RACE 2050 – A VISION FOR THE EUROPEAN AUTOMOTIVE INDUSTRY

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RACE 2050 – A VISIONFOR THE EUROPEANAUTOMOTIVE INDUSTRYJanuary 2019

RACE 2050 – A VISIONFOR THE EUROPEANAUTOMOTIVE INDUSTRYJanuary 2019

CONTENTSIntroduction and key messages. 6I Tipping point: The successful European automotive industry iscurrently facing unprecedented changes. 81.1 The automotive industry has been one of the most important growth enginesfor economic welfare in Europe. 81.2 Europe’s leading position in mobility is threatened by the enormousmomentum of regions and players beyond the traditional set. 121.3 Disruptive megatrends require new core competencies, new actions,and a new way of thinking. 14II RACE 2050: A long-term vision for the European automotive industry. 182.1 Building a truly customer-centric European mobility industry. 202.2 Achieving front-runner position in sustainable mobility. 222.3 Creating superior and sustainable economic value add the “European way”. 24III Speedup: Five clusters of initiatives to pave the way towards the vision. 30Cluster 1 – European “Mobility Valley” and employment transition. 31Cluster 2 – Synchronized approach to decarbonize transport of goods and people. 34Cluster 3 – New forms of cooperation and alliances. 36Cluster 4 – “Future mobility regulatory forum”. 38Cluster 5 – Support of cities and districts through mobility solutions. 39Outlook. 40Contributors. 42Legal notice. 43RACE 2050 – a vision for the European automotive industry5

INTRODUCTION ANDKEY MESSAGESThe European automotive sector has ascended to the top of the global industry. It hasachieved record sales, and — as a major employer and a source of significant grantmaking – it is an integral part of European society. Fundamental changes in the industry,however, are threatening Europe’s1 lead position. If the European automotive sector is tostay ahead in this changing competitive landscape, leaders will need to make sometough decisions. Above all, a shared vision regarding the European automotive sector’spositioning is needed.Based on the results of a study that was conducted by McKinsey & Company, Inc.,this report aims at providing the foundation of such a vision and at giving impulses forco-creating the next chapter for a successful European automotive industry.As indicated by the report’s title, RACE 2050, this vision for the European automotive sectorimagines the industry as a Responsible Automotive Customer-centric Ecosystem. It is to bebuilt on the “European way,” leveraging Europe’s diversity of mobility realities and strengthsin technological innovation, talent, skills, and collaborative spirit to make the region thegateway of the global automotive future.At the same time, multiple sources informed the insights presented in this report, including Proprietary knowledge, analyses, and research from the McKinsey Center forFuture Mobility Interviews and several rounds of discussions with members of the EuropeanAutomobile Manufacturers’ Association (ACEA) Conversations with members of key European automotive-related associations, e.g.,DigitalEurope, FuelsEurope, CLEPA, Eurelectric, FIA, and other industry leaders.We express our appreciation and gratitude to all contributors to this report.1 In the context of this report, the term “Europe” generally refers to the EU-28. However, some statistics relate tothe EU-15 and are framed accordingly.6RACE 2050 – a vision for the European automotive industry

Three key messages have been distilled: Regions and players outside the traditional automotive set are gaining momentum,and a growing wave of technological megatrends is redefining mobility. The corecompetencies for future success are changing rapidly. European automotive playerswill need to develop these competencies and manage an employment transition ifthey are to maintain their position at the forefront of the industry. Placing the consumer at the core, leading in the area of sustainability, and leveragingthe region’s unique diversity of people and mobility realities as well as the strengths ofits economies and technologies are fundamental to a vision for Europe’s automotiveindustry. To activate this vision and actively shape the new mobility ecosystem, a speedup anda constructive engagement of policy makers, stakeholders, and automotive industryplayers are essential.Each statement is explained in more detail in the following chapters.RACE 2050 – a vision for the European automotive industry7

I TIPPINGPOINTTHE SUCCESSFUL EUROPEANAUTOMOTIVE INDUSTRY IS CURRENTLYFACING UNPRECEDENTED CHANGESThe European automotive industry continues to be a huge success story but is currentlyfacing strong headwinds: customer trust in the industry has recently suffered in light of theDiesel scandal, revenue pools are shifting strongly towards Asia, new players are enteringthe market, and the industry is facing disruptive megatrends of a new magnitude.1.1 The automotive industry has been one of the most important growth enginesfor economic welfare in EuropeThe European automotive industry has been on a successful trajectory and has ascendedto be a global leader and driver of Europe’s growth and prosperity. Both the passenger car –as a cornerstone for individual mobility – and the commercial vehicle – as the backboneof the European economy – contribute tremendously to society, environment, economicwelfare, and growth in Europe. For a selection of performance indicators, please refer toExhibit 1.Societal contribution – people. The automotive industry has brought to people the freedom and access that come from mobility while also making it increasingly time efficient,safer, and more affordable. Today, of all journeys, more than 70 percent are made by car –and of public transport journeys over 55 percent are made by bus. Hazardous accidentsinvolving passenger cars have been reduced by 40 percent since 2005, and fatalities involving commercial vehicles have been halved since 2001. Furthermore, average costsper covered kilometer of cars decreased by 65 percent over the past 40 years, makingindividual mobility more accessible to a larger share of the population in Europe.Environmental contribution – planet. The automotive industry also contributes to environmental welfare – even if at first this seems contradictory as the number of cars Europewideincreased by 50 percent over the last 20 years. At the same time, however, the industrywas rather successful in keeping the detrimental impact on the environment of the steepincrease in numbers of cars on the road in check – mainly through effective emission reductions. With almost 36 percent reduction in CO2 emissions since 1995, today’s Europeannew cars are far more efficient than cars from 20 to 25 years ago. In the same time frame,commercial vehicles’ CO2 emissions per tkm have decreased by 14 percent. NOx emissionshave been reduced for new cars by 90 percent and by 95 percent for commercialvehicles since the early 1990s. Despite the significant reduction of commercial vehicleemissions, however, the growth of the transport industry results in a higher share oftransport sector emissions than 20 years ago. Today, the transport sector accounts for24 percent of the EU’s greenhouse gas emissions, in comparison to 17 percent in 1995.Economic contribution – profit. The automotive sector is a strong industry with attractive job opportunities and a growth engine of Europe’s economy. The turnover generatedby the sector represents roughly 7 percent of the EU’s GDP, and tax contributions relatedto the industry total EUR 410 billion in the EU-15 countries alone, equaling roughly 6 percentof their total tax income. With 5.4 million cars exported in 2017, the European automotiveindustry accounts for over 40 percent of global automotive value share, and commercialvehicles are the backbone of Europe’s economy, transporting 75 percent of all land-carriedgoods and 90 percent of value transported. With an average profitability of 7 percentreturn on sales in 2017, the industry is economically robust but with a clear gap to highlyprofitable industries, which achieve an average of 22 percent return on sales.8RACE 2050 – a vision for the European automotive industry

Exhibit 1There are highlights galore in the European automotive success storyExamples1 Example GermanySOURCE: McKinsey Center for Future MobilityRACE 2050 – a vision for the European automotive industry9

Building on this success story, the European automotive industry is uniquely well situated tobecome a center for developing, testing, and eventually adopting new mobility technologies.However, Europe’s pioneer position in mobility is endangered, since regions and playersoutside the traditional set of automotive actors are gaining momentum, and the corecompetencies required for remaining successful are changing rapidly.These changes are unprecedented compared to former evolutions in the automotive andmobility industry, as they are much more complex, dynamic, and disruptive.When it comes to growth, the European automotive industry – with the exception of therecession in the early 1990s and the financial crisis in 2009 – has continuously beengrowing since 1980. However, it only (fully) recovered from the financial crisis in 2017, andrecovery still remains fragile (Exhibit 2). This growth was enhanced by the developmentand implementation of technical innovations such as fuel-efficient vehicles and alternativepowertrains (e.g., hybrid).But while industry evolutions in the past served as accelerators to create an innovativeeconomy, the European automotive industry is now at a tipping point. The disruptivepath ahead includes value pools shifting dramatically to new business models and presentmarket leaders having to redefine their role in the newly created ecosystem, not leastbecause their technological leadership is at risk in these new business models. In otherwords, the success story of the European automotive industry is challenged by the combination of two revolutionary forces that together are fundamentally changing the industry:the current momentum beyond the traditional set of players and regions, and disruptivemegatrends.10RACE 2050 – a vision for the European automotive industry

Exhibit 2The global automotive industry is now facing a newmultidimensional disruptionExample EuropeGDP contribution of the European1 automotive industryEUR millionsMobility sectordisruption200,000Scenarios“Race isis“Do crisis200140,00020172ndIraq War2003-110199020002010203020202018Dimensions of alprogressBusinessmodelMarketboundaries1 Western EuropeSOURCE: IHSRACE 2050 – a vision for the European automotive industry11

1.2 Europe’s leading position in mobility is threatened by the enormous momentumof regions and players beyond the traditional setThe industry’s global dependence and complexity has grown substantially. The total valueof the flow of automotive goods around the world, including motor vehicles and vehiclecomponents, increased by 13 times since 1990.Measured by automotive production output, since 1970 the “economic center of gravity”has moved from the westernmost parts of Europe to Turkey and is further shifting towardsAsia (Exhibit 3). This is primarily due to the increasing importance of the Chinese automotivemarket, which has grown from an annual production of 87,000 vehicles in 1970 to 28 millionin 2018.Exhibit 3In automotive production, the economic center of gravity is shiftingtowards AsiaAutomotive production by regionRelative share in percentVehicles30 millionEurope45US35Asia-Pacific96 million25100%20552019702018SOURCE: McKinsey Center for Future MobilityBesides, the automotive industry has started to attract investors – such as tech companiesas well as venture capital and private equity (VC/PE) players – from outside the industry.These players dominate the investment volume in automotive and mobility start-ups; since2010, more than EUR 100 billion have been invested in mobility start-ups, of which 94 percent originated from players outside of the automotive industry.The mergers and acquisition (M&A) volume in automotive tech start-ups reached EUR 39 billionin the US and EUR 26 billion in Asia-Pacific between 2014 and 2017. This illustrates thatinvestments from VC/PE players focused on the US and Asia, with Europe falling behind.12RACE 2050 – a vision for the European automotive industry

Additionally, the automotive product is changing with electronics and software playinga major part and representing significant value in the vehicle, requiring skills that havenot, so far, been among the core competences of automotive engineering. The extentto which the importance of automotive electronics has increased over the last years, forexample, can be derived from the threefold increase in automotive semiconductor salesover the last two decades (Exhibit 4). This increase will further accelerate: an average Dsegment (defined by the EU Commission as large passenger cars) vehicle’s softwarecontent is estimated to grow with a compound annual growth rate of 11 percent andwill make up 30 percent of the vehicle value in 2030. Electronics and electrical contentwill comprise 25 percent of the total vehicle value. Also, since the software developmentprocess in the automotive industry is not exactly state of the art, software complexityincreased manifold as the following example shows. These days, an average modernhigh-end car has 100 million lines of code, 15 times more than Boeing 787 avionics.Exhibit 4Semiconductor sales increased threefold over the past 20 years andcar software is one of the core complexity driversSemiconductor salesAutomotive semiconductor salesEUR billions1Share of total semiconductor salesPercent 3x 8302520 1.5x615410250199620002005201020150Software complexityLines of code, millionsBoeing 7872FirefoxAndroidMozilla CoreF-35 fighter jetMicrosoft Office 2013Large Hadron ColliderFacebookCar softwarex1501020304050607080901001 FX rate USD to EUR based on average FX rate Jan-Oct 2017 (rate: 0.9), OANDA2 Avionics and online support tools only. Total flight software has 14 million lines of codeSOURCE: IHS; -code; McKinsey Center for Future MobilityRACE 2050 – a vision for the European automotive industry13

Not only are automotive products changing, but production processes and players alongthe value chain are as well. While the European automotive industry is renowned for its fullyintegrated, global supply chain model, it is questionable whether this model is sustainable.Additional or higher tariffs might force the industry to focus on regional production processes; also, the increasing relevance of (big) data and IT solutions might lead to shifts inpower between original equipment manufacturers (OEMs) and suppliers, e.g., high-techor IT players.Thus, the European automotive industry is now facing the challenge of fostering a new growthmomentum in Europe to maintain the region’s value generation. Furthermore, the regionmust handle increasing complexity and the influence of growing markets, i.e., Asia and theUS, in the future. In addition, Europe needs to leverage its own technological and marketstrengths to stay abreast of market shifts, new products, and business models.1.3 Disruptive megatrends require new core competencies, new actions,and a new way of thinkingBesides this momentum beyond the traditional set of players and regions, four technologydriven megatrends are disrupting the industry – Autonomous driving, Connectivity, Electrification, and Shared mobility (ACES) (Text box 1, Exhibit 2, and Exhibit 5).Text box 1Did you know that robotaxis will become a cheaper mobility option than private vehicles in urbanenvironments in 2030? that in 2030, one car in ten sold could be a shared car, according to the McKinsey UrbanMobility 2030 Berlin case study? that in the McKinsey 2017 Consumer Survey, 67 percent of consumers currently usingcarsharing expect to increase their usage “a lot” in the next two years? that there are currently 61 Chinese brands selling electric vehicles? that Chinese government subsidies for electric vehicles reached EUR 4.8 billion in 2017? that the Chinese government plans to increase the number of public charging poles from200,000 to 5 million by 2020? that the premium market share of traditional OEMs in the US decreased by 15 percent from2013 to 2018, while Tesla’s market share in the same time increased from 1 to 6 percent? that the US has led in total disclosed investments into future mobility technologies since2010 with EUR 69 billion – followed by China with EUR 40 billion – and that the twoEuropean countries in the top 10 are the United Kingdom with EUR 2.3 billion and Francewith EUR 1.5 billion?14RACE 2050 – a vision for the European automotive industry

Exhibit 5The 4 technology-driven ACES trends are reinforcing each other andwill disrupt the automotive industryof the top 10 OEMs plan tobuild highly autonomousvehiclesTruck platooning onthe road expected byThe percentage of consumersready to change car brands forbetter connectivityin the last 2 yearsBy 2030, connectedtrucks will make upof the fleetAs of today, at leasthave been invested inride-sharing start-upsof models announced by 2021will have EV1 powertrainsNearlyof German consumers couldimagine purchasing an EV1 astheir next personal car1 Incl. battery EV (BEV) and plug-in hybrid EV (PHEV)SOURCE: IHS; McKinsey Center for Future MobilityRACE 2050 – a vision for the European automotive industry15

Markets and revenue pools are shifting to new business models and new technologies,such as data-enabled services, advanced driver assistance systems (ADAS) technologies,and alternative powertrains. This development results in the emergence of new competitorsas tech players, start-ups, and digital/e-commerce companies can be expected to growrapidly. However, for established players this presents not only new threats but also newopportunities. To successfully shape these disruptive technologies, the industry will haveto manage a significant employment transition, with accelerated importance of softwareand electronics engineering skills. Furthermore, industry collaborations are becomingincreasingly relevant not only to gaining critical market shares, e.g., in cloud-based mobilityservices, but also to shaping the necessary infrastructure, e.g., with telecommunications orenergy providers.Finally, the four megatrends influence customers’ mobility habits. Customers are beginningto demand innovative and individualized products, such as pay-per-use mobility packagesor mobility as a service (MaaS), that integrate different modes of mobility according to individual needs. Furthermore, customer demand for sustainable mobility products is rapidlyincreasing. Thus, while Ch

The automotive sector is a strong industry with attrac- tive job opportunities and a growth engine of Europe’s economy. The turnover generated by the sector represents roughly 7 percent of the EU’s GDP, and tax contributions related to the industry total EUR 410 billion in the EU-15 countries alone, equaling roughly 6 percent of their total tax income. With 5.4 million cars exported in .

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