Study: Automotive Pathway to Net Zero

Transforming the global economy to achieve net-zero emissions by mid-century is an unprecedented economic challenge. The automotive sector is a cornerstone of the world's mobility systems and a key pillar of the global economy. At the same time, it is also a major contributor to climate change. Over the past few decades, car manufacturers have made significant improvements in the fuel efficiency of vehicles. However, the growing prevalence of larger and heavier cars, especially SUVs and larger engine sizes have counteracted these efficiency gains.

How can the net-zero targets be achieved?

Original Equipment Manufacturers (OEMs) know what they must do – reduce emissions along the entire value chain by 90% by 2050 at the latest – and have set reduction targets accordingly. However, what remains unclear is how the ambitious net-zero targets can be achieved in a cost-effective way while staying on the "below 1.5°C" path. To answer these questions, we modeled potential decarbonisation pathways to net-zero emissions for OEMs and their associated impacts on corporate carbon footprints, profit and loss (P&L), and the OEM corporate workforce.

There are relevant decarbonisation levers for OEMs to reach net-zero emissions. The carbon impact of the levers also depends on their interactions with one another. For example, applying the drive train shift as a decarbonisation lever is not as effective if it is not paired with green energy contracts in the use phase. Only when both levers are combined can their full potential be realised.

To help differentiate the effects of decarbonisation for companies, the Pathway to net-zero model provides relevant outputs related to carbon emissions, P&L and the OEM workforce:

Our pathway to net-zero model compared the carbon, P&L, and workforce impacts of different decarbonisation levers to achieve long-term emissions reductions in the most economical way, using six potential pathways in two climate scenarios.

Key results of the automotive pathway to net zero study

Our study delivered the following key takeaways:

• Achieving a net-zero future will likely require early and massive investments in all areas of the value chain, which could have a significant negative impact on the income statement and balance sheet of automotive companies in the short to midterm.
• EBIT (Earnings Before Interest and Taxes) margin will likely suffer due to green transformation, but recovery is foreseeable as companies capture additional market share and drive early decarbonisation.
• A decarbonisation strategy that is too slow will likely result in a loss of market share for battery electric vehicles (BEV). Therefore, rapid decarbonisation is the method of choice to maintain a strong market position and keep pace with emerging new Chinese/Asian BEV providers.
• Neither gains in BEV market share nor a solid current profit baseline can fully compensate for the negative midterm profitability due to the high cost of decarbonisation.
• The leap to decarbonisation will likely be achieved only with accessible electrification, so OEMs should quickly make the BEV product line more economical. New sources of revenue strongly linked to BEVs should be actively developed.
• A rapid return to profitability by OEMs may be critical for the suppliers that develop the technologies relevant to the transformation. Otherwise, these suppliers may focus on non-automotive businesses or file for bankruptcy due to the cost pressure of BEV production in the marketplace.
• A common approach and mutual support should be established between industry and regulators on how to achieve sustainable and profitable decarbonisation.

To prepare for the future, OEMs will likely need to evaluate their current operating models in light of external market conditions. In the face of uncertainty, discussing different options can allow us to map out clear paths to the future. This is by no means limited to qualitative observations. By using a structured, holistic decarbonisation model, we were able to show that quantitative insights into the P&L are possible, permitting us to provide sharp, qualitative insights.

In fact, this approach can help enable today's automotive decision-makers to take the necessary steps on an informed basis, shape the future of the industry and their own companies, and continue to play a significant role in 2030 and beyond. Now is the time to start on the pathway to net-zero.

Please download the full automotive pathway to net zero study here to learn more about the results.