5 challenges that automotive companies must confront to get in gear

As the new mobility industry takes shape, the barriers to entry that traditional automotive companies thrived under become barriers to exit.

Until a few years ago, automakers were at the center of an industry that was concentrated on affiliated functions such as financing, parts supply, logistics and retail dealerships. The old value chain was relatively straightforward: suppliers, to the original equipment manufacturer (OEM), to finance and the dealer, to the customer.

Now the ecosystem has grown to become vastly more complex, including cities, ride-sharing operators, government agencies, technology and telecom providers, media and entertainment companies, transit service providers, energy companies and utilities, financiers, and entrepreneurs.

In this expanded ecosystem, collaboration among stakeholders will be mandatory, data will be more accessible and openly shared, and the ultimate goal will be to create a fulfilling customer experience rather than simply selling more cars.

Heart versus head: the strategic dilemma

Automakers have been innovators and disruptors. They adopted and refined the assembly-line approach to mass manufacturing, for example, and used it as a competitive weapon to raise product quality while reducing prices. As a result, the industry matured and thrived.

Automakers benefited from high barriers to entry, including expertise in vehicle design and manufacturing, well-organized supply chains, vast dealership networks and massive economies of scale. But as the new mobility industry takes shape, these barriers to entry will become barriers to exit: automakers must overcome them to transition to the open-architecture model of the future.

This strategic dilemma can be described as a struggle between heart and head. The incumbents’ hearts are very much in favor of continuing to do things as they’ve always done them. Yet their heads are telling them that they must welcome the new mobility paradigm if they want to remain viable.

Overcoming challenges requires radical change

How will automakers, as incumbents, succeed in the new mobility industry?

Through our work with clients, interactions with ecosystem stakeholders and our own research, we have identified five inherent challenges automakers must overcome. Converting these challenges into opportunities will require them to radically change their thinking about their customers, business partners, employees and — especially — themselves.

1. Innovation: new ways are the way to go

Automotive has a history of innovation, and today’s car is much more technically. But creating new business models requires innovation that stresses exponentially more diversity of thought, speed of design and embraces risk and failure.

Our experience indicates that few automakers have a solid approach for developing a large portfolio of ideas, evaluating their value, designing sound in-market experiments, learning from failures and understanding when to scale.

This has resulted in automakers employing varying degrees of ideation and experimentation on connected services, mobile apps and vehicle-as-a-service offerings; however, few are engaged in truly innovating ways likely to revolutionize their own business.

2. Connecting with consumers: essential to success

Automakers need to view consumers as individuals for whom experiences, products and services must be personalized. This is especially critical as millennials and generation Z, who have grown up with mobile and on-demand everything, and who prioritize experiences and personalization, become a major portion of the consumer population.

These consumers pay for what they value, but they are increasingly opting out of relationships with service providers if they don’t get what they consider a fair value exchange. This trend is playing out elsewhere, especially in the TV and cable industry, where providers have been forced to offer customized content packages as viewers increasingly refuse to pay for content they don’t want.

But there’s a fundamental problem: automakers lack an ongoing relationship with consumers. After a single purchase or leasing transaction, customer interactions are infrequent and often impersonal. In some instances, the relationship is managed by third-party dealerships. In contrast, potential entrants to the market and leading ride-sharing providers enjoy a much closer connection.

Unless the automakers dramatically improve their ability to interact by gathering, understanding and acting on consumer intelligence, they risk losing customers.

3. External collaboration: sharing required

For automakers, many supplier relationships have been defined by formal closed contracts, tense negotiations and a rigid tier structure — a useful interaction model for purchasing parts.

But the new mobility industry requires working closely with a broader set of ecosystem partners. While there have been success stories of cities and automakers working together, an effective model for collaboration in this ecosystem hasn’t yet materialized.

The motivations of these potential partners are often very different and sometimes in opposition. However, each has assets, capabilities and data that can be leveraged for great collective impact.

Consumers will also play a role in this ecosystem beyond that of a customer. As consumers (drivers and riders) understand the value of their data to the ecosystem, they will demand a fair value exchange, effectively using their data as a currency to obtain benefits. Are automakers ready to work with customers as suppliers of data?

This is an opportunity for automakers to lead in working with other key stakeholders to openly share technology, data and expertise. This requires re-evaluating assets that have long been considered secret, aligning incentives and sharing risks and rewards. 

4. The war for talent: new strategies for battle

The automotive industry has always employed highly talented engineers and technologists, but few of the best artificial intelligence engineers and data scientists. Traditional organizational constructs, compensation models and incentives prevent the automotive industry from attracting and retaining the talent required to innovate and sustain a disruptive mobility business.

Our research among young entrepreneurs and freelance technologists revealed that automotive is not considered a desirable industry in which to innovate. When asked what was attractive about the technology industry, they cited open sourcing, shared equity and the alignment of purpose with their personal values as important elements.

Technology companies and start-ups draw the best technologists and data scientists looking to disrupt the auto industry through software. Automakers must adapt to access and develop talent in unconventional ways or else a shortage of talent will put automakers at a distinct disadvantage.

5. Outdated operating models: time for something new

As incumbents with significant legacy operations, automakers strongly prefer to leverage their old processes and systems versus creating new ones. However, multiple challenges relating to governance, innovation, partnerships, talent and back-office services arise from overreliance on the core business operating model.

If automakers set up new business units to compete in the new mobility industry, they must design new operating models for these units. Leveraging relevant capabilities from the core business must not come at the expense of remaining tied to the old ways of operating.

This doesn’t mean abandoning the core business — adept organizations will create feedback mechanisms for the new units to transfer knowledge and process innovation back to the core for continuous improvement.