Host 1:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers, who are right now rebuilding the world around us.
Host 2:
The automotive industry is being disrupted, most notably with the accelerating presence of battery electric vehicles, or BEVs. These vehicles are penetrating new vehicle sales and the carpark across the globe, albeit at differential rates in different geographies. Today, we'll be discussing the transition to BEVs and the opportunities and risks that the transition presents. Our host today is Cristobal Colon.
Cristóbal Colón:
My name is Cristobal Colon. I am partner and managing director of L.E.K. Consulting, based in Madrid with a special focus on automotive and mobility industry. I am joined by Jose Portilla, CEO of Sernauto; Ricardo Olalla, Sales Vice President of Mobility Solutions for the Spain and Portugal at Bosch; and Matt Wayne, Managing Director and partner at L.E.K. Consulting. Gentleman, before we begin, could you please provide a brief introduction of yourselves? Jose.
Jose Portilla:
Yes, hello, everyone. My name is Jose Portilla. I'm the CEO of SERNAUTO, the Spanish Association of Automotive Suppliers. The association represents the interest of the automotive supplier companies as we represent 85% of the total turnover sector. We mainly work to foster the competitive edge of our associate companies through lobby actions at top level with different administration bodies, provide added value services, great loads of relevant information and communication in order to put in value the contribution of the sector to the Spanish economy and to the Spanish society.
Cristóbal Colón:
Thank you, Jose. Ricardo?
Ricardo Olalla Guerra:
Hello, and thank you for having me. My name is Ricardo Olalla. I am currently the sales vice president for Mobility Solutions for Spain and Portugal at Bosch. I've been working for Bosch my entire career, over 30 years, in Germany, in Spain, in the US, in Mexico. I started in engineering and then I moved to product management, project management, and sales. So, yeah, I think I can represent the Bosch knowledge about mobility.
Cristóbal Colón:
Thank you, Ricardo. And Matt?
Matthew Wayne:
Hi, yes, my name is Matt Wayne. I'm a managing director and partner at L.E.K. Consulting. I'm based in Boston in the US and I focus on automotive and mobility. I've been with the firm for about 12 years and within the automotive and mobility sector. The majority of my work is focused on the aftermarket, so parts and components, retail and services, sales and distribution, mobility services, and what we call ACE, autonomous, connected, and electric. I'm also one of the co-developers of L.E.K.'s Proprietary Battery Electric Vehicle Penetration Framework. It's a pleasure being with you today.
Cristóbal Colón:
Thank you, Matt, and thank you all for the introductions. So, let's move to the first question. As an introduction, I will say that this a reality that the market is transitioning to EV at a very fast pace, but this transition is mainly driven by regulation. So Jose, how the market is evolving in Europe versus the US? And the impact of the regulation on the evolution, what is your opinion about this?
Jose Portilla:
Well, definitely the European regulation is at this stage, very ambitious in terms of objectives in terms to deployment. Those putting a huge pressure on the current industry to meet the targets. I could say that, in a very open way, that we have never have encountered, or faced such a regulatory pressure from the European bodies, administrative bodies. And this may bring some kind of problems. So, I would say that the Fit for 55 regulatory packages would try to accelerate a transition to electrical vehicle, though, as I said, it would have a negative impact concerning employment and potential closures for supply companies due to an excessive implementation or speed. When the sector is continually asking for a fair and reasonable transition.
Concerning your question, with regard to the US, in my opinion, the US regulation is more centered on bringing down barriers such as prices and taxes to make more attractive access to electrical vehicle. But, as I said, because of this high pressure of the European regulation, there is a risk for at least I see a risk to damage the European car industry because of this too ambitious regulation. Concerning the possible evolution of the European Union policy, the low penetration pace of electrical vehicles in some relevant countries may produce an alteration or softness, maybe, of the regulatory pressure, in order to adapt to the reality. If it is the case, I foresee that this will come by tackling the schedule and the timeframe of the measures.
Cristóbal Colón:
Thank you, Jose. Matt, what is your view about the US situation? How about this?
Matthew Wayne:
Yeah, certainly. So the US is a bit different and I would agree with Jose. You know, historically been focused more on ways to appease the consumer, right? So having tax rebates, things like that. But, regulation really didn't come into effect into the US until California made its executive order in 2021. That's now until law, and it stipulates that all new vehicles sold in the state by 2035 must be zero emissions vehicles, and now other states are expected to follow suit. We've seen there's about 10 states or so that follow what California does. And even though this regulation or this law has not happened, and there's questions as to whether or not it will hold, it has really changed OEM behavior. You're seeing OEM, OEM commitments really coming out focusing on developing new battery electric vehicles, which frankly in 2018, 2019 there might have been 12 models that you could buy, something very small. So, even if you wanted a battery electric vehicle, your choices were fairly limited. And frankly, if you wanted something that most of the choices were quite expensive.
So, when we think about where we are today, the US has about 6% of our vehicles that are sold, last year, that were battery electric vehicle. That's less than 1% of the 290 million vehicles on the road that are battery electric vehicles. But we see this changing. There are a multitude of factors besides regulation, so, things like pricing levels, as companies continue to invest, as battery prices hopefully continue to decline, that can go in and drive down the price premium, which is a barrier to consumers. Similarly, with range and charging, as vehicles can drive further. And there's more charging infrastructure, some of which is being supported by some government initiatives. Model availability that we talked about. And again, just recently regulation. In my mind, the key milestone before government regulation is really about getting prices down. The average vehicle in the US was I think this past year north of $40,000. Putting a 20%, 25% premium on top of that for a battery electric vehicle version of that vehicle is quite a lot for the consumer to stomach. So we've got to get prices down, we've got to get the infrastructure available so people have confidence that they can take those trips that they want to take.
We think that these are coming down, that barriers are falling. We would expect that 35% of the vehicles sold in 2030, and maybe just over 50% in 2035, would be battery electric vehicles, but still would be a fairly smaller portion of that large car park that we have. But there's a lot of things that need to go right for this to happen. I mean, we've got an earmark for 500,000 charging infrastructures, or charging stations. Those got to work, they got to be in the right place. Battery prices have to come down. They've gone up this past year, with some of the conflict that's happened with commodity prices. There needs to be availability of supply. So, the US is on its way, regulation is playing a part, but I'd say we're a little bit step behind in terms of the power and the strength of that regulatory force on the consumer here within the US versus other regions.
Cristóbal Colón:
Thank you, Matt. Well, Ricardo, as Matt commented, of course, regulation is one of the key drivers for the option of the vehicle vehicles. But besides regulation, what is your view on the key milestones to adoption? I mean, charging infrastructure, vehicle motor availability, ETC?
Ricardo Olalla Guerra:
Yeah, I think Matt was right mentioning that the first issue we have in the past one decade ago when we start talking about electric vehicle was that there were really not so many cars available, and not so attractive. I think this is the first achievement of the industry. We have now, both in Europe and in the US, a quite complete portfolio of battery electric vehicles. So every consumer can now choose an electric vehicle if he likes to do it. Obviously, we need to still work on the price, as mentioned as well. So right now, electric vehicles are still more expensive, at least on the purchase, than the let's say, equivalent ICE vehicle. So this is something that there are some help subsidies, tax incentives, that are helping on that, but this is a major point to go, let's say, to the next steps and achieve a big marketer on electric vehicles.
And for me, the major issue right now is really to develop a good, quick, fast charging infrastructure, so that electric vehicles can be used with the same convenience than the ICE current vehicles. Right now it's clear that electric vehicles are very good, very mature solution for let's say short distances, daily commuting, but you want to use it. And I thinking in Europe where we drive long distances for vacations, and so on, then we will need this charging infrastructure. This is a big investment. We are very well aware of that, and right now there are some public programs to help financing those investment, and this really have to become reality. We need to speed up in the deployment, and the installation, and availability of those infrastructure. In the meantime, we need as well as, let's say, a technology provider to look for other alternatives to electric vehicles, especially on commercial vehicles like hydrogen, or E foils. So really, it is a big disruption, then a big transformation that we are facing right now.
Cristóbal Colón:
Thank you, Ricardo. So moving to next topic, and to next question. Of course there is a transition to the battery electric vehicle, but this transition is also creating new opportunities for the introduction of new OEMs, and of course some risk for the old ones. So, Jose, in your opinion, what is the situation regarding the new entrants into the European market? And why are these new OEMs coming now and not before?
Jose Portilla:
Well, I think that reality speaks for itself. The supply chain province, mainly due to the lack of microchips, have created that the OEMs without this, the shortage, right? Those located in Korea, in Taiwan have became safe leaders for different European countries. As a matter of fact, in Spain, for example, the top three car markers by sold units in last year in 2022, what Toyota, Kia, and Hyundai. And until this supply chain problems are not solved, Sitka 2024, it will remain with the same tendency. Concerning the huge monster that is China, imports are still low. But we foresee an increase tendency from 2025. Do you, mainly? To their first evolution in product and more attractive prices definitely, as they come closer to higher scale economies know that this is something that is lacking the production of the OEMs in order to, of the battery electric vehicle, in order to bring the prices, more economic, and more democratic for the users. Know that that's the lack of still sufficient scale economies.
And that is why it's quite relevant that the European car makers fight for this competitive edge taking always into account that the user is solving when it comes to the purchasing decision. So, I cannot have any more with what the math and Ricardo mention concerning the infrastructure deployment, of course. But, of course the microchips lacking with something that would be solved probably not in 2023, maybe beginning of 2024. And then, our European producers may come to, let's say, to get back the code numbers, or the high sales position. No, but we'll see how this develops.
Cristóbal Colón:
Thank you, Jose. And Matt, in your opinion, what about the US? Do you foresee the same situation, mainly regarding the Chinese OEMs? Or is different situation, different market, and different consumer?
Matthew Wayne:
Yeah, I mean think it's a little bit different here in the US. The name of the game for battery electric vehicles has always been Tesla. I mean that's... And particularly their, recently, their model three and their model I, I mean they've had virtually almost all of the battery electric vehicle sales. We do see some introductions and some new entrance, so folks like Lucid, Rivian, Polestar, et cetera. But one of the things that I think is happening here in the US is we're really seeing a push in model development from some of the existing OEMs. Folks like Ford, GM, et cetera. Americans, we like our big vehicles. We've got large cars, tend to be larger than what's driven in Europe in most cases. And something like the introduction of the Ford Lightning, right? That's really addressing a set of the market that, up until this year, really had no option. You want a pickup truck? You're buying internal combustion engine.
Now one can argue whether or not the use cases of the Lightning will be able to satisfy what others are using the internal combustion engine for, but that is helping to ease some of the transition. One of the things I'd also note, it's a little bit related, slightly different, but, with EVs are also coming greater connectivity. I see those kind of coming hand in hand, and that's creating opportunities for OEMs, what I'd say to kind of capture more margin and more profitability directly. So, you look at some of the OEMs that are equipping their vehicles with heated seats, but in order to get them, you pay a monthly subscription, as opposed to paying that directly to the dealer, and all that's accruing to them. So, it is changing the landscape. We are seeing more of these, what I would call traditional OEMs starting to participate, and I think appease to the US consumer interests, and it is opening up the opportunity for new streams of revenue, or greater access to profitability.
Cristóbal Colón:
Thank you, Matt. So, Ricardo, so we have been talking about new OEMs, legacy OEMs, and these new OEMS investing in new lines, models CTC, so but, how is this affecting to the suppliers? Are the suppliers being able to provide companies to the new OEMs? What is the situation? Is something changing? Or is just a transition to new customers?
Ricardo Olalla Guerra:
Well, most of the suppliers, especially the tier one, the big suppliers, are already, let's say, developing and producing the main components of the electric vehicles. And we are supplying to the traditional OEMs. We as well are working with the new OEMs. So that's obviously an opportunity not only in Europe and in the US, but as well the Chinese supplier, every major tier one has to be presenting the Chinese market because of size. So, this has already customers to us. So, I don't think the challenges in supplier the new OEMs, but the challenge is for the smaller, let's say, tier two, tier three, really to find how they can use their available competencies, available technology, in this new market.
So for example, if you are specializing in doing aluminum casting, and now you are doing that for combustion engines, you have to find which parts, and it can't be made with these same technology in the electric vehicles. For me, the major challenge right now is that some of the OEMs, because they have an issue with the expertise and the unique selling point that the ACE means, they need to find something equivalent on the electric vehicle. And as well, they need to find the workload for their employees as well in this new one, the electric vehicle industry. And sometimes they are doing things and then they are producing components that they used to be produced by suppliers. So we really need to learn how to cooperate with them when they are going deeper into the supply chain.
Cristóbal Colón:
Thank you, Ricardo. So we have been talking about new cars, but as we commented before, EVs are simpler than ICE vehicles, and they have fever components, less maintenance, so there can be an impact on aftermarket. So I'm coming back to you, Ricardo. So, what is your view on this? This is going to be an impact on aftermarket, because of the EVs. There's going to be in the short, medium, long-term, what is your view?
Ricardo Olalla Guerra:
Well, short-term, as was mentioned before, probably not such an impact, because after market leaves out of the existing vehicles already on the road, and the markets here of electric vehicles is still small. So, we will be a significant volume of the business related to electric vehicles inside GM for now. So short-term, we need to prepare for this midterm. Everybody knows that, in general, electric vehicles are easier to maintain than ICE vehicles. So it's clear that we need, the aftermarket needs to rethink about their business. But there are opportunities coming along, not just with electric vehicles but with connected and, as we call, software defined vehicles. So, the aftermarket has to start to work more on the software side, remotely to be able to, let's say, monitor the vehicle remotely. Announce, you need maintenance now, as mentioned by Matt as well, there is some business in updating the vehicle remotely offering new feature, but as well repairing it.
So, the workshops and the aftermarket becomes more and more technological, and we need to develop the competencies on that. And one important point as well is that we need to learn to really repair the components. Right now, it looks like the batteries, the electronical, this new very sophisticated component, is something that the workshop will only be able to exchange, but cannot think about just replacing with new parts every part that fails in an electric vehicle. So there is a huge opportunity for learning to repair those parts. So, for example, to refurbish those part, probably not on the workshop, so the customer will get a new part, but, there will be opportunities for aftermarket companies to then repair those components. For example, if you have a battery that has failed just because of one cell to be able to repair that cell, that can be a big business. So, yes, there are opportunities, but they are related to technology, and related to this re-use of parts.
Cristóbal Colón:
Thank you, Ricardo. And, Matt, you commented that the US market is different than the European market, but I think that is also in aftermarket, it's also very different to European one. So you can comment the differences? And what is the expected impact on the US?
Matthew Wayne:
Yes, certainly, and I would agree, violently agree with Ricardo, in terms of the time that we have. Right? So, like I mentioned, we've got less than 1% of the vehicles on the road today that are battery electric vehicles. By 2030, that's going to inch up a little bit more, right? But it's still going to be relatively negligible. And when I think about the aftermarket, there tends to be a sweet spot when replacements and the like happen, which is typically, call it seven to 15 years of age. So when you think about what's the impact going to be on the seven to 15 year old cohorts, that's going to take some time. Right? It pushes that out a little bit. So I think there's a lot of time for the ICE aftermarket as it currently exists today to continue and be a sustainable market.
As BEVs penetrate, right? And that will happen, but that'll be later on, we still think, I still there's opportunity for the aftermarket, but it may be a little bit different. I think about the world in terms of needs-based repairs, or replacements, things that just have to happen with ongoing wear and tear, and then things that are really being driven by the enthusiasts. So, with needs-based, for example, you can think about the fact that BEVs are heavier, that they've got instant torque, that, all these other different architectural differences, that puts a lot of pressure on things like tire wear on some of the drive train components, et cetera, which will continue to need replacements. We don't talk about it all that much, but there are things like E-greases, which will need to be replaced, and used on an ongoing basis.
And one of the things that I found actually most interesting, we did some work a couple years ago looking at the enthusiast community, and my hypothesis going in was that they would be very resistant to battery electric vehicles. But we did the survey trying to gauge their interest, and frankly they were on par, if not slightly more interested and excited, than the general population. And I think the reason for that is that they understand what these vehicles can do, and they see them from a performance standpoint. So there'll be things that they'll be looking to upgrade and enhance depending on the use case, right? Maybe they're looking to have better suspension if they're going off-roading, or using some body armor, or maybe they're very concerned about thermal management of the battery, if they're really going to be putting the vehicle in extreme circumstances and driving it really hard. I believe the aftermarkets going to continue to thrive, but we'll be selling different products and providing different services, to both enthusiasts and the casual consumer that needs needs-based repair.
Cristóbal Colón:
So, Jose, according to Matt and Ricardo, we have a strict time for the transition, but what is your view on the impact of this transition to the suppliers that are very dependent on the combustion engine components?
Jose Portilla:
Well, I totally agree with Matt, and what his comments, as well as with Ricardo, that still the majority of cars running in Europe are combustion engines. So, if you're think in the level of the cars that are being sold at this stage, particularly the southern areas of Europe, the majority are still combustion engines. So I think that the American sector will have still many years to perform, and as I said, the big majority of cars on the road are combustion vehicles, and it could continue like that in the coming years.
In the midterm, still will probably change, and definitely in the aftermarket we need to start from now to prepare for this transition by fostering mainly two concepts, two key levers, which are innovation and digitalization. Of course, added services may play also an important role from the point of view of the aftermarket. And concerning the evolution of the suppliers would get, that you are asking me about the suppliers for the combustion engines, with this accelerated regulatory landscape, many will suffer. Now, particularly tier four, tier three, and they will need to reconfigure their processes and the products progressively to adapt to the new market demand, which will require definitely the further investments. But I'm positive in the short term about how the aftermarket sector will run and perform.
Cristóbal Colón:
Okay, so we are finishing the podcast, but before finishing, I would like to ask you a summary of the opportunities and the risk for the suppliers. So, you want to start, Matt?
Matthew Wayne:
Yeah, certainly. So going back to the top, as you mentioned, electric vehicles are coming, and the rate of their share gain in the market is accelerating. That's happening because we're seeing prices coming down, we're seeing model range increasing. We're starting to see the development of charging infrastructure. There's more models, and then most recently some of the regulation, which frankly, is motivating a lot of the OEM commitments. So we're seeing there, and the consumers, I believe, are becoming more open to battery electric vehicles now they've become a bit more commonplace. OEMs are developing, innovative and what I would call kind of customer-friendly vehicles. There are opportunities with connected vehicles for them, as we talked about in terms of gaining some of the margin which made otherwise accrue to dealers. There's a lot of data that can be connected and potentially represents an opportunity to develop new revenue streams to monetize that data and information. So I think there's a lot going on the OEM side.
Given my focus here in the US being primarily on the aftermarket, I believe the aftermarket will continue to be ripe, for the reasons that we described in terms of internal combustion engines staying on the road and being the vast majority of vehicles for a long time to come. But when battery electric vehicles are there more, the aftermarket will continue to be there, but might look a bit different. Parts and component providers will be able to sell, both needs-based and to enthusiasts, but what they sell and what customers care about might be shifting. I think about service providers. They may need to get created. Service intervals are elongating, some items are migrating to OEMs, but I believe they'll be able to continue to play a role in that market.
But as I mentioned, I think it's important for people in the automotive industry and those participating, is really to understand that this is not a snap of the fingers transition, this is going to be a slow transition. I believe there's lots of opportunity and lots of time for companies to get their strategies and initiatives in order, but they need to start thinking about that today if they're not already doing so. You can't be sitting on your laurels, but you do have time to plan and be very deliberate in how you're approaching this.
Ricardo Olalla Guerra:
Yes, with this transformation, technology, and innovation are more important than ever. We see new OEMs, new players coming from other industries, and possibly, a reduced number of vehicles on the road due to the regulation and the new business model. So we really must provide technology, not just to those traditional OEMs, but to the mobility service providers. They are becoming more and more important in the market, not just, let's say, purchasing more vehicles, but as well prescribing this new use. We think about autonomous vehicles as well, SATELs, Robo-Taxis, these kind of things. These are all opportunities for suppliers to provide technology adequate to this one. And the other point that I think is important is we need to learn to cooperate. With these new OEMs, with new mobility providers, with pledges in the market coming from other industry, especially the software and IT industry. I think we need to learn to find our strong points, and then how to cooperate with these other players to really provide the best solution for this new market.
Cristóbal Colón:
Thank you, Ricardo. And last but not least, Jose, what opportunities do you foresee in the market? What is your opinion about this?
Jose Portilla:
Well, I'd have to say that I totally agree with Ricardo. The technology will be a keystone, but definitely, the new mobility will bring new opportunities, new opportunities to design, to develop, and provide more added value products, and new services, online and offline. And for this to, let's say, to run this road, innovation is and will be the key central factor to provide these new solutions at a competitive base. Also, I would consider that there is an important element in order to speed up this transition that is the public and private corporation. It's more important than ever considering the huge level of investments and the need to speed up administrative issues, particularly if we refer to the charging infrastructure deployment.
Cristóbal Colón:
So thank you Matt, Ricardo, and Jose. Thanks for your participation on your time and giving SABUTEL I guess, it would be all the information. I am sure that our clients will appreciate it, and thank you, again.
Matthew Wayne:
Thank you very much.
Jose Portilla:
Thank you for having.
Host 1:
Thank you, our listeners for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online, at lek.com.
