Introduction
The automotive {industry} is a jewel of the European economic system. For many years, the {industry} has been an necessary contributor to Europe’s financial progress, innovation, and prosperity, accounting for nearly 7 % of the area’s GDP and being immediately or not directly answerable for using nearly 14 million folks. The {industry} additionally carries vital symbolic weight; taglines comparable to “Made in Germany,” “Italian automotive design,” “Euro NCAP for Saver Vehicles,” and “British racing” have come to face for European innovation and craftsmanship.
Nevertheless, the established order is being challenged and the {industry} faces huge ongoing transformations, such because the shift from inner combustion engines to electrified powertrains and a shift in focus from {hardware} to differentiation by software program. This dynamic has allowed new entrants in Europe and overseas—particularly in China, the biggest automotive market on this planet—to disrupt the market and win market share. In 2022, China surpassed Germany in light-vehicle exports for the primary time, with exports of about 3.0 million autos, in distinction to Germany’s 2.6 million. These transformative forces overlap with a difficult macroeconomic surroundings in Europe, together with rising power prices, inflation, and geopolitical tensions. All of those elements have drastically affected the European auto {industry} and make navigating the sector’s transformation difficult. A affluent future for the European automotive {industry} will due to this fact rely on how properly and rapidly it responds and the way European stakeholders can form the required situations for future success. The necessity for motion is pressing.
To that finish, now we have sketched a street map that covers seven areas. Executing on this plan would require motion from a wide range of {industry} stakeholders. Speedy motion from automotive corporations will probably be necessary, however the regional ecosystem, together with the general public sector and a number of adjoining sectors, might want to take part in shaping a stage taking part in subject and a fertile surroundings for the way forward for the European automotive {industry}.
A multidecade success story
The European automotive {industry} has been an engine powering prosperity and progress, employment, and innovation and has contributed to Europe’s picture and notion on the worldwide stage (Exhibit 1).
An financial powerhouse for the area, the automotive {industry} contributed about 10 % of Europe’s exports in 2022. The sector’s greater than 17,300 corporations kind a community of OEMs and suppliers of all tiers. Considerably, the {industry} immediately or not directly employs greater than 6 % of the area’s workforce, creating optimistic spillover results outdoors the sector.
The automotive {industry} has additionally been a nexus of innovation. Technical champions and small and medium-size companies throughout the ecosystem have repeatedly innovated, particularly within the areas of combustion engine powertrain, chassis, security techniques, and exterior and inside design. Certainly, about 30 % of world automotive patents originated from European nations, essentially the most of any area. Important investments into analysis and improvement have helped European automakers introduce new applied sciences which have contributed to main advances in sustainability and security by enhancing gas economies and lowering emissions, noise, and accidents.
Progress and funding within the European auto {industry} over the previous a number of a long time have contributed to Europe’s world picture. German engineering is broadly touted, and our analysis suggests many European automakers are thought of front-runners in sustainability, with a number of the most bold targets round electrical autos (EVs), decarbonization, and security.
Thanks partially to this work, the model worth of the ten largest European auto corporations is conservatively estimated at a mixed €200 billion; 5 of the ten most dear automotive manufacturers worldwide are European. The grand problem now could be to take care of and construct on these belongings within the face of profound and accelerating change.
Disruption and transformation
The historic strengths and just lately reported file margins of European OEMs might create a false sense of security for the {industry}. Accelerated disruptions round electrification, software program, and new aggressive pressures loom.
Substantial market disruptions have been noticed in different industries, with severe outcomes. As an illustration, European producers misplaced greater than 90 % of their share of the smartphone market in simply six years. McKinsey evaluation reveals that main gamers within the movie digicam {industry} misplaced comparable market share over 9 years.
Market share knowledge recommend that European OEMs’ management place is being challenged as new entrants, particularly from China, acquire traction. Our evaluation additionally means that European market situations for native improvement and manufacturing have gotten much less aggressive. Evaluation from the McKinsey Middle for Future Mobility reveals that since 2019, European incumbents have misplaced six proportion factors of market share of their dwelling market and 5 proportion factors in China. In the meantime, Chinese language OEMs are gaining floor in each China and Europe, reaching 45 % market share of their dwelling market in 2022 and octupling their market share in Europe between 2020 and 2022. This dynamic is much more obvious in battery electrical autos (BEVs): new EV-focused entrants maintain 51 % of the worldwide BEV market (Exhibit 2). Apart from market share, European OEMs additionally face the problem of operating worthwhile BEV companies.
A extra detailed have a look at totally different segments presents a extra nuanced image of the {industry}. Within the premium phase—dwelling turf for a lot of European OEMs—European OEMs nonetheless maintain 71 % of world gross sales. However this phase can also be turning into tougher to carry: newcomers claimed 18 % of the premium market in 2022.
This shake-up stems from the quick tempo of change within the {industry}. The transition from internal-combustion-engine (ICE) to zero-emissions autos is accelerating, with world EV gross sales rising 80 % per 12 months since 2020. McKinsey evaluation means that many world mobility markets will attain near-total EV penetration by the mid-2030s. In response, European OEMs have introduced bold electrification plans to launch greater than 150 EV fashions by 2030, in response to McKinsey evaluation.
The EV transition drives the {industry}’s emphasis away from {hardware} towards software program and digital. In accordance with our evaluation, EV customers are greater than twice as more likely to swap manufacturers for higher in-vehicle expertise, comparable to superior driver help techniques (ADAS) options and connectivity providers. Our analysis reveals that profitable automakers are growing automobiles outlined by software program, leading to a tripling of software program content material per car since 2015.
With electrified, software-defined automobiles turning into the norm, semiconductors and batteries are the brand new {industry} management factors. In reality, greater than a 3rd of the worth of a BEV is related to the battery. Consequently, the European provider panorama is altering quickly, and new capabilities are wanted in improvement and manufacturing.
Lately, software program improvement and {hardware} improvement are more and more decoupling. We’ve noticed that European suppliers have change into proficient on the interplay between software program and {hardware} within the context of particular management items that oversee particular elements of a automotive, such because the engine or transmission. Trendy autos might have as many as 150 management items in a distributed software program structure. {Hardware} and software program will more and more decouple as software program turns into extra centralized into domains such because the powertrain and in-vehicle connectivity—and, ultimately, into computer systems that oversee zones of the car reasonably than elements.
Because of this shift towards extra centralized computing, parts of autos might change into commoditized, and scale and incremental enhancements might change into the principle drivers of competitiveness. Because of this, a number of part markets more and more resemble the smartphone {industry}, during which the core differentiator is software program innovation—along with economies of scale, industrial excellence, and high quality in {hardware}. McKinsey evaluation means that the variety of build-to-print suppliers (which manufacture merchandise and elements to prospects’ detailed engineering directions) within the automotive {industry} that present elements comparable to energy electronics will improve. We’ve discovered that a few third of OEMs’ requests for quotes in some powertrain elements and techniques are already build-to-print requests.
New entrants are transferring to produce the automotive market with crucial future applied sciences comparable to batteries, semiconductors, and software program. Conventional suppliers discover themselves sandwiched between “high-tech commodity” corporations that present semiconductors and batteries upstream and cost-pressured incumbent OEMs downstream. This dynamic threatens European provide chains. Contemplate that the present battery worth chain is essentially managed by Chinese language corporations (Exhibit 3).
To counteract these developments and kind a powerful provide community just like the one Europe created in the course of the ICE period, main {industry} contributors are asserting strategic partnerships to safe entry to sources and manufacturing capability, particularly for batteries and semiconductors. For instance, some incumbents plan to strengthen their management over crucial parts of the worth chain by partnering with mine operators and even buying stakes in mines. Whereas these actions are steps in the fitting path, the projected provide and capability are usually not but sufficient to fulfill the area’s forecast demand by 2030. Accelerated efforts are needed.
Lastly, these transformative forces overlap with a European macroeconomic surroundings that has a very acute affect on the area’s auto {industry} (see sidebar “Macroeconomic challenges and the European automotive {industry}”).
Highway map for the European automotive {industry}
The European auto {industry} is within the midst of the best change in its historical past. In service of serving to the {industry} stay globally aggressive we define a street map of seven pillars for stakeholders to behave on (Exhibit 4). The time to behave is now: in response to our evaluation, European automotive OEMs and suppliers earn about thrice the income of their Chinese language counterparts and 5 instances the EBIT, which suggests the European {industry} can act from a place of power.
A speedy response from OEMs and suppliers within the European auto {industry} will probably be necessary. However different stakeholders—together with adjoining industries such because the power, analysis, and public sectors—would additionally must act collaboratively to offer an surroundings that allows success for the European automotive {industry} (and mobility ecosystem) of the longer term. In brief, the ecosystem strategy that made Europe robust within the ICE period must be translated to serve the period of software-defined, electrified automobiles.
Revive strengths in buyer understanding, product design, and model
The European automotive {industry} might want to lengthen its legacy of cutting-edge product design and superior model worth and switch it into the brand new context of software-defined electrical autos.
Of the 25 world manufacturers with the best model worth, all however three are European. Our knowledge present that model stays among the many high 5 buy standards for European, American, and Chinese language auto customers. Nevertheless, within the age of electrification and software-defined automobiles, buy standards will change and model rankings may get reshuffled.
To keep up superior model worth, European incumbent OEMs would wish to research and perceive buyer wants and preferences to construct fascinating merchandise. Conventional client segmentation would have to be tailored for the period of software-defined electrical autos, with more-detailed client profiles and more-granular consumer profiles. Proudly owning and analyzing client knowledge will allow OEMs to supply tailor-made mobility options and seamlessly interact customers throughout the life cycle. They will additionally construct their product improvement organizations to mirror buyer journeys and experiences, which might carry operational roles nearer to the shopper. As customers’ wishes change and expertise advances, OEMs would wish to repeatedly replace their software program remotely to carry essentially the most up-to-date performance to prospects and meet their wants.
Focus relentlessly on value and pace
McKinsey analysis from 2022 reveals that the car buy value is a very powerful shopping for issue for customers throughout markets. Notably in EVs, Chinese language OEMs can flip their value benefit right into a aggressive edge: our evaluation reveals that their prices are 20 to 30 % decrease than these of European OEMs.
To catch up, European OEMs might drive down prices strategically. In accordance with our evaluation, European OEMs might shut as much as 20 proportion factors of the fee hole by adopting structural product design, vertically integrating battery manufacturing, scaling EV manufacturing, and enhancing productiveness. For instance, battery insourcing might lower European OEMs’ prices by three proportion factors, and cost-efficient battery cell chemistry options might save 5 to 6 proportion factors for some autos and segments. As for the remaining 5 to 10 percentage-point value hole, European OEMs might determine differentiating options that customers can be keen to pay a premium for, comparable to model differentiation; environmental, social, and governance (ESG) management; and superior security efficiency.
Pace is one other consideration. McKinsey evaluation reveals that European OEMs have a protracted improvement cycle in contrast with rivals from different areas, with concept-to-pilot phases lasting as much as 4 years. Against this, we’ve discovered that the quickest automakers in China want solely 21 months to maneuver from idea to pilot, permitting them to answer market developments rather more rapidly.
To be clear, it’s not essentially acceptable to make direct comparisons between the Chinese language and European automotive sectors or improvement cycles. Nevertheless, European OEMs ought to tackle the problem and redesign their very own processes to speed up innovation, improvement, and industrialization. As an illustration, the product design course of may very well be accelerated by iterative styling strategies. Subsequent product improvement may very well be optimized by decoupling {hardware} and software program improvement and by making use of agile ideas to software program improvement. Throughout all processes, co-locating cross-domain groups and organising activity forces for merchandise which might be not on time or elements with provide bottlenecks can additional speed up improvement.
Execute a profitable technique for the Chinese language market
Our analysis reveals China will stay the largest automotive market sooner or later, which suggests profitable in China will probably be necessary for European OEMs and suppliers that wish to play a globally related position.
European incumbents have misplaced 5 proportion factors of market share in China since 2019, a considerable lower. In the meantime, our evaluation reveals that Chinese language automakers are outpacing their rivals and have gained greater than ten proportion factors of market share in China, pushed by their maintain on greater than 80 % of the EV market.
How have they completed it? Chinese language OEMs supply considerably lower cost factors, and their merchandise are extra interesting and tailor-made to Chinese language customers’ wants and preferences. In addition they carry focused improvements to market quickly; our analysis reveals that greater than 70 % of recent autos unveiled on the Shanghai auto present in April 2023 got here from Chinese language OEMs.
Like their OEM counterparts, European automotive suppliers have a tough time gaining traction with Chinese language EV gamers, particularly for EV powertrain elements and techniques. Whereas Western suppliers have held greater than half of China’s ICE powertrain market, they maintain lower than 5 % of the EV powertrain market.
European OEMs and suppliers would wish a basic strategic overhaul to regain competitiveness in China and meet the preferences of Chinese language prospects. This begins with growing merchandise particularly tailor-made for the Chinese language market. In accordance with our analysis, the typical buyer in China is 34 years outdated, in contrast with 58 in Europe. These customers have considerably totally different buying standards. As an illustration, Chinese language customers place increased worth on cutting-edge expertise, connectivity, superior driver help techniques, and on-board multimedia screens than European and American customers do. Chinese language automotive patrons additionally favor simplified car selections with preconfigured choices.
To implement a “native for native” technique—during which R&D, manufacturing, and distribution are in shut proximity to the place merchandise will probably be purchased and used—European gamers would wish to regulate their working fashions for the Chinese language market. For instance, OEMs might localize analysis and improvement capabilities and switch determination rights to native administration. Coming into native partnerships throughout the portfolio and provide chain may also be important to develop a powerful foothold in China and to learn from the know-how and reputations of native companions.
Create resilient, round, and sustainable provide chains
To cut back bottlenecks and dependencies, the {industry} will want resilient, round, and sustainable provide chains centered on batteries, semiconductors, and inexperienced supplies. In 2021, the chip disaster led to a lack of ten million autos in world manufacturing, highlighting a necessity to extend provide chain resilience.
To create resilient provide, localization is significant. We mission that the European provide–demand hole for batteries will attain nearly 40 %, or 500 gigawatt-hours (GWh), by 2030. To cowl European battery demand domestically, an extra 20 gigafactories, a €35 billion funding, can be wanted. The continent would additionally want 37 new semiconductor fabs to cowl native demand, requiring a €190 billion funding. As a primary step, the European Chips Act will present €43 billion in subsidies. Subsequent steps might contain increasing the ecosystem alongside the worth chain whereas safeguarding essential provides, with techniques comparable to growing security inventory and implementing dual-sourcing methods.
At the least within the midterm, enhancing the circularity of provide chains will additional lower Europe’s dependence on uncooked supplies and elements from different areas whereas growing sustainability. It might additionally improve the share of native added worth in crucial EV elements and create extra jobs and financial progress. Our evaluation reveals that reusing supplies from scrapped batteries can even save as much as 10 % of prices and keep away from 20 % of the CO2 required in manufacturing. To implement a round worth chain, {industry} stakeholders would wish to decide to using recycled content material and materials effectivity and set up reverse operations at finish of life.
Finish-to-end transparency on ESG standards comparable to digital traceability is a vital method to make crucial provide chains extra sustainable. As sustainability requirements in key industries start to develop—think about the launch of the battery passport, which accommodates ESG knowledge for batteries—the European auto {industry} ought to keep on the forefront of ESG efficiency to achieve and keep aggressive benefit sooner or later.
Hyperscale aggressive European battery and semiconductor gamers
We’ve noticed that European gamers are underrepresented in battery manufacturing and high-end compute and semiconductors that energy synthetic intelligence. In accordance with our evaluation, just one European producer is among the many high ten by way of market capitalization for battery manufacturing, whereas in semiconductors, Europe wants to shut the aptitude hole for the subsequent wave of computing to ship functionalities comparable to ADAS.
A path to creating an ecosystem of expertise champions consists of three parts. First, Europe ought to think about growing a pan-European regulatory rule ebook to scale high-growth corporations, aligning tax requirements, rules, labor guidelines, and bureaucratic processes. Second, to remain on the forefront of expertise, the area would wish to construct specialised information and product innovation capabilities. Suppliers might faucet into area of interest specialties, comparable to more-sustainable battery refining. Lastly, the European {industry} would wish a battery and semiconductor community, much like the one which serves the aerospace {industry}. European incumbents might kind strategic partnerships with rising entrants and analysis establishments.
Design a approach ahead for ADAS with coverage help
Superior driver help techniques options are more and more necessary. They’re turning into a key differentiator for car patrons: In accordance with our analysis, 51 % of customers worldwide would think about switching to some type of ADAS automotive sooner or later. Aggressive pressures round ADAS are additionally intensifying. In 2022, Mercedes-Benz was the primary automotive participant to introduce and certify Stage 3 autonomy, the brink at which drivers can take their palms off the wheel. Different contributors within the world {industry} are catching up utilizing a wide range of expertise approaches.
To stay aggressive, the European {industry} might must kind a cross-industry alliance. Gamers might collaborate in two important areas. The primary space is the place differentiation is negligible and the place there are alternatives for financial savings. This would come with standardizing sensor communication protocols, which might simplify the mixing of recent sensors. Standardizing middleware (which sits between front- and back-end applied sciences) and layers of the working system are different approaches.
The second space of collaboration is the place scale and huge databases might allow a quicker, extra strong improvement course of for efforts together with the continual updates of software program layers in maps—updates comparable to creating high-definition map- and location-based providers. A shared pool of knowledge may be used for AI coaching and validation.
The appropriate regulatory surroundings may very well be crucial to allow this type of cross-industry collaboration. Public-sector stakeholders might think about adapting current tips to the context of autonomous driving. These updates might encourage collaborative precompetitive analysis and innovation that advance and speed up technological progress and drive standardization.
Shut the software program ability hole to win the automotive digital transition
Software program is crucial to the way forward for the automotive {industry}. However in response to our evaluation, solely 15 to twenty % of present R&D employees at European incumbents have software program expertise, in contrast with nearly 45 % at new entrants.
To shrink the hole, {industry} stakeholders would wish to seek out holistic options. For instance, European incumbents might create shared—or not less than interoperable—software program platforms throughout OEMs in Europe (and probably different areas the place the {industry} has robust partnerships) to enhance particular person contributors’ capabilities and to keep away from pricey solo efforts.
Early hiring, reskilling, and international expertise can even assist shut the hole. Gamers can intensify early hiring immediately from universities and increase STEM and software program expertise training by partnerships with universities and faculties. Our analysis reveals that reskilling is already in progress: 37 % of European suppliers have ongoing reskilling efforts, and one other 41 % have plans to implement them. To attract expert software program expertise from different areas, European employers would wish speed up processes round work permits and accommodate international expertise’s necessities on wage, advantages, and dealing situations.
Creating an surroundings that allows accelerated progress
European automotive gamers are transferring in the fitting path however ought to think about scaling and accelerating their efforts. To perform this, all kinds of stakeholders within the area would wish to create an surroundings that breeds progress and future wins for the area’s automotive {industry}. The formulation requires a street map, catalysts, and platforms for cooperation.
A transparent street map such because the one we define is required to assist speed up the European automotive {industry}’s progress. Its seven pillars would have to be transformed into actionable measures and quantifiable targets for {industry} stakeholders—suppliers, OEMs, gamers from adjoining industries, and regulatory our bodies. Associations might tackle a coordinating position.
Catalysts play a big position in implementing the street map. One is a aggressive regulatory surroundings. Clearly defining and speaking frequent requirements and codifying interoperability throughout all parts of the street map is more likely to be crucial.
One other crucial catalyst of the European {industry}’s transition is EV infrastructure. In accordance with our evaluation, the {industry} will want a cumulative €300 billion price of infrastructure investments in electrical energy era, the electrical energy grid, EV chargers, and hydrogen refueling techniques by 2030. European stakeholders have begun to put in public chargers at a tempo of two,000 charging factors per week. However to fulfill demand, determination makers would wish to construct out charging infrastructure to the tune of 6,000 to 14,000 charging factors per week. We discovered that the wind and photo voltaic belongings required to satisfy the corresponding demand for power with renewable sources would require 4 instances as many employees in Europe by 2030 than are at present out there.
Lastly, the {industry} would wish platforms for collaboration. As {industry} boundaries are redefined, three sorts of partnership will change into extra necessary: horizontal partnerships between entities in the identical components of the worth chain (comparable to a number of automotive corporations) for efforts comparable to software program improvement or to achieve a strong footing within the Chinese language market; vertical partnerships between entities in numerous components of the worth chain (comparable to automotive corporations with tech corporations) to safe entry to expertise and expertise; and cross-industry partnerships, comparable to collaborations between automotive gamers and utilities to facilitate structural objectives comparable to seamless sector coupling.
Our street map reveals a approach ahead for a globally aggressive European auto {industry}. The work would require motion from an expansive array of regional stakeholders and a supportive administrative surroundings. Time is of the essence.