Scaling the automotive industry in the Economy

The automotive sector is on the cusp of changes not seen since the Model T Ford rolled off the production line in the early 1900s, as new regulations, technologies, and consumer preferences transform its products and business models. Both traditional OEMs and new start-ups are spending more to address these trends: since 2010, intrigued investors have funneled $280 billion into innovative automotive hardware and software solutions. Almost half of this investment, about $115 billion to $120 billion, has gone to electric vehicles (EVs).

Capital markets have rewarded this influx. With a weighted average total shareholder returns (TSR) of 79 percent from March 2020 through January 2022, traditional OEMs and component suppliers outperformed companies in many other thriving sectors, including high tech and chemicals. The results were even more impressive for the relatively new kids on the block, such as NIO, Tesla, and other EV start-ups, whose weighted average TSR of 278 percent topped the list.

The industry has typically relied on sales of traditional vehicles with internal combustion engines for much of its growth. But overall vehicle sales are projected to increase at a modest 2 percent CAGR through 2025 and might even decline over the balance of the decade. But the industry’s TSR remains high because of optimism about increasing revenue from other sources, including those related to new technologies and services. EVs, which now represent a small portion of vehicles sold, is at a tipping point and are responsible for much of the enthusiasm within capital markets. In the second half of 2020, sales and penetration of passenger EVs accelerated in major markets despite the economic crisis caused by the COVID-19 pandemic. McKinsey projects that worldwide demand for EVs will grow sixfold from 2021 through 2030, with annual unit sales going from 6.5 million to roughly 40 million over that period.

Although some large companies may attempt to increase their access to raw materials, most automotive companies currently lack this option. What the industry can tackle, however, are issues related to gigafactories and the charging infrastructure. Taking quick action will be key to extending the momentum in EVs and may even help to accelerate adoption of autonomous vehicles (AVs), through which OEMs will find even more opportunities in services and life cycle revenues from such things as over-the-air software updates, mapping services, and in-vehicle entertainment.