The pace of investment in vehicles that run on alternative fuels is accelerating as countries adopt more stringent emissions regulations and more consumers are opting to buy cleaner cars, Moody's Investors Service said. Demand for battery electric vehicles (BEVs) is set to grow the fastest, though automakers are also spending heavily on plug-in hybrids (PHEVs).

"Automakers' electrification investments are accelerating as the industry continues its shift away from internal combustion engine powertrains toward alternative fuels," said Bruce Clark, a Moody's SVP. "Although most new vehicles sold even in 2030 will be powered by traditional internal combustion engines, the crossover point will be shortly thereafter."

Achieving adequate returns on growing BEV portfolios will be a major challenge for automakers, Clark said. The auto industry is known for thin margins, and though some established companies generate operating margins as high as 10%-12% on traditional vehicle sales, it will be tough to earn those returns as alternative fuel vehicles are rolled out. Obstacles include high battery costs and effectively integrating mobility services with BEV products, even as demand must be high enough for companies to produce the cars at scale.

Automakers will need to maintain a profitable franchise of traditional vehicles in order to fund their investments in alternative fuel vehicles, Moody's said. They are pursuing a broad range of electrification strategies, ranging from aggressive in-house approaches to heavy reliance on partnerships and buying technology and components from third parties. As they move from a traditional vehicle business model to one more devoted to alternative fuels, automakers will also need to effectively navigate massive shifts in asset allocation.