Mobility’s future: an investment reality check

COVID-19 didn’t erase all other mobility disruptions. It just made investors choosier, which is why they need a better technology lens. By McKinsey's Benedikt Kloss, Daniel Holland-Letz, Thibaut Müller, and Matthias Kässer

The global COVID-19 pandemic hit the mobility industry like a multi-car pileup. The crisis has given automakers and suppliers a new revenue and profit mandate: develop a sustainable business strategy that aligns with ‘next normal’ realities. McKinsey’s 2020 overview of the mobility start-up and investment landscape offers both incumbents and new players alike a detailed analysis on which players are spending how much on what technologies in the dynamic mobility industry.

Special report: Who are the mobility start-ups and unicorns to watch in 2021?

Gaining a competitive edge

Despite the global pandemic’s impact, automotive players cannot afford to ignore the other major disruptions taking place, namely autonomous driving, connectivity, electrification, and smart mobility (ACES). These trends will not disappear but instead remain crucial ways mobility players can achieve a competitive edge in the next decade.

While all the ACES remain on the table, the pandemic has added a new wildcard to the deck. As McKinsey consumer surveys showed, travel around the globe dropped significantly and consumers considered shared modes of transport less safe than private ones. COVID-19 will force the industry to do two things which is now more important than ever to not lose ground to competitors and to achieve a competitive position in future mobility in the next decade.

First, since no single player has the resources to invest in all of the ACES trends and fight the pandemic simultaneously, the old gambler line about knowing ‘when to hold and when to fold them’ is appropriate. Companies need to refocus their investments where they’ll do the most good. Second, in support of those decisions, they need to develop a plan that lays out how, where and on what they will spend money. The ‘how’ part raises some strategic questions: Should they do it organically, strike a partnership or go the merger and acquisition (M&A) route?

ACES still wild

Since 2010, investors have poured over US$330bn into more than 2,000 mobility companies focused on ACES trends. That total includes over US$100bn invested since the beginning of 2019. About two-thirds of these investments have targeted autonomous vehicles (AVs) and smart mobility. In contrast, the data suggests that companies approach connectivity and electric vehicles (EVs) from an in-house rather than inorganic perspective.

The best way to understand the industry at this highly uncertain moment is simple: follow the money and the technology

After a constant rise in average annual investments, our analysis for the first time reveals a flattening, especially for e-hailing and infotainment solutions. E-hailing, which drove the early market, has actually experienced an investment decline. Investments in operationalising technologies remain small but continue to increase, especially in car-sharing, charging stations and battery technology. It is important to note that this trend was already under way well before the COVID-19 pandemic. ACES trends show an increasing tack toward in-house development, a fact supported by the accelerated patent filing activity across all technology clusters. It makes sense: companies are now operationalising their prior investments.

Total investments into future mobility technologies continued during COVID-19, about US$39bn as of October 2020, which extrapolated to the full year likely means a similar level to 2019 of about US$51bn. The investment deceleration described above hence already started before the pandemic.

Outsiders continue to outspend incumbents. Non-incumbents made over 90% of the investments in mobility since 2010. Our breakout reveals technology players made roughly 28% of the investments, venture capital and private equity (VC/PE) companies contributed approximately 65%, while traditional automotive companies spent only about 7%, or about US$20bn to US$25bn.

These investments of in future mobility companies have to be set in relation to organic in-house investments. Automotive players invested more than US$200bn in ACES since 2014, thereof about 80% in electrification. Thus, much more than for inorganic capability building.

Diving into the details

Looking in more detail at new mobility company spending, the main investments focus on semiconductors (about US$51bn) advanced driver assistance systems (ADAS) components (about US$36bn) and e-hailing services (about US$83bn). In the smart mobility ACES trend, investments in e-hailing dominate, attracting over 80% of all smart mobility investments. These three company clusters account for more than half of all ACES investments.

The dominance of these three company clusters results mainly from large deals. For instance, roughly US$170bnover 55%comes from about 1% of all transactions, or less than 300 in total.

Overall, a flattening in investment sums can be observed when looking across the last three-year time horizon. This is mainly driven by investment deceleration in the three largest overall investment buckets: Semiconductors, ADAS components and e-hailing as outlined above.

Looking into more detail into the development of ACES investments over time shows that investments in autonomous driving had its peak in 2017, after that dropped significantly, and showing new interest and rising since mid-2019 again. Connectivity had its peak also 2017 and afterwards lost traction while showing a rise since 2018 and then flattened out.

While overall investment growth flattened, company clusters that attracted fewer investments in recent years gained traction. The main investment increases occurred in the following company clusters: AV integration, which saw a four-fold increase when comparing investments from 2014-17 to 2018. AV software saw a three-fold increase, micromobility four-fold and car-sharing seven- to eight-fold.

Especially regarding the smart mobility trend, companies outside of e-hailing services are gaining traction while e-hailing shows a slight de-acceleration, which might suggest this mobility vertical has reached investor saturation. Gains come from shared micromobility and car-sharing, but the main investments are occurring in asset-free platform business models, mainly peer-to-peer (P2P) car-sharing platforms that connect private car owners with car-sharing users.

Patent activities vary across ACES trends. We found companies have filed over 60,000 patents for ACES technologies since 2010, with more than 80% targeting AVs and EVs, while patent activity in smart mobility is negligible, suggesting that it is business models and customer scaling rather than technology that drives this ACES pillar.

Since 2010, investors have poured over US$330bn into more than 2,000 mobility companies focused on ACES trends. That total includes over US$100bn invested since the beginning of 2019

We determined that companies file most patents for ADAS components at about 9,000 filings. 5,000 patents were filed for semiconductors, 10,000 for EVs and 7,000 for both batteries and charging solutions each, in absolute terms.

Following years of constant investment acceleration, the mobility market appears ready to enter a new stage of operationalisation and commercialisation. For mobility investors, COVID-19 added a new layer of complexity to an already challenging situation. All mobility stakeholders, from incumbents to technology super-giants to investors and beyond, need to understand which way the market is moving and why, which can reveal dominant ACES trend strategies and emerging hot plays. The best way to understand the industry at this highly uncertain moment is simple: follow the money and the technology.

About the authors: Daniel Holland-Letz is an analyst in McKinsey’s Munich office, where Matthias Kässer is a partner; Benedikt Kloss is an associate partner in the Frankfurt office; and Thibaut Müller is an associate partner in the Geneva office