Electric Vehicles Will Destabilize the Automotive Industry

The auto industry is in trouble, and repeated profit warnings and falling stock prices paint a disturbing picture. Not only are automakers facing economic and trade headwinds, but they are also confronting disruptions posed by mobility services, autonomous vehicles, and electrification. Automakers are investing in mobility and autonomy while simultaneously diverting capital away from their core business and into areas where there is no timetable for turning red ink black.

Global automakers have announced a timeline for electrifying vehicles in their portfolios. Nevertheless, electrification is the only disruptor that has the power to totally transform the automotive landscape by eliminating historic barriers to entry, namely the amount of investment capital and expertise required to assemble a competitive vehicle.

The established automakers are protected from new entrants as long as internal combustion engines and transmissions dominate the market. The high cost of entry posed by these components effectively precludes startups. China lured automakers with joint ventures that provided the only path to access what everyone knew would be the world’s largest vehicle market, but access came with a price, namely capital investment and technology transfer to China. Nevertheless, China has not developed engines, transmissions, and related systems equal to those of established Asian, American, and European automakers. If anything, China’s automotive experience confirms the magnitude of the challenges posed by these critical systems.  

Modern engines and transmissions represent more than a century of accumulated expertise across a range of engineering disciplines. Production facilities are incredibly expensive, and these components consume a significant portion of annual R&D budgets to continuously improve fuel efficiency, emissions, and durability.  

But when it comes to electric vehicles, the investment and design expertise needed to build a car are less expensive and easily available to a startup.  EVs have fewer parts, and manufacturing all of the critical elements, including the battery, can be outsourced. And instead of making the investment to produce engines and transmissions internally, EV assemblers can simply source the most important and expensive component, the battery from any number of suppliers.

 China is the primary benefactor as battery powered vehicles alter the competitive landscape, making it easy for local startups to enter the auto industry on a more or less equal footing with established companies. The country is already the world’s largest electric vehicle market and home to the largest concentration of battery producers and production capacity.

China also controls much of the global supply of lithium, cobalt, and other battery cell components. Recently NIO, a small Chinese electric car producer, raised $1 billion in an initial public offering in the U.S., demonstrating not only its appeal to international investors but also the relatively small amount of capital needed to enter this industry. There are a growing number of Chinese companies making electric vehicles, though some of them look like enclosed golf carts, not street-worthy cars. Nevertheless, the rush to get into the EV game demonstrates the ease of entry into the mainstream auto industry. 

Tesla demonstrated exactly this path to mainstream legitimacy. The company stunned the auto industry by launching the electric roadster in 2008, less than five years after its rocky start in 2003. Then, only four years later, it introduced the widely-acclaimed Model S. Tesla’s timetable and investment of some $14 billion raised from investors is a pittance compared to what a conventional ICE powered vehicle would cost to develop and assemble.

As the world shifts to electric vehicles, established automakers will lose their most important differentiating feature in today’s motor vehicle, the distinct identity of their brands often embodied in the characteristics provided by their engines and transmissions. Recently, the CEO of Volkswagen, Herbert Diess, said at a conference in Germany that there was only a 50-50 chance that the German auto industry would be among the global elites in ten years because of the electric vehicle’s disruptive potential.

Never before has the global automotive establishment confronted such fundamental and imminent challenges. The rise of electric vehicles will enable China to achieve parity in vehicle production while establishing an OPEC-like vise over battery capacity and, more importantly, over the critical materials needed for the production of lithium ion batteries.

Maryann Keller is principal of Maryann Keller & Associates, a New York area automotive strategy consultancy.