Disruptive technology-driven trends are impacting the automotive industry and will continue to do so over the next few decades. Key trends include autonomous driving, connected cars, and electrification especially electric vehicles. These trends are not only reshaping the automotive industry but are actually fostering convergence of the automotive and technology industry.
Different types of electrified vehicles have been introduced recently, including hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs), and battery electric vehicles (BEVs). This article – the first in a series of three to be published over the upcoming weeks – explores the potential impact of electrification, especially of BEVs, on the fundamental structure of the automotive industry and examines how this profoundly alters the automotive supply chain. You may need to rethink everything you know about the automotive industry.
Electric Vehicles Gathering Pace
Support for electric vehicles is gathering pace. UBS, a global bank, predicts that 14% of all cars being sold globally in 2025 will be electrified; in Europe, predictions even reach up to one third. By that time, total cost of ownership (TCO) could be lower for BEVs than for their gasoline equivalents in the US and Europe, according to new research by Bloomberg.
New Components Changing Industry Structure
BEVs are built from a different set of components than their gas-guzzling cousins. Instead of combustion engines and liquid fuel tanks, their critical components include electrical engines and batteries, along with battery controller technology to link the battery with the engine. In addition, electrification requires adapting other parts in the powertrain, such as gearboxes and drive shafts. And because it is essential to reduce vehicle weight – so that the electric vehicle can cover sufficient kilometers on a single battery charge – BEVs are built using a significant share of composite materials such as aluminum and carbon-fiber-reinforced polymers.
The change in components is a root cause for the anticipated re-structuring of the automotive industry. Some BEV parts will be supplied by companies that are new to this sector. As these organizations start to enter the industry, suppliers of newly obsolete components need to innovate and re-shuffle their portfolios in order to remain competitive within the industry. And the arrival of new components and new players on the automotive scene is sure to change the net depth of value added by incumbent players, as well as the distribution of profit among them.
The component suppliers to watch closely are battery manufacturers. These organizations may be able to reap a significant share of profit per BEV, given the importance of battery technology and the fact that batteries represent a large percentage of total vehicle cost. For example, in first-generation mass market electric vehicles such as the Nissan Leaf, Renault Zoe, and BMW i3, battery costs range from one third to a half of total cost.
Batteries Driving Competitive Edge
OEMs (original equipment manufacturers) need to defend their competitive position against this new class of critical component suppliers. In the past, OEMs achieved competitive advantage from a product perspective through superior engine performance, efficiency, and durability. But in future, much will depend on battery technology, particularly the relative merits of battery capacity, size, charging time, and maximum charging cycles. Thus, OEMs will draw on battery specifications to differentiate themselves and achieve competitive edge. The key question is will they make their own batteries or buy them?
Currently, OEMs are using some different strategies. Tesla is partnering with Panasonic and is investing heavily in a dedicated battery plant. With this business model, Tesla is seeking competitive advantage through proprietary battery cell technology. Established OEMs are more hesitant to invest in dedicated battery factories. Instead they are focusing primarily on “lighter” partnerships with battery manufacturers to secure access to sufficient battery cell production capacity – for example, BMW recently signed a memorandum of understanding with Samsung. With this strategic approach, OEMs are hoping to achieve competitive advantage by benefiting from economies of scale from purchasing latest-generation batteries at reasonable prices from specialized manufacturers. For example, gigafactories, exceeding the capacity of Tesla’s current factory, are planned to be built in China. OEMs that follow this approach may also aim for achieving competitive advantage by developing proprietary technology in packaging multiple battery cells into battery packs and building proprietary battery controllers.
The near future will reveal whether both strategies can co-exist or whether one strategy has significantly greater potential to secure competitive advantage.
Making moves in the supply chain
All of these structural changes in the automotive industry are impacting the supply chain. There are new stakeholders and new flows in the inbound to manufacturing (I2M) supply chain. Which suppliers and OEMs will establish production facilities? Where will these be located? Which modes of transport will be used? And how will the supply chain support the automotive aftermarket with spare parts and battery logistics? These questions are investigated in the two upcoming articles.
If you would like to explore any of these or related issues further, please get in touch with us. In-depth analysis and strategic investigation in the automotive sector are key areas of expertise in DHL Consulting. We welcome the opportunity to discuss your specific requirements.