EU Automotive Sector
This study, conducted during Q3 2021 following the commissioning on behalf of the Committee on Industry, Research and Energy (ITRE) of the European Parliament (EP), provides guidance on optimising the balance between accelerating the environmental sustainability and digitalisation agenda and increasing the innovation-driven competitiveness of the EU automotive industry within the global value chain (GVC).
Challenges for the EU automotive sector
Accounting for over six percent of total EU employment and over seven percent of gross domestic product (GDP), the automotive industry faces the significant challenge of advancing the twin green and digital transition at a time when broader EU automotive interests are already threatened by increased global competition from both new entrants and existing companies from the Asia Pacific region, and North America.
While the COVID pandemic stress-tested the automotive GVC significantly, for example, in terms of the supply of semiconductors, it also acted as an accelerator positively impacting consumer demand for electric vehicles (EVs) along with electrification, digitalisation and GVC resilience measures. However, increased disruption, especially with new non-EU entrants, threatens EU jobs and the viability of many EU automotive enterprises. That the automotive industry will evolve more in the next decade than in the previous century means that there will be major winners and losers as a consequence of the following challenges, which include:
- Overdependence on world manufacturers outside the EU for EV battery propulsion ‘red flags’ the high risk of repeating the photovoltaic panel bubble;
- Similarly, while many European OEMs are leading innovators, in terms of technological and strategic competencies across software architecture, connectivity and autonomous driving, no European OEMs, at this time, can be considered top innovators, which represents an overdependence risk on technology companies outside the EU;
- With almost half the value of an EV being electronics related, the role of large electronics companies is becoming increasingly important, allowing them to enter the automotive This disruptive trend will pick up momentum, thus increasing the competition for EU OEMs;
- With around 17,000 EU SMEs active in vehicle manufacture, carmakers specialising in traditional transmission and internal combustion engine (ICE) component production face major risks. There are only around 20 moving parts in an electric motor compared to over 2000 in an ICE, which also manifests in reduced servicing that will negatively impact the SMEs in the aftersales market;
- The electromobility ecosystem in the EU, unlike the US and China, was a late starter, but the pace of dynamic start-ups is gaining momentum;
- Weaknesses in EV battery supply, raw materials, and associated innovation represent a significant threat to the development of electromobility in Europe;
- Locations with high concentrations of EVs or ‘supercharging stations’ will be prone to over- loading local substations, triggering ‘black-outs’ short term and costly remedial investment by grid operators, mid-term;
- While EU automotive companies are leading in terms of R&D intensity, the EU must increase ICT R&D, which is a key digitalisation precondition. This challenge will increasingly be exacerbated if the existing STEM trained worker supply gap continues; and
- Although an EV leaves a car showroom with zero emissions, the upstream supply chain associated with the same vehicle has already generated a large carbon
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Opportunities for the EU automotive sector
The COVID pandemic has accelerated the development and sale of EVs while connectivity, digitalisation and other new technologies are creating new ‘data-driven’ business models whereby 2020 represented a ‘tipping point’ in the adoption of EVs.
From a broader EU perspective, electrification, smart and shared mobility represent major strides towards environmental sustainability and efficient transportation, enabled to a significant extent by digitalization. The optimal route towards excelling in greening and digitalisation while unlocking the full potential of the EU automotive industry is to regain leadership in the core technologies, especially within the connected and autonomous vehicles (CAVs) segments. Key opportunities include:
- EU automotive industry to showcase that the pace of greening and digitalization is entirely consistent with the political guidelines of the European Commission in general and the EU Industrial Strategy in particular;
- A technologically neutral stance by the EU is, commendably, enabling both the growth of lithium-ion (Li-ion) and hydrogen fuel cells (HFCs) related technologies;
- Europe’s regional production systems and value chains act as a conduit through which SMEs, facilitated by demand-driven linkages programmes, can better integrate with GVCs;
- Smart Charging (V1G) and Vehicle to Grid (V2G) technologies can increase the flexibility and efficiency of the existing grid and drive further investment in renewable energy and cross- border transmission to enhance environmental sustainability;
- Consolidating the EUs global lead in sustainability-related technological development while leveraging the ubiquitous presence European carmakers and top tier suppliers have in international markets;
- Electromobility is creating considerable employment, investment, and value-added opportunities. Furthermore, mobility services and new business models are creating a new generation of IT-enabled and monetisation-related digital businesses;
- Multimodality, through enhanced connectivity, enriches consumer choices while CAVs simultaneously increase travel comfort and safety; and
- Employment gains in CAV-related design, testing and manufacturing can help offset job losses within the traditional engine, transmission, cooling, exhaust, and braking systems segments, thereby necessitating up-skilling.
The automotive sector is an important contributor to the European Union (EU) economy. Over 6% of total EU employment is linked to automotive, and the sector’s turnover represents over 7% of EU Gross Domestic Product (GDP). At the same time, the automotive sector is the biggest private investor in research and development (R&D)1. However, the industry finds itself at a crossroads with various trends changing the industry. In particular, trends related to the:
- Green transition (electromobility, hydrogen fuel cells, ); and the
- Digital transition (connectivity, autonomous driving, software ).
By themselves, the twin transition is already an enormous challenge for the industry; however, simultaneously, global competition is also intensifying. It is expected that 80% of growth in the global automotive industry will occur outside the EU. This requires not only leading and implementing the twin transition but also doing it in a way where the EU industry remains resilient and can grow in the EU while accessing global growth markets. Therefore, as a third trend, one should add the resilience of the industry and the wider economy in light of increasing global competition, changing business models and interruptions to global supply chains.
This study provides an independent overview of the automotive industrial landscape. Specifically, the study assesses the trends currently reshaping the automotive sector and provides recommendations considering the adequacy and consistency of ongoing and future EU actions. In doing so, the study aims to address the following research questions:
Table 0.1: Research questions for this study
| Trends | Research questions |
|
Greening of the industry |
· The positioning of the EU industry at the global level in terms of electric mobility;
· The state of play of research and innovation in The EU batteries value chains; · The impact of electric mobility and demand-side flexibility on the energy system; · Environmental sustainability, for example, through electromobility or new mobility concepts; and · An overview of the feasibility and time scale of the phasing out of fossil fuel cars and the future role of hydrogen and other gases. |
|
Digitalisation |
· The challenges put forward by the emergence of autonomous vehicles, the customers’ attitudes towards and acceptance of autonomous and shared vehicles;
· Digitalization of the industry, including, for example, autonomous driving or digitally driven new mobility concepts; · The dependence of the EU automotive industry regarding critical raw materials and semiconductors; and · An overview of future trends in terms of smart mobility and the role that artificial intelligence could play. |
| Trends | Research questions |
|
Resilience and new business models |
· The decline of the combustion engine and the consequences for traditional suppliers;
· The challenges and opportunities of future trends in sale and maintenance and the consequences for business models (sharing, leasing); · The model of ‘using instead of owning’ advanced by new connected services; and · The specificity of EU urban configurations and the influence of new modes of urban mobility. |
| Cross-cutting topics | · Job creation and skills in a rapidly changing industry;
· Financing or investment gaps. |
The EU Automotive Sector
The EU automotive sector is central to the EU economy. It generates a turnover that represents over 7% of the EU GDP14, which totalled around EUR 936 billion in 2020.
The sector plays a major role in the economy through its vast supply chain and generating various business services15. Strategically, the EU automotive sector contributes to the EU balance of trade, generating a surplus of EUR 74 billion, thanks to over 5.6 million vehicles exported per year to the rest of the world16. Automotive manufacturing alone employs 3.5 million people (over 11% of EU employment in manufacturing), of which 1.2 million are employed in assembly plants, 1.4 million employed with automotive suppliers, and the rest in indirect automotive manufacturing, such as in the production of tyres, gears, and ventilation equipment18. All in all, the sector19 consists of 1.4 million companies20. The EU leadership in the automotive sector is due to its capacity to innovate.
It is the biggest private investor in research and development (R&D) in the EU, with over EUR 62 billion invested in 201921. Of this total, over EUR 25 billion are invested yearly by suppliers, which also produce an estimated two- thirds of the over 9,000 patents filed by the automotive sector.
Automotive factories across Europe
The regional integration of the automotive GVC discussed in the previous section can also be found in the EU, where automotive is the most integrated ecosystem in intra-EU value chains. Over 45% of its production depends upon cross-border value chains within the EU26. This intra-EU value chain brings together vehicle manufacturing, automotive suppliers, manufacturers of motor batteries, electrical equipment, tyres, suppliers of raw materials and car use services. A very large number of SMEs, highly specialised in specific segments of the value chain, such as exhausts, interior fittings, precision tooling, are located in Member States like Hungary, Czech Republic, but also France, Spain and Italy, where they play a fundamental role for the ecosystem27. Figure presents the number of jobs per sector across the value chain of the EU automotive sector.
Employment creation in the EU automotive value chain
Source: CLEPA, 2021, Automotive supplier’s employment footprint. Available at:https://clepa.eu/who-and-what-we- represent/suppliers-eu-employment-footprint/employment/.
While manufacturing of vehicles is concentrated in a few Member States28, other Member States have prominent roles in the value chain. This is due to the fact that western European car manufacturers outsourced parts of their supplier network and manufacturing to Central and Eastern European Member States, where labour costs are lower. Until now, according to the European Centre for Vocational Training, outsourcing to Eastern Europe assembling and machine operation activities is still more attractive than fully automating processes. Figures on employment in the car bodies, parts, and tyres manufacturing industry suggest that Member States like Poland, Czech Republic, Slovakia, Hungary, and Romania are key for the sector. These countries account for 47% of total employment, compared to 43% accounted for by more mature supplier markets such as Germany, France, Italy, and Spain29. Furthermore, a report by McKinsey maintains that that central and eastern European markets offer untapped potential for the development of competitive automotive R&D in the region.
Given the aforementioned tight integration of the sector, only focusing on the European or national level risks overlooking the importance of the sector for certain regions, such as Bavaria, Baden- Württemberg, and Niedersachsen in Germany or Piedmont and Lombardy in Italy. This is especially important as car manufacturers and suppliers tend to form strong clusters.
The impact of COVID-19 on the EU automotive sector
As identified by the European Commission (EC), the automotive sector has been one of the industries hit the hardest by COVID-19 during the first wave. This is in part due to the supply chain disruptions that followed the shutdowns in China and, most prominently, to the containment measures adopted across Europe between March and May 2020. In the first half of 2020 alone, the EU automotive sector suffered a loss of production of 3.6 million vehicles, which corresponds to a loss of EUR 100 billion. Several carmakers had to be bailed out due to liquidity issues33. Moreover, the widespread use of furlough schemes did not prevent the announcement of several plant closures and job losses for both manufacturers and suppliers.
Despite the negative impacts of COVID-19, a recent study commissioned by the European Parliament maintains that the most likely scenario of recovery for the EU automotive sector is U-shaped. The EU passenger car market contracted by 23.7% in 2020 compared to 2019, which corresponds to 9.9 million units in 2020.
Due to smaller production capacity and a decrease in consumer confidence, car sales in the EU continued declining into 2021. Figure indicates that in June 2021, although the number of car registration is growing compared to the same period in 2020, pre-COVID-19 levels have not been reached.
New passenger car registrations in the EU
The EU automotive sector is central for the whole EU economy. Notwithstanding the current strong positioning globally of EU automotive manufacturers, and the measures introduced for the recovery of the sector after the COVID-19 pandemic, the industry is facing three structural challenges: 1) the greening of the industry; 2) digitalisation; and 3) increasing global competition.
Electrification will, inter alia, reduce assembly costs (if excluded the production of battery cells, the total number of workhours needed for components is 15%-30% lower for electric vehicles), whereas self- driving connectivity will create new markets and services relying on computing systems and data analysis. To address those transformations, huge investments are necessary. In order to succeed, investments will also be needed in the associated infrastructure and in reskilling the workforce. All those factors are forcing industrial players to find new solutions, adapt production, and establish themselves as leaders amid intense global competition.
Leading the twin green and digital transition
The EU automotive sector will experience in the coming years massive structural changes if it wants to remain a global leader. Adapting to new climate change mitigation goals and ensuring the development, deployment and uptake of digital technologies will be key in the future global positioning of EU automotive industries. Currently, the European Commission launched various proposals and initiatives addressing those challenges.
The European Parliament will have a central role in shaping how future initiatives and legislation could support the automotive industry to become greener and more digital. Among the key proposals that will be further elaborated in Chapter 5, we bring attention to:
- EU industrial strategy [COM(2020) 102] and its update of 2021 [COM(2021) 350], which have an overarching goal of guaranteeing that the EU retains global leadership in the upcoming decades while fostering the green and digital transformations of its economies. Noteworthy is the inclusion of automotive as one of the key ecosystems for the EU industrial leadership;
- The EU Green Deal [COM(2019) 640] and the recent Fit for 55 package [COM(2021) 550], which aim at transforming the EU into a carbon-neutral economy in the coming decades. Attention is put to the automotive sector, both in terms of limiting vehicles’ emissions and in terms of improving the circularity of vehicles and batteries (this last aspect is central in the Circular Economy Action Plan [COM(2020 98]);
- EU proposals on supporting the digitalisation of the automotive sector. EU proposals aim both at developing critical infrastructure for automated and connected vehicles, such as the 5G action plan [COM(2016) 588], and to facilitate the development and deployment of automated and connected vehicles. This can be done, inter alia, by facilitating the sharing of data between industrial actors, as proposed in the EU Data Strategy [COM(2020) 66], which includes, among others, the creation of a European Common Mobility Data Space;
- Industrial alliances for the developments of key technologies, such as on batteries, clean hydrogen, processors and semiconductors, also in light of possible strategic dependencies that hinder the EU’s capabilities of truly becoming a global leader in the development of those key technologies; and
- Plans for re- and up-skilling workers, such as the European Skills Agenda [COM(2020) 274]. Such plans are key in light of the twin transitions, which is bound to reshape the needs of EU industries and – if not supported accompanied properly – might lead to large-scale mismatches in the workforce, with consequent high unemployment rates among workers of the automotive
