Plugged In: Collaborating to Win With Electric VehiclesPartner, Global Automotive and Manufacturing Industries and Digital Practice at Oliver Wyman Partner, Global Automotive and Manufacturing Industries Practice at Oliver Wyman Principal, Global Automotive and Manufacturing Industries Practice at Oliver Wyman
Are electric vehicles the future of the automotive industry? Certainly, there are many in the industry who would argue that is so, even though uncertainties surrounding electric-drive systems remain—and have increased significantly.
Challenges to electric vehicles include the current low cost of fossil fuels, the recent protectionist and nationalistic leanings of some governments and interest groups, and the limited willingness of automobile manufacturers and suppliers to partner with competitors.
At the same time, interest in electric vehicles (EVs) has spiked, fueled by the diesel emissions scandal, the continued regulator focus on reducing fine particulate and nitrogen oxide emissions, and government strategies concerning fossil fuel dependencies and global warming.
Seeking the Key to EV Market Success
Without binding legislation that’s consistent across borders or the willingness of players to work with each other beyond standard-setting activities, the rapid adoption of EV technology remains unlikely. That places the automotive industry in the unlikely position of preparing for a potential disruption without any evidence of when it will happen or how it will play out.
Customer feedback on past EV sales suggests that electric vehicles will not achieve significant market shares simply as alternatives to conventional drive systems or due to high fuel costs. The higher costs of the vehicles and their limited range, coupled with uncertainties regarding infrastructure development and vehicle residual values, have reinforced a persistent reluctance among customers to buying electric vehicles in the numbers needed to make it profitable for automakers.
Consequently, market success will depend heavily on legislation to drive EV sales, which in turn may trigger the need to establish the necessary infrastructure and lead to the scale effects that will bring prices down to a level where they can compete with conventional automobiles.
The likelihood of short-term legislative changes varies by country, and the outcome is unclear. Nations with strong automotive industries and traditional infrastructure tend to be less aggressive than others; they typically rely on a haphazard network of incentives instead of setting hard quotas. In contrast, smaller markets without substantial automotive industry footprints, such as Norway or the Netherlands, or resource-limited island nations and cities like London, often exhibit significantly more agility.
Likewise, emerging markets that lack a strong internal combustion engine (ICE) technology heritage or leadership and are establishing modern energy infrastructure, such as China, are aggressively attempting to leapfrog others to become leaders in the EV field.
Global vehicle powertrain electrification will probably gain momentum when lead markets change their EV penetration strategies and when EV technology costs reach competitive parity with the ICE. When this will happen remains unclear.
If successful, electric vehicles could make established energy delivery infrastructure and value chains obsolete.
Our research has identified four theoretical EV penetration archetypes, based on legislation and incentives, with very different ramp-up scenarios through 2035. These are not actual predictions of future EV penetration, rather they are “what if” estimates of the theoretical rate of new EV penetration by 2035 given certain legislation or incentives. For example, the first archetype models strong legislation, such as that proposed for Norway in 2025, and indicates the EV penetration rate would exceed 95 percent. For the archetype that focuses on urban and metropolitan areas in markets with low ICE heritage, such as China, the rate is about 70 percent. The archetype for markets focused on incentives, such as Germany, is 35 percent, and for those with no additional legislation or incentives, the rate drops to about 10 percent.
Understanding the Vehicle Technology Challenges
Electrification will have an increasingly dramatic impact on the automotive value chain, depending on the degree of e-mobility chosen such as mild hybrid, plug-in hybrid, or battery electric. Research suggests that one-third of the overall value creation of an average vehicle will fundamentally change when comparing a battery-electric vehicle with a conventional one. These changes focus on specific areas, thus affecting specific business models and value chains in significantly different ways.
Consequently, conventional engine and transmission components will face an ongoing decline, while the electronics landscape will likely experience comprehensive change, as power and control systems migrate to higher voltages and vehicle system electrification predominates.
Creating New Infrastructure
If successful, EVs could make established energy delivery infrastructure and value chains obsolete. Vehicles will move away from centralized fueling points (gas stations) to a new, distributed and ideally smart electric-grid-based delivery system. This shift will inevitably open a service industry to handle customer recharging needs—with a new set of players and rules.
This of course puts into question the future of fuel-cell vehicles—that is, cars requiring hydrogen-based fueling stations, as they will have to adhere to traditional centralized fueling models and value chains, especially with battery technologies rapidly moving forward and the technical complexity and associated costs of fuel-cell vehicles countering its benefits.
What to Do: Collaborate to Compete
Automotive players need to develop a comprehensive strategy that addresses today’s industry needs and anticipates a potentially rapid shift toward electrification. Attempts at “parallel positioning,” i.e., pursuing multiple strategies side by side, as some players are currently doing, come at a high cost and can carry extreme risks. For instance, due to the rapid changes in electric drive technology and the uncertainties regarding which systems will mature in the market, investing in particular areas is far from a sure thing. Parallel investment in fuel cells and battery-electric powertrains, as well as spending on traditional ICEs—even when combined with limited partnerships—will stretch the limited R&D budgets of even the largest automakers. Adding to this burden, the extensive investments required for autonomous-vehicle technologies and advanced safety systems could push spending requirements beyond the breaking point.
To address these uncertainties and spend R&D money wisely, we believe automakers and suppliers need to accelerate their participation in bold, cross-competitor initiatives to develop battery-electric vehicles, which could include full vehicle platform sharing beyond batteries, as well as joint work on ICE/hybrid powertrains as short- and mid-term solutions.
To accelerate the overall electrification trend once it gains critical mass, markets need legislative decisions that align across all forms of transportation and ideally across borders in ways that reinforce each other. Strong lead markets could form the tipping point of a true EV disruption. At the same time, the willingness of carmakers and suppliers to work with competitors will limit their risk exposure while driving technology forward and costs down for the benefit of all participants.
This piece appears in Oliver Wyman’s Automotive Manger 2017.