The automotive market is undergoing rapid change. Based on a forecast by the McKinsey Center for Future Mobility, battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) will make up more than 55 percent of new vehicle production by 2030 across China, Europe, and North America. This represents 47 million units globally—seven times more than in 2021.
Adoption has moved beyond start-ups, with all mainstream OEMs now focused on electric vehicles (EVs) and with forecasts for EV penetration continuing to accelerate: more than 500 EV programs will come to market from 2024 to 2026 alone (Exhibit 1). In short, tomorrow’s vehicle architecture is being defined today, offering a narrow window of opportunity for chemical companies to set the standard for materials applications in the years to come.
Although EVs have been a hot topic in the chemicals industry for some time,1 a major paradigm shift in automotive procurement practices has made the space dramatically more attractive for chemical players (not considering cell chemistry, a market governed by unique value chain dynamics2). Whereas chemicals in the automotive industry were traditionally considered on a unit-cost basis—with suppliers barely able to hold value over the program life cycle—savvy automotive OEMs and tier suppliers are now moving to a system value approach. These players recognize that materials solutions can provide outsize value in reducing cost and improving the reliability of expensive parts such as batteries, power electronics, and electric motors.
To illustrate this point, consider the powertrain of a typical BEV. The battery, inverter, and electric motor together cost more than $10,000—often three to four times the cost of their equivalent parts in a conventional combustion engine vehicle (Exhibit 2). Hence, the vehicle system must come down in cost for BEVs to gain widespread adoption.
In this context, leading OEMs have discovered that using the right thermal and insulation materials in the powertrain can lead to significant increases in system efficiency and reductions in warranty cost, which together can be worth several hundred dollars per vehicle. These savings make it much easier for OEMs to invest in enabling these materials.
For example, a transition from silicon oxide (Si) to silicon carbide (SiC) power modules in the inverter can generate system savings on the order of $200 per vehicle for OEMs. This is because of the semiconductor’s greater power efficiency (reducing battery cost) and more optimal cooling profile (reducing thermal management cost), despite SiC costing more than Si counterparts. Consequently, innovations in materials that enable system cost reductions can provide tremendous value to OEMs (Exhibit 3).
Electric-vehicle value pools for chemical players
High-value challenges that drive the benefits of vehicle systems primarily occur in the powertrain. The industry for specialty materials in these applications—not including battery cell chemistry—could see an industry value pool of more than $20 billion by 2030, focused on high-value challenges linked to power efficiency, thermal management, and battery life.
- Power electronics. OEMs have the potential to improve power efficiency further through wide-bandgap electronics, including the previously mentioned transition from Si to SiC materials. The EV industry is making a significant shift to more expensive, more efficient, higher-temperature inverter technology that will require better thermal and isolation materials.
- Motors and wiring. Several OEMs have demonstrated superior EV performance through high-voltage (greater than 800 volts) systems. The laws of physics dictate that a higher voltage is more electrically efficient; in turn, much better electrical insulation and more reliable connector materials must be used to maintain system safety. In most cases, the value of higher system efficiency dwarfs the additional cost of superior materials.
- Batteries. It is no secret that battery costs need to drop dramatically for EVs to become cost efficient—and that battery safety is paramount. Although most discourse seems to be focused on the chemistry and supply-and-demand balance of battery cell materials, many progressive OEMs have recognized that plastics, silicones, mica, and other thermal materials can be engineered together to significantly reduce system costs.
How to make it happen
To understand where the greatest potential for value creation lies and to maximize the likelihood of capturing it, materials players should answer the following five questions:
Chemical companies will see outsize value from materials innovations that solve power efficiency, thermal management, and warranty challenges.
- What are the growing value pools and valuable problems to solve in EVs? Chemical companies will see outsize value from materials innovations that solve power efficiency, thermal management, and warranty challenges.
- Where can our materials portfolio play to enable the creation and capture of value? Companies should articulate their value proposition based on the value OEMs can derive from solutions, applying a systems-based lens to cost reductions.
- What are the ‘big bets’ that could allow us to address more value pools? This includes prioritizing technologies that enable integrated solutions to the most valuable OEM problems. Furthermore, scenarios can be used to evaluate investments in technologies with high levels of uncertainty, such as future cell formats and chemistry.
- What capabilities are needed to deliver on the solutions? This will involve deeper application engineering with OEMs in the vehicle design stage, system-testing capabilities to build a fact-based value proposition, and key account and risk management vis-à-vis OEMs. Mobilizing commercial and technology teams quickly is important because design decisions are being made now for future model platforms.
- Who are the key customers to target, and what is the right go-to-market model? Chemical companies should take a differentiated approach to customers via a tailored value proposition based on OEMs’ make-versus-buy strategies, and they should consider value chain position trade-offs based on natural owner and customer proximity.
Given changing procurement dynamics, it is time to rethink participation in the automotive industry. Chemical companies hold the keys to the cost challenges for OEMs in many critical component areas and can play pivotal roles in unlocking the automotive electrification transformation. Now is the time for chemical players to move on the opportunity.