The automotive sector is on the cusp of changes not seen since the Model T Ford rolled off the production line in the early 1900s, as new regulations, technologies, and consumer preferences transform its products and business models. Both traditional OEMs and new start-ups are spending more to address these trends: since 2010, intrigued investors have funneled $280 billion into innovative automotive hardware and software solutions. Almost half of this investment, about $115 billion to $120 billion, has gone to electric vehicles (EVs).
Capital markets have rewarded this influx. With a weighted average total shareholder returns (TSR) of 79 percent from March 2020 through January 2022, traditional OEMs and component suppliers outperformed companies in many other thriving sectors, including high tech and chemicals. The results were even more impressive for the relatively new kids on the block, such as NIO, Tesla, and other EV start-ups, whose weighted average TSR of 278 percent topped the list.
The industry has typically relied on sales of traditional vehicles with internal-combustion engines (ICE) for much of its growth. But overall vehicle sales are projected to increase at a modest 2 percent CAGR through 2025 and might even decline over the balance of the decade. But the industry’s TSR remains high because of optimism about increasing revenue from other sources, including those related to new technologies and services. EVs, which now represent a small portion of vehicles sold, are at a tipping point and are responsible for much of the enthusiasm within capital markets. In the second half of 2020, sales and penetration of passenger EVs accelerated in major markets despite the economic crisis caused by the COVID-19 pandemic. McKinsey projects that worldwide demand for EVs will grow sixfold from 2021 through 2030, with annual unit sales going from 6.5 million to roughly 40 million over that period.
These optimistic projections for EVs come with some big caveats, however. While consumer demand appears clear, the automotive ecosystem must quickly address three major constraints before EV production and sales can gain scale:
- difficulties sourcing enough raw materials, including lithium, nickel, and cobalt, used in batteries
- an insufficient number of gigafactories that produce batteries, as well as low productivity within existing facilities
- a public charging infrastructure that must be built up to keep pace with the number of EVs on the road
Although some large companies may attempt to increase their access to raw materials, most automotive companies currently lack this option. What the industry can tackle, however, are issues related to gigafactories and the charging infrastructure. Taking quick action will be key to extending the momentum in EVs and may even help to accelerate adoption of autonomous vehicles (AVs), through which OEMs will find even more opportunities in services and life cycle revenues from such things as over-the-air software updates, mapping services, and in-vehicle entertainment.
EV motors get their energy from batteries that contain very different materials from those used with traditional ICE vehicles, including lithium, cobalt, and nickel. The extremely large facilities where most EV batteries are produced are called gigafactories, since the annual capacity they produce exceeds one gigawatt. Most gigafactories were founded in Asia and accounted for about 80 percent of battery production capacity in 2020. While most gigafactories are operated by cell manufacturers, many OEMs are becoming more active in this field as well.
Today, gigafactory operators face two major problems. First, when building these enormous facilities, construction issues inevitably arise, increasing both costs and timelines. And second, after gigafactories open, many companies struggle with operational efficiency. If the current trend of delayed production starts and prolonged ramps continue, a McKinsey analysis predicts that 30 percent of newly added annual capacity would be at risk in North America alone by 2025, potentially leaving more than 300,000 vehicles short of batteries each year in that region.
Handling construction issues
If worldwide EV demand grows as projected, the industry would need 200 new gigafactories—in addition to the 130 gigafactories that already exist, representing more than $400 billion in deployed capital—by 2030. Many of the new facilities would likely be built in locations near OEMs to reduce lead times and inventory requirements. Moreover, battery cells can account for more than $7,000 in cost per vehicle, so the pipeline inventory value for internationally shipped batteries would be very high.
But complications during the design and construction phases can delay production start by 12 months or more.
Gigafactory operators may avoid some common problems through stronger recruitment of construction talent, ideally during the site-planning phase or earlier. Positions that are most difficult to fill, such as those related to electrical or mechanical craft labor, need most attention. Gigafactory operators might also benefit from giving early attention to local design standards and regulatory concerns, such as wastewater, and from using suppliers within the local industrial base that can provide on-site support and respond to quality and output challenges more rapidly.
Increasing operational efficiency
After a gigafactory is up and running, the challenges do not disappear. Many new facilities have experienced lower than expected output because of ongoing labor shortages, unexpected machine downtime, and operational issues. The consequences of lost production can be enormous for both battery cell manufacturers and the OEMs they supply. If a 50 gigawatt-hour plant achieves only 66 percent of its planned annual output, it could lose about $500 million in value annually, transforming a modeled profit of 6 percent to a potential 8 percent loss. Downstream OEMs could experience a supply crunch, forcing them to cut vehicle production or temporarily shut plants. Several prominent OEMs had to pause production because of battery supply disruptions since 2017, even though output was far lower than it will be in the future.
To minimize labor issues, cell manufacturers must consider the talent pipeline at all stages, including site selection, construction, and process training. They also need to consider how the daily routines and skills of local workers may differ from those of staff in their other facilities. If capability building appears necessary, gigafactories can benefit from having an on-site, cross-cultural organization where employees with global experience help local hires develop strategic competencies. And with battery demand poised to accelerate, cell manufacturers should also think about their future talent needs as they conduct R&D activities designed to advance the next-generation cell manufacturing. The industry is changing so fast, and battery technology advancing so rapidly, that companies must be nimble in adapting their recruitment and training efforts.
Operational efficiency can also suffer if cell components and machinery are in short supply, especially when demand is increasing worldwide. Battery cell manufacturers may increase efficiency and reduce operational complexity by relying on local sources in some cases. For instance, they may continue to use experienced global vendors for equipment required in critical process steps but may otherwise use responsive regional vendors.
While battery suppliers are now taking the lead in handling operational-efficiency issues, the same questions will become more relevant for OEMs in the near future as more of them increase their involvement in battery production through various strategies, such as vertical integration, joint ventures, or other strategic partnerships.
For EVs to go mainstream, they will need an extensive network of charging solutions to provide drivers with an adequate electricity supply. For example, the United States now has about 100,000 public chargers, but this number could increase to about 1.2 million by 2030 to satisfy demand. In China, the number of public charging stations would have to increase from 1.15 million today to around five million by 2030, when more than 100 million passenger EVs will be on the roads. Similarly, Europe’s public charging stations would have to increase to anywhere from 2.9 million to 6.8 million—from around 340,000 in 2021,
depending on the path taken—over the same period.
Most countries have not yet committed sufficient funding to support the necessary expansion of the charging infrastructure. We estimate that more than $35 billion would be required to get to the 1.2 million public chargers required in the United States, exclusive of grid and electrical upgrade costs (exhibit). The $7.5 billion specified for public charging stations in the recently passed Infrastructure Investment and Jobs Act is only a fraction of what’s needed.
Building out the charging infrastructure presents governments, utilities, and new charging companies with some interesting questions. Consider a few trade-offs:
- Where should charging stations be located? This question requires charge-point operators and public stakeholders to balance competing imperatives, including accessibility, convenience, and equity. A low-income area should offer the same access to charging as high-income areas, for instance.
- What charging speed is essential? Fast chargers offer the greatest convenience, but they are also the most expensive. Slow chargers might often meet the public’s needs and could be installed in greater numbers because of their lower cost.
- What is the best way to balance profitability and convenience? Stations with high utilization will deliver better returns on a per-unit basis. Increasing the number of chargers would decrease utilization, and thus profitability expectations for providers, but would improve wait times for consumers (for example, during periods of peak demand). Players can develop scenario-based modeling to quantify and understand these trade-offs.
Developing a highly localized understanding of charging demand based on driving and parking behaviors—rather than assuming that one size fits all—will help stakeholders accurately and efficiently evaluate these trade-offs.
There are several levers that can help to address current challenges, and many rely on appropriate regulatory support. For instance, regulators may want to consider expediting the approval process for charging-point installation, which currently takes anywhere from nine to 16 months. If governments consider shortening site-evaluation time, either by investing in more capacity or streamlining the process, the time to site launch could be reduced significantly.
Over the next decade, the automotive industry will experience changes not seen in over a century. The first shift, from ICE technology to electrification, will encourage the development of battery-powered vehicles that contain leading-edge software, connectivity, and systems, including infotainment, high-performing computers, advanced driver-assistance systems features, and electric powertrains. Eventually, OEMs may create fully autonomous vehicles capable of the most sophisticated driving experience, including, for example, commuting from the owner’s home to work, with the driver using this time to do things such as check emails or watch a movie.
While large-scale AV uptake will hinge on software, regulatory approval, and public acceptance, many analysts believe that highly or fully autonomous vehicles could advance beyond pilots and hit the roads after 2025. Trucks making hub-to-hub trips on highways may well be the first to receive commercial approval. If OEMs create public campaigns to educate people about the safety and benefits of these vehicles, they may help expedite AV uptake.
With these emerging trends, and vehicles becoming increasingly sophisticated, a single company may struggle to take end-to-end responsibility for production. Thus more specialized companies will likely enter the automotive sector and play a larger role in specifying and integrating the components and technologies that they produce.
With such changes, the future ecosystem may bear a greater resemblance to today’s high-tech sector, with companies becoming technology leaders in different specialties and sometimes setting the industry standards. As one example, commercial customers, including fleets, operators of pooled shuttle services, and robo-taxi operators, could also become more exacting, much like technology buyers accustomed to setting their own specifications. Since these customers place bulk vehicle orders to satisfy their demand, OEMs would have to be responsive to fulfill their needs.
Beyond vehicle sales, greater vehicle connectivity will further increase the industry’s focus on service and life cycle revenues. Typical aftermarket services, which now primarily involve selling spare parts, will likely expand toward direct, digital interactions with customers to provide services including updates to connected vehicles. New vehicles could also present novel revenue opportunities throughout the life cycle, including those related to charging, mobility as a service, and other data monetization opportunities, such as selling anonymized vehicle data to specialized marketplaces.
The industry ecosystem will continue to evolve even after electrification and autonomous driving become mainstream. OEMs may eventually try to insource newer technologies to capture additional value, likely focusing on areas where they can develop unique offerings. Meanwhile, the number of specialist companies could drop as leaders emerge and the industry consolidates. The timeline for these shifts is uncertain, especially given external events such as the semiconductor shortage and raw-materials constraints, and the industry structure could be very dynamic over the coming years. The only certainty is that OEMs and other automotive stakeholders must be prepared to support and encourage a host of transitions in the years and decades ahead.