10 minute read 18 Jun 2021
Female traveler enjoying iceland view from the car trunk

Why EVs don’t spell doom for the aftermarket

Authors
Philipp Schartau

Director, Advanced Manufacturing & Mobility, Ernst & Young LLP

Helps the global mobility ecosystem create scalable new business models.

Gianluigi Indino

EY-Parthenon Partner, Strategy, Ernst & Young LLP

Seasoned and pragmatic strategist. Helping investors and executive committees in the industrial, construction and mobility sectors.

10 minute read 18 Jun 2021
Related topics Automotive Transportation

Concerns are growing for some companies around the future of the EV aftermarket.

In brief

  • Despite fears to the contrary, the EV-era automotive aftermarket has growth potential for another decade at least.
  • Compensation for revenue loss in the aftermarket will slowly balance out due to component price increases.
  • Remanufacturing EV batteries may be the answer.

As electric vehicles (EVs) become increasingly mainstream and we speed toward the mandated end of new internal combustion engine (ICE) car sales in many key countries, concerns are growing among original equipment manufacturers (OEMs) and international aftermarket manufacturers (IAMs) alike that the wheels may be about to come off the lucrative aftermarket trade in parts and servicing.

These fears are neither irrational nor without historical precedent — parts for horse-drawn carriages or steam locomotives were once big business, and where are they now? Battery electric vehicles (BEVs) have much simpler powertrains, with a mere 20 or so moving parts compared with 2,000 in an ICE. They incur less wear and tear on components such as brakes and have little or no requirement for regular maintenance and oil changes.

With EV1 sales accelerating and predicted to account for around 56% of new light vehicle sales in Europe by 2030 the automotive world looks set to become inherently lower-maintenance.

Consumers may welcome no longer having to take the car in for its regular service, but it looks like bad news for the aftermarket — less money spent in dealers’ workshops or independent garages and fewer opportunities for OEMs and IAM distributors to sell spares. In this context, the estimates by some industry watchers that aftermarket revenues may plummet 30% or more2 seem only too credible.

But is all the doom and gloom really justified? Recent work by EY-Parthenon and Ricardo suggests that predictions of the death of the aftermarket may be somewhat premature. Despite all the fears to the contrary, there will be growth potential in the EV-era automotive aftermarket for another decade at least, fueled by the surprising longevity of some legacy revenues and the emergence of accessible new opportunities, particularly around the remanufacturing of vehicle batteries and electronics systems.

The research considers the French parts market in detail, but the overall trends should be equally valid for any comparable mature territory.

Woman charging electric car outdoors
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1

Chapter 1

More expansion than contraction

The aftermarket in France will continue to grow over the next decade.

The French aftermarket will continue to grow over the next decade, increasing in value by 1.4% annually, from €9.8b at present to €11.3b by 2030. This will still grow, despite the fact that we also identify a 35% overall drop in parts consumption by EVs compared with ICEs.

A few factors are at work in this seemingly contradictory finding:

  • EV sales may be growing fast but millions of ICE vehicles are already in operation with substantial lifespan remaining: EV penetration of overall fleets will consequently be more gradual than many expect.
  • By 2030, EVs (excluding mild hybrid, hybrid EVs and plug-in hybrid EVs, which are comparable with ICE in their aftermarket requirements) of all types will account for approximately 10% (4.74m units) of the total French fleet, and only 5% of vehicles over 5 years old. Meanwhile ICE vehicles will still account for 94% of the total fleet of between 10 and 14 years old and 100% of the fleet aged over 15 years (approximately 14.7m units).
  • In theory, while it is true that an all-EV fleet might result in a drop in component sales of 30% or more, it will likely be many years before that happens. In the meantime, there will still be a large fleet of aging ICE vehicles requiring the usual maintenance and repair associated with older cars.
  • Because EV penetration of overall fleets will be gradual, any losses in aftermarket revenues will occur slowly enough for component price inflation to compensate for much of the difference. In fact, our study suggests that the negative impacts on the aftermarket — EV penetration and the higher dependability of parts — will largely be counterbalanced by the increase of the size of the fleet, by its age and particularly by price inflation, the strongest tailwind.

Finally, revenues lost as a result of declining traditional activities will be compensated in part by fresh income from novel revenue streams associated with EV powertrain parts remanufacturing, primarily batteries but also reduction gears and e-axles. Such markets should be worth €50m to €60m by 2030.

Electric car charging station
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Chapter 2

Winners and losers

Some categories will accelerate and others will decelerate.

While the overall parts aftermarket will grow at 1.4% annually some categories’ performance will vary. Not surprisingly, sales of oil and wear parts (alternators, clutches, transmission belts, brake pads and disks, exhaust systems) will grow more slowly and in some cases even decrease.

On the other hand, sales of tires, already a large category in the aftermarket, will accelerate thanks to the greater weight of the EV and the specific tire profile and material requirements for EVs.

The fastest growing categories will be Advanced Driver-Assist Systems (ADAS), electric powertrain and electronics, although this will be from a small base.

Electric vehicles at the charging station
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Chapter 3

No cause for complacency

Aftermarket dealers cannot count on business as usual.

Does this mean that OEMs and their dealers, or IAM players, can breathe a sigh of relief and simply carry on with their aftermarket operations as they always have done? Definitely not.

The above is particularly true for dealers, who will be over-exposed to the penetration of BEVs in the fleet and will feel the pinch of reduced maintenance requirements earlier than independent garages.

The jury is still out on whether OEMs and their dealers will be able to protect their proprietary knowledge of the new EV technologies (especially software) and exploit it to lock drivers in for longer, but we posit that Original Equipment Suppliers (OES) holds more intellectual property (IP) than OEMs. Furthermore, the aftermarket outlook in Norway suggests that IAM garages will be ready to repair old EVs by the time the volumes of such vehicles arise. Overall, there is a significant risk for OEM dealers that growing EV penetration will amplify other trends and shift even more volume to the IAM players.

However, the relatively gradual EV penetration we describe presents both upsides and downsides to the aftermarket, including those hard-pressed dealers. EVs will require fewer consumable parts and need less maintenance, but they also present opportunities to develop new revenue streams and innovative products and services, particularly around battery pack remanufacturing.

We have discussed the complexity of repurposing and recycling old battery packs in previous articles: this latest research suggests that battery remanufacturing may be both a more accessible and more immediately profitable prospect.

We estimate that the battery remanufacturing market might be worth €40m by 2030. More importantly, we would expect that to rise to between €1b and €1.4b in a “steady state” full BEV fleet scenario (2040–50, hydrogen cells aside).

Offering gross margins of around 30% and a more familiar value chain, revenues for IAMs in France could total around €20m by 2030. That’s based on a conservative 50/50 OEM/IAM split — it is quite possible that OEMs will subcontract at least some battery remanufacturing work to approved aftermarket partners, so the “real” market share could be substantially more favorable to IAMs.

Electric car at the charging station
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Chapter 4

Battery black hole

What happens after the EV’s battery loses capacity?

The battery is the most expensive part of an EV, and its total failure or gradual decay can render an EV with many years of potential life remaining uneconomical to repair. Although failures are rare, lost capacity is ubiquitous — the performance of every EV battery naturally declines over time, just like the ones in an electric toothbrush or a mobile phone.

OEMs offer long battery warranties (typically eight years) to allay consumer fears, but what then? In 12 years, the battery of a compact urban EV will typically have lost 24% of its original capacity. It is likely to need replacing but is years out of warranty, and a new OEM battery might cost more than the car is worth.

As the number of older EVs rises, this battery black hole in the lifespan of EVs will become increasingly visible and painful, damaging consumer confidence at the same time as raising questions over just how sustainable EVs really are on a whole-life basis. These questions are unlikely to escape the eyes of regulators around the globe.

Remanufacturing may be the answer. It’s a process that involves using proprietary software to identify and replace specific dead cells in a spent battery rather than swapping out the entire pack for a new one. It’s more sustainable and can provide another seven years of life — and potentially seven more again after that — at a fraction of the cost of an OEM replacement. A typical remanufactured battery for a small urban EV might cost  €2,500, less than a quarter of the price of a brand new pack.

Woman traveller enjoying coffee time on roof of the car
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Chapter 5

An opportunity … but for whom?

It is not yet clear which types of players will be best placed to become battery remanufacturers.

Battery remanufacturing is not heavy industry, nor does it require a production line. Individual operators in a workshop can complete all the required operations on a battery on a single bench.

In contrast to the industrial-scale capital and infrastructure requirements of making new batteries from scratch, remanufacture is a process that is well within both the technical and financial reach of dealers or aftermarket players. It costs a relatively modest €1m–€2m to acquire the necessary equipment and set up a midsize remanufacturing workshop.

Our research suggests that by 2030 there will be sufficient demand to keep 8–11 such remanufacturing workshops busy in France, each with around 20 employees and servicing 1,500–2,000 batteries annually. In a hypothetical 100% BEV fleet scenario, those figures would rise to 80–110 workshops, each servicing up to 13,000 batteries annually.

However, it is not yet clear which types of players will be best placed to become battery remanufacturers.

OEMs, who co-design the battery packs for their vehicles, have the required engineering knowledge of batteries and are well-placed to use this knowledge to create rapid testing software, a key success factor in battery remanufacturing. But on the other hand, they are not well placed to source and collect spent batteries for remanufacture (although they are legally responsible for their end of life) since older vehicles are rarely serviced by dealers.

Battery manufacturers clearly also have the technical know-how but are even further than OEMs from sourcing spent batteries. Unlike OEMs, they might at least be seen by potential customers as free from conflict of interest.

IAM players (integrated garage chains of distributors), on the other hand, are more often in touch with old cars but have no easy access to the battery know-how.

Finally, dealers involved in used car sales could (or will have to) try and take a position in remanufacturing. They will probably be able to source spent batteries, but they will also have to offer a solution to customers who decide to keep their car for another few years instead of trading it in when the battery requires attention.

The early stages of battery remanufacturing in the US — as evidenced by groups such as Spears — suggests a possible operational model: third-party players obtain software IP licenses from multiple OEM/OES and set up multi-brand workshops. Licensing the software provides access to the technical know-how the third parties lack, while the multi-brand approach helps them to ramp up and break even with the initially limited volumes of batteries there are to remanufacture.

Despite these uncertainties, our work overall suggests that the rise of the EV could give it something of a welcome boost.

Summary

Battery remanufacturing is a practical opportunity that could help supercharge the performance of those players — both new and established — who are prepared to invest today, for their own brighter tomorrows.

About this article

Authors
Philipp Schartau

Director, Advanced Manufacturing & Mobility, Ernst & Young LLP

Helps the global mobility ecosystem create scalable new business models.

Gianluigi Indino

EY-Parthenon Partner, Strategy, Ernst & Young LLP

Seasoned and pragmatic strategist. Helping investors and executive committees in the industrial, construction and mobility sectors.

Related topics Automotive Transportation