5 minute read 1 Jun 2017
A long, tangled road in Switzerland.

The six trends driving change in the automotive industry

By

Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Passionate about manufacturing, mobility and disruption. Champion for women and diversity & inclusiveness in the Advanced Manufacturing & Mobility industries.

5 minute read 1 Jun 2017

The industry is likely to witness more changes in the next decade than in the last 20 years, and the time to respond is now.

The mix of markets driving the global automotive sales has changed yet again. Growth has shifted to markets such as the US, Western Europe and China, while the emerging markets have cooled off. And the pace of global vehicle sales growth is expected to slow over the next few years.

The C-suite thus needs to focus on how to be more agile in identifying emerging trends and on how to change strategies faster. We believe the automotive industry is likely to witness more changes in the next decade than it saw in the last 20 years. We have identified six drivers of change that will shape the automotive ecosystem over the next decade.

PREPAREDNESS

82%

of automotive organizations lack preparedness, execution and resource alignment to enable faster change, according to our analysis of C-suite agendas.

1. Accelerating pace of disruptive innovation

Rapid evolution of the shared mobility market has not only proven the benefits of asset-light business models, but also their ability to rapidly deploy across the globe. As a consequence, these new entrants are also proving that the capital-intensive nature of the automotive industry, which served as a barrier to entry, is in fact becoming a liability.

New requirements for urban and individual mobility based on asset usage have also opened the doors for a multitude of new entrants ranging from journey planners to mobility aggregators that provide consumers with a one-stop interface to plan, book and pay across all modes of transport. In short, disruption has become the fundamental to the rapid evolution of the mobility ecosystem.

In response, automakers are collaborating at multiple levels, not just with suppliers and competitors but also outside the ecosystem. Now, innovation is challenging established principles, from value proposition to cost drivers and product life cycles. 

TECHNOLOGY

90%

of car innovations and new features are driven by electronics, which account for 35% to 40% of an average car’s production cost.

2. Battle to own relationships in a digital market

Mobility remains dominated by personal vehicles, and the market is far from the tipping point at which services start to generate more revenues than vehicles. But the pace of adoption of mobility solutions does raise the risks for the auto industry losing its visibility of consumers, and it has ignited discussions on customer relationship and life cycle management among automakers and retailers.

Eventually, both automakers as well as mobility service providers will need to find innovative ways to retain consumers’ loyalty when they will no longer be tied down with capital investments or contracts to a specific brand or service provider.

In the outcome economy context, purchasing decisions made for each ride are influenced by factors including availability, comfort, ease of use, reliability ratings and pricing; this is entirely different from the world of vehicle purchase decision-making where brand perception, driving experience and total cost of ownership are principal considerations.

CUSTOMER HABITS

US$6.5b

Expected global revenue from car-sharing services in 2024 (from US$1.1b in 2015)

3. Digitalization across the value chain

More data and increasingly sophisticated connectivity across the value chain have impacted the entire industry ecosystem. From exploring the monetizing opportunities at the consumer end to transforming workplaces by applying robotics, the power of digitalization is substantial. Managed, it can be a major source of competitive edge. But if unmanaged, it’s a source of risk.

While automakers, suppliers and connectivity infrastructure companies have been leveraging their access to vehicle data to progressively drive innovation, they have had limited success in creating additional sustainable revenue streams.

However, disruptive entrants into the mobility ecosystem have been able to leverage their relationship with the consumer and the driver to drive revenue growth in the ride-hailing, ride-sharing and car-sharing markets.

Digitalization also challenges existing workplaces and employment practices as employees demand greater connectivity and mobility to fulfill their roles more efficiently, irrespective of their functions.

ANALYTICS

37%

of all data generated by 2020 will have the potential to be analyzed, up from 22% in 2013.

4. Secure resources for business continuity

Rapid innovation and the increasing prevalence of diverse collaborations have created fresh challenges in capturing valuable IP from company-wide innovation programs and formalizing IP ownership structures in collaborations with third parties.

In particular, new technologies — ranging from alternate powertrains to connected and autonomous vehicles — that have witnessed widespread partnerships have increased the patent litigation risk for suppliers as well as automakers.

Also, demographic changes and the focus on new technologies are threatening traditional operational knowledge. An aging workforce and early retirement schemes are a drain on the industry’s traditional engineering and process knowledge in many mature markets. The lack of an organized infrastructure has meant knowledge is either lost with turnover or buried in silos.

INVESTMENT

US$114b

Estimated global automotive R&D expenses in 2020, up from US$80b in 2014

5. Diverse sources of unpredictability

The number of regions witnessing dramatic changes in their political landscape, rise in terrorism, social tensions and interstate conflicts, all signal growing worldwide instability. Having established a footprint across most major markets, companies across the automotive ecosystem are now being challenged by local volatilities, including in raw materials, foreign exchange and financial markets.

Volatility in the price of raw materials and the value of currencies has a direct impact on automakers’ profitability. And volatile financial markets can impact customer demand, refinancing costs and valuations.

While protectionism in developed countries has been declining for decades, the recent recession and political tensions — ranging from Brexit and dissent within the EU, to changes in the US political landscape — seems likely to spark new protectionist measures to attract and protect investments in manufacturing, technology innovation and business services.

INVESTMENT

25%

of world GDP is constituted by the economies using negative interest rates for revival.

6. Unprecedented scrutiny

Besides regulators and activist shareholders, advocacy groups are playing a greater role in demanding strict process definitions and adherence. Armed with social media and digital penetration, these stakeholders have the potential to trigger significant risks, which may not be detected by traditional automotive industry processes and risk monitoring.

Environmental advocacy groups have been among the most outspoken up to now. And they’re expected to continue to play an important role in raising environmental awareness among consumers. Corporate social responsibility along the global supply chain is becoming both more visible and increasingly important for customers and business partners.

Security and privacy of systems and processes are a focus for hacktivists, thanks to the proliferation in data, as well as the key role that software and connectivity play in vehicles.

National and international regulators are increasing the pressure on compliance, governance and transparency. This evolving and heterogeneous landscape of global regulations is driving complexity into international operations and igniting new areas of risk.

Summary

Our analysis of automotive C-suite agendas indicates that a majority of the automotive organizations — 82% — lack preparedness, execution and resource alignment to enable faster change. Auto executives aiming to bridge the gap between the current and future states must drive a sense of urgency throughout their organization and business ecosystem.

About this article

By

Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Passionate about manufacturing, mobility and disruption. Champion for women and diversity & inclusiveness in the Advanced Manufacturing & Mobility industries.