A Double Whammy for Automakers

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By: Rupak Bhattacharya

Over the past decade, electric vehicles have captivated the public. The combination of a sustainable fuel source, sleek new designs, and billions in government subsidies has stirred up a frenzy of excitement rarely seen in the car industry. But one group, unsurprisingly, isn’t quite as excited: auto executives.

And small wonder. The transition from internal-combustion engines to electric has been arduous and capital-intensive—without even taking into account the recent union action in Detroit resulting in higher labor costs. The bottom line: over the next few years, costs will rise for a product that still—despite the fanfare—sells in relatively low volume. Indeed, EV market share in the US hovered around 7 percent in the first half of 2023 (and 15 percent globally). One major auto manufacturer even announced plans to scale back $12 billion in planned EV investments after posting a third quarter loss in its EV unit. “It’s rarely easy to be first in the auto industry,” says François Mallette, a managing director at L.E.K. Consulting and coleader of its automotive and mobility practice. “They’re trying to simultaneously make money and fund this massive cost of development.”

Of course, many industries go through major transitions, but experts say the auto industry’s is particularly acute, and raises a challenge that all leaders face: whether to sell for the long term at the expense of the short term. Experts say growing demand from younger consumers represents the future carrot that senior executives are dangling in front of stakeholders. Millennials have the highest level of EV consideration (72 percent) of any generation, according to a recent survey from J.D. Power. But for now, the onus is still on leaders to manage expectations via frank communication around the potentially lean times ahead. Honesty and transparency are key for leaders, says Bradford Marion, a Korn Ferry senior client partner and global sector leader of its Automotive practice. “Particularly when you are in the public eye, both as a public company as well as with your employees,” he says.

For the auto executives, there’s a sliver of a silver lining: despite unions winning higher wages, labor costs for EV production may still be lower in the aggregate. One report estimates that 40 percent less labor is required to manufacture an electric car than a gas-powered one. Another factor that may lower costs even further: if automakers decide that they can’t sustain the salary expectations of workers, they may simply decide to double down on their investment in automation.

Setting aside capital and labor issues, the infrastructure that EVs depend on is still far from being completed. At last count, the US had about 130,000 charging stations, for example, far below what would be needed. The US government has allocated $7.5 billion to build another 500,000 stations by 2030.

Manufacturing enough battery packs is another infrastructure need. In all, there are about 30 battery plants in operation or under construction in the US. Experts say persistence from leaders and patience from stakeholders is the only way forward.

“Battery plants are nine- and 10-digit investments,” says Emile Santos, a managing director at L.E.K. Consulting. “It will take time to eventually recoup that.”