7 minute read 8 Feb 2021
Night city drive by car

How to build successful partnerships between auto and tech companies

Authors
Gaurav Dua

EY-Parthenon Principal, Strategy & Transactions, Ernst & Young LLP

Strategic advisor experienced at complex transactions. Passionate about creating high-performing teams and fostering an inclusive culture. Proud husband and father.

Brad Hehl

Partner, Strategy and Transactions, Ernst & Young LLP

Strategic advisor for the automotive and mobility industries. Focused on developing high-performing teams. Avid golfer. Family man.

Sri Prabhakaran

EY-Parthenon Principal, Strategy and Transactions, Ernst & Young LLP

Driving value through strategic growth initiatives with a focus on digital business transformations. Avid reader. Organic farming enthusiast.

Sai Avasarala

EY-Parthenon Senior Director, Strategy and Transactions, Ernst & Young LLP

Passionate about helping clients drive stakeholder value; technology enthusiast; amateur macro photographer.

7 minute read 8 Feb 2021

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Forming strategic tech partnerships is more important than ever as technology will continue to disrupt and fuel growth in the auto sector.

In brief:

  • Leadership in technology solutions will be critical for auto companies to launch differentiated products and services in the future.
  • Auto incumbents are increasingly opting for inorganic routes to innovate by accessing technology and capabilities through partnerships with tech companies.
  • Blueprint for success centers on building an ecosystem of partnerships and operationalizing the partnerships with product integration as the focus.

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Technology disruption is fast changing the construct of the traditional car, and the three main drivers – autonomous driving, electrification and connectivity solutions – are not just influencing new transportation models and growth opportunities but also are spawning several sophisticated features that will soon become the mainstay of auto products. Auto incumbents are impacted by increased sophistication of R&D, a complexity shift from hardware to software and shorter product life cycles. They also must now coexist and compete in a high startup density ecosystem. As technology disruption reshapes the auto industry, EY analysis finds that automotive executives are turning to inorganic strategies and increasingly see strategic partnerships (not full acquisitions) with tech companies as the path forward for faster access to capabilities, technologies and products.

Projected global auto market size from technology disruption
Investments of select OEMs and tier 1 suppliers in tech companies in 2017, 2018 and 2019

Given that partnerships are the preferred choice of investments in tech companies, auto companies face two fundamental questions:

  1. How should partnerships be structured, and what areas should be the focus when negotiating partnerships?
  2. How should companies operationalize tech partnerships and build an effective governance model to launch differentiated products and services to achieve success?
Man working with tablet to fix cars
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1

Chapter 1

Structuring the partnership

Build an ecosystem and align on IP & data ownership, capital & resource allocation, and exit plans.

A successful partnership will be structured around an ecosystem of tech players. That structure will include early alignment on intellectual property (IP) and data ownership rights, capital and resource allocation, and exit considerations.

Building an ecosystem rather than relying on a one-off partnership offers flexible, more scalable options. Auto companies should clearly define each tech partner’s role in that sphere, setting expectations upfront and incentivizing tech companies based on how the partnership impacts the auto company’s base business model. Otherwise, auto companies risk ending up with tech partners that default to assuming a dormant role and rely on the auto partner for capital and resource needs.

Auto partners also should assess tech partners’ IP portfolios, jointly develop a vision of how the committed IP could evolve into new technologies and products, and clearly define IP ownership rights. When products built on jointly developed IP are sold to external parties, it becomes even more important that agreements on licensing and sharing of financial proceedings be transparent.

An efficient partnership structure must take capital and resource allocation and data-sharing rights into account. To drive accountability, financial commitments should be staged rather than made upfront. Auto companies should also plan for an optimal tax structure and design greater oversight and guardrails around the capital allocation framework to prevent economic leakages in the partnership. In addition, resource needs and commitment levels should be forecasted as accurately as possible by dividing the project by work steam and sub work streams. Meanwhile, auto partners must look at using capital commitments as a form of leverage to ensure that the tech partners contribute their committed share of human resources to the partnership. Because the location of these resources is critical, the partnership model should also consider inefficiencies and challenges resulting from geographical separation of the teams. As for data, both parties need to consider data ownership rights, what data is accessible and to which parties, and the implications of a data breach.

Exit provisions should be negotiated upfront, lest auto companies be exposed to product support disruptions, business risks and other unintended costs. Such provisions should include plans to buy back customer data sets, monetization rights and other related jointly developed technologies.

Man working on card design from computer
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2

Chapter 2

Operationalizing the partnership and designing governance model

Focus on product strategy and achieve success by driving the product integration agenda throughout.

Partnership success is largely correlated to developing technology and products that can be perfectly integrated with the auto partners’ products. Therefore, the product integration strategy cannot be one-off planning and should span the entire product life cycle, starting with joint product road map design, identifying joint development processes, developing pilot build strategies to integrate technologies and ensuring product support after launch.

Product integration strategy across the life cycle
i. Product road map definition and alignment.

 Joint product road map definition in a partnership is a complex task as both parties can be tempted to pursue their individual agenda and auto companies may be eager to adopt a go-for-all approach to develop technologies for wider range of products. Thus, it is critical for both parties to find a common denominator. Both parties should allow visibility into each other’s planned product portfolio, technology capabilities and gaps. Partnerships should focus on identifying technologies that will be applicable to the auto sector, present attractive product economics and offer the right degree of technological sophistication and customer experience for the targeted market segments. Technologies falling in the intersection of these areas can be immediately prioritized for the partnership. The partnership should be used to reimagine the customer experience and accelerate technology development to meet the demand of increasingly tech-savvy consumers. Aligning and staging the technology road map in sync with the auto product road map is key to product integration. Auto and tech companies should define measurable outcomes and translate them into milestones (at least two to three) by year so that the partnership stays on course in alignment with the product roadmap. The auto partners must offer partnership freedom to execute the joint product road map while holding it accountable using mega-milestones.

ii. Technology development. 

Auto companies and technology firms typically follow different development approaches – staged gated vs agile. Forcing the adoption of either methodology risks creating an unharmonized approach and both parties should offer partnership autonomy in choosing a development process that is based on the base of both gated and agile approaches. Work streams should be staffed using hybrid teams consisting of both auto partners and tech partners to facilitate better understanding of each other’s development processes. Auto companies should appreciate the benefits of an agile framework and let the tech partnership choose its development process.

iii. Pilot testing and product launch. 

Lack of alignment on product maturity levels is often a main reason for product integration failures in pilot stage. These disagreements can be wider for software products, which tend to have more complications when tested on hardware. Technology experts from all sides should be engaged early in the partnership to jointly draft technical specifications and maturity levels, and all parties should aim to codevelop the testing environment, system interfaces and testing methodologies. This promotes a common understanding of technical problems and joint resolution of software failures. As the program advances to production, support from the tech partner becomes more critical. The auto partner must define these commitments in the partnership agreement to lock in the continuity of support at product launch.

iv. Product support.

Customer service and product satisfaction are important to car owners who expect low total cost of ownership despite technological improvements in the car. Auto companies should plan to minimize customer disruption from technology upgrades as well as plan to build a customer support strategy without depending entirely on tech partners. Top issues to discuss before entering a partnership include: transferring customer service responsibilities and appropriate supporting technologies to the auto partner; supporting the auto partner’s plans to internalize technical services or engage or train third parties to resolve technology issues post product launch; and continuing to support product enhancements and software upgrades post auto product launch.

Governance model

Auto and tech partners need to establish clear rules for maintaining control over the strategic direction of the partnership and key policy decisions. A governance model for tech partnerships should be built around a product integration agenda to drive innovation, prioritize technology development and enable fast decision-making. Auto and tech partners should avoid starting the journey with an overly complicated governance model. This can lead to overburdening the partnership with misplaced priorities and the wrong agenda. Instead, auto and tech partners should map out the phases in the partnership life cycle, identify key objectives in each phase and design governance models accordingly for each phase. In the initial stages, governance model should be designed primarily around research, product design and integration, and capital approval. Leaders selected to run the steering committees should have an appreciation for the technology nuances across the partners so that they set the right tone for adopting common processes and issue resolution mechanism. As the partnership evolves and progresses toward commercialization, governance models can be adapted to incorporate a greater representation from other functions. Throughout this journey, both the auto and tech partners must allow partnership management enough freedom to manage the organization on a day-to-day basis without being weighed down by intercompany frictions and overly bureaucratic decision-making processes.

Conclusion

Technology disruption requires auto companies to future-proof their businesses. Partnerships with technology firms are the optimal strategy to gain quick access to critical technologies and capabilities, but these arrangements must be designed to support the product integration agenda and enhance the customer experience throughout the product life cycle. Both partners should offer autonomy to the partnership and build a model by incorporating the best of both worlds. In the event of conflicts, decisions must be stress-tested to check if they support the product strategy and auto partner’s customer experience model. When setting up the partnership framework, the auto partner should build in the impact of different exit scenarios to protect its investments and future business interests. By properly structuring and operationalizing these partnerships, leading auto companies will position themselves to thrive even as their industry continues its dizzying pace of change.

Summary

Technology solutions will be the mainstay of future automotive products and partnerships will be key to gaining access to critical technologies and capabilities. Strategic planning at the onset of the partnership is key to success throughout the product life cycle.

About this article

Authors
Gaurav Dua

EY-Parthenon Principal, Strategy & Transactions, Ernst & Young LLP

Strategic advisor experienced at complex transactions. Passionate about creating high-performing teams and fostering an inclusive culture. Proud husband and father.

Brad Hehl

Partner, Strategy and Transactions, Ernst & Young LLP

Strategic advisor for the automotive and mobility industries. Focused on developing high-performing teams. Avid golfer. Family man.

Sri Prabhakaran

EY-Parthenon Principal, Strategy and Transactions, Ernst & Young LLP

Driving value through strategic growth initiatives with a focus on digital business transformations. Avid reader. Organic farming enthusiast.

Sai Avasarala

EY-Parthenon Senior Director, Strategy and Transactions, Ernst & Young LLP

Passionate about helping clients drive stakeholder value; technology enthusiast; amateur macro photographer.