Auto Suppliers Lean On Price Till Volume Ramps 2023 Outlook

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Global Auto Parts Suppliers 2023 Outlook

Kevin P Tynan Andreas Krohn
Team: Autos Team: Autos
BI Senior Industry Analyst BI Senior Associate Analyst
1. Auto Suppliers Lean on Price Till Volume Ramps: 2023 Outlook

Contributing Analysts Michael Dean (Autos)
(Bloomberg Intelligence) -- Materials shortages coupled with Table of Contents

supply chain disruption will keep auto parts manufacturing costs Key Topics
elevated -- and margins compressed -- through 2023. Public Policy to Fund EV Charging
Automobile manufacturers will be content to constrain output of US Buying Parts For Older Autos
vehicle assemblies to keep revenue and profit contribution at Tire Demand Growth Stalls
Global Battery Race Tests Margins
record highs. Suppliers in most regions are rationalizing costs to
align with tighter markets while trying to transition to new products and processes to remain relevant
as electrification accounts for a larger percentage of new vehicle demand. (12/15/22)
Key Topics
Public Policy to Fund EV Charging
ChargePoint 4x Revenue Jump Possible on State Incentive Boost
ChargePoint could almost quadruple fiscal 2022 revenue by 2026 from the five states with the most
stations alone -- an almost $700 million opportunity -- if it's able to keep its current market share as
public infrastructure spending accelerates. Even so, the charging provider may be less dependent on
government funds to grow, cushioning it from the risk of delays or discontinuation of grants and
subsidies. (11/08/22)
2. $1.5 Billion Unlocked Through 2023
ChargePoint -- the largest player in the industry, with well-established relationships -- is positioned to
benefit from public EV infrastructure spending, as subsidies reduce the cost of charging stations for
its customers. The Biden administration has allocated public funds by state and year for the next five
years, intending on adding 500,000 stations by 2030, unlocking an initial $1.5 billion through 2023.
The total cost of the initiative amounts to $5 billion, expanding capacity along 75,000 highway miles,
placing the onus on states to vet specific projects and dole out funds, with California and Texas
accounting for 20% of the budget.
The cost of a Level 2 charger is about $14,000, while a DC fast charger runs about $100,000,
implying that $1 billion would pay for 70,000 Level 2 or 10,000 fast chargers. (11/08/22)
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Bloomberg® 03/26/2023 14:27:12

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EV Infrastructure Funding by Year
Source: Federal Highway Administration
3. ChargePoint Breadth May Tip Scale on State Funds
ChargePoint's advantage as it seeks to expand is in its footprint, with the greatest potential in states
where it already owns a large share of the network. In the five states with the most stations --
California, New York, Florida, Massachusetts and Texas, accounting for almost half the US total --
ChargePoint owns almost 60% of the network on average. Cumulative funding in these states
amounts to $1.2 billion through 2026, translating into a $688 million revenue opportunity at the
company's current market share.
The potential bonanza for ChargePoint is almost 3x fiscal 2022 revenue, suggesting public investment
can turn into a meaningful catalyst, driven by its size and propped up further through adherence to
Buy America provisions of manufactured products. (11/08/22)
5 States with Most EV Charging Stations
Source: US Department of Energy, Federal Highway Administration
4. $7.5 Billion in Government Spending Well Short of Need
The passage of the Bipartisan Infrastructure Law will provide $7.5 billion to build out the public US EV
charging network over the next five years, with the true investment needs exceeding $42 billion,
delivering plenty of runway to ChargePoint. The ability to fund product development and Sales and
Marketing expenses from operations gives an edge to the largest industry player to expand its
network. The goal spelled out by the Biden administration is a tenfold increase in charging stations
from the current 47,200 to 500,000 by 2030, enabling access to about 2 million ports for EV drivers.
Disbursement of the $7.5 billion is allocated to capital spending on new stations in the amount of $5
billion and $2.5 billion for research on locations as well as outreach and marketing. (11/08/22)
Current U.S. EV Charging Infrastructure
Source: US Department of Energy
Bloomberg® 03/26/2023 14:27:12

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5. Tesla Drives Early Build-Up of Charging Network
Electric vehicle charging ports in the US have soared from just 5,000 in 2011 to over 120,000 in
4Q22, a 24-fold increase that aligns with a rise in EV unit volume. EV sales growth at Tesla, the US
leader at 72% market share, has been the key catalyst, with deliveries rising to over 350,000 EVs in
2021 from less than 20,000 in 2013. Still, the segment remains in its infancy, with EV penetration
below 4%, yet expected to rise toward 15% in 2025 and above 30% by the end of the decade.
The number of ports per station has risen marginally to 2.6 in 2021 from 2.4 in 2011, suggesting the
average size of a refueling location has remained virtually constant, a metric that could receive a
boost as EV drivers become more commonplace in high-traffic areas. (11/08/22)
Evolution of U.S. EV Charging Infrastructure
Source: US Department of Energy
6. Fresh Section 30C Tax Credits Another Catalyst
The extension of the Alternative Fuel Infrastructure Tax Credit, known as Section 30C, more than
tripling the available credit maximum, could accelerate private spending on EV refueling properties
and indirectly benefit ChargePoint through an increase in installations. The incentive reimburses the
purchaser of charging stations for up to 30% of the cost, for as much as $100,000 per station, up from
$30,000. Section 30C had expired at the end of 2021, but was renewed through the 2022 Inflation
Reduction Act and made more generous.
ChargePoint’s other gross profit, the segment that includes revenue from 30C regulatory credits if
unclaimed by purchasers of its EV charging stations, accounted for 8% of total gross profit in 2Q23,
down from 30% in 2Q21, and may decline as more customers take advantage of more lucrative
credits. (11/08/22)
ChargePoint Gross Profit by Segment
Source: Bloomberg Intelligence
US Buying Parts For Older Autos
Drivers on Sales Sidelines Prime $56 Billion Maintenance Bump
Auto parts and service sales could surge 11.5%, or $56 billion, by 2025 as money that would have
been spent buying a vehicle is directed to maintenance, with record prices prompting drivers to hang
Bloomberg® 03/26/2023 14:27:12

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onto autos longer. Copart's unique position to capture a greater share of this gain may be
underappreciated, while double-digit growth expectations for AutoZone and O'Reilly through 2024
may be aggressive given market dynamics. (09/14/22)
7. Auto Care to Add $56 Billion as Buyers Balk, Fleet Ages
Inflated new-vehicle pricing near $47,000 is pushing about 4.5 million buyers out of the market
compared with the 2016 peak when the average price was $35,000. Fewer buyers paying more keeps
the pool of retail revenue flat vs. the record volume year, while a share of the $150 billion in lost
transactions will trickle down into the used-vehicle market or go to the repair and maintenance of
existing cars and trucks. Parts and service providers can expect the auto care revenue pot to jump by
$56 billion by 2025, our analysis suggests, if average annual spending rises just $100 from the
current $1,500 as more older vehicles are kept on the road.
The fleet of US vehicles over four years old is estimated at 82% of the total and has been increasing
since 2018, with the most intense repair and maintenance needs at 7-12 years. (09/14/22)
Auto Care Spending Increases as Fleet Ages
8. Used-Vehicle Registration Drop Means Longer Ownership
Consumers forced to the sidelines by record high prices of new and used vehicles make retail auto
parts sellers a beneficiary of extended ownership periods and the additional repair and maintenance
spending. New vehicles prices above $47,000 on average are causing a flight to used units, though
the same price inflation is creating a similar dynamic in pre-owned units, now averaging above
$33,000 and forcing consumers out of the market altogether. Used vehicle registrations in 2022 are
on a 35.3 million pace through midyear, 18% below 2021.
Buyers of new vehicles are holding on for an average of eight years, doubling from 2002. The window
for increased repair and maintenance needs begins after six years. (09/14/22)
Used Vehicle Value Index
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9. Copart Gives Auto Buyers Another Turn of Depreciation
Would-be buyers staying on the auto sales sidelines has spurred growth in salvage vehicles sold for
genuine replacement parts or rebuilt and marketed for as much as 40% below one with an unmarred
title. Segment leader Copart's 38% revenue growth expectation through 2024 leads parts retailers.
The company's vehicle sales were $400 million in 2021, 15% of total revenue at 13% gross margin vs.
8% for publicly traded dealers' used vehicle sales.
The 300 million registered vehicles in the US and a recovery to 1.6 trillion miles traveled 1H -- the
second-highest ever -- will result in a greater flow of crashes and junked vehicles to auction, as high
prices amplify the number of vehicles totaled by insurers to feed Copart's supply, at a time of low
inventory elsewhere in the industry. (09/14/22)
Copart Revenue by Business Segment
10. Margins Keep Parts Retailers Hooked on DIY
AutoZone and O'Reilly will be challenged to elbow into commercial accounts, where competitors are
already established and prepared for the post-pandemic transition to fewer DIY sales. The post-
pandemic rebound in miles traveled on an aging fleet will mean more work for independent service
pros. Retailers with a tilt to commercial accounts will have the most revenue growth potential as
vehicles older than 12 years are almost half the registered fleet in the US. Eighty percent of the $338
billion in auto aftercare dollars are directed to professional shops, with the value of hard parts and
chemicals about $90 billion.
AutoZone has the most locations -- over 6,800 -- and the highest total revenue, but generates less
than 30% of sales from commercial accounts, compared with 80% at Genuine Parts and near 60% for
Advance Auto. (09/14/22)
High DIY Revenue Mix Drives Pretax Margin
11. AutoZone, O'Reilly Shift Sales Mix for Growth
Consensus' placement of AutoZone and O'Reilly's revenue growth potential ahead of Advance Auto
Parts appears to overestimate the persistence of DIY sales as retailers resume their strategic
transition of doing more business with commercial accounts. AutoZone and O'Reilly both get more
Bloomberg® 03/26/2023 14:27:12

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than 50% of revenue from DIY, a market segment that generated strong comparable-store gains
while consumers were isolated during the pandemic. The shift of repair and maintenance back to
professionals means a longer growth runway at lower margins as vehicle complexity stifles DIY
revenue growth.
Genuine Parts -- with an 80% commercial mix -- is expected to lead the parts retailers with 18%
revenue growth through 2024. Consensus for Advance Auto -- with 60% of sales to professionals --
sees only a 5% gain. (09/14/22)
Consensus 2yr Revenue Growth
Source: Bloomberg Intelligence
Tire Demand Growth Stalls
Global Tire Demand Slows, Challenged by Macroeconomic Headwinds

Contributing Analysts Gillian Davis (Autos) & Michael Dean (Autos)
Global passenger and truck replacement-tire demand has stalled through August and looks set to
reverse as recession concerns and muted consumer sentiment bite, which have yet to be reflected in
EU tire makers' 2023 consensus. Compounding these headwinds are European new-car sales
potentially declining by as much as 5% in 2022, with no recovery in 2023. (10/21/22)
12. Consensus Appears High Going Into 2023

A multitude of headwinds besetting the tire industry -- high input costs, rising interest rates and
recession fears -- are calling 2023 expectations into question. Global replacement passenger-tire
demand was flat through August and truck replacement is down 1%, according to Michelin. The
ACEA's European new-car sales 2022 outlook, previously up 7.9%, has been cut and is now expected
to dip 1%. That estimate could be down by as much as 5% as consumer confidence slides. All auto
suppliers are at risk from the slowdown, with Nokian potentially the worst hit.
Consensus calls for tire makers' 2023 Ebit to grow 18.7%, 11.6% above 2019. We believe this fails to
reflect the global downturn threat and likely assumes the easing of supply constraints for automaker
customers and price hikes combating cost inflation. (10/21/22)
Financial Summary, Consensus (€)
Source: Company Filings, Bloomberg Intelligence
13. Global Replacement Tire Demand Growth Slows

Worldwide replacement-tire demand slipped 1% in the 10 months to October vs. the prior year, hurt
by less favorable comparisons and a slowdown in China sales on regional zero-Covid policy
Bloomberg® 03/26/2023 14:27:12

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lockdowns. The European market grew 4%, according to Michelin. Global original-equipment tire
sales rose 8% in the period, yet were still 10% below the 2019 peak. China is the only region where
OE demand is higher than in 2019 (up 6%), given a 2017 sales peak, buoyed by government support
to OEMs and a robust EV market. Though worldwide auto output should recover as supply constraints
ease, waning consumer confidence and new-car sales could curtail demand until year-end.
October's global original equipment demand rose 10%, led by Europe. In contrast, China declined 3%
as local lockdowns slowed new-vehicle production. (12/12/22)
October YTD New Car, Replacement-Tire Demand
Source: Michelin Market Trends, Bloomberg Intelligence
14. View for Auto Suppliers Dulls Amid Headwinds, Uncertainty

Michelin has outperformed in its peer group -- it's down about 35% year-to-date while most peers fall
between 35-70%. The company's brand reputation and presence in specialty tires has contributed,
supported by diversification away from its tire-making dependency into areas such as mobility
services and fuel-cell production. A decline in sector multiples reflects market uncertainty over
industrywide headwinds, with persistent supply-chain disruptions and the war in Ukraine obscuring
the view.
Consensus 2022-23 Ebit for EU auto suppliers has fallen notably since the start of April but still
expects significant growth in 2023, meaning the group trades at 3.9x 2023 EV-to-Ebitda. We believe
this to be unrealistic. (10/21/22)
European Auto Supplier Comparison Sheet
15. Replacement-Tire Growth Hurt by Cost-of-Living Crisis

The twin threats of global recession and muted consumer sentiment loom as the recovery in demand
for tires appears set to slow in 2H. Yet demand for low-margin new tires will be buoyed by the easing
of supply-chain bottlenecks, though this may be short-lived. Dealers who already replenished stock
ahead of a wave of price increases in 1H could weigh down the replacement-tire segment. A shift to
lower-price products from premium brands will be watched as consumers battle inflationary
concerns. Rising input costs remain a risk.
Production of new passenger cars and light trucks is expected to expand 4-6% globally in 2022,
though this hasn't yet reached the pre-pandemic level, with replacement tires anticipated to shrink as
much as 2%, according to Continental. Replacement-tire demand is about 75% of total worldwide tire
sales. (10/21/22)
Bloomberg® 03/26/2023 14:27:12

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Vehicle Output, Replacement-Tire Demand Outlook
Source: Continental Presentation, Aug. 2022
16. Wider Electric-Vehicle Adoption, Tire Wear Will Drive Demand

Faster adoption of electric vehicles (EVs) could help to drive the demand of replacement tires
because of the higher wear-and-tear of the tires associated with the higher torque. EVs can wear out
traditional tires 30% faster than conventional vehicles, due to the powerful, instant torque and
additional weight from heavy-battery packs, according to tiremaker Goodyear.
EVs are growing in popularity, representing 20% of August sales vs. 18% in the prior year in Europe.
The pace could be accelerated by bans on the sale of combustion engines in countries, including the
U.K.'s proposal starting in 2030. Those rules may be compounded by more stringent EU emission
targets and enhanced EV ambitions in the U.S. Which could see BEVs as much as 45% of new-car
sales worldwide in 2030, according to Michelin. (10/14/22)
European Monthly Auto Registrations by Powertrain
Global Battery Race Tests Margins
CATL, Battery Giants' Cost Edge Offers Margins Stronger Backbone

Contributing Analysts Joanna Chen (Autos) & Steve Man (Autos)
CATL, LG Energy Solution and BYD are better positioned for margin resilience than smaller peers, as
their scale and cost controls buffer them against price risks lurking in the industry's aggressive
capacity push. Not rushing into solid-state batteries is prudent, as EV makers won't take the leap until
costs fall and the technology matures. (02/12/23)
17. Battery Scale Supports Cost Cuts, Margin Resilience

CATL, LG Energy Solution (LGES) and BYD's scale and cost advantages are their best defense as
intensifying competition puts battery pricing and margins to the test. Smaller battery makers are in
weaker positions to match the trio's low, per-unit production costs made possible by their greater
volume scale, extensive vertical integration and strong bargaining power with suppliers. This leaves
large producers with greater price flexibility to boost sales, especially as supply-demand dynamics
turn less favorable amid the industry's ballooning capacity in the next couple of years.
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SK On, CALB, Gotion High-Tech and other smaller battery makers posted operating losses as raw
materials costs surged in 2022. CATL and LGES managed to sustain mid- to high-single-digit
operating margins. (02/12/23)
Battery Makers' Operating Margin Comparison
18. Battery Sales Surging But Overcapacity Risks Lurk

Battery makers could see price competition heat up again as their aggressive capacity expansion
risks overshooting demand. Global EV-battery usage could more than double to 1.2 terawatt hours
(TWh) by 2025 from about 520 gigawatt hours in 2022, we calculate, if battery-electrics and plug-in
hybrids reach 21% of new-vehicle unit sales. A faster uptake to 25% of the EV mix could push battery
usage to 1.4 TWh, which might absorb about 65% of the industry's available manufacturing capacity.
Smaller battery makers with not-so-competitive cost structures will face greater margin pressure as
automakers demand battery price cuts to strengthen EVs' profitability.
BloombergNEF predicts battery pack prices will fall 18% to $124 per kWh by 2025 vs. $151 in 2022.
(02/12/23)
Battery Prices to Trend Down as Supplies Catch Up
Source: BloombergNEF, Bloomberg Intelligence
19. Cell-to-Pack, High-Nickel Designs Favored vs. Semi-Solid-State

The first EVs powered by semi-solid-state batteries -- using hybrid liquid/solid electrolytes -- will roll
off factory floors in 2023. Yet, such technology poses little threat to incumbent battery makers, at
least for now. Conventional lithium-ion batteries have demonstrated improving energy density and
cost structure thanks to innovations such as cell-to-pack designs and high-nickel cathode materials.
Driving ranges of 400-500 kilometers on a single charge have become common, even among mass-
market EVs. Combined with more expansive charging networks, these are winning over more
consumers. Semi-solid-state batteries carry greater cell energy, though probably not enough to
convince EV- and battery makers to push for scale production yet given their lofty costs. (02/12/23)
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Automakers' Strategies to Reduce Battery Costs
Source: BNEF
20. All-Solid-State Batteries Still Years Away

All-solid-state batteries remain the ideal next-generation technology that could usher battery-electric
vehicles into the mainstream. They're safer, higher-capacity -- and eventually cheaper when
produced at scale -- than their conventional lithium-ion counterparts. Solid-state battery startups
such as Quantumscape and Solid Power have attracted substantial attention, yet mounting
challenges from materials selection to supply chains and manufacturing processes could delay mass
deployment of all-solid-state batteries in EVs until the next decade.
CATL, BYD, LGES and other incumbent battery makers are treading cautiously by maintaining solid-
state R&D, but prioritizing more promising pack-design and cell-chemistry upgrades to achieve mass
production and cut costs. (02/12/23)
Battery Performance Scorecard
Source: BloombergNEF, Bloomberg Intelligence
To contact the analyst for this research:

Kevin P Tynan at ktynan1@bloomberg.net
Bloomberg® 03/26/2023 14:27:12

Auto Suppliers Lean On Price Till Volume Ramps 2023 Outlook

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Global Auto Parts Suppliers 2023 Outlook

1. Auto Suppliers Lean on Price Till Volume Ramps: 2023 Outlook

(Bloomberg Intelligence) -- Materials shortages coupled with Table of Contents

Public Policy to Fund EV Charging

ChargePoint 4x Revenue Jump Possible on State Incentive Boost

2. $1.5 Billion Unlocked Through 2023

Bloomberg® 03/26/2023 14:27:12

EV Infrastructure Funding by Year

Source: Federal Highway Administration

3. ChargePoint Breadth May Tip Scale on State Funds

5 States with Most EV Charging Stations

Source: US Department of Energy, Federal Highway Administration

4. $7.5 Billion in Government Spending Well Short of Need

Current U.S. EV Charging Infrastructure

Source: US Department of Energy

Bloomberg® 03/26/2023 14:27:12

5. Tesla Drives Early Build-Up of Charging Network

Evolution of U.S. EV Charging Infrastructure

Source: US Department of Energy

6. Fresh Section 30C Tax Credits Another Catalyst

ChargePoint Gross Profit by Segment

Source: Bloomberg Intelligence

US Buying Parts For Older Autos

Drivers on Sales Sidelines Prime $56 Billion Maintenance Bump

Bloomberg® 03/26/2023 14:27:12

7. Auto Care to Add $56 Billion as Buyers Balk, Fleet Ages

Auto Care Spending Increases as Fleet Ages

8. Used-Vehicle Registration Drop Means Longer Ownership

Used Vehicle Value Index

Bloomberg® 03/26/2023 14:27:12

9. Copart Gives Auto Buyers Another Turn of Depreciation

Copart Revenue by Business Segment

10. Margins Keep Parts Retailers Hooked on DIY

High DIY Revenue Mix Drives Pretax Margin

11. AutoZone, O'Reilly Shift Sales Mix for Growth

Bloomberg® 03/26/2023 14:27:12

Consensus 2yr Revenue Growth

Source: Bloomberg Intelligence

Tire Demand Growth Stalls

Global Tire Demand Slows, Challenged by Macroeconomic Headwinds

12. Consensus Appears High Going Into 2023

Financial Summary, Consensus (€)

Source: Company Filings, Bloomberg Intelligence

13. Global Replacement Tire Demand Growth Slows

Bloomberg® 03/26/2023 14:27:12

October YTD New Car, Replacement-Tire Demand

Source: Michelin Market Trends, Bloomberg Intelligence

14. View for Auto Suppliers Dulls Amid Headwinds, Uncertainty

European Auto Supplier Comparison Sheet

Source: Company Filings, Bloomberg Intelligence

15. Replacement-Tire Growth Hurt by Cost-of-Living Crisis

Bloomberg® 03/26/2023 14:27:12

Vehicle Output, Replacement-Tire Demand Outlook

Source: Continental Presentation, Aug. 2022

16. Wider Electric-Vehicle Adoption, Tire Wear Will Drive Demand

European Monthly Auto Registrations by Powertrain

Global Battery Race Tests Margins

CATL, Battery Giants' Cost Edge Offers Margins Stronger Backbone

17. Battery Scale Supports Cost Cuts, Margin Resilience

Bloomberg® 03/26/2023 14:27:12

Battery Makers' Operating Margin Comparison

Source: Company Filings, Bloomberg Intelligence