Hidden among alluring innovations like autonomous vehicles, electric vehicles (EVs), connected cars, and ride-sharing lurks an automotive industry aspect that generates incredibly valuable consulting opportunities: The industry is highly capital-intensive and cyclical. Take it to the bank—you heard it here first.
Of course, automotive practices have been doing just that for years, and they should expect the demand for these traditional services to sustain well into the future. That’s the case despite the recent explosion of potentially disruptive technological advances, related shifts in consumer behavior and new regulatory changes. That’s not to dismiss the potential impact of these wow-inducing developments, but to place them in context. The bulk of the industry’s overall challenges and related consulting needs still relate to the industry’s fundamental economics and nature.
“We talk a lot about these new disruptions, but it is a very big, capital-intensive industry, and it is difficult to put together a car reliably and efficiently,” says Mark Wakefield, the AlixPartners Managing Director who leads his firm’s Automotive Practice in the Americas. “The vast, vast, vast majority of capital and people are oriented to the tasks of making and selling cars today. We do an awful lot of work that is similar to the work we did five years ago.”
Wakefield along with his peers at competing firms also expresses excitement regarding what he describes as “big, disruptive forces.” These forces are spurring original equipment manufacturers (OEMs) and suppliers to accelerate production cycles; produce more fuel-efficient, more technologically advanced and safer automobiles; design better customer experiences; and consider, and invest in, new business models. AlixPartners’ nifty acronym “CASE” (connected, autonomous, shared and electric) identifies the most notable of these forces.
Connected-car technology seems to represent the most potentially lucrative and immediate opportunity today; the other disruptions, while also generating investments and consulting demand, appear to have longer-term implications and potential payoffs. Any of these emerging developments could transform the industry down the road; today, it is important to recognize that OEMs have a growing collection of diverse challenges, many of which are familiar and reflect the underlying nature of the industry. With that dose of context out of the way, it’s time to shift to those transformative,
With that dose of context out of the way, it’s time to shift to those transformative, and pretty amazing, disruptions coming down the pike.
Is Volkswagen the Future?
The strategic shift that Volkswagen AG CEO Matthias Müller described to The Wall Street Journal in mid-June encapsulated most of the disruptions and challenges—including ride-sharing, autonomous vehicles, connected cars, regulatory risks, competition from the technology industry and talent management challenges—confronting the industry and OEMS, in particular.
Müller said that the mobility, not the actual vehicle, would be the core product delivered by a company whose 600,000 employees currently build 10 million cars each year. He also announced plans to offer 20 electric or plug-in hybrid vehicles within the next four years while promising to enhance the “passenger experience” through new digital-services and mobility-services business units. Of course, Müller is CEO because his predecessor stepped down following the company’s emissions scandal. Notably, one of his first talent moves as CEO was hiring a former Apple executive as Volkswagen’s Chief Digital Officer.
That VW and other OEMs have the ability to invest $300 million in ride-sharing apps (what VW paid for Gett), talk about passenger experiences and describe themselves as mobility providers is extremely impressive.
Just seven years ago many of these same companies were teetering on the brink of destruction during the depths of the financial crisis. Since then, the industry has largely taken its medicine, demonstrated a knack for resilience and enjoyed a sustained period of growth, first in emerging economies and, more recently, in North America. Now, this growth is flattening, especially in developed countries, leaving developing economies, such as India and China (despite its slowing economy) as good bets for growth in the coming years.
The challenge for automotive companies will be to adjust to a new market cycle while evaluating and pursuing the best opportunities related to the following trends, changes and disruptions:
➤ Materials and manufacturing innovations
Rising fuel efficiency standards around the world are driving changes and innovations throughout the supply base. Manufacturers have a growing appetite for lighter materials, like aluminum, that can help increase fuel efficiency. Manufacturers and suppliers also are using other innovations, such as low-pressure casting and gravity-casting. “One of the main factors that the automakers are working toward relates to the dramatic increase in fuel requirements that are coming,” says FTI Consulting Senior Managing Director David Woodward.
Brian Collie, a Partner and Managing Director at The Boston Consulting Group who leads the firm’s North America automotive sector, points out those manufacturers are also conducting major work to make traditional powertrains more efficient.
➤ Autonomous vehicles
Despite the ubiquity of Google’s self-driving test vehicles in a handful of cities and the media attention the technology receives, widespread adoption of fully automated vehicles remains distant and impeded by significant consumer-preference and regulatory obstacles. On the global standards organization SAE International’s six-level automation taxonomy, some current vehicles have reached partial automation (Level 2).
“These cars can run with a high degree of assistance, but they require drivers’ full attention at all times so that they can take back control if need be,” says Wakefield, who notes that achieving Level 4 automation requires a “big jump” in capability. It also requires major legal, regulatory and behavioral changes as Level 4 marks the point at which and automated driving system (rather than the driver) monitors the driving environment and troubleshoots if problems arise. Wakefield and his counterparts in other firms agree that OEMs still need to figure out how they operate, or choose not to, in the autonomous driving space.
Collie, whose firm is the World Economic Forum’s exclusive partner on autonomous vehicle research, and his colleagues are now evaluating the impact fully-autonomous vehicles will have on a range of industries. “As we look ahead into the 2030 to 2035 time frame, we think fully autonomous vehicles will account for only about 10 percent to 15 percent, at most, of all vehicle sales,” Collie adds. “The traditional vehicle still has a very long life ahead of it.”
➤ New regulatory and recall pressures
Within the next decade, vehicle fleets in the U.S and Europe will need to achieve average fuel efficiency ratings of 60 miles per gallon. Getting there will require “step-change improvements” rather than incremental progress, notes Evan Hirsh, a principal with PWC’s Strategy& and a longtime automotive expert. Recent corporate chicanery related to fuel-efficiency testing as well as recent recalls have placed more industry practices under the microscopes of regulators, the media and the public.
The massive airbag recall shows that suppliers are taking on more risk and responsibility for recalls compared to the past, when OEMs bore the brunt of recall responsibility (and reputation hits), regardless of the source of the issues. Data-management improvements have enabled automotive companies to learn about potential quality issues much quicker, and several automotive consulting leaders point out that companies are becoming increasingly proactive by addressing these issues well before a recall is required.
➤ Connected cars
Connected cars let drivers safely and conveniently access content over cellular and/or wireless networks via a smart phone, an embedded system or some combination. “There was a big debate around whether the car itself should be connected to the internet or whether connectivity should be made through the cellphone,” Wakefield notes. “That debate has essentially been resolved, and an embedded system is the answer.” Now, a broad range of companies across industries are working diligently to create and provide connected services along with supporting software and hardware.
These technology services could generate an additional $40 billion in revenue in the next few years, according to AlixPartners research. Which companies and industries grab the lion’s share of that new revenue remains to be seen. “The technology necessary to make connected and intelligent cars—specifically Web networking, sensors and software—is not in the traditional wheelhouse for most automobile makers,” notes a 2016 industry trend report from PwC’s Strategy&. That leaves the door open for Apple, Google and other high-tech companies, according to Strategy&.
Mobility has received lots of attention. This is partly because Uber has attracted massive attention and capital while becoming a symbol for digital disruption across all industries, and partly because the notion of ride-sharing upends a vehicle-ownership model approach that has reigned for a century. Whether or not ride-sharing will actually upend the industry remains to be seen. “Not a day goes by without talk about all of the OEMs that are going to be in the ride-sharing business,” says Hirsh.
“That’s really a distraction from the industry’s core issues.” AlixPartners’ research shows that ride-sharing does particularly well (even replacing traditional vehicle ownership) in urban markets with thriving public transportation offerings. While that complementary relationship could pave the way for new business models, the degree to which traditional automotive companies can create those models remains to be seen. “Auto finance is clearly in the core competencies of an automaker,” Wakefield says.
Running rental-car companies, taxi fleets and ride-sharing business? Not so much. Nor is working directly with consumers in an intimate and competitive manner, Wakefield points out. But mobility remains a noteworthy concern. This is driving OEMs to hedge. “OEMs that generate a significant amount of free cash,” Collie says, “can take a small portion of that and think about: ‘How will mobility be evolving and what’s my role in it?’ That’s a smart bet to make because it allows them to think differently about customers, gain more customer insights and get closer to their customers in ways that can, in turn, help their core business.”
Five Questions for Automotive Consultants
Automotive companies continue to rely on consulting partners for assistance with traditional core business challenges, such as operational improvements and boosting cash flow. Automotive consulting leaders also report strong demand for services related to strategic decisions on capital allocation, profitability management, innovation investments, growth strategies (e.g., mergers & acquisitions and divestitures), and related make-or-buy choices. Regulatory challenges also generate consulting opportunities.
Another set of less traditional opportunities are cropping up with greater frequency. These requests for consulting assistance center on the following client questions:
How can we expand and improve our global platforms?
Capturing more benefits from global scale requires OEMs and suppliers to address local market requirements. This balancing act requires the efficiency and late-stage customization capabilities, Collie notes. This is particularly challenging for suppliers. “It’s not enough just to be global,” he continues, “[as a supplier], you’ve got to be the best in any given region or else the manufacturer will source from different suppliers there.” Global OEMs face their own set of challenges squaring off against strong, established, regional and local competitors.
Given all of changes and opportunities, where do we invest?
Even OEMs sitting on the largest piles of cash in the industry cannot afford to invest in every major opportunity. The need for sharp advice on strategic investments is intense right now as manufacturers weigh whether they should spread out their bets by investing in numerous pilots or make bigger, higher-risk investments in one or two areas.
Nearly all investments related to connected cars, mobility, major manufacturing innovations, global production expansion and the like requires some element of partnership. Before those partnerships are forged, however, manufactures need help from their consulting partners in charting a clear course for how they are going to participate in the space.
“Automotive companies need to decide which portion of the new value-add they want to make themselves, and what they want to source,” notes Klaus Stricker, a partner in Bain & Company’s Frankfurt office and leader of the firm’s automotive practice.
How can we step on the gas pedal in all areas?
Stricker also points to a need for more automotive companies to adopt the same, streamlined “trial and error” approaches embraced throughout the tech industry. Woodward notes that automakers are reducing design cycles and dramatically increasing the cadence of new product launches. From 1997 to 2016, OEMs introduced an average 39 new models a year globally; from 2017 through 2020, this figure is projected to leap to 58 new models annually, Woodward notes to illustrate a growing emphasis on speed.
That need extends to “commercializing innovations and managing the innovation queue” for new models, components and options, Collie points out. “There are a ton of great ideas out there, but the process commercializing those ideas into products consumers will buy must be conducted extremely quickly,” he adds. IBM Global Automotive, Aerospace and Defense Leader Alexander Scheidt agrees, emphasizing that automotive consulting practices have to become more agile, too. “Today, automotive companies need to make a decision, do a proof of concept, make the design, implement, build and learn,” Scheidt says. “You have to be very fast.”
How do we make money from connected cars?
Talent challenges aside (see “Talent is also Transforming” side bar), OEMs need help figuring out business models related to the evolution of connected vehicles that Deloitte U.S. Automotive Practice Leader Craig Giffi says resemble “rolling computers.” Do the OEMs build their own technology capability? Do they rely on suppliers? Do they form partnerships with tech companies? Regardless of which of those options or mix of options manufactures select, a more important question awaits: How do we really make money doing this?
The answer has so far eluded OEMs. Rolling computers generate a bounty of new data about consumer behaviors and preferences. Manufacturers need help figuring out how to generate revenue from this data and also the extent of their involvement in collecting, storing, protecting and analyzing in-vehicle data. That capability marks a core competency of some well-known technology companies. “We’ve seen this play out over and over in the tech world,” Giffi adds. “A company develops connectivity and then another company swoops in and makes a lot of money off that investment by figuring out what to do with the data. That’s a challenge and a threat for automotive companies.”
How profitable is each vehicle?
As the number of high-risk investment bets increases, OEMs will need even more financial management clarity and precision throughout all of their activities. Some manufacturers want help understanding the real profitability of specific models. “It sounds crazy but it’s been difficult for them to get down to the individual profitability of different vehicles and configurations because of the scale at which they operate and the traditional ways they allocate many costs,” Giffi says.
This work, which is fueled by advances in data analytics, calculates the profitability of a model in a specific configuration with certain mix of options. That way, manufacturers can ditch their dogs and invest more in their cash cows. “Getting to those kinds of profitability insights,” he adds, “makes a big difference in an industry where getting return on any kind of investment is really hard.”
Distinguishing between high-ROI and low-ROI opportunities has become increasingly difficult at a time when more untraditional industry participants, especially technology companies, are making their own bets on the future of the automotive industry. When it comes to charting how that future will play out, even the most seasoned automotive experts are not opposed to borrowing a guiding principle from the tech world.
“Bill Gates has a great quote about the computer industry,” Hirsh adds. “I’ll paraphrase – Gates says that we have a tendency to overestimate the impact of technological change over the short term while underestimating its impact over the long term. That’s certainly going on in the industry today.”
Sidebar: How EVs Could Rev Up Business(es) for OEMs
Apart from well-heeled buyers in high-tech enclaves teeming with Model S’s, relatively few U.S. consumers were keen on the recent generation of electric vehicles (EVs). Price was the primary problem. That may not be the case down the road, and this shift would have major impacts on automotive OEMs and their consulting partners.
Model S-maker Tesla has reportedly notched more than 325,000 pre-orders for its Model 3, whose pre-incentives sale price will start at a Chevy Volt-esque $35,000. The volume of these pre-orders is eye-opening to EV experts, partly because the car won’t be produced until late 2017 and partly because the combined sales of Model S and Chevy Volt cars were less than 41,000 last year.
Yes, the Model 3 has miles to go before it can even sniff Camry or Ford F-150 sales. And, as many automotive consultants point out, consumers have demonstrated that they simply do not want EVs at recent price points. But the Model 3’s pre-order volume points to progress on finding the right balance among price, luxury and electric drive. If the significantly higher fuel efficiency standards on the horizon in the U.S. and other regions stick, they may spur more dramatic EV manufacturing and pricing innovations.
Klaus Stricker, a partner in Bain & Company’s Frankfurt office and leader of the firm’s automotive practice, says that the demand for Model 3s show the allure of Tesla’s products combined with a lower price point. “The first OEM to match such attractiveness,” he notes, “will have a blockbuster in its portfolio.”
A Tesla owner since 2009, Enovation Partners Founder and CEO Bob Zabors reports that his firm is engaged in EV-related projects in a number of industries that extend beyond vehicles. For example some OEMs and service providers are considering the need for a new, ubiquitous fueling infrastructure.
Pricing—not only of vehicles, but also of fuel—marks another complex challenge automotive industry participants need help addressing. Zabors notes that the pricing of electricity is largely set through state and local regulations, which depend on the cost structure of each individual utility. In some cases, electricity pricing is determined by competitive-generation markets, which tend to make electric prices far more volatile than gasoline prices.
Some OEMs are exploring EVs’ potential role in electric grids. The idea is that EVs’ batteries, when they are plugged in, can store additional power during low-demand periods and return electricity to the grid during peak times. Adding this type of capability to help balance the grid across utility and state lines, Zabors notes, “challenges the entire foundation of an industry model based on centralized and stationary sources of supply.”
In the short term, the challenges facing a possible EV boom are formidable. Recent research from the Boston Consulting Group identifies historically low oil prices, consumer preferences (for light trucks and other decidedly non-electric options), fuel-economy advances in internal combustion engines, and declining-but-still-high EV battery costs among other hurdles EVs must address to significantly improve upon the 0.3 percent of global auto sales they currently account for.
Over the long-term, however, other factors—especially consumer preference—could make future Model 3s and Volts as popular as Ford F-150s. “I can say that [owning an EV] has changed the expectations of the ownership and driving experience for me,” Zabors adds, “and, perhaps more importantly, for my kids and their friends who now expect a future full of EVs and hybrids from every manufacturer.” —E.K.
Sidebar: Talent Needs a Tune Up
The differences between mechanical engineering and software engineering are numerous and sizeable, and this chasm poses a major challenge for automotive manufactures. Since the industry’s launch early in the last century, OEMs have built workforces teeming with mechanical engineers. To capitalize on the ample revenue connected cars promise, OEMs will need to retrofit their workforces, to varying degrees, so that they possess software engineers and data analytics experts.
This talent management gap “is not a trivial challenge,” says Craig Giffi, Deloitte’s U.S. automotive practice leader. “It requires finding, hiring, developing and then retaining the talent necessary to manufacture vehicles that are rolling computers with millions and millions of lines of software code. It requires a lot of investment in talent. And the manufactures are competing for the same talent against Silicon Valley companies and against every other company in the world that’s developing smart products.” —E.K.
Editor’s Note: About Those Driverless Cars