Three Disruptive Trends Set to Transform the Auto Industry

Over the next 10 years, the global automotive industry is expected to face one of the most significant changes in its history – the replacement of internal combustion engine (ICE) vehicles with electric vehicles (EVs). EVs are seeing strong year-on-year (YoY) growth in some Asian markets (28% in South KoreaFootnote[1] and 76% in ChinaFootnote[2]), more than 40% in the U.S.Footnote[3], and over 100% in certain European marketsFootnote[4]. We expect the industry will see double-digit compound annual growth rates (CAGRs) for the next decade.

Growth in EVs, especially in battery electric vehicles (BEVs) will likely lead to material changes in the automotive value chain and present significant challenges for existing automotive players and their margins. Many traditional auto incumbents will face declining revenues in core areas. On the other hand, we expect suppliers with a diverse range of product offerings and customer base, and those that focus on the EV must-have components (such as batteries and traction motors) to be more resilient than some of the original equipment manufacturers (OEMs). In our view, they will be the likely winners in this changing landscape.

Transition to EVs will likely lead to significant industry disruption

We expect the shift from ICEs to BEVs will spur three major disruptive trends:

  1. Increased bargaining power for suppliers. The number of components required for BEVs is estimated to be 30%-40% less than for ICEs, and the manufacture process tends to be more streamlined with fewer suppliers involved. As a result, the supply chain will likely become less tiered and winning suppliers should have more bargaining power with the smaller OEMs.
  2. Lower margins for both traditional OEMs and new EV-focused players. Prices for batteries and traction motors will likely continue to elevate EV manufacturing costs in the short term. BEVs may not benefit the margins of OEMs as much as those for EV battery makers and EV-specific component suppliers.
  3. Further industry consolidation. We have already started to see consolidation among suppliers and traditional OEMs, while some ICE-focused suppliers are going out of business. At the same time, BEVs have fewer barriers to entry (given not as many suppliers are involved, processes are streamlined and less complicated to coordinate) and will allow OEMs that have less legacy in ICEs and other types of hybrids to compete. For example, Korean automakers and some Chinese OEMs are starting to focus on pure BEVs. In addition, we expect new pure EV producers to enter the market.