The automotive industry is going through a paradigm change. The paper describes the challenges facing the industry and the main directions of change. It argues that the automotive transformation will affect the entire supply chain and have the potential to redraw the boundaries of the sector, redefine the key players and sourcing practices, and affect the relative advantage of countries and regions, reshaping existing industrial geographies.
The automotive industry is going through a paradigm change that will affect the entire supply chain and have the potential to redraw the boundaries of the sector, redefine the key players and sourcing practices, and affect the relative advantage of countries and regions, reshaping existing industrial geographies.
The legacy European and US carmakers have been slow in responding to the challenges posed by electric (EV) and autonomous driving (AV) vehicles. Conversely, the People’s Republic of China rose to become the world’s largest electric car market and the first world producer, hugely profiting from first-mover advantage. Moreover, the new technologies require skills that have not, so far, been among the core competences of automotive engineering. Competition from new players, more adroit in the new technologies related to connectivity, autonomy, sharing and electrification, is threatening the established structure of the automotive industry. To comply with ever-stricter emissions regulation, take advantage of the new market opened by government EV subsidies and, above all, catch up with new, challenging competitors in their own markets, car makers have finally taken up the challenge, speeding up the production of electric and hybrid vehicles1.
New players: partners or competitors?
The race to electric and autonomous vehicles calls for huge investments, while the speed in innovating and the urge to bring new ideas to market entail big risks. Prospects of profit are attracting new investors from the most diverse sectors outside the industry – such as tech companies, venture capital and private equity players, and indeed battery producers. These players came to dominate investment in automotive and mobility start-ups, dwarfing the investment that the OEMs could afford2. Irrational exuberance – the combination of EV mania and the profusion of funds ensured by Spacs3 – rewarded start-ups that had not yet produced profits, while neglecting legacy carmakers producing millions of vehicles. Tesla stands out as the most aggressive and successful entrant, contending with the Chinese company BYD Auto ranking as the world’s largest producer of battery electric vehicles (BEVs). Its market capitalisation, greater than the sum of the market values of the main legacy carmakers, gives it a huge advantage in terms of investment capacity, which enhances its undeniable innovative ingenuity.
In the mature oligopoly that preceded the era of e-vehicles, carmakers (OEMs) opted for M&A to control competition and consolidate market shares in a saturated industry. Nowadays, the speed of disruption, the need to make bets on multiple products, services, sectors and technologies, the sheer size of the investments involved, and the uncertainty of the outcomes mean that strategic alliances to share R&D, resources and projects have become a must. Thus, we have seen a shift in alliance archetypes away from familiar horizontal alliances towards cross-sector strategic alliances, joint ventures, and acquisitions of innovative technology start-ups, a trend that has gathered momentum subsequent to Covid-19. Consolidation and partnership deals take place on an almost daily basis in autonomous driving, electric vehicles, batteries, hydrogen fuel cells, sharing and mobility. All these different sectors are simultaneously involved in this paradigm change. As the automotive product changes, software and batteries are taking on an increasingly important role in the competitiveness and value of the vehicle. Fully connected vehicle platforms, which allow for over-the-air software updates, may enable carmakers to generate recurring revenue streams from new services. Yet, the increasing relevance of big data and IT devices is threatening to undermine carmakers’ leadership, shifting the power from OEMs to Big Tech, increasingly enticed to enter the EV market, directly or, more often, in collaboration with a start-up: Amazon, Google, Apple, Huaway, Xiaomi – and the list is bound to go on growing.
At the heart of electric mobility
Batteries are at the heart of the electric transition. With all major manufacturers rushing to launch BEV models, batteries have proved to be a major bottleneck.
Battery manufacturing is currently dominated by East-Asian companies. China’s decision, a decade ago, to develop a full-fledged industrial value chain for EV batteries has endowed it with strategic power. Chinese battery makers have gained control over the key strategic resources of the Li-ion battery industry, structured the industry, and defined and controlled its competition rules. The Chinese industry’s current competitive dynamics are articulated around three core principles: industrial segmentation based on different battery chemistries, in-house development and production of strategic technologies, and the bargaining power of suppliers following customization and diversification of transactions (Heim et al 2021) – a strategy described by Wang and Wei (2021) as “specialized vertical integration”4.
The EU and the US are trying to catch up. Since its May 2018 Strategic Action Plan for Batteries the EU has stepped up efforts and financial support to encourage risk-taking and investment in research and innovation in the field, bringing together a set of measures to support national, regional and industrial efforts to build a battery value chain in Europe, from raw materials to reuse and recycling, in derogation of the European state aid rules.
When it comes to clean/renewable energy technologies, the game is still wide open. The competition is being played out between batteries, fuel cells and different, more ecological forms of fuels for traditional engines, as well as between different kinds of batteries – lithium-ion vs solid state. The technologies are still relatively new and the costs of production high, as indeed is the uncertainty over future developments. Given the current state of technology, hydrogen has yet to become competitive for passenger cars, but fuel cells can be used for trucks, buses, and industrial use: as production goes up, the cost of electrolysis goes down, making it competitive with electric cars. The battery industry itself is still in its early stages of development, and the flow of news of major or incremental innovations is unceasing. OEMs and battery producers are jointly guiding the research into new, more efficient batteries. Cost, time efficiency and the availability of raw materials are crucial concerns in the choices made for batteries. The Li-ion battery industry for EVs faces the competition of solid batteries, which promise higher energy density, lower recharging times, and, above all, do not need cobalt.
Competition between technologies makes for an uncertain scenario, leaving room for a role for the state in coordinating and governing change. While massively subsidising the demand for electric vehicles and the production of batteries, all the governments have singled out clean hydrogen as an essential area to address in the context of the energy transition. The EC estimates that Europe is highly competitive in clean hydrogen technology manufacturing, which offers a unique opportunity to bridge the gap accumulated in battery technology vis-à-vis the Asian countries5. France and Germany have already earmarked billions of euros for investment in fuel cell technology, and the Next Generation EU plan can help other member countries to finance the green transition. Last but not least, the US has finally joined in the game, combining regulation with incentives. While bestowing subsidies and incentives to attract new investments, Biden’s $1.2 trillion infrastructure bill introduced the country’s first national Local Content Requirements (LCR) policy for renewables, essentially barring access to federal infrastructure financing unless the project uses US-produced materials6. All the major legacy carmakers have announced plans to build massive battery factories in North America.
As battery fab plans mushroom, the issues of building the battery value chain and ensuring the supply of scarce raw materials remain in the shade. It took ten years for China to build its battery value chain. Its companies control much of the supply of the metals that go into batteries (nickel, cobalt, manganese). In 2018, Chinese companies owned half of the largest cobalt mines in the Democratic Republic of Congo, the source of most of the world’s supply of the metal – known as the “blood diamond of batteries” for the often inhumane conditions associated with its extraction. The carbon emissions from the production of batteries (including pollution from extracting the metals used in the batteries) and hydrogen are also beginning to attract attention, as well as investments in plants to recycle used EV batteries.
Countries’ competition, companies’ collusion?
There is a huge market to exploit out there, and it is getting crowded. Market dynamics and competition patterns are in constant flux. OEMs are striking back, making enormous efforts to pre-empt the market; start-ups which took advantage of the speculative bubble in the EV market, reaching astronomical valuations, are cashing in through fusions and M&A; battery producers are undertaking vertical integration; oil producers are (slowly) diversifying into renewables. Alliances cross borders. Old and new western players are establishing or strengthening their ties with China, to benefit from its huge market and skilful supply chains. As with electronics in the 1990s and 2000s, this strategy can backfire, with China outperforming its competitors in electric and autonomous driving. Several Chinese companies are announcing ambitious expansion plans across the EV value chain in the US and in Europe, alone or in partnership with local companies. With the car market regrouping, and old and new players repositioning themselves in the three macro-areas, the first movers’ advantage is increasingly being challenged: Tesla’s BEV share of the US market is expected to drop from 79% in 2020 to 56% by the end of 2021 (though it rose to no. 1 in Europe in 2021).
Increasingly, location is defined by governments’ policies, in their attempts to reduce dislocations and attract new investment through subsidies, tariffs or political pressures. All engage in different shades of protectionism. Although welcoming US and Asian producers, European governments tend to favour their “national champions”, on the assumption that they will be more responsive to the domestic interests. The US seems to rely more on its huge market, and LCRs, to attract foreign companies. Finally, China is still keeping a tight control on FDI, allowed only in partnership with a local producer, except when helping the technological catch up, as in the case of Tesla. Despite tight restrictions, US and EU carmakers have flooded the Chinese market, attracted by its size and the pre-eminence of its EV technology. Everywhere, states and regions are vying – with land, subsidies, cheap and skilled workforce, and infrastructure – to lure new plants, in an effort to reduce the impact of the ongoing transformations on the quantity and quality of employment.
Towards a new paradigm
The question of employment is key. Digitalization and electrification define a completely new product, requiring new components and new skills: less engineering and more software. Moreover, the EV requires far fewer components, as alternative powertrains are less labour intensive than conventional combustion engines. According to some estimates, the industry could shed 30 percent of jobs, with other jobs lost and new skills demanded downstream, in services and repairing. Tier-1 suppliers and their value chains are at the forefront of technology changes. While they struggle to incorporate the new skills, a large segment of the supply chain connected with the internal combustion engine is expected to disappear.
The loss of jobs may be disastrous for the integrated peripheries and semi-peripheries, mostly specialised in the ICE engines, though it will not spare the core countries7. The impact on the integrated peripheries could be even worse if concerns about the resilience of the value chain or the core countries’ defence of employment lead to policies that favour re-shoring.
Technologies in renewable energy and autonomous driving are still in their infancy. The automotive industry’s old core, which based its supremacy on engineering excellence, is now committing large sums in the new technologies, forging alliances upstream and downstream in the new value chains, and exploiting the advantages accruing from its command over production technologies. Governments are trying to shield domestic production and employment from the effects of the transition by subsidizing investments in new plants and technologies. Still, if the car follows the destiny of the computer, where the value is increasingly in the software, a redistribution of profits across sectors is very likely. Eventually, not only the car, but the whole car industry, will be completely transformed.
About the Author
Annamaria Simonazzi is Professor of Economics, retired from Sapienza University of Rome, Italy. She is Expert Councellor of CNEL (National Council of Economy and Labor) and President of the G. Brodolini Foundation, editor of Economia & Lavoro and member of the editorial board of the web magazine www.inGenere.it. She has published widely on European macroeconomic issues, industrial policy, employment, welfare and gender economics. Among her latest papers on the automotive sector are: “The Future of the Automotive Industry: Dangerous Challenges or New Life for a Saturated Market?” Inet WP no. 141, November 2020 and “Mexico’s Automotive Industry: A Success Story?” WP no. 166, October 2021 (both with Carreto Sanginés, J. and Russo, M).
- See A. Simonazzi, J. Carreto Sangnés and M. Russo, “The world to come. Key challenges for the automotive industry, Economia & Lavoro, no. 1, 2022 (forthcoming) for an in-depth analysis of the ongoing transformation.
- McKinsey reports that since 2010 more than EUR 100 billion have been invested in mobility start-ups, 94 percent of which originated from players outside the automotive industry. See: MacKinsey, Race 2050 – A Vision for the European Automotive Industry, January 2019. https://www.mckinsey.com
- The SPAC (special purpose acquisition company) is a blank-cheque company that enables businesses to list without the usual scrutiny of a traditional initial public offering.
- S. Heim, K. Kakitani, J. Lee, H. Shioji, The competition patterns and dynamics of the Chinese Li-ion battery industry, Gerpisa November 2021; Xieshu Wang, Zhao Wei, Specialized Vertical Integration: Value Chain Strategy of Power Lithium-ion Battery Firms in China, Gerpisa, November 2021. https://gerpisa.org/en/node/6573
- According to representatives of Germany’s mechanical engineering sector, the German industry already has the necessary expertise for electrolysis and hydrogen storage, but needs solid commitments from the government to attract the necessary investment.
- Biden’s plan provides that by 2030 50% of the new vehicles sold in the US must be EV or hybrid plug-in and offers 7500$ tax credits for e-vehicles made in the US and 4500$ for cars made with union labour.
- Simonazzi, A., Carreto Sanginés, J. and Russo, M. “The Future of the Automotive Industry: Dangerous Challenges or New Life for a Saturated Market?” Inet WP no. 141, November 2020.