What business leaders should know about the future of the automotive industry

Swarna Ramanathan, a London-based partner who helps drive McKinsey’s work in integrated future mobility, shared her perspective with Thomas Farrar, a manager of communications in the firm’s UK office, about the future of the car and transformative changes facing the automotive industry.

Thomas: In the United Kingdom, the number of new car registrations has been falling since 2020. What’s driving this trend?

Swarna: The most significant factor in recent years would be the COVID-19 pandemic. As countries sought to curb the pandemic, mobility and social activities were restricted, leading to a slowdown in the demand for vehicle ownership.

In 2022, despite the easing of coronavirus restrictions in many countries, the automotive market is still dealing with significant supply chain disruptions and shortages of key components such as semiconductors. This has contributed to a shortage of new cars.

Meanwhile, it’s not just the lasting effects of the pandemic or supply chain issues contributing to the decline of car ownership, particularly in urban environments.

In London, for example, there are multiple modes of public transport and ongoing investment in public- and private-transport options. Moreover, many new transport options are increasingly dependent on renewable energy and therefore becoming more attractive to consumers—think hydrogen fuel, cell-powered buses, electric bikes, and e-scooters.

There are also more young people living in urban areas than anywhere else in the United Kingdom, and this demographic of young city dwellers has also shown the steepest fall in car ownership. The prolonged period of economic uncertainty brought about by the pandemic may also have contributed to the slowdown.

Finally, shared mobility companies have emerged in densely populated urban areas, with companies offering greater flexibility for leasing vehicles, from hour-long rentals to two-week periods.

Thomas: Electric vehicle (EV) sales have accelerated dramatically in the last two years. How have internal combustion engine manufacturers reacted to this turning point?

Swarna: Acceptance levels vary across the automotive sector. Some incumbents believe that internal combustion engine vehicles will continue to play an important role, while others are completely rethinking ‘business as usual’ and have defined a specific date to end production of internal combustion engine vehicles.

Companies that are investing in future technologies will benefit the most. Consider the original equipment manufacturers (OEMs) that invested in battery technology back in the 2000s. These organizations will have a significant competitive advantage amid a continued transition toward electrification and scaling up of EV production.

Furthermore, leaders who anticipated demand signals from consumers focused on investing early. Mindsets have shifted toward sustainable mobility, and the sooner company leaders realize this, the sooner they can convert their strategy into something sustainable for the long term.

Consequently, the OEM supply chain is becoming much more diverse. At McKinsey, my work has involved advising OEMs on how to strike new partnerships, identifying suppliers that can create new opportunities through electrification, digitization, and decarbonization. Historically, automotive companies would only be talking to other automotive companies, but now you’ll see a much broader range of industries, including those from semiconductor, electrical, computing, and sensor technology sectors.

Thomas: It's clear that businesses have to adapt to these trends. Could you share an example of how a business has significantly transformed the way it operates?

Swarna: Company leaders are rethinking ‘business as usual.’ If the number of new registered vehicles continues to decline, automotive dealers, for example, may find it increasingly difficult to achieve growth or even maintain existing sales figures.

I know dealers have had to look beyond typical B2C sales models and diversify their sales approach to expand markets and reach more drivers. Piloting B2B collaborations and partnerships with fleet owners and business-to-consumer models with shared mobility companies could help offset a decline in direct-to-consumer sales.

Fuel providers, who are also likely to face a shrinking market in terms of volumes of fuel sold, could be considering how to gain a foothold in the fast-growing provision of the electric-charging market. While first-generation EV buyers relied mainly on private charging, the next generation may demand greater flexibility, and those without access to private driveways will be more dependent on the availability of public charging.

Thomas: Infrastructure will have to change and adapt to the way people move around. Can you give an example of how it will be impacted in the short term?

Swarna: As far as urban infrastructure is concerned, city authorities may need to consider how major changes to the way people move around will impact the physical environment and develop policies accordingly. In the early days of e-bikes and e-scooters, for example, there were vandalism problems, and bikes or scooters were not being returned to designated spots, leading to unwanted hazards on roads and pavements. Company leaders had to think carefully about what would curb improper use and retroactively change policies. City officials could be anticipating and evaluating the impact and scale of disruption caused by new modes of transport and work closely with new entrants to avoid risks such as those seen with e-scooters.

Electricity grid infrastructure will also likely need adjustment. It’s likely that the transition to EVs will radically alter demand patterns. If most vehicles have to be plugged in to recharge overnight, there could be big spikes in electricity demand during nighttime hours, putting the grid under stress during a period of the day that has historically seen the lowest demand. Utility companies may have to find ways to stabilize the load and may consider offering different rates at different times to balance demand.

Thomas: Autonomous driving technology is gaining attention. What would mark a turning point toward getting autonomous vehicles on the road?

Swarna: Our research surveying automotive executives suggests that it’s only a matter of time until autonomous systems start playing a much more significant role in road vehicles. There are a few reasons behind this.

First, and perhaps most crucially, more automotive suppliers and OEMs are investing in research and development in this space. Suppliers and manufacturers are anticipating this shift and are attempting to gain a foothold in the technology akin to the developments of EVs when traditional car companies started investing in battery technology.

Second, this shift is leading to more pilots and studies being executed on public infrastructure. Safety and security will be paramount to any public policy approval of autonomous vehicles. If these pilots can become more sophisticated and generate reassurance, the greater the likelihood the technology will gain acceptance among policymakers and consumers.

Third, the transition to autonomous vehicles will be somewhat incremental, and therefore so will the potential risks. Piloting low-risk options before moving to high-risk vehicles that transport people could expedite the transition. Small vehicles and drones, already being considered for postal services and food delivery, have a much lower risk profile in terms of potential harm to humans. Once these models are scaled, companies can apply learnings to larger and more ambitious transport projects and product lines.

This article was edited by Thomas Farrar, a manager of communications, based in McKinsey’s London office, where Swarna Ramanathan is a partner.

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