EV growth is driving auto suppliers out of the market: report

The surge in demand for electric vehicles (EVs) — and declining interest in gas-powered cars — is driving car manufacturers toward greater consolidation, according to a new report.

That’s bad news for the broader ecosystem of parts suppliers, service stations and mechanics, who risk getting squeezed out of the market, according to a new report published on Tuesday from consultancy Deloitte.

The report predicts an epochal shift toward electric vehicles and away from gas-powered ones over the rest of the decade.

It predicts that this change will lead to a larger transformation of the car market — and the supply chains that feed it — that will outpace even the shift to EVs.

While EVs still account for a relatively small share of current production, consumer demand is shifting away from gas cars.

Fewer than two-thirds (62 percent) of consumers surveyed told Deloitte that they wanted a “traditional” internal combustion engine-powered car in 2023 — a “significant” decline from the 80 percent who wanted one five years ago. 

That means that while gas-powered cars still dominate both existing vehicle fleets and new vehicle sales, Deloitte predicts that demand for such cars — and the components that make them up — will decline steeply over the next five years.

The report predicts that revenue from the sale of internal combustion engines and related parts like fuel systems and exhaust systems will fall by nearly half (44 percent) by 2027.

At the same time, revenues from key electric parts like drivetrains and batteries are expected to surge by 245 percent, or nearly 2.5 times, over the same period — a number that far outstrips the number of vehicles expected to be sold.

These numbers are a bit misleading because the gas-powered market is so much larger than the EV market that a large growth in the percentage of EV sales doesn’t necessarily translate to a big change in the global car fleet — at least, not overnight.

But 1 out of 7 cars sold worldwide last year were EVs — up from 1 in 70 in 2017, according to a report by the World Economic Forum.

In terms of new cars sold last year, in China — the world leader — 1 in 4 was an EV, while in the EU it was 1 in 5 and in the U.S. 1 in 10. 

Standing against this trend toward lower-emission cars and trucks is the rising preference for both electric- and gas-powered sports utility vehicles (SUVs), the emissions from which reached nearly 1 billion metric tons in 2022, according to the International Energy Agency.

But while that rise in the uptake of big, heavy vehicles is countering national climate goals and driving the world closer to dangerous climate tipping points, the Deloitte report suggests that it isn’t enough to offset the declines in conventional car and truck manufacture — and the associated disruption in auto supply chains.

For manufacturers, suppliers and technicians, the biggest difference between electric and gas-powered cars and trucks isn’t the fuel they burn, but the relative complexity in their engines.

More than 100 moving parts in the typical internal-combustion engine drivetrain (the power system that drives a car) will be cut in the transition to EVs, according to Automotive News. 

That wide array of failure-prone parts has led to an enormous array of parts suppliers, auto shops and mechanics that work in tandem with major car manufacturers.

But as these largely mechanical moving parts, like mufflers and catalytic converters, are replaced by another 41 largely electronic components, those suppliers will watch their market share shrink.

The Deloitte report suggests that this trend will increase across all vehicles — not just EVs — as car manufacturers seek to cut costs by simplifying and integrating their supply chains. 

The “less complicated vehicle architectures may lead to fewer, more competitive opportunities for suppliers” to sell to major carmakers, the authors wrote in an accompanying statement.

The consulting firm suggests seeking markets abroad for internal combustion car manufacturers and suppliers.

Alternatively, firms can spin off gas-powered manufacturing chains into separate companies (as Ford did last year), which the consulting firm advises ultimately selling off to private equity.

For EV and battery manufacturers — and the relatively stagnant fields like brakes and suspension manufacturers — it forecasts a wave of mergers, as companies acquire or merge with their competitors as a means to keep driving up their share prices.

That likely means a wave of greater consolidation in auto companies, which will lead to many companies being gobbled up by larger rivals, the report predicted.