The automotive industry is at a crossroads. Traditional automakers, or original equipment manufacturers (OEMs), are in the midst of a tsunami that not all of them will survive. What will be the reason for their demise? Besides the transition from an internal combustion engine (ICE) car to an electric vehicle (EV), the car industry is undergoing an unprecedented structural transformation.
New technologies – autonomous, connected, electrified, sharing (ACES) – are being introduced that will make drivers obsolete; while new competitors have entered the industry with Midas-like resources and are accustomed to constant business model upheaval. Don’t underestimate the enormous effect both are having on consumer behavior and their demand for cars.
Frankly, for the OEMs, it costs too much to design and build cars in the traditional way. The market evolution from internal combustion engine (ICE) car to electric vehicles (EV) is only serving to exacerbate the cost differential.
It’s clear that new thinking is needed if traditional car brands wish to survive this tsunami. Be plugged in to consumer tastes and able to optimize for product-market fit. But also implementing flexible manufacturing technologies knowing that tastes will be fickle.
Product life cycles will be shorter in the future than ever before. Forget the industry rule-of-thumb that a product can last 6-8 years with a minor facelift in the middle. Apple unveils a significantly upgraded smartphone virtually every year, along with even more frequent improvements to the operating system – and that has trained consumers to have completely different expectations.
What is the solution then? OEMs need to be ready to make partnerships and adopt engineering services outsourcing (ESO) for more critical functions to category specialists than ever before. It’s simply not possible for a single automaker to excel in every required capability from R&D to design, autonomous driving software, EV platform and battery development, manufacturing and component value chain.
The EV market is nearing its inflection point. ICE-to-EV price parity is expected to be reached sometime within the next few years. Indeed, more and more countries and cities – including China, UK, and EU – have pledged to phase out new ICE cars by 2030 or 2035, at the latest.
Last year, even as the pandemic raged on, more than 3.2 million EVs were sold worldwide, an increase of over 40% year on year. For the first time, EVs made up more than 4% of all new vehicle sales. Customers are ready to accept EVs as cars. Improving charging infrastructure has lessened range anxiety. The fact that there are more models to choose from – whether micro-urban cars to high performance and luxury models – has also increased their appeal to buyers.
But for all the consumer excitement, the EV profitability formula is muddied by a continuing pricing differential between EV and ICE cars. While the complexity of an EV is significantly lower than that of an ICE car, the higher cost of battery cells means that profit margins are razor-thin at best or, more likely, negative for the next few years still until the price of batteries come down further.
This puts even more pressure on OEMs to be operationally smarter. The trick is to throw away so-called tried-and-true legacy ways of making cars and adopt new, optimized ways that make better economic sense within the new paradigm.
A recent McKinsey study suggested some possible options for OEMs to consider; these include stripping out costly equipment to create many lower-cost minimum viable products, fitting smaller battery packs to optimize range for urban distances rather than chasing Tesla’s ultra-long-range offerings, and, most importantly, aggressively outsourcing capital expenditures, even ones that would have been considered core in the past.
The latter, for example, is the strategy being pursued by the Volkswagen Group, which has partnered with Ideenion Design and other ESOs on engineering, design and prototyping.
The pressure is on to implement change. EV disruption has already arrived, but much more is coming.
So far, we’ve only talked about EVs in the context of ACES, but connectivity is already here in terms of sat-nav and cloud applications, whether for entertainment or diagnostics. Tesla’s cars can automatically update their software over 4G/5G networks like your mobile phone or laptop, eventually, all cars will.
Apple’s market cap is some $2.4 trillion and has some $200 billion in cash stashed away. By comparison, that’s enough cash to buy Ford Motor Co nearly 4 times over or about two-thirds of Toyota. That’s a lot of horsepowers for the OEMs to try and outrun.
What does this mean for the future of the car industry? Some people believe that, with the advent of self-driving, we’ll be able to share cars and no longer need to own them ourselves. I don’t believe that will be the case.
Cars have become an extension of our persona; along with our clothes and accessories, they are how we project our self-image to the world. Certainly, there will be a market for autonomous ride-sharing services, but it may not be significantly more than that of public transport today.
It’s much more likely that cars become like our smartphones. Personalized, always connected. But, also like our smartphones, the new Big Tech-derived car makers will move them on a much faster product cycle.
Eventually, the business model will extend beyond just selling you a new car every couple of years. What will that be? I don’t have a crystal ball, so I couldn’t tell you. But it will be as different as my old Nokia handset was to the latest iPhone in my pocket.
And that’s a good warning to the OEMs if they don’t want to become the next Nokia.
Source: Unicorn Financial