May 2022

Can the automotive

industry scale fast enough?
The rapidly increasing uptake of electric vehicles
could transform the automotive ecosystem
and promote even greater innovations. For that
to happen, two imperatives need attention now.

by Russell Hensley, Kevin Laczkowski, Timo Möller, Dennis Schwedhelm

The automotive sector is on the cusp of changes not seen since the Model T Ford
rolled off the production line in the early 1900s, as new regulations, technologies, and
consumer preferences transform its products and business models. Both traditional
OEMs and new start-ups are spending more to address these trends: since 2010,
intrigued investors have funneled $280 billion into innovative automotive hardware and
software solutions. Almost half of this investment, about $115 billion to $120 billion, has
gone to electric vehicles (EVs).

Capital markets have rewarded this influx. With a weighted average total shareholder
returns (TSR) of 79 percent from March 2020 through January 2022, traditional OEMs
and component suppliers outperformed companies in many other thriving sectors,
including high tech and chemicals. The results were even more impressive for the
relatively new kids on the block, such as NIO, Tesla, and other EV start-ups, whose
weighted average TSR of 278 percent topped the list.

The industry has typically relied on sales of traditional vehicles with internal-combustion
engines (ICE) for much of its growth.1 But overall vehicle sales are projected to increase
at a modest 2 percent CAGR through 2025 and might even decline over the balance of
the decade. But the industry’s TSR remains high because of optimism about increasing
revenue from other sources, including those related to new technologies and services.
EVs, which now represent a small portion of vehicles sold, are at a tipping point and are
responsible for much of the enthusiasm within capital markets. In the second half of
2020, sales and penetration of passenger EVs accelerated in major markets despite the
economic crisis caused by the COVID-19 pandemic.2 McKinsey projects that worldwide

1
“ICE businesses: Navigating the energy-transition trend within mobility,” McKinsey, March 14, 2022.
2
“Why the automotive future is electric,” McKinsey, September 7, 2021.
 demand for EVs will grow sixfold from 2021 through 2030, with annual unit sales going
from 6.5 million to roughly 40 million over that period.3

These optimistic projections for EVs come with some big caveats, however. While
consumer demand appears clear, the automotive ecosystem must quickly address three
major constraints before EV production and sales can gain scale:

• difficulties sourcing enough raw materials, including lithium, nickel, and cobalt, used
in batteries

• an insufficient number of gigafactories that produce batteries, as well as low

productivity within existing facilities

• a public charging infrastructure that must be built up to keep pace with the number of
EVs on the road4

Although some large companies may attempt to increase their access to raw materials,
most automotive companies currently lack this option.5 What the industry can tackle,
however, are issues related to gigafactories and the charging infrastructure. Taking
quick action will be key to extending the momentum in EVs and may even help to
accelerate adoption of autonomous vehicles (AVs), through which OEMs will find even
more opportunities in services and life cycle revenues from such things as over-the-air
software updates, mapping services, and in-vehicle entertainment.

Build gigafactories (and make them work)

EV motors get their energy from batteries that contain very different materials from those
used with traditional ICE vehicles, including lithium, cobalt, and nickel. The extremely
large facilities where most EV batteries are produced are called gigafactories, since the
annual capacity they produce exceeds one gigawatt. Most gigafactories were founded in
Asia and accounted for about 80 percent of battery production capacity in 2020. While
most gigafactories are operated by cell manufacturers, many OEMs are becoming more
active in this field as well.

Today, gigafactory operators face two major problems. First, when building these
enormous facilities, construction issues inevitably arise, increasing both costs and
timelines. And second, after gigafactories open, many companies struggle with
operational efficiency. If the current trend of delayed production starts and prolonged
ramps continue, a McKinsey analysis predicts that 30 percent of newly added annual
capacity would be at risk in North America alone by 2025, potentially leaving more than
300,000 vehicles short of batteries each year in that region.

3
This figure includes battery, fuel-cell, and plug-in hybrid EVs.
4
 n expanded charging infrastructure will also require an enhanced grid and expanded renewable-energy production. This article
A
focuses on the charging infrastructure because it is most relevant to the automotive sector.
5
“The raw-materials challenge: How the metals and mining sector will be at the core of enabling the energy transition,” McKinsey,
January 10, 2022; Andreas Behrendt, Ricardo Moya-Quiroga Gomez, Raphael Rettig, and François Soubien, “Amid disruption,
automotive suppliers must reimagine their footprints,” McKinsey, April 19, 2022.

2
 Handling construction issues
If worldwide EV demand grows as projected, the industry would need 200 new
gigafactories—in addition to the 130 gigafactories that already exist, representing
more than $400 billion in deployed capital—by 2030. Many of the new facilities would
likely be built in locations near OEMs to reduce lead times and inventory requirements.
Moreover, battery cells can account for more than $7,000 in cost per vehicle, so the
pipeline inventory value for internationally shipped batteries would be very high.6 But
complications during the design and construction phases can delay production start by
12 months or more.

Gigafactory operators may avoid some common problems through stronger recruitment
of construction talent, ideally during the site-planning phase or earlier. Positions that are
most difficult to fill, such as those related to electrical or mechanical craft labor, need
most attention. Gigafactory operators might also benefit from giving early attention to
local design standards and regulatory concerns, such as wastewater, and from using
suppliers within the local industrial base that can provide on-site support and respond to
quality and output challenges more rapidly.

Increasing operational efficiency

After a gigafactory is up and running, the challenges do not disappear. Many new
facilities have experienced lower than expected output because of ongoing labor
shortages, unexpected machine downtime, and operational issues. The consequences
of lost production can be enormous for both battery cell manufacturers and the OEMs
they supply. If a 50 gigawatt-hour plant achieves only 66 percent of its planned annual
output, it could lose about $500 million in value annually, transforming a modeled
profit of 6 percent to a potential 8 percent loss. Downstream OEMs could experience a
supply crunch, forcing them to cut vehicle production or temporarily shut plants. Several
prominent OEMs had to pause production because of battery supply disruptions since
2017, even though output was far lower than it will be in the future.

To minimize labor issues, cell manufacturers must consider the talent pipeline at all
stages, including site selection, construction, and process training. They also need
to consider how the daily routines and skills of local workers may differ from those of
staff in their other facilities. If capability building appears necessary, gigafactories can
benefit from having an on-site, cross-cultural organization where employees with global
experience help local hires develop strategic competencies. And with battery demand
poised to accelerate, cell manufacturers should also think about their future talent
needs as they conduct R&D activities designed to advance the next-generation cell
manufacturing. The industry is changing so fast, and battery technology advancing so
rapidly, that companies must be nimble in adapting their recruitment and training efforts.

Operational efficiency can also suffer if cell components and machinery are in short supply,
especially when demand is increasing worldwide. Battery cell manufacturers may increase
efficiency and reduce operational complexity by relying on local sources in some cases. For
instance, they may continue to use experienced global vendors for equipment required in
critical process steps but may otherwise use responsive regional vendors.

6
 0 kilowatt-hour pack at $90 per kilowatt-hour; pack sizes range from 60 to 200+ kilowatt-hour depending on vehicle segment
8
and class.

3
 While battery suppliers are now taking the lead in handling operational-efficiency issues,
the same questions will become more relevant for OEMs in the near future as more of
them increase their involvement in battery production through various strategies, such as
vertical integration, joint ventures, or other strategic partnerships.

Accelerate the rollout of the charging infrastructure

For EVs to go mainstream, they will need an extensive network of charging solutions to
provide drivers with an adequate electricity supply. For example, the United States now
has about 100,000 public chargers, but this number could increase to about 1.2 million by
2030 to satisfy demand.7 In China, the number of public charging stations would have to
increase from 1.15 million today to around five million by 2030, when more than 100 million
passenger EVs will be on the roads. Similarly, Europe’s public charging stations would have
to increase to anywhere from 2.9 million to 6.8 million—from around 340,000 in 2021,8
depending on the path taken—over the same period.9

Most countries have not yet committed sufficient funding to support the necessary
expansion of the charging infrastructure. We estimate that more than $35 billion
would be required to get to the 1.2 million public chargers required in the United States,
exclusive of grid and electrical upgrade costs (exhibit). The $7.5 billion specified for public
charging stations in the recently passed Infrastructure Investment and Jobs Act is only a
fraction of what’s needed.

Building out the charging infrastructure presents governments, utilities, and new
charging companies with some interesting questions. Consider a few trade-offs:

• Where should charging stations be located? This question requires charge-point

operators and public stakeholders to balance competing imperatives, including
accessibility, convenience, and equity. A low-income area should offer the same access
to charging as high-income areas, for instance.

•W
 hat charging speed is essential? Fast chargers offer the greatest convenience, but
they are also the most expensive. Slow chargers might often meet the public’s needs
and could be installed in greater numbers because of their lower cost.

•W
 hat is the best way to balance profitability and convenience? Stations with high
utilization will deliver better returns on a per-unit basis. Increasing the number of
chargers would decrease utilization, and thus profitability expectations for providers,
but would improve wait times for consumers (for example, during periods of peak
demand). Players can develop scenario-based modeling to quantify and understand
these trade-offs.

7
 hilipp Kampshoff, Adi Kumar, Shannon Peloquin, and Shivika Sahdev, “Building the electric-vehicle charging infrastructure
P
America needs,” McKinsey, April 18, 2022.
8
As suggested by the European Alternative Fuel Observatory.
9
“European EV charging infrastructure masterplan,” European Automobile Manufacturers’ Association, March 28, 2022.

4
 Web <2022>
<McKQ Mobility’s next act>
Exhibit
Exhibit<1> of <1>
Hardware, planning, and installation for public charging could cost more than
$35 billion through 2030.

Capital expenditure required for charger demand through 2030,1 $ billion

Total 96.7
Workplace 3.5 2.1 1.4 AC charger cost
1.2 10.8 DC charger cost
Fleet 12.0

5.7 3.2
Retail and destination 8.9

29.2
Public
use cases
On the go 29.2 38.1

43.1

Residential 43.1

1
Based on a scenario where electric vehicles account for half the vehicles sold in the US in 2030, in line with a federal target. Includes the cost of charger
hardware, planning and engineering, and charger installation; does not include costs for grid and site electrical upgrades.
Source: McKinsey Center for Future Mobility

Developing a highly localized understanding of charging demand based on driving and

parking behaviors—rather than assuming that one size fits all—will help stakeholders
accurately and efficiently evaluate these trade-offs.

There are several levers that can help to address current challenges, and many rely on
appropriate regulatory support. For instance, regulators may want to consider expediting
the approval process for charging-point installation, which currently takes anywhere
from nine to 16 months. If governments consider shortening site-evaluation time, either
by investing in more capacity or streamlining the process, the time to site launch could be
reduced significantly.

The automotive industry’s next act

Over the next decade, the automotive industry will experience changes not seen in
over a century. The first shift, from ICE technology to electrification, will encourage
the development of battery-powered vehicles that contain leading-edge software,
connectivity, and systems, including infotainment, high-performing computers, advanced
driver-assistance systems features, and electric powertrains. Eventually, OEMs may
create fully autonomous vehicles capable of the most sophisticated driving experience,
including, for example, commuting from the owner’s home to work, with the driver using
this time to do things such as check emails or watch a movie.
5
 While large-scale AV uptake will hinge on software, regulatory approval, and public
acceptance, many analysts believe that highly or fully autonomous vehicles could advance
beyond pilots and hit the roads after 2025.10 Trucks making hub-to-hub trips on highways may
well be the first to receive commercial approval. If OEMs create public campaigns to educate
people about the safety and benefits of these vehicles, they may help expedite AV uptake.

With these emerging trends, and vehicles becoming increasingly sophisticated, a single
company may struggle to take end-to-end responsibility for production. Thus more
specialized companies will likely enter the automotive sector and play a larger role in
specifying and integrating the components and technologies that they produce.

With such changes, the future ecosystem may bear a greater resemblance to today’s
high-tech sector, with companies becoming technology leaders in different specialties
and sometimes setting the industry standards. As one example, commercial customers,
including fleets, operators of pooled shuttle services, and robo-taxi operators, could also
become more exacting, much like technology buyers accustomed to setting their own
specifications. Since these customers place bulk vehicle orders to satisfy their demand,
OEMs would have to be responsive to fulfill their needs.

Beyond vehicle sales, greater vehicle connectivity will further increase the industry’s
focus on service and life cycle revenues. Typical aftermarket services, which now primarily
involve selling spare parts, will likely expand toward direct, digital interactions with
customers to provide services including updates to connected vehicles. New vehicles
could also present novel revenue opportunities throughout the life cycle, including those
related to charging, mobility as a service, and other data monetization opportunities, such
as selling anonymized vehicle data to specialized marketplaces.

The industry ecosystem will continue to evolve even after electrification and autonomous
driving become mainstream. OEMs may eventually try to insource newer technologies to
capture additional value, likely focusing on areas where they can develop unique offerings.
Meanwhile, the number of specialist companies could drop as leaders emerge and the
industry consolidates. The timeline for these shifts is uncertain, especially given external
events such as the semiconductor shortage and raw-materials constraints, and the
industry structure could be very dynamic over the coming years. The only certainty is that
OEMs and other automotive stakeholders must be prepared to support and encourage a
host of transitions in the years and decades ahead.

Russell Hensley is a partner in McKinsey’s Detroit office, Kevin Laczkowski is a senior partner in the
Chicago office, Timo Möller is a partner in the Cologne office, and Dennis Schwedhelm is a senior expert
and associate partner in the Munich office.

The authors wish to thank the Battery Insights Group, Thomas Baumgartner, Andreas Breiter, Volker
Grüntges, Mikael Hanicke, Kersten Heineke, Evan Horetsky, Ani Kelkar, Martin Kellner, Morgan Lee,
Rachel Mickelson, Florian Nägele, Alex Panas, Shivika Sahdev, Patrick Scott, Emily Shao, Andreas
Tschiesner, and Felix Ziegler for their contributions to this article.

10
 ersten Heineke, Ruth Heuss, Ani Kelkar, and Martin Kellner, “What’s next for autonomous vehicles?,” McKinsey, December 22,
K
2021.

Copyright © 2022 McKinsey & Company. All rights reserved.

6
The emerging
mobility landscape
The mobility industry will become increasingly diverse
as new technologies, revenue sources, and business
models emerge. Each industry segment will have a few
leaders, but collaboration, from design through sales,
will be more important than ever.
Top hat
The top part of the car will
typically be the domain of
OEMs and contract manufac-
turers, which will differentiate
builds based on use case
(for instance, fleet or private-
customer sales).
Semiconductors
Close collaboration among
Vehicle sales
Direct-to-consumer sales will
Vehicle operations
Vehicle operations will
the automotive, mobility, and become increasingly important become more digital;
semiconductor industries will and occur through a mix of online a remote system will
be essential as demand for and offline channels. Large-fleet manage scheduling and
semiconductors, which are customers will be able to define maintenance for fleets
key components of smart cars, their own vehicle requirements, and privately owned
continues to outstrip supply. given the quantities they order. autonomous vehicles.
Connectivity/HMI
Connectivity and human–machine
interface will bring the interior
to life. New companies entering
mobility will play a large role, but
close collaboration with traditional
OEMs will be essential.
Software
Moving goods and
This is evermore critical across
domains, with technology
people
companies, suppliers, and OEMs Private-vehicle ownership
making it even more of a priority. will decrease; mobility ser-
vices for moving people and
Sensors goods will be an integral
part of everyday life.
These are the basis for future
advanced driving and autono-
mous technologies.
Charging infrastructure
13:15
Battery electric-vehicle An expanded charging
platform infrastructure will increase
convenience for drivers
Gigafactories, built worldwide,
and allow manufacturers
will engage in large-scale battery
to right-size the battery.
production. The network of local
factories will minimize the need
for long-distance shipping.