Is the End of the ICE Age Near?
The internal combustion engine (ICE) has been the world’s dominant form of vehicle propulsion for 100 years and counting. However, global regulatory changes focused on emissions reduction, road safety and fuel-economy improvement are increasing the potential for fully electric, zero-emissions vehicles, which will create a significant disruption to this 100-year-old technology.
Are we starting to see the signs of an “extinction-level event” as future vehicle innovation accelerates? Early signs support the notion that the end of the ICE age is nearing, manifesting in the changing global legislative environment, increasing investment in these alternative powertrains and emerging OEM strategies. Everyone in the automotive industry, from suppliers to automakers, must heed the writing on the wall to avoid being caught off guard by the arrival of a new age.
The year 2017 was the beginning of an emerging global trend of banning the sale of ICE passenger vehicles. Several countries have laid out formal plans to adopt fully electric vehicles within the next decade. Norway took the lead in February 2017 by announcing it intends to allow only the sale of electric vehicles starting in 2025. In June, India’s energy department stated that it set the “ambitious” target to stop selling gas-powered vehicles. As one of the world’s most polluted countries, India is making a bold vow to forsake ICE vehicles for battery electric vehicles (BEV) by 2030.
France’s President Emmanuel Macron announced his own ICE ban by 2040. In this July 2017 announcement, the government’s intent was to end the sale of new petrol and diesel vehicles by 2040 in order to meet the obligations of the Paris Climate Accord. This was immediately followed by the U.K.’s 2040 ICE ban, with Environmental Secretary Michael Gove stating, “There is no alternative to embracing new technology.” In September, Scotland announced plans to end petrol and diesel car sales by 2032, eight years ahead of the U.K.’s deadline.
In September, Xin Guobin, China’s vice-minister of industry and information technology, told a forum of automakers in Tianjin that the government would ban the production and sale of fossil-fuel cars. Although no timetable has been formally announced, most Chinese automotive insiders, including BYD Chairman Wang Chuanfu, believe this ban will take place starting in 2030.
The current American administration, on the other hand, has rolled back fuel-efficiency standards to 36 MPG, which may impact the rate of adoption of the BEV.
Emerging OEM Strategies
In response to the legislative environment, which has accelerated around the globe, automakers have been aggressive in developing strategies to create market-leading positions, both now and in the future.
One such automaker is the Volkswagen (VW) Group. As part of its “Transform 2025 Strategy,” the VW Group has established a target of 2-3 million electric vehicles a year by 2025, or roughly 25% of annual production. This is supported by Porsche, which plans 50% of its total sales to be BEV by 2023. Another example is Audi, which plans to have 30% BEVs and/or hybrid electric vehicles for sale in the U.S. by 2025. All totaled, VW currently has plans for 30 pure-electric vehicles.
Other developing OEM strategies include:
- Daimler plans an $11 billion investment with a commitment to electrify its “entire portfolio” by 2022, offering 11 BEV models. From 2020, Smart will only offer electric drivetrains.
- Ford plans an $11 billion investment to offer 40 electrified vehicles by 2022, seven of which will be BEVs, and the rest plug-in hybrids.
- GM plans to phase out gas-powered vehicles for an “all-electric future,” but didn’t give an exact date for an all-electric vehicle lineup. The effort starts, however, with plans for 11 all-electric vehicles by 2023.
- BMW has developed a new vehicle architecture that will enable “electrification on every model/series” with the goal of 15-25% of total vehicle sales to be BEV/hybrid electric vehicles by 2025.
- Toyota will launch 10 new BEVs by 2022 and will have an electric option for its entire lineup of cars by 2025.
- BAIC, one of China’s largest carmakers, plans to phase out production of non-electric or hybrid cars under its own brand by 2025.
- Please note: Ford and GM have announced a strategy to focus on manufacturing trucks and SUVs for the American market. The demand for these bigger and more powerful vehicles in North America could mean a slower transition to BEVs.
Big Shifts in Supplier Demand
Possibly the biggest blow to the supplier industry will be the decrease in demand when BEVs tip the scale and become more common. Simply put, the battery-electric powertrain does not require the same amount of parts as the traditional ICE does. In the case of the Chevy Bolt, the car has only 24 moving parts versus the comparable 149 in a traditional powertrain; it requires no fluids; and around 56% of its entire vehicle content is supplied by LG, an electronics company.
Bluntly speaking, suppliers will no longer form the cornerstone of the industry when BEVs take over. The cars of the future are being designed with completely different needs in mind, and everything that’s considered traditional and old-fashioned will be re-examined for its usefulness and, in most cases, discarded in lieu of modern technologies.
Impact to Forging Suppliers
Today, suppliers provide about $4,000 per vehicle of content for traditional engine, transmission, exhaust and fuel systems. This content comes from a chain of countless mid-market suppliers that supply items like forgings, castings, hoses and machined components. So, with today’s global market producing 100 million vehicles, the shift from ICE to electric technologies will disrupt – and potentially eliminate – a $400 billion market segment.
Think about this impact to the forgings. The Chrysler Pacifica, with a V6 engine and an eight-speed transmission, has a total of 107 forgings between these critical systems. However, consider the architecture of the BEV. When you look at a vehicle like the Nissan Leaf or the Tesla Model S, the number of forgings decreases to nine.
This decrease in content has the potential impact to the forging industry of about $400 per vehicle, or a $40 billion market impact. When considering that the global forging industry is forecast to be about $90 billion in 2020, this potential impact on this global industry is huge.
This shrinking market for ICE components will create excess production capacity and will have a significant impact on this supplier universe. However, the industry shift toward electrification will also create tremendous opportunities for suppliers that are prepared to meet the market head-on. This disruption will lessen the chances of survival for traditional suppliers that fail to act – and operate without a clear vision, a winning strategy and the right technical resources.
Incumbent suppliers have four strategic options as they tackle this market challenge.
- Divestiture – A strategy to remove some of a group’s assets under its current business portfolio. Depending on the purpose of restructuring, divestitures can take several forms, such as sell-offs, spin-offs or equity carve-out. Recent examples include Honeywell, Delphi and Autoliv.
- Business transformation – A change in management strategy, which has the aim to align people, process and technology initiatives of a company more closely with a new strategy and vision. Examples include Borg Warner’s acquisition of Sevcom and ZF’s acquisition of TRW.
- Diversification – A strategy to enter a new segment or industry in which the business doesn’t currently operate. Expansion of the existing product line with related products is one such method adopted by many businesses.
- Consolidation – The act of merging two or more organizations into one. The primary focus is to create financial synergies and competitive advantage and leverage in shrinking markets. Examples include Tenneco’s acquisition of Federal Mogul and American Axle’s acquisition of MPG.
As these new OEM strategies create new products and business-model opportunities, the challenge for the movers and shakers in the automotive industry will be to adapt and refocus their product portfolios and business strategies accordingly. The future of the automotive industry is moving ahead regardless of tradition – and it won’t wait for those who refuse to think both practically and strategically.