As 2022 draws to a close, the AutoTechInsight practice leads at
S&P Global Mobility use our new Talking Heads series to find
out what challenges and opportunities face their domains in 2023.
The current year has again been dominated by the chip crisis.
Overlaid on this has been the worsening macroeconomic position due
to the fallout from the Russia-Ukraine conflict, which has had
knock-on effects for the industry in terms of demand surety. In
turn this has brought an end to the era of cheap capital, which has
served to slow the burgeoning mobility startup ecosystem. In the
broader sense the sector looks set to be heading to a phase where
demand-side considerations replace the current supply-side
fixation.

Matteo Fini
Vice President, Automotive Supply Chain, Technology and
Aftermarket, S&P Global Mobility

If one looks across the sector, I sense that the topic of
supplier resiliency will come to the fore in 2023. The macro
environment is not conducive to success for those suppliers who’ve
not got a good handle on costs or a degree of operational
flexibility to manage the headwinds. This is most apparent in
Europe.

High energy costs combined with stagnant volumes and rising
financing costs will create major pressures for suppliers in the
region. The risk factors appear heightened in Germany. Smaller
tier-1 suppliers there – those with revenues between EUR100 and
EUR500 million – and tier 2 suppliers seem the most exposed.

In the last couple of months, we saw German suppliers Ruester
(vibration/damping products) and Dr. Schneider (ventilation and
interior trim parts) file for insolvency. Ruester’s case is quite
interesting as they faced liquidity problems following two
acquisitions and rising input costs. I would expect this becomes a
theme in 2023.

Additionally, energy-intensive parts of the value chain, such as
metal foundries, that also rely on volumes for returns will have to
navigate the maelstrom. Indeed, any company that overstretched
itself in 2021 and early 2022 with major investment programs
contingent upon a return of pre-crisis volumes will have to
reconsider its priorities for survival.

Jeremie Bouchaud
Director, Semiconductor, E/E and Autonomy Practice, S&P
Global Mobility

Semiconductors

The structural capacity deficit will take years to solve. While
there was plenty of investment in capacity in 2021 and 2022 it
takes time to bring additional capacity online. The lead time for
equipment increased from one to two quarters to between two and
two-and-a-half year. That means that some of the investment and
CAPEX boom in 2022 will not result in significant additional
capacity before 2024 or 2025.

While the supply-side issues won’t see any immediate relief the
demand side will bring some respite. As we had predicted in
January, more of the existing capacity in the sector was allocated
to automotive in H2 2022 and this will continue early into 2023 and
this arose because of a slowdown in other chip-hungry industries
like telecoms and consumer electronics. Additionally, aggregate
demand conditions are deteriorating globally due to the war in
Ukraine, inflationary pressures, and a generally moribund economic
outlook. These conditions may mask the capacity issues in 2023 but
one should not be fooled. The average chip content per car is
increasing at an accelerated rate because of electrification and
the capacity deficit will become visible again as soon as demand
from other industries picks up again.

Analog will remain the main bottleneck in 2023 though due to
several factors. First, due to the number of analog chips per car
increases faster than the number of MCUs. Additionally, analog
chips don’t shrink as well as SoCs or MCUs; this means production
remains on mature process nodes where there is not enough capacity
and not enough investments. Lastly, the demand for analog is strong
in other mass markets – especially mobiles phones.

To mitigate semiconductor risks we expect that for 2023 and
beyond that will rethink the way electronics are designed in their
vehicles. They will work on increasing the standardization of chips
and reducing the fragmentation/variety of chips they use. For
example, we expect them to make sure their Tier 1 suppliers use
fewer ASICs/ASSPs (custom chips or chips designed for a single
applications) and use more general-purpose chips. In Japan we’re
also seeing some effort, led by the government there, to simplify
chip qualification across OEMs and Tier 1s. Reduced customization
and the use of more multipurpose chips will mean that OEMs can
increase their vehicle output for a given chip capacity because
there are fewer single points of failure. Also, it is easier to
reallocate optimally available chips across different systems.

Revenue growth for automotive semiconductors will slow in 2023
to around 13%, after an estimated 22% in 2022. This is a soft
landing for the sector, but one cannot rule out a harder crash for
automotive semiconductors. Much will depend on how the demand for
vehicles evolves. It is unclear how much of the inventory will be
burnt and when.

Autonomy

The robotaxi race is about to get interesting in 2023. There’s
been a lot of focus on Ford and VW pulling out of Argo AI, but that
shouldn’t detract from what’s happening in autonomy.

Regarding robotaxis, I believe we are about to see a reshuffling
of the pack. At the moment, the tech companies like Waymo are seen
as winning the race. But I don’t see first mover status as
necessarily conferring any sustainable competitive advantage. If we
stretch the race metaphor further, the tech companies – like Cruise
and Baidu – have done a great job of reacting to the starter’s
pistol and getting out of the blocks first. But the first part of
the race is akin to the technological demonstration. To deliver the
robotaxi future, I think the much more difficult piece to execute
against is commercialization.

Here, neither investors nor the capital markets will continue to
pay the bill if there is no revenue generated. As we enter the
commercialization phase, the challengers will not just emerge from
robotaxi tech peers like Pony, WeRide and Waymo but also from the
car manufacturers. The car manufacturers have some advantage here
in that they’re already operating large fleets complete with
automated driving functions like Level 2+. Tesla and XPENG are
targeting the delivery of robotaxis in 2023. They are training the
software with data that comes free of charge from the millions of
vehicles already on the market. Meanwhile, robotaxi companies are
burning cash to collect richer data from a far smaller pool of
vehicles on the roads. Data is the new oil. Trained software, built
on real-life data, is a more scalable path forward, and will be
augmented by simulation to cover edge cases. However, that said, it
has not yet been proven that automated vehicle content can be
successfully leveraged into L4 on-road deployment—or if these
automakers can deliver on promises that have gone unfulfilled
before.

When we look at the commercialization and productization issues,
cost discipline and awareness is a bread-and-butter competency of
the OEMs. If Tesla and XPeng can demonstrate this approach in 2023,
we’re going to see more legacy OEMs jostle for position in the
robotaxi marathon. But tech companies like Waymo and Baidu do have
the enormous cash reserves that will be necessary to sustain a
position in the race on the long runway before profits takeoff.

Dr. Tawhid Khan
Director, Software Practice, S&P Global
Mobility

Software

Two key things stand out for me in 2023. Despite mounting
tensions in US-China relations, there are no signs that Germany’s
industry is ready to participate in a united western front. The
recent visit to China by the German Chancellor Olaf Scholz, during
which he was accompanied by German industry leaders such as the VW
and BMW CEOs – Oliver Blume and Oliver Zipse respectively – has
reinforced this view. Comments from both CEOs emanating from the
visit reinforced this view with both adamant that transforming
their companies is reliant on the Chinese market and being able to
manufacture cars in the country, particularly in the EV era.
Perhaps more telling was a comment from the previous VW CEO,
Herbert Diess who stated, ‘Without the deals with China, inflation
would continue to explode’. Given the energy crisis that’s hitting
Europe, and Germany particularly hard, the continuing focus on
China in the face of the contradictory noises and policies coming
from allies such as the US and the UK indicates that German
industry will continue to place large bets on China. This is seen
as a strategic move to alleviate the pains of the energy crisis and
the accompanying stagflation.

Second, and more directly related to my domain, there’s the
looming question of who will win the automotive software wars. Will
it be the automakers, or will it be big tech? If not giving us an
answer, 2023 will give us more clues as to the direction the
battles will take. Consumers are beginning to adapt to, and
embrace, the new philosophy of tech-focused transportation. The
pressure to deliver the new groundbreaking technologies is enormous
for the OEMs. To deliver, the OEMs require a massive influx of
talented software developers. The market for software talent is
highly competitive – OEMs are competing with their supply base for
this talent as well as the tech companies. The automotive sector
has a couple of obstacles in its path if it wants to develop its
own software ecosystems. The industry is bound by process and
legislation, and this doesn’t make the sector particularly
attractive to young software graduates. Finding a way to attract
the necessary talent to the industry will be key. The reinvention
of the industry to try and win the talent battle will be
interesting to observe. Already we’ve seen VW’s CARIAD – an attempt
to create company with big tech behaviors – struggle to deliver. It
will be fascinating to see what other players in the sector do to
try and lure the best talent to the industry.

Brian Rhodes
Associate Director, Connected Car and Vehicle Experience,
S&P Global Mobility

Connected Car

The tumultuous economic and supply chain situations of the
previous two years+ have put a focus on margin performance by
automakers, which have soared to record highs. This renewed focus
on margin performance will evolve as demand for new vehicles faces
headwinds. As a result, the potential for margin growth from add-on
features and services have garnered not only more attention – but
more commitments to Wall Street. These connected services and paid
updates can achieve a margin of greater than 70%, which makes this
space incredibly attractive for an industry seeking cover from the
cyclical nature of selling vehicles.

A sampling of 2030 revenue targets related to software and
services:

• General Motors – $25b, software, services, subscriptions
• Stellantis – $23b, software • Renault – 20% of revenue, data,
  mobility, energy services
• Volkswagen – 20% of revenue, subscriptions, mobility
  services

2018-20 were years of deployment, with many automakers both
standardizing connectivity hardware in regions that don’t
traditionally support higher option pricing as well as the release
of new generations of TCU (telematics control unit) hardware that
will keep a connection active much longer. 2020-21 saw releases of
new innovative service-oriented business models beyond Tesla, and
2022 was underscored by leading automakers leveraging the
flexibility of these services to adjust packaging, pricing, and
availability of features. We expect 2023 to be the launching pad
for similar features, with much broader use cases, from mainstream
follower automakers. This development will be critical to moving
the concept of built-in upgradable content from headlines to
reality for consumers with newer vehicles.

Graham Evans
Director, Battery, Charging, Propulsion and Thermal
Practice, S&P Global Mobility

Battery

For batteries there are a couple of areas that will come more
into focus in 2023, namely:

• The raw materials deficit, how the industry addresses that, and
  what are the additional implications for sourcing decisions on the
  carbon footprint. On one hand there’s this massive need to secure
  raw material supplies, but they can’t be secured at any cost
  because ESG considerations are gathering momentum. Added to this
  mix are the implicit needs of the US’s Inflation Reduction Act
  (IRA), which has sparked many OEMs and suppliers into tearing up
  their battery playbooks for the US market to secure access to
  manufacturing subsidies and purchase subsides for their
  consumers.
• Secondly, as we know inflation is a burgeoning issue around the
  world due to the confluence of the pandemic’s aftermath and the
  Russia-Ukraine conflict. This is putting pressure on consumers, and
  we could see a pivot from the OEMs to address the changed
  macroenvironment. For example, does this mean a switch to lower
  tech battery solutions (and implicitly lower cost batteries) such
  as those with LFP (Lithium-Iron-Phosphorous) based cathode
  chemistries to secure higher margins, or will it mean increasing
  demand for batteries with a lower capacity and therefore
  compromises on vehicle range?

Charging

In 2023, we might get a little closer to finding out whether a
couple of nascent technologies that have been around BEVs for a
while have a chance of mainstream adoption:

• First, there’s battery swapping and the question of whether it
  can be deployed outside China where government incentives and
  geospatial issues in cities have driven its initial success. Nio, a
  key player in China, is launching in Europe and already has a
  handful of stations in Norway – so that market, as ever with EVs,
  is an interesting petri dish for swapping in Europe. In the US,
  it’ll be interesting to see if Ample, the Californian start-up, can
  drum up sufficient interest in the fleet sector it’s targeting.
  However, swapping has more against it outside China. There’s the
  propensity for home charging, the lack of governmental directive
  and the need to homogenize battery packs which would see OEMs and
  T1s surrender some of their IP.
• The second thread to charging is wireless charging developments
  and its deployment by mainstream OEMs. While BMW, Hyundai (both
  with WiTricity’s Halo) and Volvo (with InductEV) have already
  dabbled with wireless charging, widespread adoption of the
  technology has the potential to challenge the current stand-off
  between battery size and range. Consumers will be able to charge
  more conveniently at home and adopt ‘splash and dash’ behaviors if
  dynamic wireless charging becomes widespread. The technology suits
  fleet applications well, such as taxis, but are mainstream
  consumers prepared to pay a premium for such convenience technology
  when the industry has already converged on the charging plug?
• DC wallbox chargers are also something to lookout for the in
  the domestic charging sphere. They offer a halfway house between
  slow AC chargers and the superfast public DC chargers. Their wider
  deployment has potential to shift the balance in the domestic vs
  public charging conundrum. Furthermore, there are models available
  that facilitate V2G (vehicle to grid) operation, which could prove
  more appealing in these energy conscious and cost-sensitive
  times.

Propulsion

The Euro 7 implications are important for technology fitment on
vehicles still fitted with an internal combustion engine, however
supply chains ramping up to support E-motor applications are not
without their challenges.

• The proposal for Euro 7 emissions was finally announced in
  October 2022. The limits were watered down from what had initially
  been signposted. This will cause many OEMs to pause for thought on
  their electrification plans – does Euro 7 make it worth investing
  in one more round of ICE updates? Or does it make more sense to
  focus on electrification and continue on the path of separating ICE
  and EV businesses in the way that the likes of Renault and Ford
  have already chosen?
• The electrical steel capacity crunch potentially has
  ramifications for the propulsion domain. A shortage of e-steel
  could mean that planned product mix could change in the short- to
  medium-term in favor of ICE and hybrid applications where there’s a
  much-reduced demand for e-steel.
• The desire to squeeze more range and efficiency from existing
  BEV parameters should prompt more the in the industry to switch to
  silicon carbide (SiC) inverter technology. SiC inverters deliver
  efficiency in that they’re able to extract more energy from a
  battery – thus improving range – and allow for faster charging and
  improved acceleration. Major power electronics suppliers such as
  Marelli, BorgWarner and Delphi Technologies have been increasingly
  active in this area recently, developing their products and
  securing orders which suggests that we’ll see increasing SiC
  inverter adoption in the short-term.

Thermal

For the thermal domain one of the most pertinent issues
presenting itself in 2023 relates to the EU’s ruling on banning PFA
(perfluoro alkoxy alkane). The decision is expected to be announced
in January. Here there are implications for the refrigerants
R1234yf and R134a, which are widely used in vehicle HVAC systems.
While there are alternatives to PFA refrigerants they’ll
necessitate a wholesale redesign of HVAC systems depending on the
alternative that is decided upon. In addition to HVAC, the
potential for a PFA ban adds complexity to EV batteries too as the
incumbent chemical types are widely used to manufacture binders for
battery electrodes.

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.

• SEO Powered Content & PR Distribution. Get Amplified Today.
• Platoblockchain. Web3 Metaverse Intelligence. Knowledge Amplified. Access Here.
• Source: http://www.spglobal.com/mobility/en/research-analysis/autotechinsights-talking-heads-series-key-themes-for-2023.html