EY study: car industry profits are shrinking, strategic shift needed

The global automotive industry is weakening, with German carmakers experiencing a continued decline in earnings during the first half of the year, according to a study by auditing and consulting firm EY released on Friday.

German car giants Volkswagen, BMW, and Mercedes-Benz collectively earned €25.9 billion in operating profit (EBIT) from January to June, marking an 18% decrease compared to the same period last year.

EY analyzed the financial figures of the 16 largest car manufacturers worldwide. Although all groups’ sales rose 3.7% to over €1 trillion in the first half of the year, earnings before interest and taxes (EBIT) were 7.8% lower than in the previous year, at €80.4 billion.

Japanese at odds

Conversely, Japanese carmakers were particularly successful, with a profit increase of around 37.1% and 14.2% growth in sales. This was due to the ongoing yen depreciation, which makes Japanese products cheaper abroad and increases exchange rate gains.

Constantin Gall, an EY market observer, said that Japanese manufacturers’ profit growth due to currency effects masked the more challenging profit situation in the automotive industry.

Increasing profit pressure

Gall predicted that manufacturers would face increasing profit pressure due to high investments in electromobility, component delivery issues, problematic model changes, and discount campaigns, resulting in widespread cost-cutting measures.

Amid limited influence over regulatory conditions, Gall emphasized the importance of optimizing internal structures, reducing costs, and strategically investing in areas that highlight the manufacturers’ brand essence and value proposition.

The first half of the year saw manufacturers’ profitability come under pressure. The average EBIT margin, which represents operating profit as a percentage of revenue, decreased by one percentage point to 8.0%.

Out of the sixteen manufacturers investigated, South Korean car manufacturer Kia emerged as the most profitable carmaker, boasting a margin of 13.1%. They were followed by Mercedes (10.9%) and BMW (10.8%), which decreased their margins compared to the previous year.

US electric carmaker Tesla also experienced a significant drop in its margin, falling from 10.5% to 5.9%. Margins are under pressure everywhere in the business, making car manufacturers hesitate about their electrification investments and increasingly worrying about the growing hesitations in the authorities’ policies.

Strategic shift

EY says that the automotive sector is moving away from its traditional value pools, and a strategic shift is driven by evolving customer demand, emerging technologies, and tightening regulations.

This will see the industry’s value shift from manufacturing and transactional sales to the complete vehicle lifecycle, opening opportunities for automakers, battery manufacturers, suppliers, energy companies, and investors to focus on new areas.

Martin Cardell, EY Global Mobility Solutions Leader, says: “The global automotive industry is undergoing a paradigm shift, with value moving away from manufacturing and transactional sales to the complete vehicle lifecycle.”

“The industry will have to refocus on new growth areas, while areas of activity, like combustion engine parts and maintenance, will rapidly disappear. Leaders across the industry need to carefully examine their business models and focus on where they can grow and where they need to reduce activities set to become outdated,” he adds.

“To succeed in these new areas, companies should embrace innovation, optimize their data strategies, and focus on training and nurturing skilled talent. They must choose between becoming either a leader or a fast follower. It’s time to put themselves in the driver’s seat and gear up for the great value shift,” he concludes.

Three key areas

EY analysis has identified three critical areas with the highest revenue growth potential. First, supercharge the future (batteries, charging, and energy storage). The latest predictions from the EY Mobility Lens Forecaster show that by 2040, the number of registered EVs (battery electric vehicles and plug-in hybrid electric vehicles combined) on the road globally is expected to surpass non-EVs. Batteries and charging are foundational to steering a successful EV transition.

Second, redefine the vehicle architecture. The shift from hardware to software-defined vehicle (SDV) architectures will not only unlock new revenues in technology and data-based services but also drive cost efficiencies, enhance faster software delivery, and improve the quality of fleets.

Third, close the loop. Moving toward fully circular models that reuse and recycle materials promises a greener automotive industry and solves an increasingly geopolitical war for rare minerals.