeline for consum To defend their market share, incumbents
er adoption. Similarly, suppliers need to will have to update their product offerings,
understand how to selectively invest to po refine their differentiation, and revisit their
sition themselves for growth as this trend partnership arrangements—all while hold
develops, even in a softening environment. ing their ground against traditional peers.
Digital will become the de facto way of op Managing this balancing act during a peri
erating along the value chain. Advanced od of slumping sales will take foresight, dis
automation, AI, and additive manufactur cipline, and commitment.
ing will reshape traditional processes. Con
trol towers will provide real-time visibility
of the supply chain, and personalization Business as Usual Will Not
tools will change the way OEMs conduct Work
marketing. Staying competitive will require Auto companies that attempt to ride out
investing in new technologies and adapting the downturn by hunkering down and ap
existing processes. plying the budget-slashing tactics they used
in 2008 will emerge critically weakened—
EVs may represent the future, but today outflanked by competitors inside and out
consumers are still buying gas-powered side the industry that continue to aggres
vehicles. Consequently, OEMs must find a sively invest throughout the downturn.
way to maintain legacy ICE powertrain
assets while building capabilities around This time around, businesses must do more
EV drivetrains in parallel. OEMs must than simply survive the downmarket. They
adapt their production capabilities to meet also need to survive what happens after
shifting consumer preferences, even to the the downmarket ends. Our analysis of in
point of reconsidering historical make- dustry outperformers in past downturns
versus-buy models, such as the decision to found that growth heading into a downturn
fully own all ICE capabilities. was more strongly correlated with financial
health than traditional debt levers and ex
Profit pools are changing, too. Our model pense reduction. OEMs and suppliers that
ing suggests that sales of autonomous ve focused on enhancing revenue growth, im
hicles (AVs) and EVs, related components, proving capital efficiency, and generating
data and connectivity services, and on- cash during the final year before either of
demand mobility offerings will account for the past two downturns struck emerged
40% of total industry profits by 2035, up from the past two corrections with the
from just 1% in 2017. Cars that use alterna strongest shareholder returns.
tive powertrains such as electric power,
fuel cells, and plug-in hybrids are already Going into this downturn with flexibility
seeing substantial growth. Suppliers should and momentum will be even more import
begin looking now for ways to create com ant. To release funding power and protect
petitive advantage in the new mobility their critical strategic investments, OEMs
market. For instance, the prospect of radi and suppliers will need a different set of
cally redesigned SAEV interiors may give guiding principles than they relied on in
suppliers significant opportunities to create the past. The good news is that there is still
differentiated experiences. time to develop a plan. Some indicators are
indeed softening, but the underlying eco
As the pace of convergence accelerates, nomic picture remains strong. Rather than
well-funded tech challengers are likely to pulling back from the challenges ahead,
Boston Consulting Group | An Automotive Downturn Is Coming—It’s Time to Prepare 4businesses should use this period to take of current market dynamics, analysis of
bold, proactive steps that will give them a cash flows, and assessment of risk exposure
decisive competitive advantage over the and breakeven volumes along the entire
rest of the field. value chain. One aspect of defining a
company’s true north involves being clear
about how the company wants to balance
How Automotive Companies investments in traditional business against
Can Seize the Upside in a new mobility. Once the company’s leaders
Downturn have identified priorities, they need to put
The coming years will undoubtedly intro mechanisms in place to ensure that critical
duce new uncertainties and challenges, but long-term investments will not be jetti
OEMs and suppliers that create a down soned when things get tough.
turn plan, build downturn-ready processes,
and invest to win can use the downturn as Build downturn-ready processes. The
an opportunity for renewal and advance companies that outperform their rivals
ment. (See Exhibit 3.) during the next recession won’t be the
skinniest; they’ll be the fittest, with lean
Create a downturn plan. Companies need operations, flexible systems, and agile work
to go into the downturn with as much practices. Companies must look holistically
momentum as possible. Volume is already across their business and evaluate every
dropping, and leaders should agree on a thing from product creation to go-to-market
plan of action immediately. To maximize strategies and be prepared to challenge
flexibility and preserve funding power, sacred cows. To prepare their business for
automakers must align on their strategic the coming downturn, leaders should focus
and operational priorities, such as protect on the following tasks:
ing market share or maintaining profitabil
ity. Those priorities will serve as a true •• Simplify the offering. By raising
north to help the business navigate the hurdle rates on their investments,
recession—providing important clarity and limiting cost proliferation, and seizing
avoiding costly delays in decision making opportunities to cut products and
by managers and partners at every point programs that either are not aligned
on the value chain. Defining those priori with the company’s long-term ambi
ties is not a casual exercise. Given the tions or have delivered borderline
evolving mobility landscape, successful performance, OEMs and suppliers can
execution requires a deep understanding stretch capital and free up the resources
Exhibit 3 | Now Is the Time to Prepare Systematically for the Next Downturn
Create a plan Build downturn-ready processes Play to win
Deeply know Protect your
your context Simplify Take a new Reinvigorate Maximize big bets
Strengthen
offering and approach to manufacturing net price
go-to-market
Assess your stretch capital product cost productivity realization Seize nonorganic
structural health opportunities
Prioritize Win in the
the portfolio Build a leaner, faster, more flexible organization aftermarket
Source: BCG analysis.
Boston Consulting Group | An Automotive Downturn Is Coming—It’s Time to Prepare 5needed to accelerate development of •• Build a leaner, faster, more flexible
critical consumer-facing features. organization. Management should use
the downturn as a time to strategically
•• Adopt a new approach to product restructure the organization and attack
cost. The near-term priorities are to bureaucracy by realigning resourcing
identify exposures and opportunities, levels, embedding agile ways of work
create supply optionality, ensure supply ing, and accelerating results. Companies
flexibility, and scrutinize individual that eliminate waste effectively can
supplier risk. Beyond that, OEMs and channel their savings into other critical
suppliers should partner more closely, activities.
jointly identifying opportunities to
drive efficiency, remove bureaucratic Invest to win. Cash-rich tech giants and
processes, and eliminate requirements nonautomotive entrants will be on the
that are out of line with industry lookout for capital-constrained OEMs and
standards. They should also avail suppliers. Many will be eager to capitalize
themselves of digital tools and dash on the industry’s disruption to consolidate
boards to improve data sharing and assets at bargain prices. Automotive
transparency. leaders need to preempt such maneuvers
by adopting long-term thinking, prioritizing
•• Reinvigorate manufacturing bold strategic bets, and ring-fencing the
productivity. Business leaders should investments necessary to secure their
pressure-test their manufacturing future. At a time when outside funding
footprint against different volume may be hard to come by, automotive
scenarios so they will be ready to align players may find value in partnering to
capacity with demand when the need create scale in new mobility and other
arises. Operations leaders should take a long-term investments.
similar approach in addressing their
sales and operations planning processes Now is the time for leaders to review their
and systems. Another priority is to M&A pipeline and identify promising stra
stabilize underperforming plants, tegic partners that can fill gaps in the com
especially with regard to increasing pany’s portfolio—keeping future mobility
labor and production flexibility and and AV needs in mind. A downturn can
reducing inventory. present attractive opportunities to acquire
critical talent and capabilities inside and
•• Maximize net price realization. outside the traditional auto sector. Well-
Rather than automatically resorting to placed investments can enable an auto
discounts that might hamstring the maker to leap ahead of slower-moving
business’s cash position, leaders should peers and gain a significant edge in innova
build a granular understanding of tion, development, and speed to market.
pricing effectiveness, managing the Companies that use the period before a
tradeoffs between higher production downturn to prepare themselves for it will
costs and maximized economic profit be better positioned to seize attractive val
from discounts and incentives. uations when they arise.
•• Strengthen go-to-market planning. Companies should also assess their port
OEMs and suppliers need to perform folio and identify countercyclical growth
downturn-specific segmentation to opportunities. For example, in the after
anticipate which customers and dealers market, OEMs and suppliers should under
are likely to be most affected by a take a granular, category-by-category assess
downturn. Using those insights, they ment of their parts and services leakage.
can develop differential strategies to Those insights can help them adjust their
prioritize and direct marketing activi offering, pricing, and inventory levels and
ties, digital engagement, and personal see where to apply telematics data to tar
ization initiatives. get and engage customers more effectively.
Boston Consulting Group | An Automotive Downturn Is Coming—It’s Time to Prepare 6I t’s increasingly clear that the auto
motive industry is in the early stages of a
downturn. But while contractions are a
Note
1. BCG analyzed a number of historical macro
economic and automotive industry variables, as well
as forward-looking assessments that included
time of uncertainty, they also introduce sig detailed sales projections, economic forecasts, and
nificant value-generating opportunities. assessments of the potential impact of new mobility.
Multivariate regression models incorporated
Businesses that act quickly and decisively adjustments for the length and depth of previous
to embrace a new and more strategic play recessions and included assumptions about the
book will not only rebound faster from the timing and volume of adoption of shared
autonomous electric vehicles.
next downturn but also come out of it
stronger than they were before.
About the Authors
Brian Collie is a managing director and senior partner in the Chicago office of Boston Consulting Group; he
leads the automotive and mobility sector globally. You may contact him by email at collie.brian@bcg.com.
Jonathan Van Wyck is a managing director and partner in the firm’s Minneapolis office and a core mem-
ber of the automotive team. You may contact him by email at vanwyck.jonathan@bcg.com.
Carsten Schaetzberger is a managing director and partner in BCG’s Stuttgart office and a member of
the automotive sector’s global leadership team. You may contact him by email at
schaetzberger.carsten@bcg.com.
Katie Milliken is a principal in the firm’s Minneapolis office and a core member of the automotive team.
You may contact her by email at milliken.katie@bcg.com.
To learn more, please read “Emerge from the Automotive Downturn Stronger Than Before.”
Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor
on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all re-
gions to identify their highest-value opportunities, address their most critical challenges, and transform
their enterprises. Our customized approach combines deep insight into the dynamics of companies and
markets with close collaboration at all levels of the client organization. This ensures that our clients
achieve sustainable competitive advantage, build more capable organizations, and secure lasting results.
Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more
information, please visit bcg.com.
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