Chemicals Practice

Electric vehicles: The

next growth engine in
chemicals
A paradigm shift in automotive purchasing linked to the electric-
vehicle transition is creating a major growth opportunity for chemical
companies.
by Guttorm Aase, Chris Musso, and Dennis Schwedhelm

© Aranga87/Getty Images

August 2022
 The automotive market is undergoing rapid change.
Based on a forecast by the McKinsey Center for
Future Mobility, battery electric vehicles (BEVs) and
plug-in hybrid electric vehicles (PHEVs) will make up
more than 55 percent of new vehicle production by
2030 across China, Europe, and North America. This
represents 47 million units globally—seven times
more than in 2021.
Adoption has moved beyond start-ups, with
all mainstream OEMs now focused on electric
vehicles (EVs) and with forecasts for EV
penetration continuing to accelerate: more
than 500 EV programs will come to market
from 2024 to 2026 alone (Exhibit 1). In short,
tomorrow’s vehicle archi­tecture is being defined
today, offering a narrow window of opportunity
for chemical companies to set the standard for
materials applications in the years to come.
Although EVs have been a hot topic in the chemicals
industry for some time,1 a major paradigm shift in
automotive procurement practices has made the
space dramatically more attractive for chemical
players (not considering cell chemistry, a market
governed by unique value chain dynamics2).
Whereas chemicals in the automotive industry
were traditionally considered on a unit-cost basis—
with suppliers barely able to hold value over the
program life cycle—savvy automotive OEMs and
tier suppliers are now moving to a system value
approach. These players recognize that materials
solutions can provide outsize value in reducing cost
and improving the reliability of expensive parts such
as batteries, power electronics, and electric motors.
To illustrate this point, consider the powertrain of a
typical BEV. The battery, inverter, and electric motor
together cost more than $10,000—often three to

Exhibit 1
Tomorrow’s vehicle architecture is being defined today.
Tomorrow’s vehicle architecture is being defined today.
Global EV1 market growth is strong and More than 500 EV1 programs are coming
accelerating. to market in 2024–26.
Global BEV2 and PHEV3 light-vehicle production, Number of electric-drivetrain vehicle programs by
millions BEV2 and launch year
PHEV3 share 901
50 47 of sales, 2030
184
European
40 60%
Union
176 540
30 30% p.a.4
23 180
China 57%
20
North 46% 195 Vehicles currently in
10 America development that are 361
Rest of coming to market in
3 166 2024–26
world 22%
0
2015 2020 2025 2030 2022 2023 2024 2025 2026 Total

1
Electric vehicle.
2
Battery electric vehicle.
3
Plug-in hybrid electric vehicle.
4
Per annum.
Source: IHS Markit; McKinsey Center for Future Mobility

1
For more, see “What the future of mobility holds for chemical players,” McKinsey, September 21, 2020.
2
For more on the battery value chain, see Nicolò Campagnol, Alexander Pfeiffer, and Christer Tryggestad, “Capturing the battery value-chain
opportunity,” McKinsey, January 7, 2022.

2 Electric vehicles: The next growth engine in chemicals

four times the cost of their equivalent parts in a innovations in materials that enable system cost
conventional combustion engine vehicle (Exhibit 2). reductions can provide tremendous value to OEMs
Hence, the vehicle system must come down in cost (Exhibit 3).
for BEVs to gain widespread adoption.

In this context, leading OEMs have discovered that
using the right thermal and insulation materials in
the powertrain can lead to significant increases
in system efficiency and reductions in warranty
cost, which together can be worth several hundred
dollars per vehicle. These savings make it much
easier for OEMs to invest in enabling these materials.
For example, a transition from silicon oxide (Si) to
silicon carbide (SiC) power modules in the inverter
can generate system savings on the order of
$200 per vehicle for OEMs. This is because of the
semiconductor’s greater power efficiency (reducing
battery cost) and more optimal cooling profile
(reducing thermal management cost), despite SiC
costing more than Si counterparts. Consequently,
Electric-vehicle value pools for
chemical players
High-value challenges that drive the benefits of
vehicle systems primarily occur in the powertrain.
The industry for specialty materials in these
applications—not including battery cell chemistry—
could see an industry value pool of more than $20
billion by 2030, focused on high-value challenges
linked to power efficiency, thermal management,
and battery life.
— Power electronics. OEMs have the potential to
improve power efficiency further through wide-
bandgap electronics, including the previously
mentioned transition from Si to SiC materials.
The EV industry is making a significant shift

Exhibit 2

Cost
Costreduction
reductionofofpowertrain
powertrain systems
systemsisisaakey
keylever
leverfor
forthe
thecost
costcompetitiveness
of electric vehicles.
competitiveness of electric vehicles.

Expected cost reduction in key e-powertrain components, $ thousands per vehicle

Battery pack Inverter, e-motor, and reducer Thermal management

10.3
0.5
1.4 –3.2 An electric powertrain adds significant
8.2 cost to a vehicle’s bill of
0.5 materials—more than any other
7.1
1.1 0.5 component in automotive history.
–20%
1.0
BEV1 powertrains cost 3–4 times as
much as an average ICE2 powertrain.
8.4
Cost reduction and innovation are
6.6 required for the market to reach
5.6 –30% adoption.

2020 2025 2030

Note: Estimated cost for a 150-kW system with a simplified e-drive with 1-speed reducer, 400-V system voltage, and battery capacity of 70 kWh.
1
Battery electric vehicle.
2
Internal combustion engine.
Source: McKinsey Center for Future Mobility

Electric vehicles: The next growth engine in chemicals 3

 Exhibit 3
The reduction
Innovations in reduce
that cost of overall
power train systems
system is highly
cost are a key lever for and
valued the cost
can command
acompetitiveness
premium. of electric vehicles.

Example: 2020 BEV1 powertrain costs, $ thousands per vehicle

Battery pack Inverter, e-motor, and reducer Thermal management

10.3 +0.1 –0.2 –0.1 10.1

0.5 0.4 Next-generation systems of
10% 2% ~30% less sophisticated OEMs use silicon
1.4 higher 1.5
smaller heat loss (6 carbide (SiC) inverters rather than
inverter battery, kW reduced traditional silicon oxide power
cost equal to to 4 kW), modules.
1–2 kWh equal to 20%
of savings SiC component costs are higher,
cost reduction
but system costs are lower due to
in thermal
8.4 lower heat losses and increases in
management 8.2
powertrain efficiency.
Efficiency improvements can be taken
as either battery cost savings or
extended range.

Baseline cost Higher cost of Battery Thermal Net cost

(Silicon oxide) silicon carbide downsizing management (Silicon
downsizing carbide)

1
Battery electric vehicle.
Source: McKinsey Center for Future Mobility

to more expensive, more efficient, higher-
temperature inverter technology that will require
better thermal and isolation materials.
— Motors and wiring. Several OEMs have
demonstrated superior EV performance
through high-voltage (greater than 800 volts)
systems. The laws of physics dictate that a
higher voltage is more electrically efficient;
in turn, much better electrical insulation and
more reliable connector materials must be used
to maintain system safety. In most cases, the
value of higher system efficiency dwarfs the
additional cost of superior materials.
— Batteries. It is no secret that battery costs
need to drop dramatically for EVs to become
cost efficient—and that battery safety is
paramount. Although most discourse seems to
be focused on the chemistry and supply-and-
demand balance of battery cell materials, many
progressive OEMs have recognized that plastics,
silicones, mica, and other thermal materials can
be engineered together to significantly reduce
system costs.
How to make it happen
To understand where the greatest potential for
value creation lies and to maximize the likelihood
of capturing it, materials players should answer the
following five questions:
1. What are the growing value pools and
valuable problems to solve in EVs? Chemical
companies will see outsize value from materials
innovations that solve power efficiency, thermal
management, and warranty challenges.
2. Where can our materials portfolio play to
enable the creation and capture of value?
Companies should articulate their value

4 Electric vehicles: The next growth engine in chemicals

Chemical companies will see outsize
value from materials innovations
that solve power efficiency, thermal
management, and warranty challenges.

proposition based on the value OEMs can derive
from solutions, applying a systems-based lens to
cost reductions.
3. What are the ‘big bets’ that could allow us
to address more value pools? This includes
prioritizing technologies that enable integrated
solutions to the most valuable OEM problems.
Furthermore, scenarios can be used to evaluate
investments in technologies with high levels
of uncertainty, such as future cell formats and
chemistry.
4. What capabilities are needed to deliver on the
solutions? This will involve deeper application
engineering with OEMs in the vehicle design
stage, system-testing capabilities to build a
fact-based value proposition, and key account
and risk management vis-à-vis OEMs. Mobilizing
commercial and technology teams quickly is
important because design decisions are being
made now for future model platforms.
5. Who are the key customers to target, and what
is the right go-to-market model? Chemical
companies should take a differentiated
approach to customers via a tailored value
proposition based on OEMs’ make-versus-buy
strategies, and they should consider value
chain position trade-offs based on natural
owner and customer proximity.
Given changing procurement dynamics, it is time
to rethink participation in the automotive industry.
Chemical companies hold the keys to the cost
challenges for OEMs in many critical component
areas and can play pivotal roles in unlocking the
automotive electrification transformation. Now is the
time for chemical players to move on the opportunity.

Guttorm Aase is an associate partner in McKinsey’s New York office, Chris Musso is a senior partner in the Denver office, and
Dennis Schwedhelm is a senior expert in the Munich office.

The authors wish to thank Michael Guggenheimer and Markus Neumann for their contributions to this article.

Copyright © 2022 McKinsey & Company. All rights reserved.

Electric vehicles: The next growth engine in chemicals 5