Issue: Jan 2014


Automotive Industry Is Entering a New Golden Era of Innovation



Regulatory Mandates, Changing Consumer Expectations, and Technological Advances Are Driving Increasing Innovation, According to New Research by The Boston Consulting Group

by Claudio Francisco

The global automobile industry is entering a new golden era of innovation and advancement, and the ability to innovate in four key areas--power train, lightweight materials, connectivity, and active safety and assisted driving--will be a major factor in individual carmakers' success in the years ahead, according to new research by The Boston Consulting Group (BCG).

The research, released today during the press preview of the North American International Auto Show in Detroit, draws on several sources, including the results of a new U.S. consumer survey, an analysis of patent filings, BCG's annual study of the world's most innovative companies, and the firm's experience working with major automotive companies around the world. The findings will be published in a BCG report later this month. Here are a few highlights:

Innovation in the global automotive industry is intensifying.

-- Fourteen automakers are among the top 50 most innovative companies in
BCG's 2013 survey, compared with 10 carmakers in 2012 and only five in
2005. Three companies (Toyota, Ford, and BMW) rank in the top 10, and
nine automakers are in the top 20. For the first time since BCG began
conducting this survey nine years ago, there are more auto manufacturers
than consumer companies in the top 50 and more carmakers than technology
companies in the top 20.

-- R&D spending at these 14 original equipment manufacturers (OEMs)
increased at an annual rate of 8 percent since 2009, while spending at
leading tier-one suppliers[1] rose by 5 percent a year.(1 )

-- From 1995 through 2011, the number of patent applications filed by OEMs
increased by only 3 percent annually, while the number of filings by
tier-one suppliers rose 6 percent a year. A recovery from the 2008
crisis has resulted in the number of applications by tier-one suppliers
leaping 37 percent, while the number by OEMs has jumped by 28 percent.

The focus on innovation has been in four areas: power train, lightweight materials, connectivity, and active safety and assisted driving.

-- The four areas had patent application growth rates of 6 to 15 percent
from 1995 through 2011, compared with an average growth rate for all
patent filings by OEMs and tier-one suppliers of only 4 percent.

-- Filings in all four areas showed only an 8 percent decline from 2008
through 2009, compared with an average drop in the number of
applications of 25 percent.

-- Filings increased 10 percent faster than the average growth rate in the
bounce-back years from 2010 through 2011.


Consumers value the introduction of new technologies and features.


-- New BCG research on U.S. consumers shows that most car buyers want to
purchase a car from a company seen as innovative--almost 60 percent say
this is a very or somewhat important consideration.

-- A key characteristic of an innovative automaker, according to car
buyers, is being the first to introduce new technologies.

-- U.S. consumers see features related to connectivity, safety, and fuel
economy as the most innovative in today's vehicles. Most U.S. consumers
rank connectivity and safety features in the top 5 of some 20 new
features in vehicles today

"Innovation in the automotive industry is retaking center stage," said Xavier Mosquet, a BCG senior partner and coauthor of the study. "Consumers want to buy cars from companies that bring new technologies to market, and connectivity, safety, and fuel efficiency are three of their top priorities. The ability to innovate in these areas will be a major factor in individual automakers' success in the coming years."

Regulatory and marketplace demands with respect to fuel efficiency, connectivity, and safety, as well as technological advances that are making new features possible and reducing their cost, are driving the renewed focus on innovation.

Mosquet, who coleads BCG's global Automotive practice, and his coauthors say that OEMs and tier-one suppliers need to address three areas with a sense of urgency:

-- The shift from mechanical to software-driven vehicles. Cars are no
longer primarily mechanical devices. Rather, automobiles are
increasingly becoming software driven (literally, as well as in other
ways). Given the rise of electronics and the fact that software features
reduce tooling cost, as well as allow for configuration later in the
product development cycle, the shift to more software in cars will
continue. This shift requires auto executives to think about product
life cycles--and the involvement of their companies with them--in new
terms.

-- The quickening pace of product development. Consumer electronics and
technology companies have taught consumers to expect a rapid pace of
innovation. This expectation will make it more and more difficult for
automakers and their suppliers to adhere to the current three- to
five-year product design and development process. Car manufacturers will
need to experiment with alternative design processes, new development
models, and in the longer term, advanced manufacturing techniques. The
ability to discern early what consumers see as the most valuable
innovations will also create an advantage.

-- The increasingly prominent role of tier-one suppliers in innovation and
technological development. The importance of tier-one suppliers in
innovation and product development will escalate. These companies are
already playing a bigger role in innovation in the areas of power train,
interior design, and chassis components--historically the R&D domains of
carmakers. In addition, the determinants for differentiation are
shifting toward connectivity and active-safety features, in which
tier-one suppliers have substantial expertise. Those manufacturers that
construct the most effective collaboration models, encouraging and
rewarding supplier R&D investment, will build a long-term advantage.

"Other areas of innovation loom large as well, such as alternative fuels and assisted driving," said Massimo Russo, a BCG senior partner and coauthor of the study. "Those automakers that determine how to organize themselves to harness and direct fast-moving developments in power train, lightweight materials, and, most critically, software, electronic components, and connectivity will establish a decided advantage over competitors in the near and longer term."

A copy of the upcoming report, Accelerating Innovation: New Challenges for Automakers, will be available later this month at www.bcgperspectives.com.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

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Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content--including videos, podcasts, commentaries, and reports--can be accessed by PC, mobile, iPad, Facebook, Twitter and LinkedIn.


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