The transformation of the automotive industry is not driven by changes in mobility patterns but by deeper underlying trends. Looking ahead to 2040, four key forces—collectively called “PACE”—will reshape the industry landscape and drive sustained growth: Polarization, Automation, Connectivity, and Electrification. These insights are drawn from a comprehensive analysis of the global landscape and expert perspectives, providing a clear roadmap for where companies should focus their resources over the next fifteen years.

Polarization — From Globalization to Regionalization

The automotive industry’s future will be characterized by diverse regional developments progressing at varying speeds, driven by geopolitics, regulations, technology, consumer preferences, and macroeconomic factors. China is set to evolve into a market dominated by local automakers and electrification, while North America will remain largely reliant on internal combustion engines. By 2040, these regional disparities will profoundly impact value chains and revenue distribution, requiring companies to adopt differentiated regional strategies or rethink their global footprints to stay competitive.

Despite robust economic and population growth in the “Global South,” North America, Europe, and China will remain core automotive markets.

North America’s economy is expected to grow at about 1.8% annually until 2030, slowing to 1.5% thereafter; Europe’s growth will average only 1.1% from 2030 to 2040; China’s growth is projected to decline from 3.8% to 2.9%. These rates lag behind the Global South’s approximately 3%–4% growth, with emerging giants like India surpassing 5%. However, the Global South accounts for only about 34% of global GDP, with lower purchasing power and infrastructure levels. Its automotive market remains dominated by entry-level and mass-market vehicles; although growth outpaces the global average, it is concentrated in cost-effective models.

Regulations will continue to drive the shift toward sustainability, but regional differences will persist.

Regulatory efforts to advance sustainability in the automotive sector will persist despite challenges in achieving net-zero emissions targets on schedule. Supported by public consensus, governments aim to leverage emissions reduction for industrial competitiveness, yet enforcement intensity varies by region. Some countries are already questioning the feasibility of strict targets—such as the EU’s 2035 mandate for zero-emission new vehicles—or considering exemptions for synthetic fuels.

Stable geopolitical conditions are no longer assured.

Global political tensions are intensifying, with violent conflicts reaching post-World War II highs and U.S.-China competition escalating. In 2024 alone, over 3,300 protectionist measures adversely affected the automotive sector, disrupting raw material and component supplies. Moving forward, many nations may implement policies promoting localized supply chains and subsidies, fragmenting globalization into two dominant ecosystems centered on the U.S. and China. This will restrict market access, increase costs, and compel automakers to prioritize geopolitical risks, strengthen localization strategies, and enhance supply chain resilience.

Automation — From Human Drivers to Artificial Intelligence

The adoption of autonomous driving is progressing slower than expected, with limited advancements in Level 3 and Level 4 technologies. Key challenges include handling complex scenarios, regulatory disparities, and low consumer trust. While autonomous taxis have begun trial operations in select U.S. and Chinese cities, large-scale deployment and profitability remain elusive, and private consumers show limited willingness to pay. With improved policies and cost reductions, these hurdles could gradually be overcome. By 2040, various autonomous vehicles are expected to be deployed progressively across different regions.

1. Deployment of On-Demand Autonomous Vehicles On-demand autonomous vehicles (e.g., robo-taxis, shuttles, buses) are already operating in parts of China and the U.S. Their fleet sizes are projected to match traditional taxis in major cities by the early 2030s, becoming a key part of urban transport globally by 2040. Rural autonomous bus services, led by Europe, will also expand.
2. Profitability of On-Demand Autonomous Services Many companies’ autonomous mobility services are expected to reach profitability by 2040. Intense market competition and operational challenges before then will pressure margins. Eventually, dominant players will secure significant market shares, raise service prices, and achieve sustainable profits.
3. Consumer Availability of Autonomous Private Vehicles A substantial number of autonomous private cars will be on roads by 2040, primarily in the premium segment. Broader adoption will be gradual, as consumers must pay ongoing subscription fees for autonomous features.
4. Autonomous Fleets in Logistics and Delivery Commercial autonomous vehicles will capture significant market share in long-haul transport by 2040, though short-distance delivery penetration will be lower. Large-scale deployment of autonomous trucks on fixed routes or “hub-to-hub” corridors is expected in the early 2030s.
5. Full Consumer Trust in Autonomous Vehicle Safety By 2040, consumers will generally trust autonomous vehicles, with many considering them safer than human-driven cars.
6. Legalization of Autonomous Vehicles on Public Roads Regulatory frameworks will mature by 2040, legalizing autonomous vehicles on public roads with region-specific rules. Overall, autonomous driving will have limited impact on total vehicle sales. Level 4 autonomous private cars will create new profit pools for premium manufacturers. Due to complexity and high investment, automakers will abandon full-stack in-house development. The autonomous mobility service market will consolidate, with 1 to 3 major operators per city or region.

Advancements in Artificial Intelligence

Artificial Intelligence (AI) in the automotive industry remains in its early stages, yet the sector’s unique and vast data resources offer tremendous potential. Automotive companies possess extensive and growing datasets spanning corporate functions to end customers. Leveraging AI to reduce costs and enhance efficiency is becoming a critical competitive advantage. By 2040, AI is expected to be widely adopted across R&D, manufacturing, sales, and after-sales services, driving quality improvements, risk management, and profound organizational transformations.

The value AI creates depends heavily on a company’s ability to access data and train AI on proprietary processes. Development and benefits will vary significantly across players. Regulatory frameworks and geopolitical factors limit data usage and access to cutting-edge technologies, affecting AI model quality and deployment costs, thus creating uneven AI potential across regions. Company size, value chain position, and organizational structure further influence access to capital, talent, and data training capabilities.

Consequently, the automotive industry will experience notable divergence in AI adoption and value creation. Large, resource-rich OEMs are better positioned to capitalize on AI, while smaller suppliers face greater challenges. Overall, AI will be a key driver of future competitiveness and innovation.

Different segments will experience AI’s impact differently:

• OEMs are expected to embed AI extensively across functions, using sales and after-sales data to enhance R&D and manufacturing capabilities, thereby boosting competitiveness.
• For suppliers, data acquisition capability will be crucial; leaders with superior data and AI training will set cost-efficiency benchmarks and earn excess profits, while laggards risk obsolescence.
• Aftermarket players’ ability to access customer and vehicle data will affect operational efficiency and personalized services, with compliant data sharing unlocking new opportunities.

Long-term, disparities in AI value creation may disrupt the industry, potentially leading to distinct AI ecosystems—such as Western and Chinese—limiting global collaboration. Automotive companies must maximize their data assets, continually invest in innovation, and optimize their organizational structures to navigate AI-driven complexities. Many currently lack sufficient capabilities, outdated architectures hinder potential, and transformation pressures mount. Enhancing AI capabilities will be essential for sustained competitiveness in the future automotive landscape.

Connectivity — From Horsepower to Bytes

By 2040, all new vehicles will be built around Software-Defined Vehicles (SDVs), fundamentally transforming the user mobility experience. Continuous software updates will enhance safety, comfort, and personalization, making software-driven features a key purchasing factor. The SDV model can reduce overall software costs by approximately 26% and accelerate agile development cycles, shortening time-to-market. To stay competitive, OEMs must comprehensively revamp their electronic and software architectures.

Currently, most OEMs rely on proprietary architectures with no cross-industry standards, resulting in high integration costs. Moving forward, three dominant ecosystems are expected to emerge, ultimately converging on a universal, hardware-agnostic software standard:

• Semiconductor-Led Ecosystem: Leading chipmakers drive hardware-integrated middleware standards, dominating ADAS and infotainment domains. However, OEMs may seek alternative partnerships to reduce dependence.
• Tech Giant-Led Ecosystem: Leveraging capital and technical prowess, tech giants integrate automotive with cloud services, offering open-source, low-cost solutions. OEMs face risks of losing influence.
• OEM-Led Ecosystem: To reduce external reliance, OEMs are building shared ecosystems that decouple hardware and software, spread development costs, and enhance feature reuse. Some leading OEMs have already made progress.

The future hinges on which OEMs or alliances will control these ecosystems and steer rapid industry advancement.

The widespread adoption of the Software-Defined Vehicle (SDV) model will fundamentally reshape the automotive electronics value chain.

While cross-OEM ecosystems can generate significant cost savings for manufacturers, they also risk rendering existing proprietary platforms—whether already invested in or planned—obsolete. Tier-1 electronic and electrical suppliers face intensified competition from new entrants and must reinvent their business models to mitigate these risks.

Semiconductor suppliers need to evolve from component providers into integrated hardware-software ecosystem builders to enhance their position in the value chain. However, the rise of OEM-led ecosystems may challenge their long-term market dominance.

Electrification — From Internal Combustion Engines to Electric Vehicles

Electrification has become a central focus in the automotive industry, encompassing not only the widespread adoption of battery electric vehicles but also the role of vehicles as energy storage units within vehicle-to-home (V2H) and vehicle-to-grid (V2G) green energy systems. Although growth rates vary by region, the global share of electric vehicles continues to rise, driving structural changes across supply chains, downstream businesses, and target markets. As scale expands, new business models are emerging—for example, V2G systems help customers reduce costs while creating new revenue opportunities for automakers.

By 2040, the global penetration rate of battery electric vehicles (BEVs) is expected to exceed 68%.

Despite recent market fluctuations raising doubts about BEV forecasts, the overall trend is clear. For example, in China, new energy vehicles accounted for 50% of new car registrations in July 2024 for the first time. Strict emission standards, the financial unsustainability of dual powertrain systems, and the launch of new models will further drive BEV adoption across entry-level and mass-market segments.

BEV adoption depends on battery technology, supply chain factors, and consumer acceptance—such as charging convenience and range anxiety—but regulatory environments and automakers’ responses remain the critical factors.

Two adoption scenarios reflect varying drivers: the baseline projects 68% BEV penetration by 2040, while a conservative scenario estimates 63%. Regional differences are significant: Europe is expected to reach 99% BEV penetration by 2040 with minimal green fuel use; North America around 38%; China between 70% and 85%; and other regions approximately 50%. Overall, BEVs will become mainstream across major global markets.

Structural Shifts in Supply Chains, Downstream Business, and Target Markets

Supply chains are gradually moving away from fossil fuel dependence, forming new interdependencies. On one hand, the Global South holds the majority of battery raw material reserves; on the other, China dominates the refining and supply of battery materials. To reduce external reliance, the U.S. and Europe are actively promoting local battery production capacity.

Electrification presents both challenges and opportunities for the automotive downstream sector. Demand for traditional parts in BEVs is expected to drop by 30%–35%, while new components like high-voltage batteries create potential aftermarket revenue. However, due to low battery failure rates, many owners may opt to scrap rather than repair, leaving market development uncertain.

Regions in the Global South, such as Latin America and India, offer significant growth potential for electric vehicles, benefiting from abundant renewable energy and raw materials and clear adoption targets. Falling EV prices are expected to accelerate adoption. Yet, imports of used vehicles bring aging batteries and outdated electronics, compounded by insufficient charging infrastructure. Aftermarket and used vehicle industries must innovate to tackle these challenges.

New Business Models for Battery Electric Vehicles

The growing number of battery electric vehicles (BEVs) will significantly impact grid stability due to the variability of renewable energy influenced by weather. However, BEVs can serve as energy storage units, using vehicle-to-home (V2H) and vehicle-to-grid (V2G) technologies to balance electricity supply and demand, enhancing grid resilience.

V2G technology also enables owners to sell electricity back to the grid during peak hours, earning income or offsetting energy costs. During outages, V2G/V2H-enabled vehicles can provide backup power for homes and critical infrastructure, ensuring energy security. Combined with charging services, these technologies create new business opportunities and drive revenue growth throughout the vehicle lifecycle. Nevertheless, regulatory constraints, particularly in markets like China, may limit the full development potential of these solutions.

Alternative Fuels Unlikely to Become Mainstream in Passenger Vehicles

Alternative fuels, particularly hydrogen, are not expected to play a significant role in the passenger vehicle market due to technological, cost, and infrastructure disadvantages compared to battery electric vehicles (BEVs). Hydrogen production and supply are energy-intensive, resulting in low overall efficiency—a drawback unlikely to improve significantly in the near term. Fuel cells, with their high energy density, are better suited for commercial applications, especially long-haul heavy trucks. Compared to BEVs, fuel cells offer longer range and faster refueling, potentially providing total cost of ownership advantages. Regional differences are notable: about 10% of medium and heavy trucks in the U.S. are projected to use hydrogen, compared to a global average of 3%, while around 20% of buses in China are expected to run on hydrogen.

Synthetic fuels, which can be produced from wind or solar energy, face challenges due to high costs and limited supply, making them unlikely to become large-scale alternatives for passenger or commercial vehicles. Their prices are expected to remain significantly higher than gasoline and electricity over the next 15 years. Moreover, their conversion efficiency is low; research from Germany’s Fraunhofer Institute indicates direct electrification is roughly five times more efficient than synthetic fuels. Overall, battery electric vehicles will remain the dominant alternative in passenger transport, with hydrogen and synthetic fuels better suited for specific commercial use cases.