By Mark C Boyadjis
Mark C Boyadjis is the global lead for automotive technology consulting within the Automotive Advisory practice at IHS Markit. He is responsible for developing custom research for IHS Markit clients in the areas of automotive UX, ADAS, autonomous driving, connectivity, software, and related topics and is a regular speaker at industry conferences and events.
The automotive industry is facing a paradigm shift. The fundamentals that drive business and dictate corporate strategies are beginning to change. The figures and statistics that the industry has used to measure success in the past, and even today, are becoming less important and starting to wane.
As we look to the future of the automotive industry, it will be heavily reliant on new product type, new business model, and new forms of engineering and development that are still making their way into the normal course of business within the automotive industry.
In the future, the monthly vehicle sales and production figures will become less connected to profitability and the focus will shift toward daily active users and vehicle miles travelled. In many areas of the world, the vehicle purchase will become a capex decision for fleet owners and carrier brands, as the Car-as-a-Product model begins to shift to Mobility-as-a-Service (MaaS). And the brands that hold up the industry today will weaken as the end-consumer may begin to place more value in the carrier brand than the vehicle brand itself.
Bedrock For The Future
The leading indicators of this shift can be seen through the hundreds of billions of dollars invested into ride-hailing and car-sharing companies, as well as partnerships among these players and global automakers. Ola is searching for custom-designed vehicles for its platform. Didi is working with Volkswagen on the same prospect, as are Uber and Toyota, and Hyundai-Kia and Grab. Meanwhile, Softbank, as a telecoms giant, sees an alignment between mobility services and their future in wireless services growth. As such, Softbank seems to have an unlimited amount of funds to invest for the growth of mobility services companies, as they seek to fund every corner of the industry.
This trend is analogous to the mobile phone industry and to the airline industry. In most cases, people are drawn to the operating system (OS) and services eco-system of their phone (i.e. Android or iOS) and put less equity on the device itself. Likewise, seldom do air travellers notice or care who makes the jet they are on, but rather are hyper focused on points and rewards programmes of their favourite carriers.
These financial investments are potentially returning value, as the popularity of these services continues to grow. IHS Markit estimates that 10 billion rides were completed in China, Europe, India, and the US combined in 2017, representing almost one percent of all vehicle miles travelled in the collective regions. This number illustrates the importance of these services, now providing a primary mode of transportation for many consumers.
Although private vehicle ownership will continue for the next couple of decades, the calculus for automakers will change. In 2035, IHS Markit forecasts 3.5 million MaaS vehicle sales in China alone, mostly equipping the ride-hailing service fleets.
With this amount of future volume, it is obvious automakers will strive to win those production contracts, yet the bigger opportunity is in the services platform. Operating these fleets will generate trillions of dollars, per year, per market, in revenue, with healthy operating profits hitting the bottom lines.
New Supply Chain
Obviously, all these changes impact more than just the automakers, though they might experience the bulk of the disruption. Other nodes in the value chain will experience massive changes as well. Products, services, and business models must adapt to the component suppliers, the dealer network, and third-party retail operations.
If the fundamentals of this industry shift – which many scenarios dictate – then all the relevant support segments of the industry will also need to adapt.
Component, software, and service suppliers might have the most to gain as the ecosystem shifts away from a vertical hierarchy, to a horizontal one. Tier-2 and Tier-3 suppliers used to be relegated to the annals of a Tier-1 supplier’s discretionary accounts.
This is where true commodity pricing was realised. Now, however, these suppliers in the hardware, software, and services space have amassed more power in technology ownership and innovation and are therefore partnering directly with automakers.
A case in point is the semiconductor industry, now with big-name ‘automotive’ brands, like Qualcomm, Intel, Samsung, and NVIDIA. This is also true in the software space with names like Elektrobit, Wind River, QNX, Green Hills, and many others harbouring the keys to success in the future of mobility – software development talent.
These companies have either formed direct partnerships with the OEMs themselves or are becoming vertically integrated into the OEMs and mega suppliers through acquisitions.
It is important to take this period of change and invest into new growth strategies. The unknowns are known – technology roadmaps, looming potential economic downturn, and future mobility demographic shifts. These and other new market drivers can wage war on a company’s business and corporate strategies. There is no better time than the present to put all options on the table for securing future growth.
The process is straightforward, but not necessarily easy. The first step is to establish which of the new market fundamentals impact your business. For component supply chain, this could be measuring software talent pools. The retail space might be focused on the percentage of vehicles in the parc with a full suite of ADAS features. And the dealer and fleet services space would be wise to watch the rise of vehicles purpose-built for MaaS versus traditional private car ownership. Whatever the guideposts chosen, it is important to define them.
Next is to propose actions and scenarios around these guideposts. If MaaS usage in New York, London, and Shanghai reach 15 percent of vehicle miles travelled, how does this impact my business? What is the impact if this is 45 percent? What downstream impact will 30 percent electrified vehicle sales in the US have on my service business? What about 75 percent? Whatever the scenarios, it is important to describe them and understand their expected impact.
The third step is to address corporate strategies. Given the first two steps have been drawn up, it becomes critical to have a build, buy, or partner discussion among the C-Suite. Right now, the industry is seeing partnerships and investments at the $100 billion (USD) level and beyond. Global automakers like Ford and Volkswagen are working together; also Honda and GM, Daimler and BMW. Building a connected, autonomous, electrified and shared vehicle is very expensive. These decisions should likely come with a mixed approach, wherein the build strategy is most expensive, takes the longest, and secures the best possible competitive advantage. Meanwhile, the partnership strategy is still expensive, but can yield faster, albeit less internalised, results.
The fourth step is to execute. By this stage, the C-Suite should have the resources and the options well laid out to deploy a multi-stage plan through both organic and inorganic expansion. This step is not for the faint hearted, but ultimately if steps 1-3 have been sufficiently mapped, execution can be painless.
Lastly, the C-Suite should review. This can be built into a regular cadence of meetings on the subject every quarter, year, or longer. While the timescale is important, it is imperative to use this step to critically review the process made on investments and to reevaluate and reallocate resources, if the guideposts have changed. At this stage, it becomes necessary to reconsider the relevant guideposts and their impact, thrusting the process back into stage one.
Ultimately, corporate boards and senior leadership teams are faced with myriad decisions on where to invest. There are thousands of startups, ventures, partnerships, and associations where money could be allocated. These could impact competitive technology and IP, global capacity expansion, core research functions, talent pools and more. But there is no one-size-fits-all bucket to place your bets. The key is to stay agile with strategies and resources. Only this will separate the successful firms from the rest of the pack.
Footnote: (1) Ola=India ride-hailing leader; Didi=China leader; Uber=USA leader; Grab=South East Asia leader.