A dramatic shift in automotive profit pools is underway. The convergence of three trends – vehicle electrification, autonomous driving, and shared mobility – will profoundly change the automotive industry over the next ten to 15 years. A recent study by The Boston Consulting Group (BCG) found that, in the most likely scenario, the share of industry profits generated by new mobility technology would grow from only 1% last year to 17% in 2025 and 40% in 2035.
As profit pools shift, incumbent OEMs will find their competitive positions under pressure by newly empowered market players, including suppliers, on-demand platforms, and tech giants, as well as cities that play an increasingly active role in mobility. Although the changes will occur gradually, incumbents must lay the groundwork today in order to thrive in a market that will undergo fundamental changes. By exploring scenarios for the market’s development, they can define a strategy for capturing the lion’s share of the profits as new mobility technology increasingly dominates the industry.
New sources of profitability emerge
At first, incumbents will enjoy a deceptively smooth ride. New car sales volume will grow substantially through 2025, driven largely by volume growth in China and other developing markets. Thereafter, as volume growth in China slows and breakthroughs in autonomous driving enable cheaper and more convenient on-demand mobility services, new car sales growth will stall.
BCG estimates that global annual sales volume for new cars will grow until the mid-2020s and then stall through 2035. During the same period, the global annual volume of vehicles sold for on-demand services could grow to more than 10 million units. Indeed, by 2035, almost one in five passenger miles will be driven in vehicles shared on demand, primarily autonomous electric cars. By that time, 30% of new cars sold globally will be battery-powered electric vehicles (BEVs) and more than 20% will be fully autonomous vehicles (AVs).
Even with these disruptions, industry profits will grow at a rate of about 3% per year through 2035 (see Exhibit 1). However, as AV and BEV adoption increases and new technologies expand the industry’s boundaries, the sources of profitability will change. In the scenario for the industry’s development that BCG views as most likely, the share of industry profits represented by emerging profit pools – including components for AVs and BEVs, sales of BEVs, data and connectivity services, and on-demand mobility offerings – is projected to reach 40% in 2035. By then, traditional profit pools – including traditional components, sales of internal combustion engine (ICE) and hybrid-electric vehicles, financing, and aftermarket business – will represent only 60% of industry profits, down from 99% in 2017. Among the emerging profit pools, on-demand mobility is expected to be the largest, reaching US$76bn in 2035 (see Exhibit 2).
A review of the factors underlying the forecast provides insight into how the market is developing:
New car sales. Economic growth could add more than 17 million units to the new car market by 2035, but volume will remain relatively flat from 2025 onward. Sales volume will be promoted by the continued growth (albeit at a slower rate) of China and other emerging markets. The higher utilisation of self-driving taxis compared with privately owned vehicles will negatively impact sales volume, despite a shorter replacement cycle. Additionally, revenues will be boosted by higher prices for vehicles.
Executives should not leave it to the next generation of leaders to prepare their companies for the new market landscape. Now is the time to get ready
Component supply. OEMs’ share of the component value per vehicle is expected to fall to 15% in 2030, just over half of what it was in 2015 (27%). BCG forecasts that new AV and BEV components, primarily manufactured by suppliers, will represent 50% of the component value of autonomous EVs. Today, the ICE powertrain is the component for which OEMs create the most value. However, it currently appears that most OEMs will not produce battery cells and other new components for AVs and BEVs in-house. In that scenario, suppliers of the new components would be the big winners, while traditional suppliers of ICE-related components would face a stagnant market.
Aftermarket. OEMs’ high-margin aftermarket business will be hurt by the adoption of BEVs, which need nearly 60% less maintenance per year than ICE vehicles. However, because BEVs will comprise only about 10% of the vehicles on the road by 2035, the negative impact will occur slowly. OEMs’ aftermarket business will also suffer as operators of on-demand fleets establish their own maintenance workshops, similar to those of commercial fleet operators today. Even so, OEMs have sufficient time to prepare for these developments by devising ways to leverage the higher complexity of AV and BEV components to capture value in the aftermarket.
Data and connectivity. The adoption of AVs will enable tremendous growth in revenues related to connectivity services. BCG forecasts that revenues will increase from US$4bn in 2017 to US$157bn in 2035. Connectivity revenues will be generated by in-car advertisements and recommendations (such as currently available in some taxi fleets); digitally-enabled services, feature unlocks, and subscriptions (such as GM’s OnStar); and business-to-business data brokerage (in which an OEM sells vehicle-related data to third parties).
On-demand mobility. Self-driving taxis will substantially reduce the cost of on-demand mobility, compared with today’s ride-hailing and car-sharing services. Indeed, instead of using a personal car, many people will hail an autonomous vehicle wherever and whenever they need it. In 2030, it will be more economical for 30% of Europe’s population to use self-driving taxis than to purchase a car. Based on customer survey data, BCG forecasts that approximately half of those for whom it will be economical to make the switch will do so.
A “double whammy’” investment challenge
To unlock the promised value of mobility technology, industry players will need to invest more than US$900bn in new growth areas by 2030 and more than US$2.4trn by 2035. Key areas for investment include AV technology, battery production facilities, EV charging infrastructure, and self-driving taxi fleets. For example, by 2035, the industry will need to build 57 battery production facilities equivalent to Tesla’s new ‘Gigafactory’, which has enough capacity to build batteries for BEVs produced today. The industry will also need to invest US$130bn to build more than 38 million additional public charging stations by 2035.
OEMs face a double-whammy 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. BCG’s analysis found that OEMs are likely to see their return on sales drop by 1 percentage point in 2025 compared with 2017. 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 1 percentage point, as OEMs address the imperative 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 capture the customer interface and data. Start-ups and digital attackers will enter the race to offer vehicle-centred services. And cities will 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 cell 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 AV and BEV technology; and dealerships and service stations that cannot expand their service offerings.
Scenario modelling is the starting point
By defining and modelling different scenarios, a company can explore how the industry and its profit pools will develop. The modelling should consider the full range of scenarios, from conservative to most likely to aggressive. The development of specific growth areas within each profit pool should also be evaluated in detail, including the potential opportunities within each role in the value chain. The ability to customize the model is essential to assess the impact of changes to variables such as battery cost, energy prices, and adoption rates for AVs and BEVs.
Armed with an in-depth understanding of the scenarios, a company considers how to best leverage its current strengths to capture a large share of the emerging profit pools. It decides where to play, establishing strategic priorities with respect to products and services. Next, it focuses on how to win, identifying the most important assets and competitive differentiators and the potential partners and acquisition targets. Finally, it determines how to execute, setting out the required initiatives in an action plan for pursuing the opportunities.
Most important, incumbents must avoid having a false sense of security about the market’s development. It is true that industry revenues 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 change dramatically in the next ten to 15 years. Executives should not leave it to the next generation of leaders to prepare their companies for the new market landscape. Now is the time to get ready.
This article appeared in the Q2 2018 issue of Automotive Megatrends Magazine. Follow this link to download the full issue
