The automotive industry has been undergoing significant changes as it recovers from the global pandemic and adapts to emerging trends, new technologies and evolving consumer preferences. These changes can bring opportunities for companies to better align themselves within the market and their customers, but also can have implications for accounting and finance functions within the industry as well. As the automotive industry transitions from supply chain disruptions and production closures, to producing autonomous vehicles and focusing on shared mobility, understanding the next phase of where the industry is heading can help better position companies today and capitalize on current and existing opportunities.
New Technology Research and Development (R&D)
Overall, the automotive industry is highly competitive with many new players entering the market, driving innovation and forcing established automakers to adapt to changing market conditions. Once such change is an increased amount of industry entrants bringing a shift towards electric vehicles (EVs). New and legacy automakers are investing heavily in the development and production of EVs, since there are various governmental incentives to encourage consumers to adopt them. This increased focus on developing new technology is great for the ultimate consumer, but there are also strategic tax and incentive opportunities for companies to capitalize on this related increased R&D spend.
For example, the 2022 Inflation Reduction Act and IRS Section 41 credit for increasing research activities in the automotive sector are two federal programs that offer reductions in tax exposures or credits on future liabilities, and can help assist a company’s financial position. Depending on the type of R&D spend, there may be additional opportunities to capitalize on; companies should be well-versed in the type of incentive programs available to them depending on the operational strategy they plan to pursue.
Market Consolidations and Disruptions
With an increasing overall industry presence, there could be a tendency to drive market consolidations to address the associated competitive pressures, reduce pricing power and sustain access to resources. Larger companies often experience economies of scale, allowing them to manufacture vehicles at a lower cost per unit. This cost advantage can make it difficult for smaller companies to compete, leading to consolidation in the market as smaller companies are acquired or merged with larger ones. Increased competitive pressures create a challenging environment for companies, particularly smaller ones, leading to companies seeking to gain an advantage and survive in a competitive landscape begin to merge and consolidate. Finance and accounting groups should be ready to seamlessly incorporate newly acquired companies into existing operations with a well-defined integration plan, roadmap, and timeline. Technical accounting provisions and interpretations will be required for any business combinations for valuation, as well as analysis and potential technical memos around the purchase price accounting, open balance sheet calculations, and other debt- and equity-related transactions.
Alternatively, companies may rely on their corporate objectives and customer value model to continue their market pursuits without merger and acquisition activity. Fulfilling that objective in this competitive environment will require robust financial planning and analysis, cash forecasting and analytics, as well as streamlining operational processes. Understanding your cash flow can be the difference between satisfying debt covenants and sometimes losing financing agreements altogether, so its importance should not be overlooked.
Sustainability Focus
There is also an increasing consumer focus on environmental impact, and automakers are addressing sustainability-related questions more than ever. Vehicle manufacturers and suppliers are under increasing pressure to reduce their carbon emissions and use more sustainable materials in the production of their vehicles. This is driving innovation in areas such as battery technology and lightweight materials, and is leading to the development of more sustainable supply chains.
Environmentally conscious suppliers and vendors are opted over those that do not have mature and transparent Environmental, Social and Governance (ESG) tracking and reporting internal functions. Specifically, evaluating a vendor’s ESG practices can help identify potential risks, such as regulatory or reputational risks, that could impact a company’s operations or brand in the eyes of consumers. Vendors with strong ESG practices may have more efficient and sustainable operations, which can lead to cost savings for the company and help ensure the long-term sustainability of a company’s operations. Those that recognize this value are creating and implementing ESG tracking and reporting processes today, prior to the proposed SEC Climate Disclosure rules requiring publicly traded companies to disclose their greenhouse gas emissions and any climate-related risks to their operations beginning in 2024.
How We Can Help
No matter what capacity your company serves in the automotive industry, it is vital to understand current market developments in order to plan for the direction of the industry and capitalize on existing opportunities. Finance and accounting functions are helping to define and lead the path for organizations to capitalize on certain market advantages, so empowering and educating those functions is an arguable first step. Understanding the various credit and incentives programs to help ensure better financial health, along with developing leading operational processes will assist positioning for the future and can help realize material improvements and value.
Every organization and accounting department has different needs and business drivers. Whether your organization is going through transactions, adopting regulatory changes, or simply looking to mature or optimize an existing platform, Cherry Bekaert’s Accounting Advisory team can help you design and implement strategies with results in mind. Our teams can ensure that you’re able to maintain control of your business and are well prepared for increased competition in the future, as well as disruptions and market uncertainties.
Reach out to your Cherry Bekaert advisor to learn more about how our industry-driven insights can help your business adapt to changes and remain profitable while driving R&D and sustainability practices.
Additional Insights:
- Inflation Reduction Act of 2022: Key Income Tax Provisions
- Importance of R&D Tax Credit Documentation: Lessons from Recent Court Cases
- Inflation Reduction Act Nearly Triples Section 179D Tax Incentives
- Inflation Reduction Act Doubles R&D Tax Credit to Offset Payroll Taxes for Start-Up Businesses
- How Can A&E Firms Take Advantage of New Tax Credits in the Inflation Reduction Act?
- How the Real Estate and Construction Industry Benefits from the Inflation Reduction Act of 2022
- R&D Tax Credits: 2022 Year in Review
- CHIPS Act Provides New Federal Funding for the Industrial Manufacturing Industry
