How will the automotive industry afford to sustain the speed of on-going electric transition?
The automotive industry is undergoing a significant transition, fueled by major drivers such as technological advancements (electric powertrains, autonomous drive, connectivity, etc.), regulatory pressure (e.g., EU mandate to ban sales of Internal Combustion Engine -ICE- cars by 2035) and societal changes (e.g., shared mobility).
In economic terms, the dominant shift is related to Battery Electric Vehicles (BEVs or EVs), and many experts consider that the future of the automotive industry is clearly electric. Consumer demand for EVs is growing and most of it remains untapped, with 42% of respondents in a recent survey by McKinsey indicating they want their next car to be an EV. This shift is driven by sustainability concerns and changing transportation habits, and the current growth slowdown of EV sales is certainly not contradicting the long-term trend.
The speed and affordability of the transition however present major challenges, although these challenges are not geographically uniform or identical for all players.
A massive investment phase
This transition to EVs requires massive investments from automakers. Investment announcements over 2022 and 2023 -according to a study by the International Energy Agency- amount to nearly USD 500bn (USD 275bn for EVs, US195bn for batteries), and this certainly is below reality due to the “invisibility” of smaller players in the game.
This only makes sense in the light of the strong value shift that the automotive industry is and will be experiencing in the short and mid-term. According to an EY analysis, there's a global $660 billion revenue opportunity as the focus moves from ICE vehicles to BEV.
How to sustain the transition when major markets are slowing down
At the same time, securing sales volumes and market shares for BEVs on mature markets means selling cars in solid markets and at “reasonable prices”, hence cutting on profit margins vs ICE vehicles (cost parity will only be achieved in a few years). In the past 2 years, market growth in major economic areas, combined with “adequate” pressure on their supply chains, enabled legacy car manufacturers to however enjoy historically high operational profit rates.
2024 H1 statements and H2 outlook indicate that this party may be over for now, while macro-economic perspectives are rather dull in Europe, uncertain in North America, and in need of a boost in PRC. Recent guidance revisions and profit warnings by VW Group, Mercedes-Benz or Stellantis are quite informative in this regard.
Protecting legacy makers during the transition was the ambition of the United States and European Union governances when they decided to severely increase customs duties on Chinese electric cars. But this only offers short-term protection, as Chinese companies are now accelerating their foreign investments and setting foot in the EU, such as Chery (Spain), BYD (Hungary) or Leapmotor.
In the longer run, defensive policies such as the protection of mature markets cannot prove sufficient to afford the scope and depth of the transition to EV: While legacy players (manufacturers and supply chain) are burdened by the weight of their historical activities, many new entrants are trying to impose a steady pace.
So, is there any other solution than hunting for sales volumes on new, emerging markets that simultaneously experience growth and transformation, a magic recipe for whoever will manage cooking it?
Let us review some of these on-going developments and how some new entrants (pure EV players) are behaving.
New playgrounds with promising EV market growth
Promising growth and EV market share trends are already visible in several emerging countries, at different scales:
- India's car market is expanding rapidly, with demand expected to grow at a compound annual growth rate (CAGR) of close to 10% from 2023 to 2030, leading to a projected market size of 8.4 million units by 2030 (equivalent to current Japanese market, half of US automotive market). The government officially aims for 30% of new vehicle sales to be electric by 2030.
- Southeast Asia, led by Thailand, is experiencing rapid EV adoption: EV registrations quadrupled year-on-year, reaching a 10% sales share (comparable to the United States) and Chinese companies account for over half of EV sales. This growth is driven by new subsidies, lower taxes, and increasing presence of Chinese automakers.
- In Mexico, EV registrations are starting to pick up and increased by 80% year-on-year, reaching a market share just above 1%.
- Latin America saw EV sales reach almost 90,000 units in 2023, with Brazil leading the pack.
Globally, all these trends are indeed gradually weakening the once generally accepted -and, at least for legacy players, reassuring- scenario anticipating a long persistence of ICE cars in emerging countries.
EV manufacturing hubs
The rise of EVs on those markets is significantly impacting traditional car makers, as Chinese EV manufacturers have proved quicker at expanding their presence in some areas, particularly in Southeast Asia and Latin America, while setting foot in Europe.
Sizeable EV manufacturing hubs are indeed now developing in emerging countries, with intense competition between manufacturers. This is true mostly for production intended for local markets, but also for export-bound vehicles; taking advantage of low labor-cost advantage allows for agile, lower-CAPEX (reduced process robotization), faster-built plants.
- In India, government initiatives like "Make in India" and the Automotive Mission Plan 2026 aim to boost domestic manufacturing, which, all automotive products included (from 2-wheelers to trucks), should then account for more than 45% of the country's manufacturing GDP.
- In Thailand, BYD inaugurated there their first foreign production facility in July 2024. The government aims to attract USD 28 bn in foreign investment within 4 years to become a major EV manufacturing center for domestic and export markets.
- Mexico is leveraging its proximity to the United States and existing manufacturing capacity to develop local EV supply chains, with major global automakers like Tesla, Ford, and Volkswagen establishing or expanding EV production, some of their decisions being however dependent upon the outcome of the Presidential election in the USA at the end of this year. Chinese automakers like BYD, Chery or SAIC are also considering expanding to Mexico.
- In Brazil, Chinese automakers like BYD, Great Wall, and Chery have quickly become top-selling EV brands, challenging established local manufacturers. BYD is investing over USD 600 M in Brazil to build its first electric car plant outside Asia. Hyundai announced investments of USD 1.1 bn to start local manufacturing of electric, hybrid, and hydrogen cars by 2032. GM plans to stop producing ICE models, and shift to BEV production, partly to serve export markets.
- Even in the smaller Uzbekistan market, local automaker UzAuto Motors formed a joint venture with BYD to produce 50,000 electric cars annually, and Chery signed partnerships to produce electric cars locally.
What’s next
In an ideal world, the transition speed toward EV predominance would have been driven by its affordability for major players, spreading huge investment over time. What we are seeing is rather a Darwinian process, largely driven by the opportunity, financial capacity and compelling need of the Chinese auto industry to outgrow its domestic market.
In what could also be seen as a rebalanced globalization of the automotive industry, a key factor will, as a matter of fact, be the evolution of supply chains. In recent years, breakthroughs and crises have demonstrated their key role in the industry. Very few of the major car manufacturers are vertically integrated and independent suppliers, large and smaller, remain the major value contributors of the automotive industry. They may actually be those defining the tempo of this transition to EVs.
At CDI Global, we are able to leverage both our automotive industry expertise and a 50-year experience in mid-market transactions to offer full and unique support to our clients in these challenging times. They can rely on us to advise and support their strategies and worldwide M&A roll-out through our offices on the five continents.
By Gerard Payen, CDI Global Member
