5 Trends in the Automotive Industry That Preview a Bloody Battle for Survival

Modern times are clearly more chaotic than what our parents and grandparents have witnessed. Their lives were upended when computers and the internet marked the latest industrial revolutions. Whereas 20th-century generations have confronted one, maybe two, industrial revolutions throughout their lives, we're already in our third (artificial intelligence) and on the way to see the dawn of the fourth industrial revolution (the robot uprising).

Future generations will probably see more disruptive events akin to industrial revolutions happening every few years. This is why you shouldn't be surprised that the world we take for granted today will become unrecognizable in less than five years. Those who deny that electric vehicles will replace combustion cars soon are only refusing to face the truth. EVs will win not because somebody will force them down our throats but because they are cleaner, better, faster, and more efficient.

However, what is now inevitable was hardly conceivable only ten years ago. Tesla singlehandedly created the EV market and brought it where it is now. Not only by designing and selling the best electric vehicles possible, but by demonstrating that EVs can be better than gas cars. The Model Y becoming the best-selling vehicle in the world is only the tip of the iceberg. Tesla also leads by inspiring other startups and even legacy carmakers.

However, just because it started early and became the dominant EV maker, it doesn't mean that Tesla will continue to dominate the industry in the EV-only era. The auto industry is in the midst of a consolidation movement, which will see big carmakers wiped out and new companies launching and flourishing. Tesla is in the pole position for now but needs to execute flawlessly to keep its advantage in the face of this all-out war. Here's what you should expect in the auto market in the next five to ten years.

EV startups die left and right

Tesla's success undoubtedly encouraged other startups to pursue their own vision. Tesla proved that once considered hermetically closed, the auto industry can be infiltrated and conquered. It succeeded where many other car companies failed, thanks to a unique combination of factors. Most importantly, it had no competition when it took the market by storm with the Model S and, later, the Model 3 as the first mass-market electric car.

Sadly, other EV startups don't have this luxury anymore. Electric models in all segments saturate the market, and becoming profitable is a lot harder, given the current market conditions. Inflation and high loan rates are wreaking havoc, making it harder for people to finance purchases and startups to raise new capital. This means that mirroring Tesla's success is an almost impossible mission, even for startups that followed the same recipe, like Rivian.

Despite having everything lined up for a successful production ramp-up, Rivian is in a difficult position. It has incredible products with amazing quality and features, but Rivian is still struggling to stay afloat. The startup has spread its resources too thin by stubbornly insisting on building a second factory despite not bringing the first one to profitability. Combine this with a supply chain disaster, and you'll see why Rivian is now taking corrective measures, even though it might be too late.

Rivian still has about $10 billion in its cash reserves, but it's too little to finance the development of its future models and become profitable at the same time. This is why it recently announced that it would be pausing its second factory plans, which it should've done long ago. The R2/R3 compact EVs will start production at its current manufacturing facility in Illinois. However, whether Rivian could begin production without raising new capital is still unclear.

The R2 is slated for a 2026 launch, but the company already unveiled it alongside the R3 and R3X compact EVs. The fact that Rivian felt the need to announce three models at once shows that it desperately needs investors to get on board. My feeling is that the EV startup put everything on the table, hoping this would pump the stock enough to allow it to raise capital in more favorable conditions.

If that was the plan, it may have failed already. Rivian shares trade today at the same low price they dropped after Rivian tempered 2024 expectations. Three new models and investors are still not impressed; I wonder what it would take to move up from here. It's such a shame because Rivian has incredible products. Unfortunately, they arrive at a time when the market is literally flooded with great electric SUVs, making it even more difficult to convince investors.

Rivian is not the only startup that is seeing its hopes underwater. Lucid is also struggling to make ends meet and doesn't even have Rivian's cash reserves. It has powerful backers, including Saudi Arabia's PIF, but that doesn't mean it can lose money forever. Unfortunately, Lucid's lineup consists of only one model, the Lucid Air. Even though the startup launched more affordable variants, it's still far from breaking even. To make things worse, its upcoming Gravity SUV will not expand Lucid's market, and it doesn't have any volume models ready for production.

Not that having one is a guarantee for success. Fisker had a more affordable SUV, the Ocean, and a few more models in the pipeline. The startup chose a different path, hiring a contract manufacturer to produce the Ocean. While this allowed Fisker to start Ocean production almost immediately, it did nothing to convince customers to buy the SUV. Fisker produced about 10,000 Ocean SUVs in 2024 but only found buyers for less than half. The company is heavily indebted and is now contemplating bankruptcy.

This is a bleak perspective that other EV startups are facing. Tesla succeeded, but others might not be that lucky. In the next five years, we will see more startups reaching the end of the road. Very few will have the chance to be bought by other companies, with the rest disappearing into the void. To be fair, very few have innovated the industry to attract the interest of other carmakers.

Apple abandons the EV game, Xiaomi is accelerating

Not only startups decided that entering the car market is not worth it given current market conditions. The most high-profile exit was Apple, which started its car project a decade ago. Since then, Apple has spent over $10 billion without being able to produce a single electric vehicle or at least a design sketch that we know of. The technology giant had shifted its goals until it finally realized it was not going anywhere and only burning money.

In 2014, Apple wanted to build an autonomous vehicle with no steering wheel and no pedals. Many companies and startups were trying to achieve the same thing at the time. For its part, Apple was looking for a new killer product to offset slowing iPhone sales. However, the initial plans didn't pan out, and Apple had to repeatedly scale down its ambitions. By 2016, Apple gave up on building a car independently and instead continued developing autonomous driving software.

After initiating talks with several carmakers, including Tesla, BMW, and Mercedes-Benz, Apple settled with Lexus to supply the vehicles for its testing fleet. Later, Apple abandoned the idea completely and switched efforts to generative AI. Rumor has it that Apple realized the car project would never reach the insane profit margins Apple enjoys on its other products. Others thought that Apple finally understood that significantly more resources would be needed to fulfill the autonomous driving dream, which so far has remained a pipe dream.

Whatever the reason, Apple decided to cancel Project Titan and turn it into Project Titanic. The engineering team Apple hired to work on its car must've had feelings similar to those of people car companies hired to jumpstart their software efforts. With no clear goal and objective changing every year until the project was finally canceled, I can only imagine how frustrating this was.

Apple is not even the first technology company to consider building an electric vehicle, only to abandon the project after spending billions. The first to do this was Dyson, the fancy vacuum cleaner manufacturer that thought it could compete with Tesla. Dyson had unique expertise in producing advanced electric motors and lithium-ion batteries. However, after spending more than $5 billion, Dyson gave up. Unlike Apple, Dyson has already passed the prototype phase, but that hasn't changed its fate.

Not everyone realizes that building an electric car is hard. Sony has been working on a car project for some time now. Its Vision-S prototype, which was introduced at CES in 2020, took everyone by surprise. Two years later, it announced a partnership with Honda to produce the Afeela, its first electric car. Sony later admitted that Afeela is too expensive to sell and announced plans to lease the car over a period of 8-10 years.

While these are intriguing plans, another technology company looks more down-to-earth when making an EV. China's Xiaomi has already moved into production with its first model, the SU7. Customers can order it now, with the first deliveries planned by the end of March. The Xiaomi SU7 is an electric sedan competing with the Tesla Model S and Porsche Taycan, but with the price of the Model Y. Not unlike what Xiaomi already does in the smartphone market.

Chinese carmakers will wipe the floor with Western companies

And since we started talking about Chinese carmakers, it's worth exploring what they could do to the Western car industry. They have gone a long way from copying other car models with laughable results and are now technologically on par with the best in the industry. Chinese EV companies already wiped the floor with legacy carmakers in their local market, putting American and European companies on the defensive.

The Chinese offensive has not even started yet, but we can see how they can disrupt the market. Tariffs and trade barriers cannot keep them from competing with European and American carmakers. BYD is already making a splash across the globe, having recently expanded its base in Europe. So far, its efforts might seem futile, with models that are inferior to Tesla while at the same time being more expensive. But make no mistake, the Chinese are coming, and they will do to the car industry what they have already done to smartphones and electronics.

BYD has become bigger than most carmakers and is on track to surpass Tesla in the EV market this year. BYD's growth pace has been extraordinary, with 3 million cars produced in 2023 and enough manufacturing capacity to exceed four million units this year. It's also building new factories around the world, with the latest planned in Mexico. If this doesn't ring the alarm bells at the Detroit Three, I don't know what will.

For its part, BYD said that it has no plans to launch EVs in the US, citing confusing market conditions and conflicting politics. But even if the Mexican production facility will not export its production to the US, believing that the Chinese have no ambitions for the lucrative US market is a mistake. Americans might not be as big EV fans as Chinese and Europeans, but the US is a huge market with immense potential. And because BYD manufactures its EVs in Mexico, it could circumvent tariffs and qualify for federal tax credits.

The Chinese carmakers will soon face market saturation in China, where almost half of the new passenger cars are electric. To keep growing, they will need to expand to new markets and do whatever it takes, even selling at a loss, to establish their footprint in those markets. American carmakers should prepare to compete, or they will be wiped out, as in China.

Legacy carmakers step up their EV game but lack in the software department

The sheer complexity of automobile manufacturing functioned like an impenetrable barrier for newcomers. But it also worked the other way around, becoming a trap for the legacy carmakers. Electric vehicles are relatively simple, with a fraction of the component number of ICE cars. Combustion engines are very complex machines requiring equally complex gearboxes and differentials to function. Instead of all this mess, electric vehicles have very simple electric motors that only need a small number of auxiliary components to send power to the wheels.

This is how Tesla went around the complexity barrier, but doing this is far from enough to succeed in the auto industry. Legacy carmakers have seen this the hard way in the past year. Replacing the combustion engine with electric motors and batteries doesn't make a compelling electric car. You must establish new supply chains, from raw battery materials to power electronics and electric motors. However, the secret sauce was only recently discovered and will take time to mature.

This sauce is software, and it's the biggest advantage Tesla and other EV startups have over the legacy auto industry. Cars have been mechanical beasts for more than a century, and software has been mostly an afterthought. However, Tesla used software as leverage in its fight against traditional carmakers. It has spoiled car buyers to the point that the establishment must step up its software game or die. However, this is easier said than done unless they fundamentally change how they build cars.

Specifically, carmakers have relied on suppliers to offer them the necessary parts to build their cars. A combustion vehicle comprises tens of thousands of components from dozens of different suppliers. This makes it impossible to build software-defined vehicles like Tesla and other startups do. Their vehicles rely on myriads of electronic components that have their own software code. Updating all of them in one step is nearly impossible, and the chances of breaking things are high.

This is why Volkswagen still prefers to make software updates at the dealership, although their EVs are theoretically capable of doing over-the-air updates. If something goes wrong during the update, service technicians have a chance to fix things. Updating tens of thousands of cars remotely would turn into a PR and logistics nightmare even if as few as dozens of them are bricked during the update.

Thankfully, legacy carmakers have finally realized what's keeping them from being successful in the EV arena. This doesn't mean they can shake things up and compete with Tesla head-on in the software department. They still need to accelerate vertical integration of electronic components to streamline software. This, however, risks alienating suppliers and upending the entire automotive industry.

Since they are still new to the game, legacy carmakers are struggling to establish strong software teams. Talent is sparse, and keeping everyone happy is a complex endeavor. Even when they can lure top software engineers from technology leaders like Apple, Google, or Meta, it's hard to keep them around in an environment that is hardly as open and dynamic as other industries.

This is probably why GM recently lost the head of its software department, Mike Abbott, barely one year after poaching him from Apple. Rumor has it that Abbot left with an entire team of engineers, leaving GM's software department in shambles. This is critical for GM, whose Chevrolet Blazer EV sales were halted last year because of software issues.

Tesla is expanding its market as a volume carmaker, but there's still danger ahead

Tesla is now in a commanding position, selling more EVs in the US than all other carmakers combined. The company has become too big to fail, and it has expanded its business lines to the point that building cars might become a secondary activity in the near future. However, Tesla does not want to abandon the car market and will fight to expand its market share.

No matter how successful Tesla becomes as an artificial intelligence company or energy provider, the market will still judge its performance by its ability to sell cars. And even if Optimus robots conquer the market, Tesla will still be considered a car company first and foremost. This doesn't matter much to Tesla, especially as it sticks to its mission to decarbonize the transportation sector. Indeed, all other products in Tesla's lineups, from self-driving software to the Supercharger network, were only created to support the mission.

However, Tesla's position in the market is shifting, and this has many implications. As more carmakers flood the market with electric vehicles, Tesla's market share in the EV segment will only shrink. The American EV maker is already poised to lose the number one position to BYD at the end of 2024. At the same time, Tesla will continue to chip away at legacy carmakers' market share in the overall car market. Tesla is on track to surpass Mercedes-Benz, BMW, and Audi, and the Model Y is already the best-selling car in the world.

But as Tesla builds more electric vehicles and accelerates EV adoption by dropping prices, becoming bigger than Mercedes-Benz might become irrelevant. There are people who no longer consider Tesla a luxury carmaker. The massive price cuts Tesla announced in January 2023 destroyed whatever luxury aura Tesla still had. The more successful Tesla becomes and the more affordable its EVs are, the less exclusive it gets.

Even though the Cybertruck still has stratospheric prices, this won't hold for long. As the pool of early adopters dries out, Tesla will lower the price as it did with all other models to keep all those production lines busy and inventory manageable. And as if this is not enough, Tesla is working on a truly mass-market electric vehicle, selling for about $25,000.

The so-called Gen-3 EV, a sub-compact crossover akin to a shrunk Model Y, will cement Tesla's status as a volume carmaker. Although it might not come earlier than 2026, at least not in enough quantities to make a dent in the market, the compact EV will prove as disruptive as any other Tesla model. This might keep Tesla on an upward trend but could also cause new troubles.

The EV maker has not exactly made a name for listening to its customers. Tesla has removed features and changed tabus as it saw fit. It eliminated ultrasonic sensors and turn-signal stalks without offering better alternatives, rattling many potential buyers, especially in Europe. So far, Tesla has gotten away with it, mostly because stalkless vehicles have been sold in fewer numbers. However, as the Model 3 has lost its stalks and the Model Y is likely following suit with the Juniper update, things could change.

So far, the refreshed Model 3 has been highly appreciated. Still, almost everyone who reviewed it complained about the lack of a turn indicator stalk. Replacing the stalks with capacitive buttons (or a button on the infotainment screen) doesn't solve any problem for the customer, although it saves Tesla a few bucks. With the stalkless design expanding to volume models, Tesla risks alienating more customers. Remember, these are no longer Tesla fans; they are people the EV maker tries to lure from other brands, and I should say they are not convinced.

The next-generation EV Tesla plans to sell in the millions will only exacerbate this. If Tesla really wants to convince so many people that its cars are better than other brands, it should offer what people expect. Price alone would not be enough to convince them to put aside their own biases and beliefs. At least, not enough to convince 20 million people a year, as Tesla announced in its Master Plans.