The rise of electric vehicles, self-driving cars and shared mobility will dramatically change the sources of profitability in the automotive industry. Over the next 10 to 15 years, the market structure will shift as suppliers, ride-hailing companies, tech giants, and cities and larger mobility ecosystems seek to gain influence at the expense of original equipment manufacturers (OEM).
New sources of profitability emerge
Emerging profit pools – including battery-powered electric vehicles (BEVs), components for BEVs and autonomous vehicles (AV), data and connectivity services, and on-demand mobility offerings – will account for 40% of industry profits in 2035, up from 1% in 2017. This shift in profit pools will intensify at the same time that growth in sales of new cars slows.
A review of the factors underlying the forecast provides some insight into how the market is developing:
New car sales: Annual sales of new cars could increase by 17 million units by 2035. But volumes will remain relatively flat from 2025 onward, as the market for new cars will be affected both positively and negatively by a variety of developments. Sales volumes will be bolstered by the continued growth (albeit at a slower rate) of China and other emerging markets. Additionally, revenue will get a boost from higher vehicle prices.
Component supply: Value creation will shift from OEMs to suppliers as BEV penetration increases. OEMs’ value share (that is, their share of the costs of components manufactured per vehicle) is expected to fall to between 10% and 20% for BEVs by 2030, considerably less than what it is today for internal combustion engine (ICE) powered vehicles (27%). We forecast that new AV and BEV components, primarily manufactured by suppliers, will represent 50% of the component value of autonomous BEVs.
Aftermarket: OEMs’ high-margin aftermarket business will be hurt by the adoption of BEVs, which require nearly 60% less maintenance per year than ICE vehicles. However, the negative impact will develop slowly, because BEVs will make up only about 10% of the vehicles on the road by 2035.
Data and connectivity: The adoption of BEVs and AVs will enable tremendous growth in revenue related to connectivity services. We forecast that revenue will increase from $4 billion in 2017 to $157 billion in 2035. Connectivity revenue will be generated by in-car advertisements and recommendations; digitally enabled services, feature unlocks, and subscriptions; and business-to-business data brokerage.
On-demand mobility: Self-driving taxis will substantially reduce the cost of on-demand mobility compared not only with traditional taxis, but also with today’s more affordable ride-hailing and car-sharing services. Indeed, instead of using a personal car, many people will hail an AV wherever and whenever they need it. The lower costs and greater convenience of using AVs hailed on-demand will lead to a substantial increase in market penetration, especially in cities.
A 'double whammy' investment challenge
To unlock the promised value of mobility technology, industry players will need to invest more than $900 billion in new growth areas by 2030 and more than $2.4 trillion by 2035. Key areas for investment include: AV technology, battery production facilities, charging infrastructure and self-driving taxi fleets.
OEMs face the double challenge of needing to make their share of the investments in growth areas at the same time that margins in their core business are declining. Our analysis found that OEMs are likely to see their return on sales, now close to 7%, drop by approximately 1% by 2025. Among the factors driving the contraction will be the lower profitability of BEVs and hybrid vehicles and the cost of compliance with emission regulations. Over the same period, the ratio of capital expenditures to revenue will climb by around 1% as OEMs work to fund future growth areas.
A transformed market structure
As a result of these developments, OEMs will find their market position challenged on multiple fronts over the next 15 years. Suppliers, especially makers of AV and BEV components, will gain greater influence. Ride-hailing companies and tech giants will battle to dominate the customer interface and data flows. Start-ups, including digital natives, will enter the race to offer vehicle-centered services. And cities may emerge as the gatekeepers to local services.
Likely winners will be those market participants that are well-positioned in future growth areas: AV technology providers (including electronics and software suppliers), battery makers, and on-demand platform providers and operators. Potential losers could include incumbent suppliers that focus on components for ICE vehicles; incumbent OEMs without a strong position in new business models or in AV or BEV technology; and dealerships and maintenance shops that cannot expand their service offerings.
Among suppliers, the new entrants represent a diverse set of firms, from large corporations to start-ups. These companies will offer a wide variety of new technologies, including AV software, sensors, engine control units, batteries and navigation systems. For example, four companies - BYD, LG Chem, Panasonic, and Samsung - have expanded their roles in the mobility industry by becoming the dominant suppliers of batteries, the most expensive component of self-driving BEVs.
In the on-demand market, major ride-hailing companies such as Uber, Didi Chuxing and Lyft have a strong headstart. Their large driver networks and efficient routing algorithms help them provide the fastest pickups, and they have the know-how to compete in specific markets. As a result, each has a broad customer base and an established brand. However, given the expected adoption of self-driving taxis, the long-term outlook for these current leaders is unclear. The fastest pickup times will belong to the platforms that have the largest self-driving taxi fleets. Ride-hailing companies will also need to build expertise in managing local fleets, rather than drivers, and foster strong partnerships with cities.
On-demand mobility will need a new supporting ecosystem. It requires new infrastructure (including traffic management control centres, pickup and drop-off hubs, and dedicated lanes); purpose-built vehicles and the related financing and insurance; local operations (such as cleaning, maintenance, charging, parking, and roadside assistance); and a technology platform that provides the customer interface, routing and trip assignments, and payment processing. Local operations will represent the largest share of costs, potentially making them a critical source of competitive differentiation.
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Tech giants such as Google and Tencent are building integrated service platforms. For example, Google Maps integrates ride-hailing services from Uber and Lyft, and Tencent’s WeChat has an “order taxi” function that interacts directly with Didi. The tech giants have also invested in one or more of the leading ride-hailing companies. Because these giants control the customer interface and have deep pockets for funding, other players in the market must continue to find ways to collaborate with them.
How to prepare today
Given the large investments and long timeframe required to adapt to the evolving market landscape, industry players must immediately begin defining their strategies for how to best prepare for the shift in profit pools. Each type of player has opportunities to pursue a variety of growth areas:
- Suppliers should decide how to participate in the market for AV hardware and software and BEV batteries and components.
- Automakers will need to manage their transition into new growth areas.
- On-demand mobility companies need to build a broad customer base and strong brand and forge relationships with local and national regulatory authorities.
- Cities have an opportunity to actively shape the future of urban mobility.
Automotive industry incumbents must avoid a false sense of security about the market’s development. It is true that industry revenue will continue to grow and that emerging profit pools will expand slowly at first. However, it is equally true that the sources of profitability will have changed dramatically 10 to 15 years from now. Executives should not leave it to the next generation of leaders to prepare their companies for the new market landscape.