The car industry is undergoing profound changes as electric car sales continue to rise and the geography of global car sales shifts. Global car sales approached 80 million in 2024 and have largely bounced back from their pandemic-related slump. Recent growth has been exclusively driven by sales of electric and hybrid cars, which made up around 30% of total car sales in 2024, while global sales of pure internal combustion engine (ICE) cars peaked in 2017 and have since fallen by 30%. By contrast, electric car sales grew more than 14-fold over the same period, reaching over one-fifth of cars sold globally in 2024. The geography of car markets is also on the move: China and other emerging economies now account for over half of global car sales, up from just 20% in 2000.

China’s car production more than doubled between 2010 and 2024, when China overtook the European Union to become the world’s largest exporter. Global car production today is lower than at its 2017 high, and its centres have shifted. China now accounts for 40% of total manufacturing capacity and Europe and North America for 15% each. India’s car output has also grown and is now 25% above 2017 levels. By contrast, production in advanced economies has stalled or declined in the past decade, despite the European Union and Japan still relying heavily on export markets, which account for 40% or more of production.

How the incumbent car industry responds to these shifts will be critical for its future and that of industries across the supply chain – and for the energy sector as a whole. Passenger cars are the single largest source of global oil demand today, covering around one-quarter of total consumption, while electric cars are a small but growing driver of electricity demand. The use of alternative fuels, notably biofuels, represents 5% of energy use from cars today and is set to grow in support of policy priorities such as fuel diversification and emissions reductions. The extent and pace by which cars electrify, however, is what will affect future car manufacturing as well as the energy sector the most, and explains the focus of this report.

Even as ICE car sales are set to continue declining in China and advanced economies in aggregate over the coming years, they are likely to rise in other regions. Different regional technology mixes pose challenges for the global industry. Today, Japanese carmakers supply two-thirds of cars sold in Southeast Asia and over half of those sold in the Middle East and India; European carmakers have a nearly 50% market share in Central and South America. Industry incumbents dominate ICE car sales in these regions, and the lack of recharging infrastructure is a bottleneck for electric car sales growth. But their market uptake cars is increasing in these regions nonetheless, challenging the market share of incumbents; imports from China make up 90% of electric car sales in emerging markets today.

New market-entrants are capturing an increasingly large share of the electric car market. Growth in electric car sales in recent years has especially benefited new pure-play electric car makers from China and US-based Tesla; some 45% of global electric car sales in 2024 were from such pure-play electric car makers. Chinese electric cars are cost-competitive domestically and increasingly abroad. Around 70% of electric cars sold worldwide are manufactured in China, thanks in part to government industrial policies, such as low-cost loans, that have supported manufacturing scale-up, strong supply chains and the development of advanced battery technologies. Two-thirds of battery electric cars sold in China in 2024 were cheaper than equivalently sized ICE cars.

Existing electric car manufacturing capacity is more than sufficient to supply global demand today, but some retooling or repurposing of capacity will be needed moving forward for countries to meet demand domestically. In China, electric car manufacturing capacity is currently about twice as high as domestic production. This means there is ample opportunity to cater to growing international markets, although this surplus capacity and fierce domestic competition has been hurting profit margins and made consolidation of the industry an important government priority. In Europe and North America, electric car manufacturing capacity is roughly sufficient to meet domestic demand today, although future growth in sales will require additional manufacturing lines. This does not, however, mean that new factories need to be built; past evidence suggests that repurposing ICE factories is possible without halting conventional car production, and retooling can be achieved within 1 year.

The car manufacturing industry and supporting sectors account for 2-6% of GDP in major car-producing countries. The world’s largest car manufacturers – China, the European Union, Japan, Korea and the United States – together account for around 80% of the direct value added in global car manufacturing. Many other sectors also contribute to the manufacturing of a car, from steel and aluminium production to the suppliers of vehicle parts and components. In major car-producing economies, for every dollar of output from the car industry, about USD 0.7 of value added is generated in the economy to support production.

Car manufacturing directly employs over 10 million people globally today, nearly half of whom are in China and the European Union. Indirect employment in related industries also adds to the significance of the car industry as an engine of jobs. For example, in Japan, the automotive industry directly supports around 900 000 jobs, but this grows to 1.4 million jobs when including those in upstream industries, such as materials and equipment supply. Jobs in manufacturing of vehicle components, which are tradeable and more labour intensive than vehicle assembly, tend to be concentrated in countries that neighbour centres of vehicle assembly and have lower labour costs, such as Mexico, Poland and Thailand.

The car industry tends to operate in clusters where vehicle assembly, automotive supplier and materials plants benefit from proximity. This is because the required volumes are very large – with the car industry accounting for 6% of steel and 17% of aluminium demand globally, with even higher shares in the European Union, Japan, Korea and the United States. Automotive industrial clusters today closely reflect regional vehicle priorities: Detroit in the United States and Nagoya in Japan each have 1 battery factory, whereas Shanghai in China has 26, with a production capacity of about 200 gigawatt hours. That is over 5% of the global total and more than current capacity in all of Europe.

The automotive supplier market is worth about USD 1.3 trillion today, equivalent to 40% of the global market for cars. Over two-thirds of the market is related to components other than the powertrain, while around 20% are ICE-specific. The market for electric vehicle-specific components represents just 10% of the overall market, but the share has grown nearly sevenfold since 2019. The global market for ICE-specific and non-powertrain components is dominated by suppliers headquartered in Europe, Japan, Korea and North America. In contrast, for battery related-components, Chinese companies command around 80% of global manufacturing capacity. Exports of other automotive components from China are also growing.

The direct cost of manufacturing a battery electric car is higher than producing an ICE car, mostly due to battery costs. Powertrain components and the battery also account for the main difference in economic value created by manufacturing. In the European Union, for example, over 90% of engines and parts for ICE cars are produced domestically, compared to just over 40% of batteries and parts for battery electric cars. This difference is less pronounced in the United States, where a higher share of both engines and batteries are imported, albeit from different regions. Japan and China have domestic supply chains for both ICE and battery electric car manufacturing, meaning there is hardly any difference in levels of domestic value creation. The ability to produce batteries competitively is the main determinant of regional EV manufacturing costs.

As battery manufacturing scales up in different regions, policy support will need to strike the right balance between competitiveness and domestic value creation. Full domestic self-sufficiency is rare in the car industry, and importing components may provide a short-term boost to the competitiveness by significantly cutting production costs. The powertrain represents around one-third of the estimated retail price of a battery electric car, and the battery about one-quarter. As such, even in regions where all battery components are imported, most of the economic value associated with car manufacturing is retained through vehicle design, assembly and non-powertrain component manufacturing. Still, there are strategic benefits from developing a domestic battery industry over time, as its value extends beyond the car industry. China’s recent announcement of export controls on batteries, components and machinery is a reminder of the potential risks that stem from a concentrated supply chain.

Producing cars in China is cheaper than in advanced economies, especially for electric cars. Producing a small SUV in China is over 30% cheaper than in advanced economies for both ICE and battery electric powertrains. Large-scale manufacturing operations and vertical integration are the key reasons behind China’s cost competitiveness; lower energy prices and labour costs also contribute, but to a lesser degree.

Lower powertrain costs explain nearly 40% of the manufacturing cost difference for electric cars in China compared with advanced economies. Average battery cell prices in China are over 30% lower than in Europe and over 20% lower than in the United States. China achieved this cost advantage through economies of scale, experience, access to supply chains for critical minerals, and successful innovation in lithium iron phosphate (LFP) battery chemistries, a lower-cost battery alternative. Prior to 2018, China and the United States had cumulatively produced similar quantities of EV batteries and offered similar battery pack prices, but by 2024 China had produced over six times as many, with battery packs priced more than 20% lower than in the United States.

The gap in battery production costs can be bridged with sufficient time and investments. The cost of an equivalent battery cell fully produced in Europe would be 70% higher than one produced in China today. Access to low-cost components and critical minerals account for 30% of the cost difference, but another half is due to manufacturing efficiency and automation. Comparable rates of battery production efficiency can be reached outside of China if factories ramp up production and gain experience. Recent investments in cheaper LFP chemistries across advanced economies may shrink the cost gap further, but the recent export controls risk slowing the deployment of advanced LFP chemistries outside China if enacted.

Additional direct manufacturing costs do not fully explain the higher prices of electric cars outside China. The cost gap between electric and ICE cars exists in all markets, but the gap between respective retail prices and direct manufacturing costs varies due to differing pricing strategies, competitive pressures and indirect costs (such as overhead and R&D). For example, in China, the difference between the retail price of the electric and ICE version of a small SUV is similar to the difference in direct manufacturing costs; in Germany, the retail price difference is more than double the manufacturing cost difference.

There are no easy responses for incumbent manufacturers to the challenges posed by the major shifts in global car markets. Many are currently working to balance their portfolios in a way that leverages their strengths in producing ICE and hybrid cars, while also improving competitiveness in EVs. The latter can rely on five strategic priorities for public and private sector actions:   

• Achieve economies of scale and foster learning-by-doing. In countries with large ICE manufacturing operations, policy measures to create dependable, mass-market demand, such as sales targets for EVs, can drive investment and help to build experience as manufacturing ramps up.

• Scale up domestic battery manufacturing and develop related skills. Sharing scale-up risks through partnerships, prioritising workforce skills and fostering a domestic ecosystem to supply and maintain equipment can support nascent battery manufacturing capacity through the difficult start-up phase.

• Prioritise the most competitive battery chemistries. Attracting investment in manufacturing today’s cost-competitive battery chemistries close to car assembly centres is a near-term priority, but remaining at the technological frontier will require continued R&D on innovative battery designs.

• Secure dependable supply chains for critical minerals. In the near term, the focus must be avoiding shortages, but diversified supply chains will be key to future competitiveness. Co-operation with mineral-producing and processing countries can support this aim while providing partners with economic opportunities, as can technological and regulatory developments to increase local minerals supplies, reduce demand and increase recycling.

• Minimise energy costs where they matter most. Energy costs can influence decisions about where to locate new manufacturing plants, especially in upstream supply steps such as material production and battery component manufacturing. Electricity market design and power purchase agreements can help reduce costs and price volatility.