Over the next 10 years, the global automotive industry is expected to face one of the most significant changes in its history – the replacement of internal combustion engine (ICE) vehicles with electric vehicles (EVs). EVs are seeing strong year-on-year (YoY) growth in some Asian markets (28% in South Korea and 76% in China), more than 40% in the U.S., and over 100% in certain European markets. We expect the industry will see double-digit compound annual growth rates (CAGRs) for the next decade.

Growth in EVs, especially in battery electric vehicles (BEVs) will likely lead to material changes in the automotive value chain and present significant challenges for existing automotive players and their margins. Many traditional auto incumbents will face declining revenues in core areas. On the other hand, we expect suppliers with a diverse range of product offerings and customer base, and those that focus on the EV must-have components (such as batteries and traction motors) to be more resilient than some of the original equipment manufacturers (OEMs). In our view, they will be the likely winners in this changing landscape.

Transition to EVs will likely lead to significant industry disruption

We expect the shift from ICEs to BEVs will spur three major disruptive trends:

  1. Increased bargaining power for suppliers. The number of components required for BEVs is estimated to be 30%-40% less than for ICEs, and the manufacture process tends to be more streamlined with fewer suppliers involved. As a result, the supply chain will likely become less tiered and winning suppliers should have more bargaining power with the smaller OEMs.
  2. Lower margins for both traditional OEMs and new EV-focused players. Prices for batteries and traction motors will likely continue to elevate EV manufacturing costs in the short term. BEVs may not benefit the margins of OEMs as much as those for EV battery makers and EV-specific component suppliers.
  3. Further industry consolidation. We have already started to see consolidation among suppliers and traditional OEMs, while some ICE-focused suppliers are going out of business. At the same time, BEVs have fewer barriers to entry (given not as many suppliers are involved, processes are streamlined and less complicated to coordinate) and will allow OEMs that have less legacy in ICEs and other types of hybrids to compete. For example, Korean automakers and some Chinese OEMs are starting to focus on pure BEVs. In addition, we expect new pure EV producers to enter the market.

The transition to EVs will likely vary across markets

We expect growth rates for the EV industry to diverge across markets, driven by regulation, government subsidies, infrastructure, energy fuel mix, local advantages and customer preferences. In countries such as Japan, where cars are most commonly used for shorter trips, hybrid electric vehicles (HEVs) perform well as an energy-efficient vehicle and could be preferred by consumers. In fact, HEVs could be the most eco-friendly option in countries where the fuel mix employed at electric companies is still heavily tilted toward non-renewable sources in the transition period.

Another factor that will affect EV transition and adoption is government policy. Some governments have provided incentives to discourage ICEs. The South Korean government is committed to supporting local automakers (and their ecosystem) to be first movers in the field of ecofriendly cars, particularly BEVs. As a result, EVs could gain market share more quickly. China, on the other hand, is providing strong policy incentives for EVs, while current auto OEM capacity is geared more toward HEVs, driven by consumer preference. The Biden administration is promoting EVs in the U.S. and there are several proposals in Congress, including reinstating the EV tax credit. In Europe, stricter regulations – a more aggressive CO2 emission target and tightening of controls on particulate matter, nitrogen oxide, and carbon monoxide emissions – will continue to provide a tailwind for the EV industry.

Identifying opportunities over the short and long term

For the next five to 10 years automotive companies will likely be forced to battle the headwind of a shrinking ICE market offset by rapidly increasing EV demand. As with other severe industry disruptions, this period of change will lead to winners and losers as competitive advantages built around the ICE fade while new entrants establish themselves and take market share.

While we expect this secular trend to lead to margin pressure for traditional players, it will also continue to create short-term investment opportunities. In 2021, the secular pressure on traditional OEMs' margins from EVs has been offset by competing factors such as pent-up demand and supply chain distortions caused by pandemic-related lockdowns. This has already caused a rapid recovery in margins, which we expect to continue through the rest of the year and into 2022.

Over the medium to long term, given fading concerns over the performance of EVs (such as battery durability, driving experience and platform buildout), growth will be driven by factors including incentives, regulations, subsidies, local advantages and customer preferences. Likely winners will include auto suppliers with a focus on EV-specific components that have built scale in key areas and increased bargaining power; traditional OEMs that are successful in transitioning and balancing between ICE and new energy vehicles (including EVs); and new entrants that are able to scale up fast. Investors will need to be alert to these factors to identify emerging winners and losers, and actively reposition their portfolios to take advantage of these opportunities.

For details on our outlook for the global economy in the year ahead and the investment implications, please read our latest Cyclical Outlook, “Inflation Inflection.”

The Author

Yishan Cao

Credit Research Analyst

Lillian Lin

Portfolio Manager, Investment Grade Credit

Akimi Matsuda

Credit Research Analyst

Charles Watford

Credit Analyst, Europe



PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH- . The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.

All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO.

China’s Decarbonization Goal Won’t Dent its Appetite for Commodities Any Time Soon
XDismiss Next Article