China’s Electric Vehicle Dominance Poses a Challenge to the West

• 11-Jan-24
• admin

The big headline last week was how a Chinese EV company, BYD, based in Shenzhen, outsold Tesla in quarterly sales for the first time. It did not escape the world that Warren Buffet owns a stake in BYD. Not that Mr Buffet has played a significant role in management, but it is clear that his vision has paid off again.

BYD stands for Build Your Dreams.

On top of that news, it was also made known that the entire Chinese EV market is now selling more cars than the Japanese, which for a long time, has been the world’s largest car producer with an annual output of about 5million units. And by 2030, China is expected to sell 10million cars. Not that Toyota, Nissan etc, which have great technology and plenty of resources, are giving up. Toyota for instance is launching 20 new EV models this year. And they just changed their CEO to a younger man, Koji Sato, to respond better to the Chinese challenge. Toyota, as well as Porsche, are trying to do things like solid state batteries as well as deploy new technology like hydrogen engines. Not that these have hit the streets yet, or any time soon, but if you are watching their announcements, you may think that the EV wars are not over, rather than won by Chinese manufacturers.

Here is an assessment from a western newspaper, the Financial Times, with the article ominously entitled:

China’s electric vehicle dominance presents a challenge to the west

Companies such as BYD and Nio are targeting overseas markets, leaving governments torn between encouraging greater take-up and protecting domestic manufacturers. Phrases in bold are my emphasis or written by me.

For close to a century, Toyota prided itself on its ability to constantly trim the costs of making its complex, highly engineered vehicles. But when Takero Kato, the head of the Toyota division tasked with building electric vehicles, travelled through China in 2018 he was shocked by what he found. For the first time, I came face to face with the competitiveness of Chinese components,” he told the company’s internal newspaper, Toyota Times, in November.

“Laying eyes on equipment that I had never seen in Japan and their state of the art manufacturing, I was struck by a sense of crisis,” he recalled. “We’re in trouble!” Kato was right to worry. Last year China overtook Japan as the world’s biggest auto exporter, with data from Shanghai-based advisory firm Automobility showing Chinese auto exports have nearly quintupled since 2020 to approach 5mn last year. In the final quarter of 2023 BYD, the Shenzhen-based company backed by Warren Buffett’s Berkshire Hathaway group, outsold Tesla for the first time, sending a powerful warning signal to the global auto industry.

BYD’s sales come mostly from the domestic market, which it dominates. But the group is one of several Chinese EV makers turning their sights to foreign shores.

China’s entrants — from publicly listed BYD to state-owned Chery — plan to use new regional operations in places like Hungary and Mexico to enter western markets with cheaper electric models, securing their global dominance and challenging storied incumbents such as General Motors, Ford and Volkswagen. Their other Trojan horse includes JVs with western car-makers with marketing in the hands of the westerners.

“No one can match BYD on price. Period,” says Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights. “Boardrooms in America, Europe, Korea and Japan are in a state of shock.” While the US government has responded with numerous subsidies to encourage domestic manufacturing, the prospect of millions of low-cost, high-tech cars made by Chinese companies hitting European shores poses a dilemma for lawmakers there. A flood of cheap Chinese car imports could be disastrous for Europe’s incumbent carmakers, with the EU already considering import tariffs to limit the damage. But restricting lower-cost imports could stymie the development of the electric vehicle market (and a transition to a greener planet desired politically) at a time when Europe is trying to limit fossil fuel emissions and working towards outlawing combustion-engined vehicles altogether by 2035.

In other words, the shock is evolving into panic.

Three-quarters of Chinese cars exported today have petrol or diesel engines, notes Bill Russo, former head of Chrysler in north-east Asia and founder of Automobility. But it is the rise of affordable Chinese EVs that is making carmakers nervous around the world and “prompting protectionist governments to consider trade restrictions”. In her State of the Union address in September, European Commission President Ursula von der Leyen complained that China was flooding the global market with cheap EVs and that Beijing was making prices “artificially low” via huge state subsidies. (Not true, since the Chinese government considers Chinese affordability, since on a PPP basis, China is much cheaper than Europe.) The EU has launched a probe into China’s industry, a move that could result in hiked tariffs on Chinese imports. In the US, where EVs account for a much lower proportion of car sales than Europe, lobby groups like the Alliance for American Manufacturing have urged the Biden administration to stand vigilant against the Chinese auto groups. “A flood of Chinese imports has devastated several of America’s domestic industries in the past, notably undercutting American solar and steel manufacturers,” a spokesperson for the alliance warned last year. “It’s the same formula for disaster that we’re seeing play out with EV batteries”.

However, experts warn that even if China’s automakers were confined to their home turf behind a wall of tariff protections, they would still be able to compete with US and European manufacturers on price. A key cost advantage for BYD, the company which industry leaders acknowledge poses the biggest threat, comes from its expertise in producing lithium-based batteries, the most expensive single part of an EV. The group, which evolved from a cell phone battery maker in the 1990s and 2000s, has become a world leader in the field.

 

 

According to Bernstein research, BYD batteries are among the lowest cost in the world while also boasting close to the highest energy density, which results in better performance in the cars. Tesla and Toyota are customers of BYD’s battery division. That has helped it undercut its western rivals. BYD’s Atto 3, the company’s cheapest model, sells for €38,000 in Europe, while the Tesla Model 3 is priced at around €43,000 in major markets such as Germany and France. The brand, which already sells in more than 50 countries, has five models on the market in China that sell for less than the equivalent models from Elon Musk’s group.

Chinese automakers have sufficient unused capacity in their domestic factories to make significant inroads into major overseas markets before they break ground on a single regional hub. BYD exported nearly 250,000 cars last year and — even without the US or European markets — management have told investors they believe they can increase that by more than tenfold over the coming years. “China still builds and buys more EVs than the rest of the world combined,” says Dunne. “Chinese EV makers are sitting on enough capacity to supply 75 per cent of global EV demand. That should keep western automakers awake at night.” As Ford prepared to close its ageing factory in Saarlouis, Germany last year, a thought occurred to executives: Why not find another carmaker to take over the site? At its door were several Chinese carmakers, including BYD, that were looking for an easy toehold in Europe’s competitive auto market. The talks faltered. A potential buyer walked away. Last month, BYD instead announced it will erect a gleaming new factory in Hungary, “the heart of Europe”, to cater to its growing ambitions. Yet while Chinese automakers are already encroaching on European territory, gaining a foothold in the $1.5tn US auto sector is the grand prize, especially given the surplus of manufacturing capacity over demand in China itself.

“It isn’t just ‘the mighty Chinese making great profits at home, and now they’re stepping into the US market’,” says Dunne, the consultant. “They understand that sitting back in China is not an option. They have to come to North America. They have to find a way in. One of the ways in is to establish a base on America’s southern flank.” BYD and several other Chinese carmakers are currently scoping the Mexican market to find new manufacturing sites to better target American consumers, as well as other countries in the region. Chinese groups already stand at a distinct disadvantage in entering the US — especially in the nascent EV sector — compared to rival carmakers from South Korea, Japan and Europe. Joe Biden’s Inflation Reduction Act aims to dole out billions in subsidies for EV development to nonChinese groups in a bid to reduce US exposure to Chinese technology in key supply chains.

There is also a trend, difficult to quantify but likely to be significant, of consumer wariness about buying China-made products. Yet experts think companies like BYD could still one day crack the US car market, even accounting for trade barriers and the rise of anti-Chinese sentiment in the US. The competitive factor, as in Europe, is cost. The lower-price segment of the auto market has largely been abandoned by the “Detroit Three” of General Motors, Ford and Chrysler-owner Stellantis, who have concentrated instead on pick-ups and sports utility vehicles. Dunne notes that the average price of a new car in the US this year is about $48,000. “Imagine [Chinese automakers] come in with a $20,000 product. The current tariff of 25 per cent knocks it up to $25,000 or $26,000. They are still in a very good position.”

But others point out that cost advantage is not set in stone. Once groups like BYD start manufacturing outside China, they will not enjoy the same levels of state support as they do inside the country, says Jorge Guajardo, a former Mexican ambassador to China and now a partner at Dentons Global Advisors. “The subsidies cannot easily be exported; they are energy, state and local taxes,” he says. “There are not that many examples of Chinese manufacturing abroad. In countries which are competitive in their auto sectors, as is the case in Mexico, the Chinese will have to face a type of competition that they’d be hard pressed to face without the subsidies.” Western governments are increasingly on guard against China’s incursion into their markets. The Biden administration has privately cautioned Mexico about the imminent wave of Chinese investment. Congressional representatives wrote in a recent letter they were worried Chinese companies would use Mexico as a “back door” into their market. The EU anti-dumping and subsidy investigation, meanwhile, will set out its conclusions by November this year. At the same time, officials in both the US and Europe are also sharpening their focus on the perceived security risks of having China-made components in critical infrastructure such as energy and telecoms. Such concerns will now be applied to Chinese vehicles as well as batteries and other clean technologies, experts say.

For their part, Chinese auto executives are pushing back at what they regard as western protectionism. They have called for fair treatment, arguing that foreign automakers have long profited from selling into China’s huge consumer market. They are also trying to position themselves as “global” companies to counter western consumers’ misgivings around Chinese groups. William Li, founder and chief executive of Shanghaiheadquartered EV group Nio, told the FT late last year that investors from outside China hold more than 80 per cent of the company’s shares. The company has maintained a Silicon Valley office since its founding in 2015. “We’ve hoped to become a global start-up since our inception,” Li told the FT last year. “The problem we’re solving is also something the whole world is faced with together.” Western policymakers considering blocking China from their clean tech supply chains will need to consider the impact on their net zero ambitions, says Cory Combs, associate director at the Beijingbased Trivium China consultancy. He adds that while governments are justified in seeking to diversify supply chains, western countries risk “pushing themselves into a corner” by inhibiting their own climate transitions without sufficient mitigation strategies in place. “We’re quickly approaching a make-or-break moment . . . I wonder if that trade-off is being thoroughly considered in a lot of capitals.”

 

By Edward White in Shanghai and Peter Campbell in London, 6 January 2024

And here are my additional comments in red: China has beaten Japan and Germany (and the US) in car manufacturing in a very short time. And this is an important area of manufacturing since for most consumers on the planet, a car represents the second largest purchase they will ever make, after the roof over their heads. This is an enormous market. How did they do it?

It is not just a matter of sales of Chinese ev’s catching up. There are many imported marques that are falling precipitously in China. Some Chinese dealerships are going bankrupt because the legacy cars are not moving. This is bad news for the countries which sell them. In Japan, where the main manufacturing industry revolves around autos and their supply chains, the fact that these car makers have been caught flatfooted will lead to massive retrenchments and deindustrialization there. Germany will be hit twice, first by rising energy costs and now declining sales in the industry that represents its best export. The deindustrialization will be real.

Makers like BYD are not just turning out EVs that look like boxes. The design of the top models are truly stunning. Here is the showcase BYD car in last years’ Shanghai motor show. It’s the Yang Wang U9 and it sells for US$150,000 in America.

Besides good design, which is very important for cars, the Chinese EVs are also highly competitive against European marques because there is a more sophisticated software industry in China. Other than SAP, software engineering is not a strength in Germany, so China wins hands down in this department. Needless to say, good design is not only found in the high end models. Here is the BYD Attos 3, one of the cheapest of their cars:

 

And it must not be forgotten that the success of the Chinese EV industry is deeply entrenched in Chinese national economic policy. BVD and the other 20 other EV makers would not have succeeded if the Chinese government has not built up the battery re-charging infrastructure over a vast country in which the typical human reaction to EV acceptance is “what if I run out of juice on a long trip?” As a matter of fact, that is the problem with EV acceptance in the US. The recharging infrastructure is not well developed. And with the Biden administration pushing hard on the greening of its car industry, all the manufacturers are forced to make EVs. It has reached the point in which the new cars are piling up at the dealerships and nobody is buying them (the opposite phenomenon is happening in China, testifying to the wider acceptance of new technology in China than in America). In other words, in spite of the subsidies provided by the US government, there is not enough offtake. Every car maker is losing money in making these cars. And if this continues, the greening effort will fail. On the other hand, in China, because the government is strongly supportive, it makes sense for people to buy EVs since the cost of ownership and running an EV is lower.

That is also why in Europe, governments there cannot be too aggressive in pushing out the EV industry. If it makes sense for people to buy these cars, the end result will be the destruction of the European car makers, since the BYDs of the world will replace them. If they put tariffs in place, that will be a big slap in the face of the leaders who are in support of greening. And not only that, China will then claim that they can also put tariffs on German and other European marques in China, and that will sink the European manufacturers which sells ¼ to 1/3 of all their cars in that country. The problem for European governments is that China is also the largest car market in the world. So this is a challenge for the west. Here is an article that highlights what the Chinese government has done for its EV industry:

 

China claims title of having world’s largest EV charging network

Scooter Doll | Oct 29 2021

A report out of China, citing recent data from the Electric Vehicle Charging Infrastructure Promotion Alliance, hands the crown to the country as having the world’s largest EV charging network. With over 2.2 million charging stations throughout the country, China’s EV infrastructure continues to expand at an impressive rate, while other countries, including the US, have some serious catching up to do. In more ways than one, China has been at the forefront of electric mobility. While it may not be home to the world’s largest EV automaker by market capital, the country takes its transition toward electrification very seriously, alongside extensive support from its government. China’s path toward EV ascendancy began over a decade ago, with a government-led focus on promoting and implementing new energy vehicles (NEVs). This category includes BEVs and PHEVs. The initial trial program included pricing incentives for private NEV purchases and subsidies for Chinese automakers. Despite the early efforts, less than 0.01% of new vehicle sales in China from 2009 to 2012 were electric. To accelerate NEV adoption, China set new target sales goals and introduced further monetary incentives in 2014 alongside plans for a nationwide charging network in order to expand charging infrastructure. By the mid-2010s, EV sales had jumped to the hundreds of thousands annually, seeing yearover-year growth of over 300%. Sales of NEVs in China skyrocketed from there, surpassing 1 million units annually in 2018.

Furthermore, a vast majority of the NEVs sold were manufactured by Chinese automakers. Foreign automakers like Tesla and Ford have since entered the Chinese EV market and have found success. That being said, Chinese automakers like NIO and SAIC still dominate their domestic market and have begun expanding to other global markets as well. With the successful transition to EVs so far, China’s charging network has seen a growth correlation alongside other technologies such as battery swap stations. As a result, it has established itself as the current leader in EV infrastructure. Total number of public EV charging stations in China – 2015 to 2020 : Statista

China is currently the largest EV charging network on earth

According to a report from The People’s Daily, data from the Electric Vehicle Charging Infrastructure Promotion Alliance shows that China currently offers 2.22 million EV charging stations throughout the country, the largest network in the world. According to that same data report, China’s EV charger stations have more than doubled since this period last year. The country has added nearly 240,000 public chargers so far in 2021 alone, totaling 1.04 million in all – a 72.3% increase compared to 2020. The second half of China’s tremendous charging network comes from private NEV owners, who have installed over 1.02 million charging piles in their homes and other dwellings. For perspective, the US has 45,124 public charging stations offering about 111,000 charging stations, according to data from the US Department of Energy. China has implemented more than twice that in 2021 alone.

The success of any industry in China cannot happen without the development of the supply chain. And that is another major factor in the growth of the Chinese EV juggernaut. The role played by the battery makers cannot be overestimated. These batteries are cutting edge. The largest of them is CATL. CATL has won accolades on its products, and even Tesla buys components from CATL.

Here is more information on CATL:

CATL Chinese battery manufacturer Contemporary Amperex Technology Co. Limited (simplified Chinese: 宁德时代; traditional Chinese: 寧德時代; pinyin: Níngdé Shídài), abbreviated as CATL, is a Chinese battery manufacturer and technology company founded in 2011 that specializes in the manufacturing of lithium-ion batteries for electric vehicles and energy storage systems, as well as battery management systems (BMS). In 2022, its global market share stood at 37%. The company is headquartered in the city of Ningde in China's Fujian province. CATL has established thirteen battery manufacturing bases worldwide, namely in Ningde; Liyang, Jiangsu Province; Xining, Qinghai Province; Yibin, Sichuan Province; Zhaoqing, Guangdong Province; Lingang Special Area of China (Shanghai) Pilot Free Trade Zone, Shanghai; Xiamen, Fujian Province; Yichun, Jiangxi Province; Guiyang, Guizhou Province; Jining, Shandong Province; Luoyang, Henan Province; Erfurt, Germany and Debrecen, Hungary. History CATL was founded in Ningde, which is reflected in its Chinese name ('Ningde era'). The company started as a spin-off of Amperex Technology Limited (ATL), a previous business founded by Robin Zeng in 1999. ATL initially manufactured lithium-polymer batteries based on licensed technology, but later developed more reliable battery designs themselves. In 2005 ATL was acquired by Japan's TDK company, but Zeng continued as a manager for ATL. In 2012, Zeng and vice-chairman Huang Shilin spun-off the EV battery operations of ATL into the new company CATL. Until 2015, former parent TDK held a 15% stake in CATL.

Zeng has applied management styles of TDK and Huawei to his company.

Growth China's battery sector has decoupled from the monopoly of western technology, aided by lithium battery technology and domestic production of rare earth metals used in anodes and cathodes. It has joined the supply chains of European and American vehicle manufacturers amidst competition from Panasonic and L.G. Chemical. In 2016, CATL was the world's third largest provider of EV, HEV and PHEV batteries, behind Panasonic (Sanyo) and BYD. In 2017, CATL's sales of power battery system reached 11.84GWh, taking the lead worldwide for the first time.

In 2018, it was announced that CATL would establish a new battery factory in Arnstadt, Thuringia, Germany.

As the Chinese government started to phase out subsidies for EVs towards 2020, CATL sought to diversify its revenue overseas. In June 2020, CATL's founder Zeng Yuqun announced that the company had achieved a battery for electric vehicles (EVs) rated as good for 1 million miles (or 1.6 million kilometers) and was waiting to receive orders. In the first half of 2022, CATL ranked first in the world with a market share of 34 percent, according to SNE research.

In 2022, CATL announced plans to establish a new battery factory in Debrecen, Hungary.

 

Partnerships

Due to its main competitor BYD Company prioritizing battery supply to its own vehicles, CATL was able to capture partnerships with foreign automakers. CATL's battery technology is currently used by electric vehicle manufacturers in the international market, and CATL collaborates with companies including BMW, Daimler AG, Hyundai, Honda, Li Auto, NIO, PSA, Tesla, Toyota, Volkswagen, Volvo and XPeng. In China, its clients include BAIC Motor, Geely, GAC Group, Yutong Bus, Zhongtong Bus, Xiamen King Long, SAIC Motor and Foton Motor. In January 2017, CATL announced its plans to enter into a strategic partnership with Valmet Automotive, focusing its collaboration on project management, engineering and battery pack supply for EV and HEV. As part of the partnership, CATL acquired a 22% stake in Valmet Automotive.

BMW announced in 2018 that it would buy €4 billion worth of batteries from CATL for use in the electric Mini and iNext vehicles. In July 2022, Ford announced buying batteries from CATL for use in the Ford Mustang Mach-E and Ford F-150 Lightning models, which subsequently raised concerns with the United States House Select Committee on Strategic Competition between the United States and the Chinese Communist Party.

In October 2022, CATL expands deal with VinFast to provide skateboard chassis for EVs and ‘enhance global footprint.’

CATL signs MoU with HKSTP In 2023, Ford announced a plan to build an EV battery plant in Marshall, Michigan using technology from CATL. The facility would be a wholly-owned subsidiary of Ford and is expected to employ about 2,500 workers. Ford says doing so would bring production to the US and reduce the import of batteries, which many vehicle manufacturers engage in. The construction was paused after lawmakers raised questions about how tax subsidies to Ford would be distributed. On December 7, 2023, CATL and Hong Kong Science and Technology Parks Corporation (HKSTP) signed a memorandum of understanding to establish a CATL research center at the HKSTP with a total investment of over HKD 1.2 billion.

Technology

According to former Tesla battery supply chain manager Vivas Kumar, CATL "are seen as the leaders of lithium iron phosphate battery (LFP battery) technology". The company employs the cell-to-pack method to reduce the inactive weight of its batteries. It increases volume utilization rate by 15% to 20%, doubles the production efficiency and reduces the number of parts for a battery pack by 40%, while the energy density of a battery pack jumps from 140 to 150 Wh/Kg to 200 Wh/Kg. According to Kumar, unlike competitors such as LG Chem or SK Innovation, CATL is more willing to adapt outside technology, as opposed to applying a full in-house design. In 2021 the company unveiled a sodium-ion battery for the automotive market. A battery recycling facility is planned to recover some of the materials.

In 2022, CATL's Yibin manufacturing plant was certified as the world's first zero-carbon battery factory.

CATL prioritizes cost and operational efficiency over innovation for new products and production techniques. In production, standardization helps CATL reduce wastage, stabilize quality of products, and offer cheaper replacements for end users, but also restricts the company's ability to develop products for clients to match their designs. In 2023, CATL introduced its M3P battery, offering a 15% increase in energy density, reaching 210 Wh/kg. The battery replaces the iron in the lithium iron phosphate battery with a combination of magnesium, zinc, and aluminum.

Later that year, the company announced its Shenxing LFP battery. The cathode of Shenxing LFP is fully nano-crystallized, which accelerates ion movement and the response to charging signals. The anode's second-generation fast ion ring technology increases intercalation channels and shortens intercalation distance. Its superconducting electrolyte formula reduces viscosity and improves conductivity. A new separator film reduces resistance. At room temperature, Shenxing can charge from 0 to 80% in 10 minutes and in just 30 minutes at-10 °C, maintains 0-100 kph performance at low temperatures. Safety is enhanced by using a safe coating for the electrolyte and the separator. A real-time fault testing system allows safe and fast refueling.

The above are the critical factors that have enabled the Chinese EV industry to leapfrog the world in car making. But if China continues to succeed, then it is obvious that the western car making industry will decline, as least in terms of market share. This has serious implications for the world economy. When an enormous industry like car making retrenches, what do you think will happen? The world will get into serious economic problems. It is not possible to know how bad this will yet become, but it cannot be easy on the countries used to high standards of living because the automobile industry has sustained their economies since WW2. Remember, the US Automotive Workers Union last fall were asking for and got pay increases for their members starting from US$100.000 per annum. These guys will become more cannon fodder for Trump’s Make America Great Again, soon enough. At those wage rates, and with Chinese wages at fraction of those, the Chinese EV makers will eat the Americans for lunch. In short, bad times for these western automakers will come soon enough when the trend towards EVs accelerate, as it must, and their domestic manufacturers still live in the past. A Youtuber by the ElectricViking which has produced 600 videos on EVs in the last couple of years. So he is something of an expert on EVs. His prognosis is that Tesla will remain at the top of the sales leagues, if only for still enjoying first mover advantage, and great financial strength. BYD will become second placed.

What is the conclusion here? That China will become a major player in the car making industry, not just EVs. There are 10 Chinese companies there!! Most countries would be happy if they have two or three…

But that does not mean that the success of China in EVs will shrink the global car industry. In fact there is a new McKinsey report that claims that the revenue pool will increase.

 

McKinsey:
Today’s economies are dramatically changing, triggered by development in emerging markets, the accelerated rise of new technologies, sustainability policies, and changing consumer preferences around ownership. Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity.

Most industry players and experts agree that the four trends will reinforce and accelerate one another, and that the automotive industry is ripe for disruption. Given the widespread understanding that game-changing disruption is already on the horizon, there is still no integrated perspective on how the industry will look in 10 to 15 years as a result of these trends. To that end, our eight key perspectives on the “2030 automotive revolution” are aimed at providing scenarios concerning what kind of changes are coming and how they will affect traditional vehicle manufacturers and suppliers, potential new players, regulators, consumers, markets, and the automotive value chain.
This study aims to make the imminent changes more tangible. The forecasts should thus be interpreted as a projection of the most probable assumptions across all four trends, based on our current understanding. They are certainly not deterministic in nature but should help industry players better prepare for the uncertainty by discussing potential future states.

1. Driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30 percent, adding up to $1.5 trillion.
The automotive revenue pool will significantly increase and diversify toward on-demand mobility services and data-driven services.

This could create up to $1.5 trillion—or 30 percent more—in additional revenue potential in 2030, compared with about $5.2 trillion from traditional car sales and aftermarket products/services, up by 50 percent from about $3.5 trillion in 2015.

Connectivity, and later autonomous technology, will increasingly allow the car to become a platform for drivers and passengers to use their time in transit to consume novel forms of media and services or dedicate the freed-up time to other personal activities. The increasing speed of innovation, especially in software-based systems, will require cars to be upgradable. As shared mobility solutions with shorter life cycles will become more common, consumers will be constantly aware of technological advances, which will further increase demand for upgradability in privately used cars as well.

2. Despite a shift toward shared mobility, vehicle unit sales will continue to grow, but likely at a lower rate of about 2 percent per year.

Overall global car sales will continue to grow, but the annual growth rate is expected to drop from the 3.6 percent over the last five years to around 2 percent by 2030. This drop will be largely driven by macroeconomic factors and the rise of new mobility services such as car sharing and e-hailing.
A detailed analysis suggests that dense areas with a large, established vehicle base are fertile ground for these new mobility services, and many cities and suburbs of Europe and North America fit this profile. New mobility services may result in a decline of private-vehicle sales, but this decline is likely to be offset by increased sales in shared vehicles that need to be replaced more often due to higher utilization and related wear and tear.

The remaining driver of growth in global car sales is the overall positive macroeconomic development, including the rise of the global consumer middle class. With established markets slowing in growth, however, growth will continue to rely on emerging economies, particularly China, while product-mix differences will explain different development of revenues.

 

3. Consumer mobility behavior is changing, leading to up to one out of ten cars sold in 2030 potentially being a shared vehicle and the subsequent rise of a market for fit-for-purpose mobility solutions. Changing consumer preferences, tightening regulation, and technological breakthroughs add up to a fundamental shift in individual mobility behavior. Individuals increasingly use multiple modes of transportation to complete their journey; goods and services are delivered to rather than fetched by consumers. As a result, the traditional business model of car sales will be complemented by a range of diverse, on-demand mobility solutions, especially in dense urban environments that proactively discourage private-car use.

Consumers today use their cars as all-purpose vehicles, whether they are commuting alone to work or taking the whole family to the beach. In the future, they may want the flexibility to choose the best solution for a specific purpose, on demand and via their smartphones. We already see early signs that the importance of private-car ownership is declining: in the United States, for example, the share of young people (16 to 24 years) who hold a driver’s license dropped from 76 percent in 2000 to 71 percent in 2013, while there has been over 30 percent annual growth in car-sharing members in North America and Germany over the last five years. Consumers’ new habit of using tailored solutions for each purpose will lead to new segments of specialized vehicles designed for very specific needs. For example, the market for a car specifically built for e-hailing services—that is, a car designed for high utilization, robustness, additional mileage, and passenger comfort—would already be millions of units today, and this is just the beginning.

As a result of this shift to diverse mobility solutions, up to one out of ten new cars sold in 2030 may likely be a shared vehicle, which could reduce sales of private-use vehicles. This would mean that more than 30 percent of miles driven in new cars sold could be from shared mobility. On this trajectory, one out of three new cars sold could potentially be a shared vehicle as soon as 2050.

 

4. City type will replace country or region as the most relevant segmentation dimension that determines mobility behavior and, thus, the speed and scope of the automotive revolution.

Understanding where future business opportunities lie requires a more granular view of mobility markets than ever before. Specifically, it is necessary to segment these markets by city types based primarily on their population density, economic development, and prosperity. Across those segments, consumer preferences, policy and regulation, and the availability and price of new business models will strongly diverge. In megacities such as London, for example, car ownership is already becoming a burden for many, due to congestion fees, a lack of parking, traffic jams, et cetera. By contrast, in rural areas such as the state of Iowa in the United States, private-car usage will remain the preferred means of transport by far.
The type of city will thus become the key indicator for mobility behavior, replacing the traditional regional perspective on the mobility market. By 2030, the car market in New York will likely have much more in common with the market in Shanghai than with that of Kansas.

 

5. Once technological and regulatory issues have been resolved, up to 15 percent of new cars sold in 2030 could be fully autonomous.

Fully autonomous vehicles are unlikely to be commercially available before 2020. Meanwhile, advanced driver-assistance systems (ADAS) will play a crucial role in preparing regulators, consumers, and corporations for the medium-term reality of cars taking over control from drivers. The market introduction of ADAS has shown that the primary challenges impeding faster market penetration are pricing, consumer understanding, and safety/security issues. Regarding technological readiness, tech players and start-ups will likely also play an important role in the development of autonomous vehicles. Regulation and consumer acceptance may represent additional hurdles for autonomous vehicles. However, once these challenges are addressed, autonomous vehicles will offer tremendous value for consumers (for example, the ability to work while commuting, or the convenience of using social media or watching movies while traveling).

 

6. Electrified vehicles are becoming viable and competitive; however, the speed of their adoption will vary strongly at the local level.

Stricter emission regulations, lower battery costs, more widely available charging infrastructure, and increasing consumer acceptance will create new and strong momentum for penetration of electrified vehicles (hybrid, plug-in, battery electric, and fuel cell) in the coming years. The speed of adoption will be determined by the interaction of consumer pull (partially driven by total cost of ownership) and regulatory push, which will vary strongly at the regional and local level.

In 2030, the share of electrified vehicles could range from 10 percent to 50 percent of newvehicle sales. Adoption rates will be highest in developed dense cities with strict emission regulations and consumer incentives (tax breaks, special parking and driving privileges, discounted electricity pricing, et cetera). Sales penetration will be slower in small towns and rural areas with lower levels of charging infrastructure and higher dependency on driving range.

Through continuous improvements in battery technology and cost, those local differences will become less pronounced, and electrified vehicles are expected to gain more and more market share from conventional vehicles. With battery costs potentially decreasing to $150 to $200 per kilowatt-hour over the next decade, electrified vehicles will achieve cost competitiveness with conventional vehicles, creating the most significant catalyst for market penetration. At the same time, it is important to note that electrified vehicles include a large portion of hybrid electrics, which means that even beyond 2030, the internal-combustion engine will remain very relevant.

 

7. Within a more complex and diversified mobility-industry landscape, incumbent players will be forced to compete simultaneously on multiple fronts and cooperate with competitors.

While other industries, such as telecommunications or mobile phones/handsets, have already been disrupted, the automotive industry has seen very little change and consolidation so far. For example, only two new players have appeared on the list of the top-15 automotive original-equipment manufacturers (OEMs) in the last 15 years, compared with ten new players in the handset industry.

A paradigm shift to mobility as a service, along with new entrants, will inevitably force traditional car manufacturers to compete on multiple fronts. Mobility providers (Uber, for example), tech giants (such as Apple, Google), and specialty OEMs (Tesla, for instance) increase the complexity of the competitive landscape. Traditional automotive players that are under continuous pressure to reduce costs, improve fuel efficiency, reduce emissions, and become more capital-efficient will feel the squeeze, likely leading to shifting market positions in the evolving automotive and mobility industries, potentially leading to consolidation or new forms of partnerships among incumbent players.

In another game-changing development, software competence is increasingly becoming one of the most important differentiating factors for the industry, for various domain areas, including ADAS/active safety, connectivity, and infotainment. Further on, as cars are increasingly integrated into the connected world, automakers will have no choice but to participate in the new mobility ecosystems that emerge as a result of technological and consumer trends.

8. New market entrants are expected to target initially only specific, economically attractive segments and activities along the value chain before potentially exploring further fields.

Diverging markets will open opportunities for new players, which will initially focus on a few selected steps along the value chain and target only specific, economically attractive market segments—and then expand from there. While Tesla, Google, and Apple currently generate significant interest, we believe that they represent just the tip of the iceberg. Many more new players are likely to enter the market, especially cash-rich high-tech companies and start-ups. These new entrants from outside the industry are also wielding more influence with consumers and regulators (that is, generating interest around new mobility forms and lobbying for favorable regulation of new technologies). Similarly, some Chinese car manufacturers, with impressive sales growth recently, might leverage the ongoing disruptions to play an important role globally.

Automotive incumbents cannot predict the future of the industry with certainty. They can, however, make strategic moves now to shape the industry’s evolution. To get ahead of the inevitable disruption, incumbent players need to implement a four-pronged strategic approach:

Prepare for uncertainty. Success in 2030 will require automotive players to shift to a continuous process of anticipating new market trends, exploring alternatives and complements to the traditional business model, and exploring new mobility business models and their economic and consumer viability. This will require a sophisticated degree of scenario planning and agility to identify and scale new attractive business models.

Leverage partnerships. The industry is transforming from competition among peers toward new competitive interactions, but also partnerships and open, scalable ecosystems. To succeed, automotive manufacturers, suppliers, and service providers need to form alliances or participate in ecosystems—for example, around infrastructure for autonomous and electrified vehicles.

Drive transformational change. With innovation and product value increasingly defined by software, OEMs need to align their skills and processes to address new challenges like software-enabled consumer value definition, cybersecurity, data privacy, and continuous product updates. Reshape the value proposition. Car manufacturers must further differentiate their products/services and change their value proposition from traditional car sales and maintenance to integrated mobility services. This will put them in a stronger position to retain a share of the globally growing automotive revenue and profit pool, including new business models such as online sales and mobility services, and cross-fertilizing the opportunities between the core automotive-business and new mobility-business models.

If McKinsey is right, there will be enough revenue for all these car companies to share. But the transformation of the industry from manufacturing to services-based, as pointed out above, will make most cities in the world look more alike than different – perhaps less exclusive and personalized - from smaller places in the countryside.

However, if they are wrong, then there will be an absolute decline in the industry, and increasing calls for protectionism which as usual will not work. There will be declining standards of living in the west and Japan. Should that happen, expect the yen and the Euro to stay weak. And I would be the last one to worry about China’s economic growth.

 

By:

Wai Cheong

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.