Transforming Auto Makers to Connected Platform Makers
I love January. As the saying goes, “New Year, New You.” And new cars. LOTS of new cars, announcements and demonstrations how the car will evolve with new features, content and systems. This year the volley started early with huge announcements in week 1 at the Computer Electronics Show in Las Vegas and will continue in weeks 2 and 3 the Automotive News World Congress and North American International Auto Show in Detroit.
There are some mega-trends emerging from the recent announcements and research SAP has conducted over the past six months and will progressively make available through its social channels over the course of 2016. Economically, a number of impacts are at work. With the fall of crude oil prices and other commodities, and North American volumes hitting pre-recession levels of 17.5M units in the passenger vehicle segment, growth is expected to continue. However it will be a different kind of growth based on the evolution of the value chain, as well as general expectancy that global AGR levels will taper from 7.8% (from 2009 to 2015) to 2.8% (from 2016 to 2020) according to IHS, and the retention length of vehicles rising to over 12 years on average. OEM consolidation will likely follow in the next decade to help keep growth moderate and remove industry structural costs.
The “Future of the Car” is changing as well, from mostly mechanical and metal-based vehicles to a connected set of component platforms, plastics and next-generation materials essentially creating a rolling data center providing safety and entertainment going from Point A to Point B. Social acceptance of a fully autonomous vehicle – and the regulatory environment supporting that – is likely 5-10 years out based on current forecasts (OESA, CAR). However a connected vehicle – depending upon what your definition of “connected” is and what services that uses – is here today, both on the public highways and in prototype communities like M City.
(Image: Hewlett Packard)
What does all of this mean for SAP’s automotive OEM and supplier customers? It means companies have significant choices in product design, value chain placement (and respective participation), and customer experience to define the organization for the next few years to come. Last year I asked executives “are you buyers or sellers?” This year I am more apt to ask “are you a platform maker or owner?” as makers and innovation will rule the ability of OEMs and suppliers to not only have the profit to make acquisitions but also determine the position of the portfolio in the value chain where they will drive content. And content is profit, and profit means growth. And growth means you survive and prosper in an ebbing business cycle.
Here are some disruptions and mega-trends coming out of this month’s automotive announcements. As more become available during the month (or as forecasts change, which of course they will) I will update this post as appropriate.
- Technology is not the long pole in the tent. Regulatory needs to catch up. The big data base technology to help manage petabytes (1,000 terabytes) of information including music, images, maps, consumer behavior is already here. How we use these – based on location-based privacy and social norms – and what we are able to implement in products – based on regulations – have only partially been defined. This is a real bummer to consumers and tech savvy developers, who essentially are releasing only parts of consumable disruption based on business environments. Uber as an example has taken its disruptive model to court in a number of cities and states (and won). Google has sent its driverless, autonomous vehicles to a number of cities with some relative success. Until we are ready to give up control of our driving abilities? Not yet. But in Michigan you can’t take a driver’s test at the Secretary of State office using a park assist vehicle to parallel park. Again, we aren’t there yet.
- The notion of a vehicle platform and how it scales and connects has changed. Typically a vehicle has a number of trim packages, platform sizes, power plants and features. When a manufacturer builds to a variable platform, usually the platform itself is constant down an assembly line and the features and cosmetics adjust per spec of the vehicle. Faraday Future announcement at CES of the FFZero1 platform for variant configuration, where the platform itself can stretch and modularly accommodate different power plant designs (e.g. battery pack stacking), has the potential to change how vehicles are designed at the platform level. Delphi emerged with its announcement of its vehicle to everything (V2E) platform also at CES allowing vehicles to sense devices, social behaviors and “things” is one example of automotive suppliers moving to “connected platform makers.” Other suppliers such as Bosch are developing their own platform to connect devices, components, homes and information. And GM announced a major $500M investment partnership in ride-sharing tech “unicorn” Lyft to enable fleet connected B2C vehicles. Being able to scale physical and information platforms using big (very LARGE) data sets with consumers is a key to transformation success.
- The Aftermarket segment will collapse, and everyone wants a share. And for you to love them. The bidding war over Pep Boys is likely the first of many acquisition plays and direct to consumer moves by auto parts suppliers to converge its OE and aftermarket businesses. With each stage of the aftermarket value chain adding a full price share of margin from one step to the next (usually 80-100% of margin per value chain step according to the Automotive Aftermarket Supplier Association), it’s no wonder that auto parts makers want drivers to get their hands on their parts directly to harvest margin otherwise flowing through the more expensive OE dealer channels. Will drivers who hold vehicles longer buy directly? Most do already through the likes of eBay, Amazon, NAPA and AutoZone to name just a few of the big players. Often this competes with OE interests to leverage their own proprietary dealer networks. How suppliers go after this high margin space, and how they communicate brand interest and customer experience to drivers who normally buy through dealers and distributors will be key to success.
Platform makers – OEMs as well as suppliers – will garner market share moving forward. Tesla, Google, Faraday, Bosch and Delphi (among others) have stated their interest and staked their claim as disruptors owning a platform. Not necessarily as a classic car company. Those companies unwilling to embark on a journey to digitize not only their product portfolio but their business operations and unleash new platform business models, will be relegated to “seller” status going into the 2020s.
Auto makers and suppliers need to stake their claim now based on these and other mega-trends to build their financial assets to continue growth throughout the balance of the decade and beyond.