The road to electrification
Authors: Rolf Ganter, Matthew Carter
Many business owners seem calm about the disruption that electric cars will cause to the auto industry. After all, electrified vehicles (full-electric and plug-in hybrids) account for just two of every 100 vehicles sold today.
Skeptics will tell you that full electrification is still too expensive and doesn't offer consumers sufficient range. Or that a lack of vital infrastructure, like widespread access to fast-charging points, will prevent mass adoption.
But business owners shouldn’t let these figures lull them into a false sense of security.
Mass electrification is coming. Around 25% of new cars could contain some form of electric powertrain by 2025, with almost half of these being fully electric and without any components from “traditional” internal-combustion-engine suppliers.
UBS does not expect (plug-in) hybrid autos to be the end point, but rather an interim step while costs come down and economies of scale improve for fully electric vehicles.
Hype vs. Reality
Do business leaders fear the electrification trend. Do they see opportunities? Or are they complacent to the threat? Members of the UBS Industry Leader Network, a global group of business owners, have weighed in:
"Electric and autonomous vehicles will kill 80% of today’s car brands over the next decade. If a car drives itself, you won’t care about the marque. I think big cities will be able to accommodate full electric vehicles soonest, but a lack of infrastructure in the countryside will mean hybrids become the real replacement to today’s fossil-fuel cars."
-Owner of a European auto dealership
"One corporate client didn’t see any cost advantage from their hybrid fleet because employees weren’t plugging in their cars. In fact, the charging cables didn’t leave their original packaging after three years of driving!"
-Owner, UK car fleet business
We identify two key drivers of full electrification:
#1: As prices fall consumer demand will increase
Figure 1: Average propensity to buy a battery vehicle (BEV)
By household income in USD
#2: Auto makers forced to go green
Figure 2: Regulations: big hurdles for the auto industry
Today, richer households are more likely to switch to battery electric vehicles than poorer ones. Overall a survey of 10,000 people across six car markets reveals that 33% would consider buying a battery electric vehicle (up five percentage points on 2017).
Lawmakers are demanding reductions in carbon dioxide, with Europe requiring a halving per kilometer driven by 2030. Expect the forced phase-out of new combustion engine cars (in China by 2030, the UK and France by 2040). The answer? Cleaner, greener electric vehicles.
UBS expects electrified vehicle adoption to take off from 2020. Around 25% of new cars could be electrified by 2025.
The current pace of electrification may seem gradual now, but it's expected to accelerate significantly. Business owners who ignore these “early warning signs” risk falling revenues and major disruption. Conversely, those owners who anticipate the shift to electrification and change their strategy early will be best placed to capture fresh opportunities and avoid fundamental threats.
The shift in manufacturing and consumer behavior will create between USD 150bn and USD 275bn of annual opportunity across electric powertrain and battery supply chains by 2025, on UBS estimates. Conversely, traditional suppliers could lose USD 65-130bn of business each year by 2025.
“What's under the hood?” – The details of electric power
As the economics of full electric vehicles improve, hybrid vehicles will likely become less popular. So business owners beware: plug-in hybrid autos in particular are likely just a pit stop on the road to full electrification.
To identify the risks and opportunities for the auto supply chain, let’s take a closer look at the cost breakdown of two engines – an internal combustion example and its electric powertrain successor.
Figure 3: Internal combustion engine - a cost breakdown
Figure 4: Electric powertrain - a cost breakdown
We identify three key takeaways and three potential supply-chain impacts
Takeaway: Suppliers that support electric powertrain electronics are forecast to become more important. We expect them to increase their content by up to 11x per electric vehicle compared to combustion engine vehicles.
Impact: Traditional suppliers of mechanical components for combustion engines (like pistons, camshafts, crank shafts, fuel and oil pumps, fuel injection, and exhaust and emission treatment systems) will lose revenue, with few substitute opportunities in a world of full-electric vehicles.
Takeaway: Battery pack expenses make up the majority of electric powertrain costs and about 30% of today’s vehicle costs. But evidence from our Tesla teardown suggests battery costs could decline by more than 35% by 2025 versus 2017 levels. The fall in battery costs should largely be passed on to consumers. Hence we expect vehicle costs to fall, and demand for full-electric vehicles to rise.
Impact: Falling battery costs should substantially lower the overall cost of an electric vehicle. Together with better charging infrastructure, this should boost the role of full-electric vehicles to at least 10% of global sales by 2025, hastening the decline in pure combustion auto sales.
Takeaway: UBS analysis suggests that the Tier 1 supplier content share per vehicle could fall from 70% (USD 13,200) of an average combustion engine vehicle’s cost (USD 19,200) to just 42% (USD 12,200) in a generic battery-operated vehicle (USD 28,700) – equivalent to USD 1,000 less value for traditional suppliers per car.
Impact: Horsepower is being replaced by the speed of semiconductor chips. Cars are increasingly more reliant on semiconductor-powered sensors. The ongoing trend towards more connectivity, including displays and entertainment gadgets, can unlock further opportunities in the communications and entertainment industries. However, the biggest value added will be less in the sensors themselves and more in the intelligence, i.e. the software, behind them. We believe this segment is where the profitable growth lies. In our view, the biggest suppliers (large Tier 1) will begin to struggle, as auto manufacturers will rely less on them and move to smaller, innovative Tier 2 and 3 suppliers. While we have already seen an increase in collaboration among auto manufacturers, we believe that if suppliers want to survive, they will need to cooperate even more.
Who wins…and who’s last to the finish line?
Electrification looks set to spark a major shift in manufacturing, supply, and revenue dynamics across the auto industry. UBS has estimated that suppliers for electric powertrains will gain significant share of the market revenue pool, along with firms that supply sensors and semiconductors to support autonomous driving. On the other hand, combustion-engine focused suppliers look set to lose out most.
Electric powertrain suppliers
The shift to electric power will mean greater demand from electric powertrain suppliers, including motor, charging, and powertrain electronics / battery management systems. All will require ongoing research and development (R&D) spend. Volume growth is likely to offset some of the projected price declines in those new technologies. Battery pack demand is also set to rise substantially.
Overall UBS expects the electric powertrain market size to grow from around USD 5bn today to anywhere between USD 70bn and USD 100bn by 2025. Battery-related value chains should grow to a total market opportunity of USD 80-175bn, reflecting the value of both battery-cell technologies and the whole battery pack.
Traditional ICE powertrain suppliers
Suppliers to the auto sector generally remain under pressure from combustion engine manufacturers. UBS research on the world’s bellwether autosuppliers reveals a consistent pressure to reduce costs by 2%-3% every year, even as global volumes of combustion engine cars have risen. These price pressures on traditional suppliers look set to worsen significantly as electric replaces internal combustion engines (ICEs), and as many countries are likely to restrict or even phase out new ICEs altogether in the long run.
Electronics and sensor suppliers
Electric vehicles with basic assisted driving capabilities at present use around 3.5 times the number of semiconductors (worth about USD 1,500 per car) than are found in traditional combustion engine vehicles. Half of these additional components are needed for electrification, half for increased autonomous driving technology.
UBS expects future electric cars to include more semiconductors and more sensors, with up to 14x more of the latter demanded by 2030 than in 2017. And while pricing for camera, radar, and laser-based radar (Lidar) systems are set to fall dramatically (to less than EUR 100 by 2030 for a Lidar, from more than EUR 10,000 today), the revenue opportunity per year is forecast to rise nearly sevenfold to EUR 41bn by 2030.
Interior, body, and chassis suppliers
We expect electrification trends to move in lockstep with greater automation of the driving experience. And in a world where the direct driving involvement and experience take a back seat to a computer, we expect a shift in how consumers will use their vehicle.
UBS predicts that the revenue pool growth to the body, chassis, and overall combustion powertrain will stagnate at best, which will hurt suppliers. The interior mix could also switch towards higher-quality plastics, leather, and greater spend on connectivity (such as gesture and voice control features, entertainment systems and displays).