Transition to electric and autonomous vehicles will cost auto industry hundreds of billions

17 July 2018 4 min. read

A new study projects that more than $255 billion will be spent on electric vehicle R&D and capital expenditures globally by 2022. A further $61 billion has been allocated to autonomous technology. Intense segment competition, flattening overall vehicle sales, high system cost, and low consumer price flexibility will make the AV and EV market unprofitable in the near term.

Autonomous and electric vehicles are touted to bring a raft of benefits to societies around the globe, from reduced smog and improved traffic throughput to fewer incidences of collisions and increased productivity. But will the transition to future tech be good for American auto manufacturers?

A new study from management consultancy AlixPartners says that the shift in technological emphasis – which for a hundred years was predicated on human drivers and combustion engines – will lead to a ‘monumental capital drain’ in the near term for the auto industry.

‘The AlixPartners Global Automotive Outlook’ found that by 2022, $255 billion will be spent on electric vehicle (EV) research & development and capital expenditures globally. Additionally, a glut of 207 electric models is expected reach the market by 2022 – many of which will be unprofitable due to high systems costs, low production volumes, and intense competition from traditional and non-traditional (Apple, Google, etc.) players.

AlixPartners reports that an additional $61 billion has been initially shoveled into autonomous vehicle (AV) tech. However, consumers are barely willing to pay a premium on the technology as of yet, with the report’s survey noting a willingness to pay only $2,300 for autonomy, while the feature currently costs around $22,900 extra.

Compounding the above issues, the study projects that the global auto market will grow at just 2.4% to 2025, almost a full point lower than expected global GDP growth of 3.3% – which signals a lack of interest in all vehicle types. Vehicle sales in the US are expected to continue declining, falling from 17.2 million in 2017 to 16.8 million units this year, bottoming out in 2020 with 15.1 million unit sales. All the above factors mean that the EV and AV market will be a difficult and unprofitable one for auto firms in the near term.

Global fleet of fully electric vehicles to pass 100 million mark by 2030

“Industry players are sort of caught between a rock and a hard place: If they don’t participate in some way in the ‘new-mobility’ revolution that’s coming, they stand to lose out on what might be the biggest thing ever in this industry,” commented Shiv Shivaraman, Americas co-head of the Automotive and Industrial Practice at AlixPartners.  “If they do participate, as so many are, they have the chance of benefitting from first-mover advantages, but they also face the possibility of going broke in the process.”

Auto industry players, however, can find a silver lining in the expectation that electric vehicles will see strong uptake by global consumers over the next decade. AlixPartners’ optimistic prediction is that EVs will account for about 20% of the US market, 30% of the European market, and 35% of the Chinese market by 2030. The International Energy Agency (IEA) estimates EV ownership to rocket to 125 million units by 2030 from the 3 million owned last year.  The IEA’s estimates for market share are more conservative, with EVs accounting for 23% of the European market and just over a quarter of the Chinese market.

Additionally, AlixPartners projects that AV sales will reach 3 million by 2030. The downside to AV adoption for auto firms is that robo-taxis sold as fleets at lower margins to Uber and Lyft will cannibalize personal car sales. The report pegs the figure at 1.6 million lost retail unit sales in the US in 2030. In the near-term, pre-wide-scale AV adoption, The Boston Consulting Group expects private sales losses of 52,000 in the US due to ride-sharing in 2021, with fleet sales making up for most of it.

While electric and autonomy suppliers will see boom times in the coming years, more traditional parts suppliers can expect tough times ahead. The AlixPartners study found that more than a quarter of supplier revenues are at risk because of electrification, particularly in the areas of powertrain and exhaust systems – which represent 26% of supplier turnover. Such suppliers will have to adapt to shifting needs in the industry or risk dying out.

“A pile-up of epic proportions awaits this industry as hundreds of players are spending hundreds of billions of dollars on electric and autonomous technologies as they rush to stake a claim on the biggest change to hit this industry in a hundred years,” said John Hoffecker, global vice chairman at AlixPartners. “The winners in this free-for-all will be those who have the right strategies and, equally important, execute on those strategies to their fullest potential—as billions will be lost by many.”