As the rise of electric vehicles, self-driving cars, and shared mobility cause major disruptions in the auto industry, the question of whether automotive businesses will see an operating profit in the years to come remains unanswered.
Although the COVID-19 pandemic caused a decline in revenue for the entire global automotive industry by 11%, automotive industry profitability has been a concern long before. But with worldwide factory closures, declines in car sales, and massive layoffs, what can we expect the auto sector to look like in the following years? A change in development is needed for the aftermarket to win.
How Much Revenue Does the Auto Industry Generate?
The market size of the US automobile manufacturing industry in 2021 was measured at $82.6 billion, accounting for roughly 3% of the national GDP.
Industry experts predict that the market will see a compound annual growth rate of 7.22% as focus shifts to electric vehicle production to meet the increasing demand for more environmentally friendly transportation and adhere to new guidelines for emission standards.
What is a Good Profit Margin in the Auto Industry?
Between 2015–2020, the average profit margin for major automotive companies worldwide was nearly 7.5%.
Profitability varies from company to company, but generally, premium car brands, like BMW, will observe higher profit margins than general and budget brands. There are, however, exceptions to this rule, such as Volkswagen and Toyota, which both show potential for profitability.
New Sources of Profitability for the Automotive Industry
By 2035, 40% of industry profits are expected to be generated by emerging profit pools, such as battery-powered electric vehicles (BEVs), data and connectivity services, and on-demand mobility offerings. As this shift in profit pools strengthens, the growth in new car sales will weaken. So, how is the market developing?
New Car Sales
It is estimated that annual new car sales could witness an increase of 17 million units by 2035. The volume of sales, however, is anticipated to remain flat from 2025 onward as a series of positive and negative developments affect the market for new cars. Sales volumes will be supported by continued growth in China and other emerging markets. This growth, however, will be relatively slow, but revenue will see a boost due to an increase in vehicle prices.
Data and Connectivity
As BEVs and autonomous vehicles (AVs) make their way into the market, tremendous growth in revenue will be related to connectivity services—with a forecasted revenue increase of $4 billion in 2017 to $157 billion in 2035. Revenue from data and connectivity services will be produced through in-car advertisem*nts such as digitally-enabled services, subscriptions, and feature unlocks.
Component Supply
Value creation will shift from original equipment manufacturers (OEMs) to suppliers with the increase in BEV penetration. Subsequently, OEMs’ value share is expected to fall between 10% and 20% for BEVs by 2030—significantly less than what it is today for internal combustion engine-powered vehicles. Experts expect that new AV and BEV components will represent 50% of the component value of autonomous BEVs.
Aftermarket
OEMs’ aftermarket business will decline with the increased adoption of BEVs. The impact, however, will develop slowly as BEVs are only estimated to comprise 10% of the vehicles on the road by 2035.
On-Demand Mobility
The cost of on-demand mobility will significantly decline as today’s more affordable car-sharing and ride-hailing services continue growing in popularity. Many people will likely experience greater convenience from hailing an AV whenever they need it than using a personal car, precipitating a substantial increase in market share derived from AVs hailed on-demand, especially in cities.
Investment Challenges
Mobility technology will not increase in value if industry players do not invest in new growth areas. The automotive industry will need to invest more than $900 billion by 2030 and more than $2.4 trillion by 2035 in key areas, including AV technology, self-driving taxi fleets, charging infrastructure, and battery production facilities, if they plan to capitalize on the growth of mobility tech.
Another challenge facing OEMs is the need for increased investments across key growth areas while profits in their core business sectors are declining.
How Can We Prepare for the Automotive Future?
The only way for industry players to successfully adapt for automotive industry profitability and to the evolving market landscape is to shift their strategies to better prepare for an upcoming switch in profit pools. Each industry player has an opportunity for growth in their specific areas:
Auto Companies
Automakers will need to oversee their transition into new growth areas, particularly the expansion of electric models as we enter the EV era.
Suppliers
Suppliers should determine how they will participate in the market for AV hardware, software, BEV batteries, and components. From large corporations to start-ups, a diverse set of suppliers will offer a broad range of new technologies, including engine control units, batteries, navigation systems, AV software, and sensors.
On-Demand Mobility Companies
In addition to expanding their customer base and strengthening brand recognition, mobility companies must create relationships with local and national regulatory suppliers to adapt to the evolving market landscape. This sector will also need a new ecosystem to support the changing market, requiring new infrastructures such as traffic management control centers, pickup and drop-off hubs, and designated lanes. Local operations—including maintenance, parking, charging, cleaning, and roadside assistance—will be a critical source of competitive differentiation as these activities will consume a large portion of the shared costs.
Cities
Cities can actively transform the future of urban mobility by making technological advances in transportation services that will allow residents to cross towns more efficiently and safely.
It’s common to wonder what the automotive industry will look like in the coming years. With so many sectors involved, the potential for the automotive industry to face the biggest changes the industry has ever seen is strong, and the good news is that we can prepare for these coming changes.
The key thing to remember is that incumbents must avoid a false sense of security in terms of market development. Although industry revenue will continue to grow and profit pools will expand slowly at first, the sources of automotive industry profitability will experience dramatic shifts in 10 to 15 years. With this in mind, it’s important to note that these changes and challenges should not be left for future generations to handle because the time to prepare for the future of the automotive industry starts right now.
