Automakers face business model hurdles with electric vehicle transition, says McKinsey

Automakers are going to need new business models as they push electric vehicles because battery economics don't support profitability and may not for years.

As Ford, GM and others chase first-mover Tesla with electric vehicles, McKinsey published a report looking at the hurdles--supply, demand and strategy--holding back the electric vehicle market. The report, to be outlined at CES 2017, noted the following:

• 30 percent to 45 percent of vehicle owners in the U.S. and Germany consider an electric vehicle purchase today.
• But consumers are worried about range.
• Automakers may not have the capital to invest in electric vehicles when they also have to focus on autonomous systems, connected cars and new business models.
• Battery costs have fallen 80 percent from 2010, but electric vehicles still cost more than traditional ones.
• Automakers will need new business models to make money as the next wave of electric vehicle buyers will have lower incomes.

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The McKinsey report is worth noting given that electric vehicles will be critical as part of a connected experience from the home to city. Indeed, the auto industry is facing the most daunting transition in its history. McKinsey noted:

For many in the industry, the transition from internal combustion engine to electrified powertrains is the signature challenge of their professional careers. In addition to the profound shift in the technology paradigm, the challenge is even more daunting given the market forces and resource constraints.

In other words, the auto industry remains one of the more interesting digital transformation case studies. The big questions about the market include:

• What price point will be needed to drive adoption?
• What business model is needed to sustain the automotive industry?
• And are these companies ready to navigate various technology and business challenges?

On that first question, the price point boils down to one word: Batteries. McKinsey said:

Unfavorable battery economics will remain a profitability barrier for the next two to three product cycles. Although battery prices have declined by ~80% since 2010, the 2016 estimated pack cost of ~$227/kWh means that a 60 kWh battery become a $13,600 component of the car. This does not include additional systems such as e-motors, high voltage wiring, on-board chargers, and inverters. Given current system costs and pricing ability within certain segments, companies that offer EVs face the near-term prospect of losing money with each sale.

Once you read McKinsey's report, you quickly realize the logic behind Ford's move to create a company focused on alternative business models. Here's a look at McKinsey's recap of potential electric vehicle business models.

What's unclear is whether incumbents can navigate the change. What McKinsey calls "e-readiness" will require a lot of capital, data, processes, strategy and talent across multiple disciplines.