There was a time when electrical vehicle (EV) transportation, powered by batteries, did not qualify as 'game changers' ...
...A niche business, maybe, throwing up many questions in terms of consumer acceptability (in doubt), real environmental benefits (limited...if any, once the entire production chain is accounted for) and power grid requirements (stretched to the limits)...
In the view of legacy manufacturers, Tesla’s success
However, the invention of light weight, high energy density, lithium-ion batteries, along with improved modes of production and falling costs, was bound to have profound implications
And Elon Musk, Tesla’s CEO, made full use of the opportunity, which he almost single-handedly promoted in public awareness and, with his genial communication talents, whipped up investor enthusiasm on the way
The global firms had already been confronted for some time by regulations pushing for EV adoption in China
Electrification was seen early on in that country as an opportunity to lower the technical barriers erected around internal combustion engines – ICEs – which never were fully mastered by the Chinese automotive industry
Determined to maintain their strong presence on the world’s largest market, it was bound to be in China that Western frontrunners, the German car manufacturers and GM
Even so…it would be wrong to subsume electrification into a manufacturing challenge, by itself an industrial feat on a revolutionary scale
There is more…because electrical motorization goes hand in hand with digitalization : software architecture, connectivity and an array of autonomous driving features
Electrical motorization and digitalization are overlapping and mutually reinforcing shockwaves, reverberating across the automotive industry
Before 2030, they will transform beyond recognition the value chain on which the car makers have relied for long
A new business approach is inescapable – opening the gates for competition by highly capitalized technological giants and confronting the legacy automakers with stark choices about their value-adding contribution
Accounting for over 6% of total EU employment and over 7% of gross domestic product (GDP), the challenge – and the strategies chosen by the car makers – will mirror the industrial revolution of the 19th century
Its social impact will be no less enduring
Undoubtedly, the assurance displayed by the legacy car makers is part bluster, but it is also rooted in past successes
Exploring technological opportunity in quick succession, transformation has taken many shapes in the past
- Allocating expertise, and added value, along the entire supply chain, with the rise of powerful component industries, ZF or Bosch in Germany, Denso
in Japan, Aptiv or Eaton in the U.S., or Valeo and Faurecia in France – to name only a few - Tasking tier-1 specialists with key car components, from fully constructed car doors by glass specialist Saint Gobain
in France to motorization by Cummins in the U.S., giving rise to powerful partners in the industry - Transforming the production and assembly processes in car factories with robotization, setting the industry apart at exceptional levels of automatization
- And ultimately, assembling of the car itself at tier 1-OEMs, such as
- Canada’s Magna International producing 30 different models
and 3.7 million cars over the years - or Finland’s Valmet Automotive, controlled by the Finnish state investment company Tesi (38,46%), Pontos Group (38,46%) and China's Contemporary Amperex Technology (23,08%), producing more than 1.7 million vehicles under brands such as for Mercedes-Benz, Saab and Porsche
- Canada’s Magna International producing 30 different models
No so much “lumbering giants” as advanced technology assemblers, the strength of the automotive industry – as national champions – should not be sought any longer in the sprawling factories of old, providing massive employment and flattering the image of the country of primary residence – however much politicians like to burnish these credentials
Brands and distribution networks have been, along with R&D achievements and close supply chain relationships, at the root of the global carmakers’ market dominance
However, is this still true?
Transitioning to electrification, the industry will undoubtedly need to meet costly challenges
Houdini-like escape plans devised by the car manufacturers, combining direct investment for the most ambitious with partnerships involving battery – and software – suppliers, could falter every step of the way
Batting for batteries
Because costs are beyond the pale, with present and future investments of $ tens of billions the ‘run-of-the-mill’ currency, only very few global manufacturers remain in the running, with Volkswagen
The smaller players, merging by necessity, most recently Fiat-Chrysler combining with Peugeot of France
Even so…
To underpin the investments required by electrification – with the launch of battery factories across Europe and in the U.S. – mergers between carmakers have gained urgency and joint ventures of traditional competitors are common place
Enlisting governmental support – and subsidies – on behalf of localized value chains and job opportunities, the projects sprouting across the Western world appear to provide momentum to the ‘new economy’ of individual transportation
Hard questions are left aside in the costly scramble
China’s large battery cell supplier, CATL, was launched as recently as 2011 and, safely ensconced in the early years behind strict import rulings barring Panasonic Invalid tag asset and LG Chem from the Chinese market, reached the n°3 rank by 2016 and has been n°1 worldwide for the last few years with a 31.8% market share
Since the March 2019 publication of ‘Battery Illusions’, the sense of urgency in the developed world has grown in stark contrast but, with undoubtedly complex technological challenges, delays have been piling up
Commitments to R&D – made by Stellantis
According to the International Energy Agency (IEA),
- 145 million EVs could be on the road by 2030 (vs. 10 million in 2020)
- 3 million new EVs were registered globally in 2020, loaded with 134.5 GwH of battery (+40% over 2019) and the trend is accelerating, with an 'astounding' growth of 98% in 2021/2020
Whether the current growth rates, worldwide, of EVs, the multi-year delays in actual high-volume production in American and European ‘gigafactories’ and the undisputed dominance of Asian cell producers bodes well for the future is better left unanswered…
Facts do not look promising
As of Jan-May 2021, in terms of gigawatt-hours, these specialists are firmly in control,
- China’s CATL and South Korea’s LG Chem each control 26% of the market,
- followed by Japan’s Panasonic (14%), Samsung SDI (5.5%), China’s BYD (5.5%), South Korea’s SK Innovation and a number of smaller players
These Asian battery specialists will be strongly incentivized to hold on to their collective 80% market share and the Chinese companies will benefit from privileged access to the ion-lithium battery raw materials (over 70% mined under Chinese ownership) and of the Chinese refineries (close to 100%)
Unsurprisingly, many of the battery plants, launched in Europe with government support, are partnerships between domestic car makers and recognized specialists...
- CATL - in Germany - launch 2018 - €1.8bn - 24 Gwh
- Farasis - in Germany - launch 2019 - €0.6 bn - 16 Gwh
- Svolt - in Germany - launch 2020 - €2bn - 24 Gwh
- AESC - in France - launch 2021 - €2bn - 9 Gwh (initial stage)
- AESC - in the UK - launch 2021 - €0.52 bn - 9 Gwh (initial stage)
...all hailing from China
Under no illusion that European and American battery makers could play catch-up with massive investment in a value chain of ion-lithium batteries, tightly controlled by China, EV planners in the developed markets are, in all likelihood, focused on new technologies to solve the conundrum
Solid state batteries or hydrogen fuel cells may provide promising escape hatches…if R&D moves down to the factory floor, an outcome pushing the time frame back to the late ‘20s – early ‘30s
Short to medium term – lithium-iron-phosphate (LFP) cell packs, already installed in China’s best-selling EV (Wuling Mini) and in Tesla’s Model 3 Standard Range may alleviate some of the costs but not dependency of Asian cell makers…
With batteries representing approx. 40% of the cost of an EV, legacy car makers who do not control battery manufacturing (few of them hope to integrate the value chain), the drop of their share in the cost of manufactured components for a vehicle is substantial
Digitalization will put further pressure on the value creation by car makers
Broadly defined as Information and Communications Technology, digitalization covers software architecture, connectivity and an array of autonomous driving features
Digital Drivers
Drawing little attention in terms of regulatory policy, the impact of digitalization on the car industry may in fact go deeper than the ‘greening’ of transportation, which is being widely discussed (and legislated, especially in Europe)
It is a boulevard opening up for deep-pocketed technology giants eager to expand the use of their proprietary software applications in the car, defined as the ultimate frontier to gain consumer attention
Potential competitors of the legacy manufacturers with cars under brands such as Apple
The electrical car will be as ‘smart’ as the reinvented phone, which took the world by storm, with possibly even richer functionalities... Within the car industry, the concern is palpable...
…Not so long ago the German luxury brands rejected Apple’s entreaties. Terms and conditions are not known but there is no doubt about who was to gain access to the data
Already, a line is being drawn between the car firms determined to go it alone (the Germans, seemingly) and those that will not (such as Stellantis), entering partnerships with American firms
Either way, the value proposition of car brands will need to be front and center, with no easy answer
- Quality distribution networks and services already are bypassed on an experimental basis or entirely (by Tesla) and servicing EVs is a cinch
- Reputation may fritter as competition concentrates on in-car soft features, no so much on technical performance (broadly similar for battery-powered cars)
In short order, lines between car line-ups will tend to be blurred
EV technical performance has been focusing on range but the differentiation might crumble as batteries improve across the board
Successful digital ecosystems, with on average 40 different partners, will stand out for a while...but copycat releases, downloaded over the cloud, have been leveling the playing field before...
Even the most ambitious car makers can hardly hope to address every angle…
If conventional business plans have lost relevance in the car industry, it is not because of electrification by itself
Consumers in developed Western markets could conceivably transition to EV line-ups delivered by their trusted car brands…
This assumption would miss the broader implication of electrification intermingled with digitalization
- There are no barriers to entry in manufacturing EVs, as both China car makers and Tesla have made clear
- To enter growth markets (which the developed markets are not), global EV makers (legacy firms and new entrants) need to fine-tune unique features to local tastes
- Brand identity will need to associate ‘old-world’ perception with features which will be predominantly digital, since performance-related characteristics will grow indistinguishable
The shift in value creation from car makers to a new line-up of suppliers (battery and software tech firms) is profound but apparently overlooked by investors (who have been pushing the valuation of the most car makers to new heights) and by the government officials committed to green agendas
- For the traditional ICE-powered vehicles, the car makers’ share of the costs of components manufactured per vehicle is 27% - for battery-powered cars, this share is expected to fall by a third to one half (to 20% - 13%)
To avoid commoditization, a fate familiar to the airline industry, legacy car makers will seek to innovate in response to local consumer expectations, one target market at a time
A tall order, undoubtedly, but a blank sheet...and unrelenting focus on client priorities is a start
As we expect to discuss shortly, one country is approaching the European markets in this spirit... China