Automotive & Assembly Practice

Automotive powertrain
suppliers face a rapidly
electrifying future
More quickly than expected, powertrain electrification is creating both
pressure and opportunities for the supplier network.
This article is a collaborative effort by Laolu Adeola, Prasad Ganorkar, Michael Guggenheimer,
Brian Loh, Alex McBride, Lukas Michor, and Patrick Schaufuss, representing views from McKinsey’s
Automotive & Assembly Practice.

March 2023
 Always quick off the mark, electric-vehicle (EV)
sales have recently seen a surge. In many industries,
the COVID-19 pandemic delayed momentum. But
the electrification of vehicles accelerated—with EV
sales between 2020 and 2022 growing by more
than 90 percent in both the United States and
Europe and by more than 300 percent in China.
This report, on the heels of McKinsey’s 2019
investigation of the trends surrounding powertrain
electrification (see sidebar “Electrification: A
changing of the guard”), reviews the latest electric
powertrain (e-powertrain) market developments.
Our research reveals a significant structural shift
is occurring: roughly 70 percent of automotive
suppliers expect the industry to consolidate
over the next three to five years. Simultaneously,
tier-one suppliers are feeling squeezed, facing
pressure from tier-two-plus suppliers (for example,
raw materials and electronic manufacturing
services), as well as major internal cost increases.
Electrification: A changing of
the guard
A decade ago, the same two types of power-
trains—gasoline and diesel—dominated the
automotive sector and had done so for more
than a century. With the rise of automotive
electrification, we published Reboost: A
comprehensive view on the changing power-
train component market and how suppliers can
succeed in 2019. This in-depth report, of more
than 70 pages, covered the key changes in the
powertrain market across system and component
portfolios through 2030. Its objective was to
help suppliers capture opportunities to win in
the transition to electrification.
2 Automotive powertrain suppliers face a rapidly electrifying future
While OEMs can pass costs onto consumers
via price increases, tier-one powertrain suppliers
have few pass-along options, which is reflected in
the 2022 average higher margins for OEMs over
their suppliers.
In this article, we address the implications for
automotive suppliers and suggest moves they could
make to emerge on top.
Over the past three years, several key shifts have
occurred in the powertrain component market.
Those relevant to this article include the following:
1. Electrification consistently accelerates
faster than expected. EV sales have surged
since the pandemic, and increased action
on climate change (via government policy,
company pledges, and consumers behavior) is
driving sales.
2. OEMs clarify their electrification make-
versus-buy strategies. With the move toward
the electrification of vehicles accelerating
faster than expected, automotive OEMs are
increasingly deciding to insource e-powertrain
systems and components.
3. Legacy components are becoming a transition
consideration for OEMs. The EV speedup
has made legacy powertrain components
for internal-combustion engines (ICEs) a
key consideration for OEMs. Demand is
projected to grow through mid-decade before
declining, which may enable increased supplier
pricing power.
4. Carve-outs become more common in the
powertrain business. Increased efforts to
separate ICEs from EV businesses for both
OEMs and suppliers to generate short-term
cash can help finance the transition in the
short term and clarify the true opportunity for
capital markets.
Electrification accelerates
By 2035, battery electric vehicles (BEVs) will likely
represent more than 65 percent of all new light-
vehicle sales across the global automotive market
(Exhibit 1). The factors driving sales differ across
regions. Europe is experiencing high regulatory
pressure, for example, while China feels a strong
consumer pull despite reduced incentives. US
demand grew to more than 5 percent of new-car
sales in 2022, and recent government action
is expected to boost the transition to BEVs (for
example, the 2022 Inflation Reduction Act has
multiple provisions to encourage EV adoption).
The industry is also facing headwinds such as
current supply chain shortages, slow charging
infrastructure rollouts, and the rising costs of
battery raw materials. We expect these to have
short- to mid-term negative effects.
To highlight the economic impact of accelerating
electrification, we reexamined market size
and growth forecasts for electric powertrain
components (Exhibit 2). The components analyzed
include the following:
— Electric drive unit (EDU): a subassembly
comprised of a traction motor, reducer, and
inverter
— Battery pack: the battery housing (including
structural elements and connectors) cells, and
battery management system
— Power electronics: the onboard charger (OBC)
and DC/DC converter

Web 2023
ElectrifyingPowertrainSuppliers-UPDATED MAR2023
Exhibit 1 of 3
Exhibit 1

China and the European Union are expected to lead in electric-vehicle sales
by 2030.

Electric-vehicle (EV) sales as a share of new passenger vehicle sales,1 %

Global EV-adoption scenarios Accelerated EV-adoption scenarios, selected countries

100 Achieved 100 EU

commitments
China
Further US
75 acceleration 75
Current
trajectory

50 Fading 50
momentum

25 25

0 0
2020 2025 2030 2035 2020 2025 2030 2035

Note: As of Mar 2023.

Includes battery electric vehicles, fuel cell electric vehicles, and plug-in hybrid electric vehicles.
1

Source: EV-volumes.com; IHS Markit (2020–21); International Council on Clean Transportation; literature search; McKinsey Center for Future Mobility

McKinsey & Company

Automotive powertrain suppliers face a rapidly electrifying future 3

 Web 2022
ElectrifyingPowertrainSuppliers—UPDATED MAR2023
Exhibit 2
Exhibit 2 of 3

Markets for powertrain components used in light battery electric vehicles are
entering a rapid growth phase.

Selected metrics Low Medium High

Value chain Market size, 5-year 10-year Competitive 2025 OEM 2025 gross
element Product area 2022 growth rate growth rate landscape1 outsourcing, % margin potential
$500 million 20–40% 20–40% 60–70% Low to Low to
Scoring criteria (low to high)
to >$2 billion high high

Electric- Electric motor

drive
units Reducer

Inverter

Power Onboard charger

electronics
DC–DC² converter

Battery Cells

Housing

BMS³

1
That is, share of top 10.
2
Direct current to direct current.
³Battery management system.
Source: McKinsey Center for Future Mobility, current trajectory scenario

McKinsey & Company

— Thermal management system: the system that
maintains powertrain component temperatures
within operational limits
Most of these components have large markets
(greater than $1 billion) that will likely increase
rapidly by 40 percent or more annually over the next
five years.
Following the sustained dip in car sales since the
start of the pandemic, growth in overall vehicle
production will likely resume. This momentum,
combined with e-powertrain cost reductions
driven by market competition and manufacturing
scaling effects, will support EV growth through
2035 and beyond, posing an unprecedented
challenge to existing value chains.
According to the Status of the Automotive
Supplier Industry, a joint survey by the European
Association of Automotive Suppliers (CLEPA) and
McKinsey in the spring of 2022, several factors
will help increase consolidation among suppliers.
These include the shift in technology from ICEs
to EVs, the repositioning of value pools within the
powertrain industry (as powertrains will have a
larger overall share of vehicle costs for BEVs), and
the make-versus-buy decisions by OEMs.
OEMs clarify their
electrification strategies
As a result of ambitious electrification targets
and plans to divest ICE powertrain manufacturing
assets, automotive OEMs continue to invest

4 Automotive powertrain suppliers face a rapidly electrifying future

 significantly in BEV production. Announced
investments by OEMs exceed $500 billion for
general electrification by 2025. The actual figures
are likely to be much larger, since many OEMs
aggregate their investment announcements.
EDU make-versus-buy implications
As OEMs’ BEV platform strategies have emerged,
electrified-component assembly plans have
matured. No single preferred solution exists, but
by mid-decade we expect many large traditional
OEMs to assemble e-drive units and battery
packs in-house and to outsource battery cells and
selected power electronic systems, such as DC/DC
converters and onboard chargers.
The key drivers of e-powertrain insourcing include
cost savings, workforce retention, and competitive
differentiation (see sidebar “Making e-powertrain
components core”). At high volumes—for example,
100,000 units of annual capacity for an e-drive
system—insourcing powertrain components can
provide significant cost savings. Some OEMs may
also choose to retain legacy ICE component plant
employees through insourcing to satisfy powerful
regional unions. Furthermore, e-powertrain
components exert a high influence over the
performance of vehicle drives, with battery packs
and EDUs being the two largest differentiators of
BEV performance.
These sourcing decisions have cascading
implications across an OEM’s manufacturing
footprint, including existing facility planning. They
can have a significant impact on the tier-one and
tier-two automotive supply base. For instance, many
suppliers are managing e-drive market pressures
knowing that, between 2015 and 2020, more than
20 global tier-ones announced more than $11 billion
of EDU investments. These investments have
helped suppliers to build capabilities to support
the current BEV market. Now OEMs are making
major EDU investments to build their in-house
capabilities. Given the fragmented nature of the
EDU supplier market and the tendency of OEMs
to insource—at least on the system and assembly
levels—we expect a major consolidation of this
nascent supplier market.
OEM e-powertrain sourcing strategies could follow
five potential paths (Exhibit 3):
In-house. Some EV disrupters are insourcing
components across the e-powertrain value

Making e-powertrain components core

Many light-vehicle OEMs view
e-powertrain components as their core
competency, with workforce retention,
facility repurposing, and financial
considerations as decision drivers. The
fundamental criteria for OEM sourcing
decisions include these:
— Financial impact: the capital outlays
required and potential cost savings
— Resource considerations: whether
to retain the existing workforce
and repurpose or re-tool internal-
combustion-engine component facilities
— Strategic positioning: promoting the
company’s core competencies and
overall value proposition as a brand
to customers
— Operational capabilities:
sourcing’s impact on vehicle time
to market and the resulting supply
chain implications
— Market forecast volatility: the risk of
adoption, volume sensitivity, and global
macroeconomic factors
To make decisions, each OEM will prioritize
and assign weightings based on its
organizational strategy. Understanding
each OEM’s unique strategic priorities
across these criteria is important for
tier-one suppliers that want to position
themselves to capture future business.

Automotive powertrain suppliers face a rapidly electrifying future 5

 Web 2022
Exhibit 3
ElectrifyingPowertrainSuppliers—UPDATED MAR2023
Exhibit 3 of 3

E-powertrain sourcing strategies for OEMs could follow five potential paths.

Electric-drive-unit market and sourcing outlook, 2030

Mixed approach
Cost focused, Cost-focused, Total
Archetype In-house1 leaning toward Performance leaning Buy representative
approach in-house focused toward buy approach OEM set

Addressable
market, 2030, 5–
% 20– 25
40
50– 55–
60– 75
75
Nonaddressable 95 80

75–
60– 95
80

25– 25–
20– 45
50
40
Addressable 5

Addressable
market, 2030, <1 11–22 3–6 12–16 9–12 36–56
million units

System share,2 % 100 75 25 50 50 25 75 10 90 40 60

System
Component

1
Includes joint ventures.
2
Includes battery electric vehicles, hybrid electric vehicles, and plug-in hybrid electric vehicles.
Source: Expert interviews; McKinsey Center for Future Mobility, current trajectory scenario

McKinsey & Company

chain. These players work with suppliers on
subcomponents and lead the design and final
assembly stages of powertrain components. They
control virtually all systems-related work as part
of their core competency. We expect that any
outsourcing to suppliers will be small, reaching
about 5 percent of the addressable market in 2030.
Cost focused and leaning toward insourcing.
These players, typically mainstream incumbents,
will likely limit systems sourcing to about a quarter
of the available total, in part to stay current with the
latest system-level breakthroughs from the supplier
community. Based on expert interviews, we believe
that by 2030 they will represent 20 to 40 percent of
the outsourced EDU market to suppliers.
Performance focused. Primarily luxury
performance OEMs, these players seek to control
the performance-related differentiating aspects
of an e-powertrain. By 2030, their sourced system
share (such as the share of completely purchased
EDU systems versus single components) is
expected to reach 50 percent, and they will likely

6 Automotive powertrain suppliers face a rapidly electrifying future

represent 20 to 50 percent of the addressable
EDU market to suppliers in 2030.
Cost focused and leaning toward outsourcing.
These companies will include a mix of new entrants
and niche players that have a high focus on short-
term profitability. In 2030, they will probably
represent 60 to 80 percent of the addressable
EDU market to suppliers, with a fully outsourced
systems share of 75 percent.
Buy. OEMs that primarily buy their EV powertrain
solutions from suppliers will mostly be electrification
followers without the resources or expertise to
develop their own e-powertrains. By 2030, we
expect them to represent 75 to 95 percent of the
addressable market for EDU suppliers and have a
sourced systems share of about 90 percent.
For their 2025–30 strategies, individual OEMs
will vary their approaches within each archetype.
For example, for EDUs, we expect OEMs to build
70 percent of all e-motors from scratch. They will
likely source the remaining 30 percent from the
tier-ones, with most of that demand consisting of
completely assembled EDUs versus subassemblies.
Many larger OEMs plan to pursue dual strategies:
sourcing EDUs from tier-ones for selected
platforms or trims while deciding to make them for
others. We also expect tier-one suppliers to provide
about 75 percent of traction inverters by 2030.
Full-system EDU suppliers are likely to experience
continued margin pressure, although experts
may disagree on this point. Some view EDUs as
commodities, while others consider them a key
performance differentiator. Nevertheless, most
OEMs seek aggressive annual price reductions and
remain hesitant to include raw-material indexes in
supply contracts. This will lead to a consolidation
of the fragmented EDU supplier market, which now
has over 20 suppliers offering EDU systems.
The shift of ICE-related portfolios toward
e-mobility will allow new suppliers to emerge in
1
All vehicles registered in a region.
Automotive powertrain suppliers face a rapidly electrifying future
the EDU space. Together with OEM insourcing
strategies, this development will increase
competition and put pressure on suppliers to
sustain their market positions. That should in turn
cause suppliers to fine-tune their offering(s) for
addressable markets. While some will focus on
manufacturing excellence for high production
efficiency and low costs, others will seek niche
markets, such as high-performance EDUs.
Legacy components emerge as a
transition challenge for OEMs
OEMs face component production capacity
challenges through the midterm. We expect net ICE
production to increase moderately through mid-
decade due to the continued growth in demand
for hybrid vehicles, before dropping precipitously
by 2030. OEMs, which are reluctant to build
out additional internal capacity for “sunset” ICE
components, will likely shift low-volume ICE engine
and transmission programs to tier-one suppliers to
free internal plant space for BEV components such
as e-motor assemblies.
We believe the ramp-down of ICE volumes
carries both mid- and long-term risks for OEMs.
Declining ICE component volumes present two
major challenges. The first involves “diseconomies”
of scale. Substantial lifetime value is at stake
because of the likely increase of component prices
due to reduced economies of scale and “last man
standing” supplier pricing flexibility. The second
involves the risk of recalls, which OEMs must
manage for existing ICE vehicles. This will require
capabilities to provide adequate solutions.
Unless banned outright, the durable and enduring
ICE car parc1 will likely create shortages for
aftermarket components in the years beyond
2030. Our article, “ICE businesses: Navigating the
energy-transition trend within mobility,” presents
some ideas on how ICE suppliers can create value
while advancing sustainability.
7
 Separating ICE and EV functions indicated that tier-one suppliers feel increasingly
The continued production of ICE components could prepared for the changes from the Aftermarket
generate cash, and industry players have taken Catalog Exchange Standard (ACES) trends
actions to capitalize on this by separating business (autonomous driving, connectivity, electrification,
units or creating stand-alone entities. Some other and shared mobility). At this point, suppliers
reasons for making such moves include creating should have moved to implementation, using
a distinct proposition for capital markets, helping unified company-wide approaches to position
management focus on critical challenges (for example, themselves for growth based on clearly defined
growth versus operational performance), and driving capabilities. Suppliers should have already
strategic repositioning. ICE suppliers that can endure prioritized transitional actions, recognizing the
the transition could expect to experience increased need to systematically steer their relevant ICE
pricing flexibility. OEMs Ford, Geely, Renault, and components, and updated their strategies for
Volvo announced last year that they would form which areas to emphasize as last-man-standing
distinct auto units based on powertrain type. components rather than consider divesting
early. The C-suite should lead this transition,
with a strong, empowered performance office
Implications for suppliers: Becoming that steers overall performance and manages
an electrification winner compliance within the clearly defined strategy.
A key element of this performance involves
Our previous report recommended that
improving e-powertrain component profitability
suppliers take several initial actions to prepare
via a mix of procurement and engineering
for electrification.2 We have updated these
actions while managing the profitability of ICE
recommendations to reflect the current trends.
components with reduced R&D support and
rationalizing the production footprint. Tier-
1. Update company strategy to include a detailed
one suppliers should harness their advanced
implementation approach. Our research and
expertise to develop more integrated offerings
experience suggest that many suppliers have
across systems. Doing so will allow them to
already completed this step. The resulting
address complexities with a lower cost base than
updated strategy and transition vision will help
those of the OEMs. Likewise, vertical integration
such players successfully navigate the waves
can improve the margin profile on EDU systems
of expected industry consolidation activities.
and components while creative sourcing
Another strategic imperative is to target the
partnerships can enable suppliers to scale
right customers. As OEMs evolve their make-
market demand to capture greater savings.
versus-buy strategies, suppliers need to develop
an ongoing understanding of the OEMs’ cycle
3. Brush up M&A skills. A company’s merger-
plans and timing. When do they intend to bring
and-acquisition (M&A) capabilities become
e-powertrain capabilities in-house, and what
increasingly important for industries in which
product features do they plan to offer? With
one market is declining while another is booming
this knowledge, suppliers can target specific
and many players fight for market share. All
OEM programs to lock in long-term agreements
the issues surrounding scarce talent and tight
and support OEMs in their transition away from
capital markets come into play, as does the
legacy ICE components. Cash generated from
need for strong postmerger-management skills.
these efforts can help finance the transition.
M&A activities are relevant on both the ICE side,
where growth is only possible through share of
2. Emphasize a performance focus with a ‘culture
wallet growth, and on the EV side, where some
of accountability.’ The CLEPA pulse check

2
“Reboost: A comprehensive view on the changing powertrain component market and how suppliers can succeed,” McKinsey,
November 8, 2019.

8 Automotive powertrain suppliers face a rapidly electrifying future

 markets are very fragmented (for example,
Find more content like this on the
e-motors and inverters). Strategic M&A actions
McKinsey Insights App
can bring together the right mix of skill sets and
competencies, critical mass, and scarce capital
to weather the current disruptions.
4. Allocate resources through an ‘old world
versus new world’ lens. Many suppliers will
have carved out their initial electrification
resource requirements. These will be allocated
Scan • Download • Personalize
in a defined product development budget
based on electrification trends and other
indicators. R&D efforts should focus on future
markets, while backbone and legacy markets
ought to follow a low-investment and cash-
out logic. Suppliers, OEMs, and public-sector
players should cooperate to bundle research
efforts and to ensure competitive, viable, and
promising solutions for the future of powertrain
technology. It also makes sense to review long-
term capacity planning based on the confirmed
order book, upcoming programs, OEM mix, and
other indicators. Suppliers need to know the
forward plans of their targeted OEMs in terms of
insourcing and outsourcing almost as well
as the automakers do themselves: are these
plans changing, and do they still match the
supplier’s development program? Tier-one
suppliers are already developing electric
drivetrains targeted to specific OEM archetypes
by defining product road maps that complement
likely OEM strategies.
5. Keep supply chain resilience as a priority.
Staying ahead of supply chain challenges will
remain a challenge for some time. Tier-ones
should seek to maintain the resilience muscle
developed through the pandemic by diversifying
their tier-two-plus base, continuing investments
in infrastructure and analytics, and collaborating
Laolu Adeola is a consultant in McKinsey’s Southern California office; Prasad Ganorkar is an associate partner in the
Philadelphia office; Michael Guggenheimer is an associate partner in the Munich office, where Patrick Schaufuss
is a partner; Brian Loh is a partner in the Detroit office; Alex McBride is a senior knowledge analyst in the Waltham,
Massachusetts, office; and Lukas Michor is a partner in the Vienna office.
Designed by McKinsey Global Publishing
Copyright © 2023 McKinsey & Company. All rights reserved.
Automotive powertrain suppliers face a rapidly electrifying future
with OEMs and other suppliers on topics such as
tracing for sustainability measures. They should
also anticipate changes in regulations that could
differ widely by region. By diversifying the supply,
powertrain suppliers can reduce supply chain
risks and improve flexibility. Investing in analytics
can help them anticipate macroeconomic and
market shifts, providing them more time to react.
Collaboration with OEMs and other suppliers
can improve supply chain efficiency through
improved transparency, which is especially
critical for achieving sustainability targets.
Given electrification’s rapidly changing competitive
environment, suppliers should maintain an active
portfolio road map. They should ask themselves
if they can bolster future offerings, how they can
tap into innovative practices they already use, and
whether they should think about M&A. McKinsey
research suggests that 70 percent of suppliers
already expect more M&As soon—a sign that the
industry is likely to consolidate. Once a supplier
develops its product road map, it needs to become
specific: which nameplates, models, and services
will it offer, and to whom?
A fundamental shift is taking place across the
automotive value chain, and it’s happening faster
than many in the industry anticipated. The impact of
the current surge in vehicle electrification has fallen
heaviest on the shoulders of the supply base, which
faces high levels of uncertainty, shifting customer
plans, and the need to secure investment capital.
To win, suppliers should position themselves as
indispensable partners of targeted OEMs for critical
components and systems and back up their claims
with industry-leading competence.
9