The transformation that the automotive industry—particularly in the U.S, but also globally—experienced in the past five years qualifies as “stunning,” “historic,” even “inspirational.” Yet, this unparalleled ride likely will seem ho-hum in comparison to the modification the industry is poised to undergo in the coming decade.
The magnitude of these changes explains why consultants like Bain & Company Partner Klaus Stricker, who heads up his firm’s automotive practice in EMEA, places quotation marks around “automobiles” when he describes how the way we think about cars is transforming. This fundamental rethinking is driven by breakthroughs in driverless operation, telematics, new powertrain concepts, new ultra-light manufacturing materials and new business models – including business models designed to profit from some Western consumers’ declining interest in owning cars.
In 2009, at the depths of the global financial crisis, people were putting quotation marks around the “automotive industry” for a very different reason; they were questioning its viability. Germany-based PA Consulting automotive experts Thomas Goettle and Tobias Reich point out that many people were talking about the “endgame” in the automotive industry a mere four years ago.
“Now it’s a completely new game,” Reich asserts, “one that is opening up in so many new directions.” Government regulations and policymaking, game-breaking technology advancements and dramatic consumer-behavior shifts responsible for all of these quotation marks, italics and exciting new directions. Today, the industry’s threats and opportunities seem to be coming from just about every direction, which is tricky news for automotive companies. Two of the most common refrains heard from automotive consultants describing the state of the industry include “there will be big winners and big losers” and “these are big, big bets we’re talking about.”
This is good news for automotive practices and firms, so long as their expertise runs sufficiently broad and deep. “It’s a fascinating time,” Reich confirms.
The Greatest Story Never Told
As recently as four years ago, it seemed to be the end of times for many original equipment manufacturers (OEMs) including a few iconic U.S. companies. “It’s a truly remarkable story,” says Craig Giffi, vice chairman of Deloitte LLP and the leader of his firm’s U.S. Consumer & Industrial Products Industry practice (which includes automotive).
Transport yourself back to January 2009 when we were peering over the cliff that the automotive companies had just plunged from. “Back then, it would be nearly impossible to imagine that in 2013, we would be talking not only how healthy those companies are and how much the industry has changed, but also how they made significant investments in new product development,” Giffi asserts. “How do you go from not making any money and having several major companies filing for bankruptcy to investing significantly in research and development and meeting rapidly changing consumer and regulatory needs while making money on virtually every vehicle? That’s a story that gets glossed over, and it’s a remarkable story.”
The change was dramatic, and overdue. The industry’s crisis-fueled restructuring forced many companies, particularly those in the U.S., to relegate unhealthy practices they had relied on for decades—including producing too many vehicles and relying on heavy sales incentives—to the trash heap.
Booz & Company Vice President Scott Corwin says that the automotive industry has experienced the same type of “massive amounts of discontinuous change” that other industries such as media, financial services and healthcare, have gone through or are currently undergoing.
“All of these industries, for different reasons, are being forced to completely upend longstanding business models to become more agile and competitive in a very different landscape with different kinds of competitors and different kinds of value chains among other major changes,” he says.
The dramatic, overdue and forced change the automotive industry went through in four short years has sparked “a renewed focus on the fundamentals,” notes Brian Collie, a Booz & Company partner in the firm’s engineered products and services practice where he works with automotive and industrial OEMs and tier-one suppliers.
“There has been a deep focus on making sure that you clearly align capacity with demand. And if you get that right, you can actually have much higher levels of profitability, even with much lower volumes of sales.”
Changes and Challenges
Higher profits with lower sales does not sound like a recipe for the “frothy times” the global automotive industry is enjoying right now, according to many consultants including Corwin. Yet, that sort of contrast actually crystallizes the industry. It has made an incredible comeback from the brink of disaster in an incredibly short time.
And yet it causes even more historic changes and challenges—primarily those driven by regulations, technology and customer behavior—in the coming decade. In the U.S., automotive sales have almost returned to their pre-crisis levels. China and other Asian countries are experiencing massive growth in sales.
Europe, on the other hand, is a tough, declining market. But the story is more complex: some European-based OEMs, such as Daimler and Volkswagen, have done very well in Asian markets. Others, including PSA Peugeot Citro