For several years now, the European automotive industry has found itself in the midst of a disruption. While the business model of producing and selling cars with combustion engines has been very stable for decades, automakers now face technological challenges such as the ACES trends (autonomous, connected, electric, and shared mobility), demand that’s shifting toward Asia, changing business models (vehicle sharing instead of ownership), and increasing instability caused by geopolitical and trade tensions. How can automakers cope with these challenges and master the new mobility world? By examining the current economic cycle, emerging technologies such as e-mobility, and the changing competitive landscape that’s moving from value chains to ecosystems, this publication aims to give a set of perspectives on how to navigate this future that’s more uncertain than ever.
Speed bumps ahead
After billing record years regarding both revenues and profits, the automotive industry is now facing an economic headwind (Exhibit 1). Margins are eroding, and many players issued profit warnings for 2018 and 2019. Many of the challenges facing the traditional value chain are short term, but others will require a long-term focus.
In the short term, geopolitical and macroeconomic risks certainly play an important role. Tensions in the international trade system and factors such as Brexit signal a high degree of uncertainty for the industry. At the same time, long-time boom markets such as China are showing the first signs of saturation. In Europe, the looming carbon dioxide (CO2) penalties plus the cost for meeting stricter Worldwide Harmonized Light Vehicle Test Procedure (WLTP) standards challenge automakers, accompanied by more traditional factors such as intensifying competition, and new market entrants.
In the longer term, automakers need to invest in new technologies such as autonomous driving, connectivity, electrification, and shared mobility—while also mastering advanced manufacturing and materials.
On top of that, the needs and objectives of regulators (nine European countries have discussed restricting internal combustion engines by 2030) and certain customer groups (those who favor mobility services over car ownership) are harder to meet.
Challenges create opportunities
The challenges are significant on many levels. Economy-wise, trade tensions could reduce world GDP by about 0.5 percent. Within the automotive industry, making electric vehicles (EVs1) profitable remains difficult: only higher-priced premium vehicles deliver positive contribution margins. At the same time, a single automaker would need to invest at least $70 billion over next 10 years in ACES trends to build a strong position in all trends (Exhibit 2).
A double-edged sword
Projections for Europe indicate that automakers would need to sell up to 2.2 million EV units in 2021 alone to meet their fleet CO2 targets (Exhibit 3). This is a steep ramp-up of EV sales in less than two years and equivalent to global EV sales in 2018.
This is a big task not only for the automotive industry, but also for adjacent industries. To power two million new vehicles, Europe would need the equivalent of about four gigafactories for the battery supply—and the additional raw materials. To meet charging demands, 300,000 to 400,000 public charging stations would be required.
Revving up e-mobility
OEMs are therefore moving quickly: to meet both regulator and customer demand, OEMs are significantly ramping up their battery electric vehicle (BEV) portfolios. Incumbent OEMs will bring more than 300 new BEV models to market by 2025 (Exhibit 4).
As the business case is more attractive, OEMs are focusing on large and medium-sized cars for the coming years. This is understandable from an economic point of view but will not necessarily help OEMs meet CO2 targets at scale, as the price point is still too high for many consumers.
Advancements in battery technology, economies of scale in EV production, native EV design, and cooperation between OEMs can help bring down costs.
Demand is rising
Consumers are already inclined to buy BEVs or plug-in hybrid EVs (PHEVs). China leads the pack, with 86 percent of Chinese consumers considering buying such cars. German consumers are at 64 percent. While American consumers still tend toward traditional vehicles, more than half—51 percent—now consider EVs when purchasing a new vehicle.
And the EV experience is extremely positive: more than nine out of ten current EV owners consider an EV for their next car as well.
However, infrastructure needs to grow in line with growing EV demand. Fifty percent of potential BEV buyers are concerned about limited range or access to charging stations. Moreover, the EV supply chain is still shaky—EVs currently have very long delivery times (Exhibit 5).
New powertrain players
Taking a closer look at the powertrain supply chain, one can see it is currently in flux.
Non-automotive players are entering the market—and they make more than 90 percent of the investments in mobility start-ups. Fifteen automotive suppliers offer or develop an e-axle system solution, which is the basis upon which new brands can easily offer their own vehicles (Exhibit 6).
Racing the tech giants
Tech giants are the other major players shaking up the automotive industry, increasing competition in a big way. Backed by large cash reserves or high stock market valuations (or both), these companies are trying to redefine how mobility will look in the future.
In light of this, automakers should not neglect their traditional strengths: they should continue focusing on design, sustaining production excellence, and maintaining a big service operations footprint. But they can learn from tech companies and adapt across three dimensions: creating new ecosystems and business models, forging partnerships, and establishing new levers for efficiency gains (Exhibit 7).2
Succeeding in tandem
Cooperation within the automotive industry is not new—for decades, OEMs have shared the financial burden in core areas like engine development and production. But given the challenges ahead, cooperation will become an even bigger success factor.
Our analysis shows that the majority of new cooperations in the industry are still in these core, investment-heavy areas (Exhibit 8); 94 new cooperations have been forged in this space since 2014. But electrification cooperations are on the rise: 65 have now been forged, and interestingly, 15 of them are between OEMs and tech companies. This figure is even higher for connectivity-related cooperations: 27 out of a total of 31 are between OEMs and tech players, giving them a high share in the autonomous-driving and shared-mobility markets.
From value chains to ecosystems
These cooperations are only the first step into what we call an ecosystem for mobility. As the traditional value chains between suppliers and OEMs begin to dissolve, new entrants, tech companies, and governments and regulators will play bigger roles.
In the long run, it is expected that a handful of global ecosystems based on different players will emerge (Exhibit 9). These could take the forms of a tech-centric ecosystem focused on the AV stack, an OEM ecosystem, an investor-orchestrated ecosystem, and an open-platform ecosystem.
Boosting EBIT with AI and analytics
Technology is not only central to developing these ecosystems, but also one lever to optimizing efficiency and profitability in the future. Artificial intelligence (AI) is a prime example of an essential technology for the automotive industry beyond traditional levers.
Since many companies work on the edge of traditional cost optimization—63 percent of executives say they have reached limits, for example, for lean manufacturing—AI and Industry 4.0 promise to deliver additional cost-optimization potential.
There are numerous use cases along the value chain (Exhibit 10).
For instance, overall equipment effectiveness (OEE): today, most solutions fail to accurately measure OEE due to unavailable or heterogeneous data. With AI, data sources can be linked and harmonized—allowing automated, real-time reports that address further efficiency potential.
Another example: while OEMs usually spend 10 to 20 percent of their revenues on incentives, it might be one of today’s most undermanaged expense categories. AI offers the potential to significantly reduce customer rebates and vehicle time in stock. By predicting demand, OEMs can optimize build-to-stock vehicle configurations, and vehicle distribution, as well as offer targeted rebates and promotions.
The road ahead for the automotive industry is certainly not straight and smooth; in fact, it is uncharted, windy, and bumpy. But one thing is clear: mobility has always been and will remain an important constant in human societies.
Therefore, if traditional OEMs and suppliers manage to turn the short-term challenges and long-term disruptions to their business models into opportunities, they will be able to continue growing successfully—and make healthy profits to boot.
