Will 2017 be remembered as the year when electric vehicles (EVs) made the move to become mass producible? A thought-provoking question for the industry, and reason for McKinsey, in partnership with A2Mac1, a provider of automotive benchmarking services, to deepen our work in the field. Last year, roughly 1.3 million EVs were sold globally. While this makes up only about 1 percent of total passenger-vehicle sales, it is a 57 percent increase over 2016 sales, and there is little reason to believe this trend will slow down. Established OEMs have announced launches of more than 100 new battery electric vehicle (BEV) models by 2024, further accelerating automotive and mobility trends, potentially growing EVs’ share of total passenger-vehicle sales to 30 to 35 percent in major markets like China, Europe, and the U.S. (20 to 25 percent globally)by 2030. Moving away from previous “niche roles” such as high-performance sports or midrange city cars, there will also be a sizable share of midsize and volume-segment vehicles among the many new BEV models. A prominent, recently launched example is Tesla’s new Model 3, with more than 450,000 preorders.
What will help EVs gain market share is that OEMs have reached ranges with their EVs that allow them to focus on reducing price points, for example, by increasing design efficiency or reducing manufacturing cost in order to become affordable to more customer segments. As shown in Exhibit 1, we find that once the average range of our set of benchmarked EVs has surpassed 300 kilometers (or 185 miles), OEMs seem to be able to concentrate on entering lower-price segments while keeping range up. This indicates that the long-awaited EV volume segment—“midsize EVs for the masses”—may be on the verge of becoming reality.
The definition of “good” range varies across the globe, depending on geography and city archetype. But average battery range seems to have exceeded the expectations of the largest customer segments. This, combined with a decrease in prices for electric vehicles, means the market for EVs may be close to a commercial tipping point.
Whether an EV volume segment is (or will be) profitable for OEMs remains a burning question for many in the industry. We estimate that many EV models in their base version, and potentially even including options, still may have low contribution margins, especially compared with current internal-combustion-engine (ICE) levels.
With profitability in mind, and given the fast pace of technological advancements and new design trends in EVs, McKinsey and A2Mac1 undertook a second benchmarking analysis on trends in electric-vehicle design (see sidebar, “McKinsey and A2Mac1 on trends in electric-vehicle design”).
In this article, we describe success factors on the way to profitable serial production of EVs and discuss essential practices for paving the road toward the EV mass market. This includes four high-level commitments to design and development through the lenses of architecture, integration, technology, and cost that can help realize a positive business case for mass-market EVs.
Build a native and inherently flexible electric vehicle
Despite higher up-front investments—in the form of engineering hours, new tooling, and so on—native EV platforms have proved advantageous over non-native models in multiple ways.
Designing the vehicle architecture entirely around an EV concept, without combustion-engine legacy elements, means fewer compromises and more flexibility on average (Exhibit 2).
As native EVs have to compromise less, particularly in their architecture and body in white, they can accommodate a bigger battery pack, which in turn correlates with a higher range. This is evidenced by the fact that native EVs have on average a 25 percent larger battery-pack volume (relative to body in white volume) compared with non-native EVs. One reason is that the body structure can be fit around the battery pack and does not have to be integrated in an existing architecture. This additional freedom in design typically resulting in larger batteries also leads to other potential advantages such as higher ranges, more power, or faster charging.
Further, as battery technology evolves quickly, allowing the newest EVs to have ranges which are not a bottleneck anymore, we see early indications that EVs are moving toward practices common in mass-market ICEs, for instance, offering powertrain options. The inherent flexibility of native EVs plays an important role in this as well. For example, battery packs can house a varying number of active cells while keeping the same outer shape and variable drivetrain technologies can allow players to produce rear-wheel, front-wheel, and all-wheel drive on a single platform.
While this may raise the idea that EVs will start moving toward modular strategies, as we know them from ICEs, thereby moving closer to industry-typical mass-production approaches, we still do not see a clear convergence toward one standard in design solutions. Players will need to stay agile on their way to mass-market EVs.
Keep pushing the boundaries of EV powertrain integration
Our benchmarking reveals a continued trend toward EV powertrain integration, with many parts of the power electronics moving closer together and being integrated into fewer modules. Yet, as players keep searching for additional design efficiency, one “mainstream” EV powertrain design has not yet emerged—either for overall architecture or for the design of individual components.
A good indicator of the increased level of integration is the design of the electric cables connecting the main EV powertrain components (that is, battery, e-motor, power electronics, and thermal-management modules). When looking at the weight and total number of parts for these cables across OEMs and their EV models, we observed a decrease in both cable weight and the number of parts in the OEMs’ latest models compared with earlier vehicles, which reflects the higher integration of more recent EV powertrain systems (Exhibit 3).
In addition to the physical integration of main EV powertrain components, we also observed a move toward more simple and efficient thermal-management solutions across said components. However, while some OEMs are on a consolidation charge here too, others still rely on multiple systems, and we do not see a clear convergence of designs yet (Exhibit 4).
Beyond the fact that technology is still maturing, the EV powertrain design variety may also be aided by its intrinsic, higher level of flexibility, as the components are generally smaller and the degrees of freedom based on available space in the underbody and front and rear compartments are higher than for ICE powertrains. To give just one example of different EV powertrain architectures: the Opel Ampera-e seems to leverage an ICE-like positioning of its powertrain electronics, including ICE-typical body and axle components, whereas the Tesla Model 3 integrated most components on the rear of its battery pack and the rear axle directly (Exhibit 5).
It is worth pointing out that such freedom in the positioning of components also gives more flexibility in overall features offered, for example, choosing to have room for a bigger trunk or to offer superior driving performance due to a lower center of gravity.
In their ongoing pursuit of mass marketability, EV players therefore might identify further opportunities in high-level integration of their EV powertrain systems. Doing so could help them capture potential benefits, such as reduced complexity in development, lower material and assembly costs, and weight and energy-efficiency improvements.
Stay ahead in the technology game
McKinsey research has shown that many electric-vehicle customers are very tech savvy. At the same time, new technologies are largely getting mature enough to be put to practice. This creates a great testing field for the new technologies that OEMs and other players hope to push into cars. But it also almost obligates EV manufacturers to equip their vehicles with the highest levels of technology around advanced-driver-assistance systems (ADAS), connectivity, and other trends that are redefining the driver experience and travel strategies.
Next to increasingly introducing ADAS technologies, OEMs meet the needs of their EV customers by enhancing the user interface and infotainment systems. Specifically, they are increasingly integrating the control of a wide range of interior functions into a more central, “smartphone-like” user interface (HMI). For example, controls move from buttons to continuously growing touch screens—a concept that was first tried in a few models from US car manufacturers in the late 1980s and now seems to have reached sufficient levels of technological maturity and customer interest. We observed EVs in our benchmark that have as few as seven physical buttons in the interior, compared with 50 to 60 in many standard ICEs.
A key enabler of such advancements is the rapid rise in computing power. While traditional cars often show many decentralized and standardized electronic control units (ECUs), the latest EVs seem to rely on ever growing and increasingly centralized computing power.
ADAS technology, for example, requires a lot of computing power for the real-time signal processing of the various sensors. When putting the latest ADAS solutions—such as adaptive cruise control, autonomous braking, and potentially even autonomous driving capability—in the context of increased ECU centralization, it seems that EVs equipped with such ADAS technology further drive consolidation of ECUs in comparison to equally or less ADAS-equipped ICEs or EVs (Exhibit 6).
An OEM’s decision for a centralized or decentralized ECU architecture can be a strategic question and will be driven by different factors. One reason for a centralized approach may be the choice to “own” a key control point in the vehicle by becoming an integrator, which could facilitate advanced software development and potentially open up new revenue streams, for example, from over-the-air updates.
Besides strategic considerations, the ECU architecture may also affect weight and cost. For example, centralization may optimize wiring and sourcing efficiency via increased bundling. Because they require simpler protocols and fewer connections compared with multiple, decentralized ECUs—thereby also reducing the number of operations that could go wrong—centralized ECUs can increase reliability. On the development side, more ECUs also mean more teams who must collaborate and communicate efficiently to ensure quality across systems. Fewer teams and simplified processes can result from centralizing ECUs, and this simplification can lead to shorter development cycles. Further, central, high-power ECUs could be the backbone for developing fully autonomous driving, thereby equipping EVs to be ready for future mass-market characteristics and potential customer expectations.
Ultimately, however, the ECU architecture choice will depend on the OEMs’ individual strategy, and as centralization may require significantly building up additional skills in-house, it will always be an individual business-case decision.
Apply design-to-cost lever
Achieving profitability is still a struggle for EVs, especially due to high powertrain cost. Since OEMs seem to have reached acceptable ranges by now, rigorous design to cost (DTC) will become more important to pave the road for EVs to successfully enter the mass market. That is, it could help achieve an attractive price point, while not jeopardizing margins for the OEM.
Cost efficiency seems to be the home turf of established OEMs and suppliers, who may be in the best position to leverage their experience and knowledge in traditional DTC levers (Exhibit 7).
Therefore, it may come as little surprise that ICEs and non-native EVs seem to be more proficient in DTC than native EVs due to the makers’ track record of continuous cost optimization and the possibility to carry over highly optimized components from previous models.
Yet the latest native EVs may be able to quickly catch up. For example, because of advantages in battery-pack advancements, native EVs now appear to switch from lightweight to more cost-efficient material solutions, such as steel elements in the body in white. They also seem to apply more rigorous despecification and decontenting (for example, in controls and air vents on the instrument panel) and to invest in mass-production processes, such as high-strength stamped steel instead of bent-pipe seat-structure designs.
As the move toward the mass market continues, EV experiments are increasingly becoming a serial-production game. Nontraditional OEMs will likely study the DTC practices of traditional OEMs, for example, including sourcing industry-standard parts, to identify better ways to close the gap in cost performance and thus increase their profit margins from the product-cost side. Nonetheless, achieving a superior cost performance might still be a competitive advantage for established OEMs and thus comprises an opportunity to step up against potential new market entrants.
Outlook: Can OEMs make money in the volume EV market?
Most recently, EVs have gained a significant share in the new product announcements of many OEMs. At the same time, EV models individually have not yet offered much in the way of contributing to overall profitability compared with ICEs. As the global market share of EVs inevitably grows, their margins increasingly move into focus.
Taking the four steps in EV design outlined in this article into consideration may help OEMs to reduce the higher manufacturing costs (including materials, production, and final assembly) of EVs. With a focus on simpler and more flexible platforms, along with a fresh approach to technology and design, we believe that a positive mass-market business case for EVs may exist.
In fact, based on our analysis, the delta from total manufacturing cost to list price for sufficiently well-equipped (including hardware and software options such as nonstandard color, range extension, and different software settings), midsize EVs could potentially reach a level of 40 to 50 percent. While powertrain-independent components and final assembly appear similar in their cost structure to ICEs, major cost drivers still lie in the EV powertrain itself and in related uncertainties in the development of battery cost.
This also highlights that for an overall attractive business case, additional measures—for example, in optimizing the offering logic and channel strategy—will still be necessary.
In summary, we may see an era of profitable mass-market EVs on the horizon, driven by design trends toward flexibility, integration, and simplification that maximizes customer value, and under the clear governance of cost efficiency for mass producibility.
As noted earlier, this publication presents only consolidated findings—detailed insights from our work are available upon request but would exceed the scope of this article.