Climate change and digitalization - the revolution in the automotive industry

The automotive industry is in a state of upheaval: climate change and digitalization are leading to a fundamental shift in the requirements for and provision of mobility. Sustainability is gaining in importance with each passing year, whether among consumers who are increasingly demanding electric cars or among investors and financiers who want to steer climate risks in their portfolios and avoid damage to their reputations. More sustainable mobility will therefore continue to be a focus of the automotive industry in the coming years. At the same time, digitalization and technological progress are leading to ever greater interest in autonomous driving. On their own, each of these trends is an enormous challenge; together, they probably represent the greatest upheaval the automotive sector has had to deal with to date. The shift to electric cars alone will require massive investment in research and development and will require a transformation of the entire value chain - in addition to the development of new infrastructure, for example in the form of charging stations. Shared mobility and autonomous driving are fundamentally challenging the industry's existing business model, as they are changing the way society interacts with cars and are likely to bring about a reduction in sales figures.

The change is unstoppable: In Germany alone, around 300,000 new vehicles with electric drives were registered in January - June 2023, according to the Federal Motor Transport Authority - more than 20 percent of total new registrations. Other European countries such as the United Kingdom and France have also already achieved a significant share of electric vehicles in 2022, with 17 and 14 percent respectively. Globally, the trend is also clearly moving in the direction of electrification: While around 16 million electric cars were still on the road at the beginning of 2022, more than 10 million e-vehicles were already newly registered during the course of the year.

More sustainability through more efficient drive technology

Not only is consumer demand increasing, but governments are also pushing for CO2 reduction. In view of increasingly extreme weather events such as forest fires, heat waves, scarcity of drinking water or flooding, many countries have cemented climate protection in laws and regulations in recent years and, for example, significantly tightened CO2emission targets. Automobile manufacturers focus on reducing CO2 emissions both in production and for the vehicles produced.

The efficiency of energy use plays an important role here. Combustion engines are only just under 40 percent efficient, while electric motors are over 90 percent efficient. Since the efficiency of electric drives is therefore more than twice as high as that of combustion engines, the energy input in their use and thus the burden on the climate can be halved.

Accordingly, almost all major automakers have now committed to increasing the share of electric cars and phasing out the production and sale of cars with internal combustion engines. In Europe, for example, the target for this is generally 2030 to 2035. For automakers, the transition - and its pace - represents an enormous strategic challenge that involves restructuring organizations and revamping product portfolios and production sites. Electrification of the automotive industry means greater material intensity and an increased shift of value creation to the upstream production chain. The main drivers for future growth in this value chain will be electrical systems and components such as batteries, electric motors, power electronics and fuel cells. This will result in changes in production and logistics: batteries for e-cars weigh up to 700 kg in some cases and are considered hazardous goods. They therefore place significantly different requirements on transport and storage. As a result, it is to be expected that car manufacturers will increasingly rely on so-called nearshoring, i.e. the production of the important components will be moved closer to manufacturing and the entire electromobile production chain will move more spatially in the direction of the end customers.

New players enter the market

In China, 98 percent of electric cars sold are already built domestically. In Europe and the USA, the figures are only 76 and 70 percent respectively. This figure is expected to increase significantly in the coming years. Here, many automakers are dependent on China. The country is a global leader both in the extraction and processing of important raw materials such as lithium or silicon and in battery production. In 2021, China supplied 75 percent of the world's battery components and nine out of ten permanent magnets are also manufactured there. For this reason, many automotive manufacturers are currently investing large sums in building production capacities for batteries and are planning to build gigafactories, while at the same time the USA and the EU are fundamentally considering strategies to reduce their dependence on China for raw materials.

In addition to these challenges, however, many companies are seizing the opportunity that electrification offers to enter the automotive market. The production of electric cars is easier than the construction of cars with combustion engines, thus traditional car manufacturers have lost a large part of their technological advantage. China in particular has seen the establishment of many electric brands such as Aiways, NIO, Xpeng and BYD, which are now increasingly looking at international expansion after success in their home market. They benefit from a developed local supply chain network for e-vehicles and their proximity to battery manufacturing. They are expected to increasingly gain market share globally in the coming years. However, it is often forgotten how difficult it is to enter the global automotive market. In the past thirty years, only a few such as Tesla, Toyota and Hyundai-Kia have succeeded in doing so. Established automakers still have a brand and network advantage that will not be easy to catch up with.

The capital requirement is enormous 

Without significant investment, the industry will not be able to manage the transformation. A large part of the capital requirement arises in particular from the conversion of production processes, the expansion of battery production and the development of a charging infrastructure for electric vehicles. This is where ING comes in: With a loan portfolio of more than EUR 2.4 billion in the automotive sector, ING supports its automotive customers in financing the transition to electromobility, for example, by providing capital for the establishment of the new value chain or investments in infrastructure such as battery plants.

ING began aligning its entire loan book with the climate target of the Paris Agreement several years ago. To this end, the bank uses its proprietary Terra approach to measure the emissions of its loan portfolio and guide its customers to achieve their climate goals in line with the net zero 2050 targets. For example, ING is continuously working towards achieving a higher share of electric and hybrid vehicles in the vehicle fleet produced by its customers, as well as initiating changes in the company's structure and production overall.

ING is always in discussion with its customers to further advance  sustainability. In the context of electrification, resource consumption can still be significantly reduced if, for example, the resources required for the batteries are recycled and reused again and again as part of a circular economy. This would actually benefit us in several ways: First, it would alleviate the major problem of dependence on China, protect the environment, and reduce the consumption of raw materials that are not infinitely available. However, this is still a pipe dream, as recycling is very cost-intensive and the procurement of new raw materials is cheaper in comparison. Appropriate regulatory requirements could increase the willingness to invest in circular models. With its sector expertise, ING is an important partner for its customers when it comes to adapting to and taking advantage of the new challenges.

Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate