The future of mobility:

Transforming to be
ahead of the opportunity

September 2022
 The future of mobility:
Transforming to be
ahead of the opportunity

September 2022

Authors
Jhankar Basu
Brajesh Chhibber
Rajat Dhawan
Shivanshu Gupta
Srikant Inampudi
Ramesh Mangaleswaran
Acknowledgements

We thank the Automotive Component Manufacturers Association of India (ACMA) for inviting
our perspective on the future of mobility in the context of the potential disruptions in this
space, on the occasion of the 62nd annual conference organized by ACMA.

Our sincere thanks to the ACMA leadership, particularly Sunjay Kapur, Shradha Suri,
Vinnie Mehta and the ACMA Secretariat for supporting us through this effort. Several industry
leaders contributed valuable perspectives as we developed this report, and we are grateful
for their guidance.

The report was made possible through the efforts of the McKinsey working team of
Samarth Agarwal, Rohan Sahni and Gandharv Vig. Avneet Choudhary, Gourav Ganguly,
Mohit Khatri and Chitradeep Sen also extended valuable support on much of the analysis
shared in this report. We thank Anamika Mukharji from the Client Communications team and
Rohan Moorthy, Fatema Nulwala and Raksha Shetty from the External Communications
team for their editorial expertise and guidance. We also thank Anand Sundar Raman and
Gurpreet Singh Bhatia from the Visual Aids team for the design of this report.

Authors

Jhankar Basu
Associate Partner

Brajesh Chhibber
Partner

Rajat Dhawan
Senior Partner

Shivanshu Gupta
Senior Partner

Srikant Inampudi
Senior Partner

Ramesh Mangaleswaran
Senior Partner

The future of mobility: Transforming to be ahead of the opportunity iii

Contents

Executive summary 1

The bend in the road: Disruptions and new possibilities 5

The transformative choices ahead: Strategies to ride the EV disruption 13

Stakeholders as enablers in this transformation agenda 25

Executive summary

The global automotive industry has demonstrated great resilience over the last two years.
The pandemic and, more recently, the war in Ukraine, exacerbated the slowdown in global
sales that had set in before COVID. However, despite near-term supply disruptions, the
long-term prospects for the industry remain strong. Global sales of passenger vehicles are
expected to rebound to peak levels by the middle of this decade. Emerging markets such as
India will lead the way, along with China.1

While there is cause for optimism, the push for clean mobility and corresponding growth in the
adoption of electric vehicles (EVs) could disrupt the automotive landscape over the course of
this decade. Europe and China are expected to be frontrunners in this shift, with the rest of
the world following suit eventually.

In India’s case, the total cost of ownership is likely to be more attractive for electric two- and
three-wheelers2 (E2W, E3W), than for passenger or heavy commercial vehicles (PV and HCV).
Sales of new E2Ws and E3Ws could grow to 50 percent and 70 percent respectively by 2030.
Internal combustion engines (ICE) will continue to dominate the Indian PV and HCV landscape,
with slower electrification. Electric PVs and HCVs are expected to account for 10 to 15 percent
and 5 to 10 percent of new vehicle sales respectively by 2030.

According to early estimates, a transition to EVs could impact up to 50 percent of ICE bill
of material (BOM) components. This could disrupt the portfolio of incumbents in traditional
ICE component categories. This disruption could be an opportunity too – creating multiple
whitespaces for companies to cater to the new EV BOM needs and generate avenues to serve
markets outside India in both ICE and EV component categories. These will represent new or
expanded value pools, which players can capture by pivoting and diversifying with agility.

For Indian automotive component manufacturers to adapt to these shifts, we have outlined
three broad strategy frameworks which they could customize to their unique starting points,
capabilities and challenges:

— Continuous improvement and expansion in traditional ICE play within India – a USD 35 to
45 bn opportunity by 2030

• Broaden across opportunities within the automotive market, e.g., 2W/3W suppliers
(facing early electrification) pivoting into segments that are going to gradually electrify
(e.g., PV/HCV).

• Capture opportunities in automotive-like adjacent sectors, e.g., construction and mining

equipment, rolling stocks for railways/metros, defence sector, etc. – all of which are
growing and have a sizable market.

1
Unless otherwise indicated, all figures for the automotive industry and electrification are projections by the
McKinsey Center for Future Mobility, detailed in Chapter 1 .
2
Global Two-wheeler Outlook 2022, Frost & Sullivan report,
https://store.frost.com/global-two-wheeler-outlook-2022.html

The future of mobility: Transforming to be ahead of the opportunity 1

 — A global expansion within current ICE categories – a USD 35 to 50 bn opportunity
by 2030

• Expand exports on the strength of shifting supply chains, as companies seek greater
resilience by diversifying beyond traditional geographies. Indian companies could
capture opportunities in areas where India has traditional advantages and exports
are growing faster than competing suppliers from other geographies. These include
categories such as forgings, castings, gear box parts, suspension parts, axles, wheel
rims, etc. 3

• Make the most of the global component manufacturing rebalancing opportunity due
to electrification. With faster EV penetration, the US and EU markets will likely lose
economies of scale to locally manufacture traditional component categories (forgings,
castings, etc.) due to low demand volumes and high variety. India-based players could
serve these markets, leveraging the lower-cost labour advantage.

— Innovation in newer opportunities and a global play – a USD 25 to 40 bn opportunity

by 2030

• Occupy emerging white spaces in EV categories, e.g., supply chain of battery cell,
battery pack manufacturing, e-motor supply chain, e-axle/reducer, electricals and
electronics for EVs and charging infrastructure.

• Expand into downstream service use-cases and their delivery, especially connectivity,
where India has advantages to make a global play – software capabilities, application
engineering capabilities and lower cost base.

This transformation to stay ahead of upcoming disruptions could be a success for the Indian
automotive industry with the concerted support of all stakeholders.

— The government could spur local manufacturing and exports through a few
specific actions:

• Provide incentives targeted at the respective stakeholder groups, e.g., purchase-

linked export-incentives for International Purchase Offices (IPO), purchase-linked
incentives for original equipment manufacturers, export incentives for component
manufacturers, etc.

• Support companies to access technology through enabling tie-ups and joint ventures,
and further incentivizing investments in innovation.

• Institute trade agreements (e.g., FTAs) and reforms.

— Specifically for tapping the exports opportunity, a dedicated multi-stakeholder task force
(comprising ACMA, SIAM and the Government of India) could systematically enable and
empower industry players, e.g., through OEM connects, cross-border M&A, shifting of
manufacturing, policy support, trade agreements, etc.

— The supplier community could embrace and invest in new technologies, quickly upskill
their managerial and labour force, and drive localization by forging strategic partnerships
and taking advantage of government incentives.

Disruptions, especially through the electrification of mobility, are inevitable. While this
disruption brings some headwinds, it also presents new possibilities for Indian suppliers to
expand both domestically and in global markets, in traditional categories and in newer EV
segments. Indian auto component manufacturers could benefit from dedicating management
bandwidth and resources to proactively harness these opportunities in the future of mobility.

3
Based on analysis of 6-digit EXIM (HSN code) data

2 McKinsey & Company

1 The bend in the road:
Disruptions and
new possibilities
Global automotive sales could regain their historic peak by the mid-2020s, led by China and
emerging markets, including India. These figures had peaked in 2016, then slowed down due
to a supply chain shift, and and subsequently been beaten down by the COVID-19 pandemic. 4
As the sales figures start to climb again, it will be important for players to anticipate and
prepare for disruptions caused by the gradual adoption of electric mobility – which could
sweep different geographies at different speeds. 5

A gradual resurgence to historic sales peak

Multiple case scenarios developed by the McKinsey Center for Future Mobility project that
global automotive sales will return to their historic peaks by the mid-2020s (Exhibit 1). China,
along with emerging markets (including India) is expected to lead this resurgence, whereas
developed markets including the US and Europe are past their peaks already.

The projected growth of the global two-wheeler (4 to 5 percent CAGR) and three-wheeler
(2 to 3 percent CAGR) markets over this decade will scale new heights in sales, largely in high-
growth markets such as South Asia, ASEAN, Africa and Latin America.6

The rise of electric mobility – disruption and opportunities 7

Even as global automotive sales see a resurgence, the industry could expect a disruption from
the upswing in electric mobility, primarily due to four factors:

1. A drop in battery costs will make total cost of EV ownership more attractive, e.g., the
production cost of the NMC (Nickel, Manganese and Cobalt) cell could fall at 4 percent
YoY till 2025.

2. The development of the battery cell manufacturing supply chain will ensure more than
sufficient production to meet demand, e.g., by 2030 demand could be for 4,500 GWhr
whereas the potential supply could be at 5,600 GWhr. Lithium availability will not be a
bottleneck in the mid-term. Supply challenged elements will be Cobalt and Nickel only,
with potential mitigation from the use of iron-phosphate chemistries.

3. The world will see growing consumer demand: Consumers appreciate a broad palette
of EV advantages and new EV segments are emerging to meet this demand – over 20 new
E2W models are expected to launch before 2025.

4
McKinsey Center for Future Mobility (Jun 22), IHS Markit (actuals)
5
McKinsey Center for Future Mobility – McKinsey Electrification Model, IHS Markit
6
Global Two-wheeler Outlook 2022, Frost & Sullivan report,
https://store.frost.com/global-two-wheeler-outlook-2022.html
7
Unless otherwise indicated, all numbers and projections in this chapter are insights from the
McKinsey Center for Future Mobility

The future of mobility: Transforming to be ahead of the opportunity 5

Exhibit 1

Global PV sales could see a resurgence, led by China and other emerging markets.
Light vehicle sales1 globally, in million vehicles

Historic peak – PV Actuals Achieved commitments Further acceleration Current trajectory Fading momentum

Scenario description (based on net-zero commitments)

Fading Momentum Current Trajectory Further Acceleration Achieved Commitments
Fading momentum in cost Current trajectory of EV/AV cost Further acceleration of transition Net-zero commitments achieved
reductions, climate policies and decline continues, however driven by country-specific by leading countries through
public sentiment will lead to currently active policies remain commitments and technology, purposeful policies, followers
prolonged dominance of fossil insufficient to close gap to net-zero though financial restraints remain transition at slower pace HALF
private transport

40

2017 2018
30

20
2019
2016

10

0
2015 20 25 2030 2015 20 25 2030 2015 20 25 2030 2015 20 25 2030

2 3 4

1. GVW <3.5 t.
2. EU incl. European Union, United Kingdom, Switzerland, Iceland, Norway.
3. Mainland China and Taiwan.
4. All other countries not incl. in EU, USA, China & Taiwan.

Source: McKinsey Center for Future Mobility (Jun 22), IHS Markit (actuals)

6 McKinsey & Company

 4. A mix of government incentives (such as FAME and PLI) and regulations (such as
CAFÉ norms) could influence the mix of powertrain technologies by incentivizing EV
vehicle production and sales. In large geographies like the US, EU and China, regulators
are already setting steep targets for EV adoption based on the respective government’s
net zero targets. This is also likely to prompt greater electrification of mobility, with the
near-total electrification of new car sales in the EU and China by 2035. The US could
attain the same level possibly in the subsequent eight to 10 years (Exhibit 2).

Exhibit 2

Steep regulatory targets for EV adoption could mean near-total electrification of new car
sales in the EU and China by 2035.
EV (BEV, FCEV, PHEV) sales in percent of new passenger vehicle sales 2021 end update

Global EV adoption scenarios ~xx% BEV % in xEVs Net Zero Accelerated Reference

China EU US

~80% ~90% ~98% ~50% ~90% ~90% ~85% ~90% ~95%

100% 100%

~90% ~85%
~80%
~75%
~70%
65%
~60%
~50% ~50% 50%
~40%

~33%
HALF
10%
6%
3%

2020 2030E 2035E 2020 2030E 2035E 2020 2030E 2035E

Scenario description

Net Zero Accelerated Reference

Net-zero commitments achieved by Most likely scenario in which Trajectory of EV penetration in which
leading countries through purposeful consumer adoption will exceed country-specific targets will be met,
policies, followers transition at country-specific regulatory targets, however insufficient to close gap to
slower pace however insufficient for net-zero net-zero

Source: McKinsey Center for Future Mobility – McKinsey Electrification Model, IHS Markit

The future of mobility: Transforming to be ahead of the opportunity 7

 In India, smaller-sized vehicles will be on the fast lane to electrification (Exhibit 3), as electric
two- and three-wheelers (E2Ws and E3Ws) are more effective on total cost of ownership.
EV adoption in passenger vehicles (PVs) could lag behind these smaller vehicles since PVs
require larger batteries, meaning a higher cost difference and longer pay-back periods. 8
The widespread adoption of electric HCVs (heavy commercial vehicles) is expected to take
the longest amount of time, given it is expected to take the route of hydrogen fuel cell EV
technology - with higher fuel cell costs and hydrogen costs at the nozzle.

Exhibit 3

India is likely to see more electric 2W and 3W penetration than 4W and heavy CVs.

EV (BEV) sales in percent of new vehicle sales in India Aggressive case Base case
2022 update
adoption scenario adoption scenario

2-wheeler 3-wheeler 4-wheeler Heavy CVs

100%

~85%
75%

60%
~60%

~40%
38%

~30%

15%
6.5% 6% ~10%
10% HALF
1.5% 0.6% 2% ~5%
~3% 0%
2021 2025E 2030E 2021 2025E 2030E 2021 2025E 2030E 2021 2025E 2030E

Overall ~5% ~20% ~6% ~10%

CAGR
2021-30

EV ~60% ~60% ~45% ~60%

CAGR
2021-30

Source: McKinsey Center for Future Mobility – EVOLVE EV forecast tool

8
Based on the BOM analysis of a leading Indian auto original equipment manufacturer in 2W/3W/4W.

8 McKinsey & Company

 New realities for automotive suppliers in an era of electrification
The rise of electrification across vehicle segments could directly impact the bill of materials
(BOM) of vehicles. This could cause value to migrate across component categories, at
different projected rates across vehicle segments, given that the uptake of E2Ws and E3Ws is
expected to be higher than that of E4Ws or electric HCVs. Engines and associated powertrain
components like fuel systems and exhaust systems will lead the transformation, and be
replaced by battery, e-motor, e-axle/reducer and power electronics. Around 75 percent of the
BOM in battery EVs consists of entirely new components (Exhibit 4).9

Exhibit 4

A rise in BEV adoption could disrupt the vehicle bill of materials.

% of costs (100% = Total materials cost), India estimates 2021 end

ICE Vehicles

31% 25% 21%

Engine + Gearbox BIW + Interior + Exterior Chassis & Suspension

16% 7% 100%
Exhaust systems E&E Total materials cost

BEV Vehicles Components different

from ICE vehicles

50% 15% 14% HALF

Varies by
OEM’s in-house Battery BIW + Interior + Exterior Motor + MCU
capability vs
outsourcing,
and supply
chain depth

11% 10% 100%

Power Elec. + Cooling Chassis & Total materials cost
Suspension

Note: Landed cost analysis restricted to ex OEM; Duties, subsidies, dealership markups, taxes excluded from analysis.

Source: BOM analysis of 4W from a leading Indian auto OEM

9
Based on the BOM analysis of a leading Indian auto original equipment manufacturer

The future of mobility: Transforming to be ahead of the opportunity 9

 EV adoption would affect the entire list of component categories – across plastics and rubber,
pressing and fabrication, electronics and electricals, forging and machining, castings and
proprietary components, and particularly component categories that are more focused on
engine and powertrain (including engine auxiliaries), e.g., forgings, castings, etc. This impact
could, however, also result in various additional opportunities for Indian auto component
manufacturers, creating a larger value pool for them (Exhibit 5).

Exhibit 5

While electrification could disrupt traditional ICE categories, it also creates new
opportunities and value pools.
Estimates Non-exhaustive xx Approx % of ICE BOM1 >85% of BOM value impact in EV2 <5% of BOM value impact in EV2

2W 4W
Component categories 4
Engine 3
Non-engine 3
Engine3 Non-engine3 New opportunities in EVs
Vehicle BOM opportunities:
Plastic & Rubber 4% 8% 1% 10%
Ÿ EV battery cells
Ÿ EV battery pack and BMS
Press & Fab 4% 23% 6% 13% (excl. cell)
Ÿ E-motor
Electronics & Electricals 9% 5% 5% 17%
Ÿ Converter and on-board-
charger
Forging & Machining 7% 5% 5% 5% Ÿ E-axle/reducer
(transmission)
Proprietary5 10% 5% 14% 8% Charging opportunities:
Ÿ Charging infrastructure
Castings 13% 7% 10% 5% (manufacturing &
installation)
Ÿ Swapping infrastructure
Total 47% 53% 42% 58%
Ÿ Charging services
HALF
100% 100%

1. Modelled on the analysis of a typical 2W (scooter) & 4W (diesel car) BOM – used to represent the broader 2W/4W market
2. % of BOM value impact in EV represents BOM % of traditional ICE components that would disappear in EVs (assumed in-wheel hub motor based E2W)
3. Engine represents powertrain related components including engine, engine control, exhaust, fuel systems, transmission; Non-Engine represents non-powertrain
related components including BIW, brakes, suspension, steering, wheels, etc.
4. Component categories represented either by manufacturing process/capabilities or by material type used
5. Proprietary components require unique capabilities for suppliers including technical know-how, specialized materials, etc, having a high BOM contribution instead of
the underlying manufacturing process itself

Source: BOM analysis of 2W & 4W from leading Indian auto OEMs

The proliferation of EVs could expand the overall BOM, creating a larger value pool for Indian
automotive component manufacturers. New avenues could include EV battery cells, EV
battery pack and BMS (excluding cell), e-motor, converter and on-board-charger, e-axle/
reducer (transmission), and ecosystem opportunities, such as charging infrastructure
(manufacturing and installation), battery swapping infrastructure, and charging services.

Automotive component manufacturers could see the rise of electrification as a

disruption or as a new opportunity, making a strategic choice to benefit from a dynamic,
evolving landscape.

10 McKinsey & Company

2 The transformative
choices ahead:
Strategies to ride
the EV disruption
Strategic choices could help Indian auto component manufacturers turn the disruption to their
advantage. The six broad opportunities ahead translate to three strategic themes (Exhibit 6).

Exhibit 6

Three strategic choices for companies to tap new opportunities in a disrupted industry.
Early estimates

Incremental revenue pool

Opportunity description creation till 2030, USD bn

‘Continuous A Expand across opportunities within automotive

15–20
1

improvement market in India

and expansion’
in the traditional
ICE play in India
B Capture opportunities in adjacent, automotive-like
20–25
2

sectors in India

‘Going global’ C Expand exports: Leverage tailwinds due to shifting

within current supply chains
categories
35–50 3, 4

D Expand exports to OE/ Tier 1/ aftermarket: Tap the

rebalancing of global manufacturing due to Electrification

‘Innovation’
in newer
E Diversify into new EV categories 8–10 5

opportunities
and a global play
HALF
F Expand into downstream service use-cases and their
delivery, esp. connectivity 20–30 6

1. Opportunity size computed for ICE sales across India passenger vehicle (4W) & heavy commercial vehicle (HCV) markets, assuming representative BOMs & base case
electrification scenarios.
2. Across 5 adjacent sectors - Construction & Mining Equipment, Power Generation – Diesel genset, Farm Equipment – tractors, Railway Equipment – rolling stock,
Defence Equipment.
3. Computed for high and medium opportunity segments for India, wherein India – China CAGR > 2%, and assuming India would achieve half of China’s 2021 market
share by 2030 & category-wise export market size to remain constant.
4. Based on base case electrification scenario (current trajectory) for US & EU markets. Assuming E/G BOM (~47%: engine, transmission, gearbox, exhaust) to migrate to
exports (50% of these components will be incrementally sourced through imports in US & 60% in EU); India to capture 25% - 40% of this incremental export's
opportunity for the shrinking ICE markets in US and EU.
5. Assuming 20%-25% CAGR from 2025-2030 in the market size for the EV value pool beyond the INR 26.2k Cr (USD 3.28 bn) market size projections for 2025.
6. Assuming India can uptake 8-10% market share in the connectivity value pool by 2030, given the strength in IT / technology.

The future of mobility: Transforming to be ahead of the opportunity 13

 Continuous improvement and
expansion in the traditional ICE play
A. Expand across opportunities within the automotive market in India
E2Ws and E3Ws are projected to rapidly grow in India, which would affect suppliers serving
these vehicle types. Suppliers could address this concern by pivoting their capabilities to
expand into segments that are projected to continue growing, such as the traditional ICE
passenger vehicle segment. For example, casting and forging – component categories
projected to shrink/grow minimally in the 2-wheeler market with growing electrification – are
expected to grow in the PV and CV market (Exhibit 7).10 Overall, while ICE for 2Ws is projected
to de-grow at around 4.5 percent per annum till 2030, 4W ICE is expected to grow at around
4 percent per annum in that time.

Exhibit 7 Opportunity A

2W suppliers could pivot to growing 4W market in India to mitigate headwinds

from electrification.

Aggressive scenario Base scenario Key categories to pivot for 2W

component manufacturers

2W new sales India 2W 4W

75.0% FY30 base-case2 FY30 base-case2

Component (60% EV penetration3) (10% EV penetration3)
categories1 CAGR 21-30 CAGR 21-30
~60%

Plastic & Rubber 3.8 5.6

1.5% Press & Fab 1.7 5.4

2021 2030E
Electronics &
0.3 5.3
4W new sales India Electricals

Forging &
0.2 5.2
Machining

Proprietary -0.7 4.9

14.0% HALF
0.6% ~10%
Castings -1.8 5.0
2022 2030E

1. Component categories represented either by manufacturing process/capabilities or by material type used.

2. Modelled on the analysis of a typical 2W (scooter) & 4W BOM; 4W (diesel car) BOM estimated by scaling long tail of BOM (bottom ~14%) across
categories in same proportion.
3. E2W & E4W penetration at 60% & 10% is as per the base case projections of the McKinsey electrification model for India.

Source: McKinsey Center for Future Mobility, BOM analysis of 2W & 4W from leading Indian auto OEMs

10
McKinsey Center for Future Mobility, BOM analysis of 2W & 4W from leading Indian auto OEMs

14 McKinsey & Company

 B. Capture opportunities in adjacent, automotive-like sectors in India
At least five automotive-type adjacent sectors – construction and mining equipment,
power generation, farm equipment, railway/metro rolling stock, defence equipment – are in
ascendancy due to their unique drivers for growth (Exhibit 8). These present opportunities for
automotive suppliers as electrification disrupts the core automotive sector.

Exhibit 8 Opportunity B

Auto suppliers could deploy their capacities in multiple adjacent sectors with a significant
market size in India.
Non-exhaustive

CAGR for Est. industry

Adjacent ICEs till FY30 size in FY21
sectors Percent USD bn Drivers of growth

Coal consumption to grow at INR 100Tn National

~4% p.a. to meet rising energy Infrastructure Pipeline (NIP)
7-8 ~5 demand
Construction
& mining
Push for ‘Make-in-India’ to Government measures to
equipment
drive manufacturing & mining improve liquidity of NBFC sector
at ~8-10% p.a.

Construction sector expected Data center market expected to

to grow at 9-10% grow to 2X+ between 2021-27
5-6 ~1
Power
Healthcare to grow to 3X in Need to improve DISCOM health
generation –
10 years; hospitals to grow & infra to overcome continued
diesel genset
13-14% p.a. power outages

Improved access to finance for High manufacturing costs in

farmers through NBFCs US/Europe
5-6 ~11
Farm
High-cost & poor availability of Increasing MSP prices & higher
HALF
equipment –
tractors labour driving mechanization demand of food

17,000 km of new tracks to be Diamond Quadrilateral network

built by 2025 of high-speed rail: connecting
7-10 ~2.5 major metros
Railway
equipment – Rising passenger & Dedicated freight corridor: Six
rolling stock
freight traffic with increasing high-capacity, high-speed
urbanization & rising incomes corridors

Defence Acquisition Opening defence R&D for

Procedure, 2020 (DAP 2020): industry, startups, and academia:
7-10 ~12 minimum 50% indigenization ~25% defence R&D budget
Defence
equipment
Increase in FDI and Innovations for Defence
encouraging technology Excellence (iDEX) scheme
transfer up to 100% involving MSMEs & start-ups

Source: Arizton Advisory (https://www.arizton.com/market-reports/india-construction-equipment-market), PS market research

(https://www.psmarketresearch.com/market-analysis/india-diesel-genset-market), ICRA (https://www.imarcgroup.com/farm-agricultural-equipments-industry-india),
Indian Railways Budget 2020-21, IBEF (https://www.ibef.org/industry/defence-manufacturing)

The future of mobility: Transforming to be ahead of the opportunity 15

 Adjacent to automotive manufacturing, these sectors have a similar (even higher)
concentration of traditional component categories like forgings/castings
(Exhibit 9). Disruptions in these sectors open doors for automotive suppliers to challenge
incumbent companies:

— Evolving regulatory measures, such as emission norms for construction vehicles and
tractors (CEV, TREM), and other safety norms require companies to innovate. Automotive
manufacturing companies entering these spaces could disrupt incumbents by bringing
better innovation, faster.

— Changing architectures (e.g., fuel injection in smaller tractors, CNG migration in power
generation) could require suppliers to develop new technologies, again creating avenues
for new entrants to carve a niche for themselves.

— Automotive suppliers could benefit from the growing investments for ‘Make in India’ and
new PLI incentives to boost the MSME sector.

Exhibit 9 Opportunity B

Automotive-adjacent sectors present a significant market size for component categories

affected by growing electrification.
Estimates

Component category: ~BOM % share

Adjacent sectors Castings Forgings Press & fab Electronics Inj. Molding

Construction &
mining equipment 30 35 15 5 15

Power generation –
diesel genset 30 40 25 2 3

Farm equipment –
tractors 25 35 15 10 15

HALF
Railway equipment –
rolling stock 8 30 40 2 20

Defence
equipment1 30 35 102 20 5

1. Defence equipment represented by a land system example, i.e., battle tanks.

2. Proprietary processes (laser cutting, plasma, water jet etc.) are required for defence equipment manufacturing given special material usage such as Titanium alloys,
etc. and a lower scale of manufacturing.

Source: Expert interviews

16 McKinsey & Company

 Going global within current categories
C. Expand exports on the back of shifting supply chains
Over the last few years, geopolitical forces have impacted global trade relations across
key markets such as the US, EU and China. Most recently, the pandemic and the war in
Ukraine also disrupted the global supply chain. As major companies seek greater resilience
by diversifying beyond traditional geographies, Indian component manufacturers could
step in as an alternative, growing their presence across categories and establishing a
competitive advantage.

An analysis of non-nearshore auto-component imports into the US and Europe indicates

that China, a leading supplier to the world, has more than five times the market share of India.
A closer look indicates that Indian exports have begun to grow at a much faster rate in select
categories, such as gearbox parts, wiring harness, brakes/clutches and bearings (Exhibit 10),
especially over the last few years. With more supply chain shifts, a significant share of the
migrating business could come to India, which constitutes a large opportunity.

Exhibit 10 Opportunity C

Indian suppliers could further expand exports in categories where India has been growing
at a fast pace.
2021 EXIM data (vs 2016) High opportunity components for India Moderate opportunity components for India
(China share >25% | India CAGR > China CAGR ) (China share <25% | India CAGR > China CAGR)

Category Imports1 size, $ bn China share, percent India share, percent

Engine - Fuel system & exhaust parts 42.6 31 4
Cabin & load body 25.0 31 3
Engine/Engine components 23.8 16 4
Gear box parts 20.5 16 6
Engine - Electricals 18.5 37 4
Heavy vehicle parts – Others2 14.8 31 7
Cabin electricals 14.0 20 1
Other articles of iron or steel3 10.1 52 5
Wiring harness 9.7 6 2
Brakes & clutches 9.3 41 7
Bearings 8.6 34 8
Rubber components 8.5 26 6
Wheel rims 6.2 40 2
Suspension 5.3 34 5
Axles 5.3 16 11
Glass & mirrors 4.0 50 2
Steering parts 3.2 24 5
Shafts 3.0 23 12
Non motorized vehicle parts – Others4 2.9 34 1
Others5 2.9 25 6
HALF
Light vehicle parts – Others6 2.3 28 3
Grand total 240.6 28 4.6

1. Non-nearshore imports excludes imports from North America (Mexico/Canada) for US and imports from western Europe, eastern Europe & Scandinavia for Europe
2. Heavy vehicle parts – Others includes HSN codes 870899, 870990 & 871690: parts and accessories, for tractors, large motor vehicles, self-propelled works trucks,
trailers and semi-trailers, etc.
3. Other articles of iron or steel includes HSN codes 732619 & 732690: articles of iron or steel, n.e.s. (excluding cast articles or articles of iron or steel wire)
4. Non motorized vehicle parts – Others includes HSN codes 871420 & 871499: parts and accessories for carriages for disabled persons & bicycles, n.e.s.
5. Others includes HSN codes 731822, 731823, 731824, 731829, 848410, 848420, 848490: washers / rivets / cotters & cotter pins / non-threaded articles/ gaskets /
seals/etc. of iron or steel.
6. Light vehicle parts – Others includes HSN code 871410: parts and accessories of motorcycles, incl. mopeds, n.e.s.

Source: 6-digit EXIM (HSN code) analysis

The future of mobility: Transforming to be ahead of the opportunity 17

 D. Expand exports to global OE/Tier 1/aftermarket, as manufacturing
rebalances due to electrification
Both the US and Europe are expected to see a significant increase in electrification over the course
of this decade, and a corresponding drop in ICE volumes. Certain components could see significant
de-growth as a result. For example, increased EV penetration is expected to impact forging component
volumes (Exhibit 11).

As the market transforms to low volumes and high variety, local suppliers in the US and Europe could
lose economies of scale. The supply for these components may then gradually move to new destinations
that specialize in labour-intensive manufacturing.

Emerging economies such as India, with the advantage of low labour costs, could benefit from this shift.
Indian SMEs could capture an incremental USD 20 bn to 30 bn by 2030.

Exhibit 11 Opportunity D

India could benefit from low labour costs and target high-variety,
low-volume manufacturing.
Example of growth scenarios for forging components with electrification of a global 4W
Non-exhaustive

Scenario 1 Scenario 2
(16% EV penetration) (24% EV penetration)
Components1 IHS current projections, CAGR 21-25 2% incremental CAGR of EVs, CAGR 21-25

Differential gears – Large 4.33 5.2

Differential gears – Medium 3.79 3.9

CPM – Suspension3 2.70 2.7

Transmission gears 1.71 0.5

Pinions 0.81 -1.7

Transmission shafts 0.71 -1.5

Annulus ring gears 0.57 -1.5

Hypoid ring gear 0.24 -2.2

CPM – Engine Products3 -0.03 -2.6

Differential gears – Small -0.17 -0.1

HALF
Balance shafts 2
-0.31 -2.9

Axle shafts -0.49 -1.3

Connecting rods -1.22 -3.7

Valve bodies/control -1.66 -4.1

CVT pulleys -2.39 -4.9

1. Includes forging, connecting rod, and machining balance shaft and valve bodies/control products
2. Balance shaft production concentrated in Bolingbrook
3. For CPM: Overall market volume growth assumed for suspension products and ICE vehicle growth assumed for engine products
4. Range of electrification across 3 EV penetration scenarios: reference, accelerated, net zero case

Source: IHS Light Vehicle Powertrain + Alternate Propulsion Forecast, Jan 2021; AAM 2025 strategy work; MF capacity utilization, data from Dec 2020

18 McKinsey & Company

 With significant export opportunities on the anvil, a concerted effort by stakeholders could
make India a globally preferred manufacturer. Suppliers, industry bodies (ACMA, SIAM) and
the government will need to work together to seed and grow specific initiatives supporting
these export opportunities.

The industry could benefit from targeted incentives to help companies grow exports:

— For International Procurement Offices (IPOs): Purchase-linked export-incentivization

schemes could encourage them to purchase more from India or grow the exports of
components by an OEM.

— For OEMs: Production linked incentives (PLIs) could be instrumental in overcoming

certain cost disabilities (e.g., logistics costs) targeting certain vehicle segments for
global exports.

— For component manufacturers: Incentivizing an increase in sales of manufactured

goods from India for domestic and global consumption, and PLIs to overcome cost
disabilities could be empowering.

Innovation in new opportunities

and a global play
E. Diversify into new EV categories
While the proliferation of EVs might shrink some of the traditional ICE categories, multiple new
EV-specific component and service categories open up across the value chain (Exhibit 12).

Exhibit 12 Opportunity E

Automotive companies could tap opportunities in multiple component categories across

their value chain.
Estimates High Low

Feasibility
Manufacturing Technology
Top opportunities complexity know-how Key opportunities in the value chain, esp. for SMEs

EV battery cells Castings: battery pack casings, enclosures (if aluminium)

Others: vibration pads, thermal sensor, PCM, signal wires,
battery connectors, enclosures

EV battery pack and

BMS (excl. cell)

E-motor Castings: motor casings; Forgings: shafts, bearings

Extrusion: copper wire coils (drawing), electrical wires
Others: steel laminations, connector plugs, rotors, magnets

Converter and
on-board-charger

E-axle/reducer Castings: gearbox casing

(transmission) Forgings: shafts
Others: shifters
Charging infra Castings: casings
(manuf. & installation) Extrusion: wiring
Others: switches, transformers
HALF
Source: McKinsey Center for Future Mobility – McKinsey Electrification Model

The future of mobility: Transforming to be ahead of the opportunity 19

 Most of these opportunity segments offer avenues for traditional component suppliers
(including MSMEs) to play a role in an expanded value chain. For example, e-motor
manufacturing requires multiple sub-components made through forging (e.g., shafts,
bearings) and casting (e.g., casings) processes.

The biggest opportunity is in the battery cell value chain – a very specialized domain, with
a high degree of manufacturing and technological complexity. By 2030, this value chain
is expected to grow to USD 14 bn in India (Exhibit 13). This is a new white space where
component suppliers could explore opportunities.

Exhibit 13 Opportunity E

Large opportunities emerging in global and India battery value pools, across the value
chain.
Value pools along the battery value chain1

Estimates 2025 2030

Global value pool India value pool

2025 and 2030, 2025 and 2030,
Key activities in USD bn in USD bn

Mine and extract raw material

Raw material Refine and process raw materials into ~55 ~123 ~1 ~4
and refining usable products

Chemically activate the raw materials

Active material ~23 ~50 ~0.4 ~1.5
Produce cathode, anode, electrolyte and
and cell components separator materials

Manufacture battery cells

Cell production Stack/roll cells in form factor (e.g., pouch, ~64 ~143 ~1.3 ~5.5
cylindrical, prismatic)
HALF
Assemble cells into modules, and modules
Battery packaging into packs ~50 ~110 ~0.8 ~2.8
and integration Connect HW and SW into complete package

Recycling and Reuse batteries for new purposes

(second-life) or recycle components and ~7 ~16 - ~0.4
second-life materials in batteries

1. Total value pool including import dependent inputs (e.g., Raw materials and semi-con).

Source: McKinsey Center for Future Mobility – Electric Vehicle Opportunity Landscape and Value Engineering; Advanced Cell Chemistry PLI, Ministry of Heavy Industries
(GOI) (https://heavyindustries.gov.in/UserView/index?mid=2487)

20 McKinsey & Company

 F. Expand into downstream service use cases, especially connectivity
The increase in EV adoption is expected to be accompanied by big shifts in global value pools
towards downstream services (Exhibit 14).

Some of these value pools, such as vehicle connectivity services, mesh very well with India’s
capabilities and starting position – deep software capabilities, application engineering
capabilities, and lower cost base to serve the global markets.

Exhibit 14 Opportunity F

Value pools could shift globally, with a projected >10x growth in vehicle connectivity, from
USD ~25 billion in FY20 to USD ~325 billion in 2030.
Reference scenario considering passenger transport and vehicles up to 3.5 tons

Vehicle Vehicle Maintenance Financing/ Vehicle MaaS MaaS digital

USD bn domains integration & repair insurance Charging connectivity operations services

0.1 25 76 175
2020

1,173 1,095 991 1,028 4,565

Vehicle
technology
1,710 1,050 2,760
2030

60 170
Lifecycle
business
1,510 1,290 325 430 3,790

Source: McKinsey Center for Future Mobility

HALF

The future of mobility: Transforming to be ahead of the opportunity 21

 A double-click on this opportunity segment of vehicle connectivity shows scope for the
global value pool to grow more than 10 times to be USD 250 to 400 bn by 2030. This could
be a significant white space for new suppliers to enter and deliver value across nine use-case
clusters (Exhibit 15).11

Exhibit 15 Opportunity F

New suppliers could enter certain whitespaces and deliver value, potentially reaching
USD 250 to 400 bn by 2030.

HW/SW Publish free/paid OTA updates; provide pay-per-use HW or

SW or service; custom subscriptions for users for in-car
on demand
60-65 hardware

R&D Hardware: Testing for product life-cycle (e.g., battery

optimization degradation)
50-70 Software: Usage data & customer feedback used as inputs for
UI optimization

Sales & service Provide on-demand services & recommendations; enable

predictive maintenance; User preference & utilization-based
efficiency
40-70 recommendations for next car purchase

In-car Subscription model for in-car entertainment incl. WIFI hotspot

(e.g., video, gaming, etc.) and in-car office (e.g., VCs, email read
experience 30-60 aloud)

Usage based insurance to passively or actively influence risk

HALF
Mobility
(e.g., driving behavior monitoring & stimulus like vibration,
insurance 30-55 notifications, alarms)

Fleet asset Subscriptions to centralized remote fleet monitoring software

for parameters like asset utilization, revenue generation,
utilization 30-50 customer satisfaction, safety, driver training

Infrastructure Selling spatial data from vehicles for geo-spatial infrastructure

5-10
optimization (e.g., regulations, city infrastructure – EV
optimization charging, gas stations, street design)

Occupant <5 Add-on paid service of in-car ‘Driver/passenger monitoring’ &

warning (e.g., attention, fatigue, mood) with additional option of
safety/security connecting to city CCTV infrastructure (e.g., speeding alerts)

Product/service <5 In-car data providing customer insights (e.g., preferences of

vehicle functions, usage behavior, feature utilization), utilized
strategy by OEMs to define their new product/service strategy

11
McKinsey Center for Future Mobility.

22 McKinsey & Company

 MSME-focused possibilities
for enduring growth
As EV adoption increases, MSME auto component players are expected to have a wide
range of options to diversify their product portfolios towards de-risking and expanding their
businesses. They can pro-actively identify their strategic play based on their unique starting
points, context, and capabilities – exploring across automotives, adjacent auto-type sectors,
global exports and new emerging opportunities such as EVs (Exhibit 16).

Exhibit 16

Opportunities for MSMEs to ensure enduring growth, through diversifying their

product portfolios.
Illustrative example; each MSME player will require a specific answer basis its unique starting point and context
Non-exhaustive

Potential opportunities to de-risk and expand

Within broader Adj. auto-type
MSME: 2-wheeler supplier automotive sectors (const,
with following play (4W/CV) power gen, rail, etc.) Global exports play EV opportunities
Forging Shafts and Pinion shafts, rack Differential gears, Piston rods for
rods bars, transmission transmission gears, hydraulic application,
shafts, cam shafts, balance shafts, con- cam shafts, forged
piston rods, rods, PTO shafts racks,
connecting rods

Gears Pinions, suspension Transmission gears, Transmission gears, E-motor shafts,

parts small differential pump gears, pinions reducer shafts,
gears, rolling-axle Drive gears,
components reducer gears

Engine small Small-to-mid sized Engine forgings, Transmission gears,

forgings forgings for engine suspension pump gears, CVT
and transmissions, components, small pulleys, suspension
suspension forgings for tracks parts
components HALF
Casting Engine small Small-to-mid sized Engine & Levers, grab handles,
castings engine & transmission mounts, small engine
transmission castings, mounts, castings Battery pack
castings, mounts structural casing,
components enclosures, motor
casings, gearbox
Housings and Suspension Valve bodies, pump Housings for castings, casings
covers housings, caliper covers, PTO Covers, hydraulic pumps, for charging
housings, mounting NVH shields caliper housings, infrastructure
brackets, mounting brackets,
transmission housing transmission housing

It will be important for all stakeholders to work together, enabling India’s automotive
component manufacturers to transform and capture the opportunities ahead.

The future of mobility: Transforming to be ahead of the opportunity 23

3 Stakeholders as
enablers in this
transformation agenda
The success of auto component manufacturers in the face of EV-linked disruptions would not
only enhance their growth and relevance, but also be a boost for India. It would consolidate
India’s position on the world map as a future-ready hub for manufacturing. This calls for a
concerted effort by all stakeholders – across the government, industry bodies, OEMs and
suppliers. Each of these could be a crucial enabler in helping the industry to prepare for its
next phase of growth.

How the government could spur local manufacturing and exports

The government could undertake specific measures:

— Introduce targeted incentives on both supply and demand side: While existing
incentive schemes are available to many, it will also be important to create targeted
incentives for larger companies that have the scale, competitiveness, and capabilities
to become global players. Such companies could also pave the way for a larger, thriving
Indian ecosystem of component manufacturers. A mix of purchase-linked incentives for
International Purchase Offices (IPOs), production-linked incentives for OEMs/suppliers
and sales-value linked incentives for OEMs could be instrumental in providing local
manufacturing a much-needed thrust.

— Institute trade agreements and reforms: The government could accelerate the growth
of Indian automotive component exports through forging bilateral and multilateral Free
Trade Agreements (FTAs) and enacting critical trade reforms.

— Facilitate innovation: As new-age technologies find applications in the automotive

space, it is important to support them with an ecosystem that allows them to thrive and
flourish. To foster innovation, the government may invest in deploying dedicated capability
building programs focused on up-and-coming topics, such as a Centre of Excellence for
Industry 4.0, Artificial Intelligence (AI)/Machine Learning (ML), analytics, cybersecurity
and electronics. Establishing investment funds and incubation centres could go a long
way to accelerate innovation for ACES (Autonomous vehicles, Connectivity, EVs and
Shared Mobility).

The future of mobility: Transforming to be ahead of the opportunity 25

 How industry bodies could support automotive manufacturers
The industry bodies that govern the automotive component industry in India can support
industry players to share their priorities and needs with the government. They could:

— Foster stakeholder connectivity: As mentioned previously, industry bodies could

constitute a dedicated task force representing OEMs, auto-component suppliers and the
Government of India to capture the opportunities ahead. The taskforce could spearhead
initiatives such as OEM connects, cross border M&A, shifting of manufacturing, policy
support, trade agreements, etc. It could help to establish and nurture institutional
connects with global bodies and scale IPOs. By organizing trade fairs, exhibitions,
and expos, it could also enable connectivity across key decision makers from various
stakeholder groups.

— Promote exports: Industry bodies could work with the Export Promotion Councils and
help to showcase the technologies, capabilities and potential of the Indian ecosystem to
prospective target markets. They could also help multiple component manufacturers to
work in a more integrated, collaborative manner to ease supply chain bottlenecks and
bring their best to high-potential export markets.

— Curate capability-building programs: As India’s automotive component manufacturers

try to adopt new-age, cutting-edge technologies at the same pace as many other parts
of the world, their management and labour force will need large-scale upskilling. Industry
bodies could curate programs and establish guidelines on relevant topics to educate the
community on latest industry trends and how to adapt to these.

How OEMs could support the local ecosystem

OEMs in India could support the auto-component industry in at least two ways:

— Drive localization: Auto-component suppliers could benefit from OEMs buying at scale
from India to meet global demand. They can take advantage of any production-linked or
sales-value linked incentive schemes to give localization its much needed boost.

— Forge partnerships with suppliers: OEMs could be instrumental in helping suppliers

to access the newest technologies and adapt to changing requirements. For a seamless
transition, OEMs could forge strategic collaborations with suppliers in joint R&D, risk-
sharing, innovation and testing. They could also collaborate with suppliers to help
them upskill and become export ready, with a special focus on quality control and
process improvement.

26 McKinsey & Company

How suppliers could navigate these shifts
This is an important moment in time for Indian auto component manufacturers, especially
MSMEs. Suppliers who can anticipate the key shifts and match the needs of a transforming
landscape with agility are more likely to succeed. Some proposed focus areas include:

— Systematically look at export opportunities: Auto component manufacturers could

benefit from making the most of any available PLIs provided by the government.
In addition, they could respond with agility to capture opportunities for strategic
partnerships or acquisitions of suppliers in these geographies – where ICE component
manufacturing is expected to decline.

— Invest in research: The BOM disruptions caused by EV proliferation are expected to

open new vistas for component manufacturers. To be able to cater to these ever-evolving
needs, component manufacturers may gain access to the latest innovations by embracing
new technologies and startups.

— Invest in training: To meet stringent global quality standards and the evolving needs of
the changing landscape, suppliers can invest in building capabilities and upskilling their
managerial and labour force. They can be proactive in their engagements with OEMs and
try to evolve from supplier relationships to partner-based collaborations.

Electrification could be the future of mobility. Indian automotive component manufacturers

could see the upcoming disruption for the opportunities it presents, pivoting and diversifying
in an agile manner to expand at home and abroad in traditional and new segments.

The future of mobility: Transforming to be ahead of the opportunity 27

The future of mobility: Transforming to be
ahead of the opportunity
September 2022
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