After a decade of relatively smooth driving, the global automotive industry has encountered some large and unsettling bumps in the road. The seemingly unstoppable growth of China’s middle-class came to a fairly brisk halt, spending in India has nosedived, Europe continues its economic malaise in key markets. Meanwhile, the US market experienced another year of top ten sales volume, although one might not know it from headlines and news reports.
While profits remain high for passenger vehicle automakers globally, there is an unsettling mix of megatrends for automotive executives to navigate as they try to set a course for what might come next. Slowing sales, global trade ambiguity, and the high cost of R&D—particularly as major markets start to demand a move away from internal combustion engines (ICE)—need to be taken into account.
Unfortunately for the industry, uncertainty and volatility are now the new normal. Tariffs, trade wars and economic uncertainty are going to be part of the ongoing narrative through next year and beyond. Meanwhile, the underpinnings of the business model that has sustained the automotive industry for more than 100 years is undergoing the biggest change since its inception.
New EV models focus on performance and design, targeting the luxury performance buyer who is immune to a price premium and seeking technology, luxury and performance in their vehicle
For a change, the megatrends driving industry transformation—particularly the need for a greater shift towards electric vehicles (EVs)—are not catching any of the automakers by surprise. In response, the big players are making some bold—if calculated—bets on the future. In the US, China and Europe, billions are being invested into developing new and more affordable battery EVs (BEVs) and mild hybrids. Several automakers have called time on new ICE platforms.
In the wake of this volatility and uncertainty, there are three mobility areas for automotive executives to watch in 2020:
1. Hybrids and BEVs gaining traction in the market
The promised electric vehicle revolution, at least in most mature markets, is still moving slowly. In the US, hybrids and BEVs account for less than 5% of overall sales. The market has capped out on number of buyers who prioritise “being green” as the key criteria in selecting a new vehicle, so the industry needs to look for ways to expand its demand for hybrids and BEVs on other buying criteria.
While profits remain high for passenger vehicle automakers globally, there is an unsettling mix of megatrends for automotive executives to navigate as they try to set a course for what might come next
The recent LA Auto Show showcased the industry’s reaction, with new EV models focusing on performance and design, targeting the luxury performance buyer who is immune to a price premium and seeking technology, luxury and performance in their vehicle. Automakers have realised that EVs as a purely environmental and ethical purchase are running out of road and, with waning tax incentives to purchase, a new approach was needed. The EY Future of Fuels survey asked consumers what the major barriers were to owning an EV, and the top three responses were cost, range, and lack of infrastructure. Cost is being addressed as battery prices are dropping with each generation of battery design. Range is a stubborn one to address, and one that is perhaps more of a myth as research shows that the vast majority of travel for most drivers easily fits within the range of current battery capabilities. Infrastructure is a big question that cannot be answered by manufacturers alone, but cost can be solved—at least in part—by getting people to buy more EVs and the major way that they can do this right now is to start producing more of the type of vehicles that people actually want to drive that are also electric.
Finally, while consumers’ tastes are gravitating toward CUVs, SUVs and trucks and away from cars (71.8% of vehicles sold in US were light trucks in November 2019), EV platforms are still dominated by cars. Through November this year, 81% of all EVs sold in the US were cars, largely because that is most of what is offered. The development of EV SUVs, CUVs and trucks is coming, and if done correctly, it can change the global perception of EVs from expensive, fragile luxury, to a useful, regular reliable vehicle that just happens to be electric. This is where the industry must offer more options.
2. A greater focus on the EV battery life cycle
The last thing that manufacturers need is to replace one polluting product with another one by getting the battery life cycle wrong or not addressing it until it is too late.
After a few thousand charging cycles, the performance of the typical EV lithium-ion (Li-ion) battery pack will no longer be able to power its vehicle. There are numerous options for how to deal with used batteries, but not all of these options are ecologically sound.
While consumers’ tastes are gravitating toward CUVs, SUVs and trucks and away from cars, EV platforms are still dominated by cars
This is an ecological headache waiting to happen, not to mention a PR disaster. EVs have, not unfairly, been sold as clean and green for years. Many millions have bought EVs believing they are doing their part in the global bid to reduce emissions, because every little bit helps. However, right now only around 5% of lithium-ion batteries are recycled. Approximately 262,000 tons of Li-ion car batteries will have to be recycled by 2022 because they can no longer power their vehicles. If all vehicles sold by 2040 are EVs, as legislation is set to demand in a number of markets, then we’ll be left with 2.5 million spent battery packs that same year.
While it is understandable that until now the focus has been on building an efficient battery—low weight, high power, low cost—that needs to change. The focus needs to move to how long the battery can last, and how it can be repurposed or recycled. The current system is not sustainable.
Some companies have already recognised the need for this. One automaker is trialling a battery refurbishment program in Japan, but this is merely a stopgap. Eventually, every EV battery will have to be built so that it can be recycled, and this will pay dividends at every stage. Standardised batteries will be easier and cheaper to manufacture, repurpose and recycle, and a truly sustainable supply chain will benefit consumers, manufacturers and the environment, as well as securing the long-term future of the EV.
3. The role of blockchain
Understanding blockchain can seem painful at first, but opportunities to change the way organisations conduct business transactions in an efficient, seamless and secure manner are too great not to explore. A secure digital ledger of transactions, managed and monitored by its users to guarantee verification, blockchain will allow the automotive industry to roll out concepts like shared and fractional ownership of fleets, vehicles and parts in a way that could radically change our concept of vehicle ownership. There is the promise of car fleets for cities, fractionally owned by citizens and then leased back to users, creating a profit for those individuals and all securely administered and maintained using blockchain. It can also help businesses and sectors improve supply chain efficiency and offer more secure leasing and finance deals. We’ve designed our own blockchain software—EY Ops Chain Tesseract—to help the industry seize these opportunities.
Eventually, every EV battery will have to be built so that it can be recycled, and this will pay dividends at every stage
The implementation of blockchain will be the challenge of the next few years. Senior figures in the industry broadly know what blockchain does and what it can do—but what can it specifically do today to give businesses an edge tomorrow? Those that succeed will be the companies that are already considering how blockchain can change the way they do business for the better and spend the next 12 months figuring out what that looks like in practical terms. Like so many other areas of the industry at the moment, there is an existential danger in being left behind.
Despite the strong profits and seemingly healthy economic indicators, the long-term challenges for automakers are very real. Unlike in 2008, when there was a universal financial crisis that impacted all equally, the current crisis is one made up of interrelated headwinds that are impacting different parts of the automotive value chain in both obvious and subtle ways that will have profound impacts for the future industry structure and the emergence of new business models.
It will not be easy in the face of these headwinds, but the industry needs to rise to the challenges set out here. It needs to continue to ask itself how it can give consumers what they want, and how to address serious ecological challenges in order to remain relevant. This is an industry that is far from done with disruption, and those that fail to continue to adapt will be left behind.
About the author: Randy Miller is EY Global Advanced Manufacturing & Mobility Leader
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms