Issue: Jun 2016


Disruptive technology-driven trends in the auto industry



by Timo Moller

Far from a being in a state of decline, McKinsey believe the biggest moments in the auto industry are still to come as the convergence of technologies disrupts traditional thinking and business models.

Digitization and new business models have revolutionized other industries, and automotive will be no exception. For the automotive sector, these forces are giving rise to four disruptive technology-driven trends: diverse mobility, autonomous driving, electrification, and connectivity.

Shifting markets and revenue pools

Some commentators argue that the automotive industry is in decline. However, we contend that growth is accelerating, fueled by new revenue streams, including shared mobility and data connectivity services as well as continuing global macroeconomic growth in emerging economies.

If the trend continues the automotive revenue pool will significantly increase and diversify towards on-demand mobility services and data-driven services. This could create up to US$ 1.5 trillion (or 30% more) in additional revenue in 2030, compared to US$ 5.2 trillion from traditional car sales and aftermarket products/services (up from US$ 3.5 trillion in 2015).

Together, these revenues could accelerate annual automotive industry growth to 4.4% (up from about 3.6% from 2010 to 2015). Connectivity, and later autonomous technology, will increasingly allow the car to become a platform for drivers and passengers to use their transit time for personal activities, which could include the use of novel forms of media and services. The increasing speed of innovation, especially in software-based systems, will require cars to be upgradable. As shared mobility solutions (i.e., car sharing or e-hailing) with shorter lifecycles will become more common, consumers will be constantly aware of technological advances, which will further increase demand for upgradability in privately used cars as well.

Fit for purpose

Overall global car sales will continue to grow, but the annual growth rate is expected to drop from the 3.6% of the last five years to 2% annually by 2030. Consumer mobility behavior is changing, leading to up to one out of ten cars sold in 2030 potentially being a shared vehicle and the subsequent rise of a market for fit-for-purpose mobility solutions.

The traditional business model of car sales will be complemented by a range of diverse on-demand mobility solutions, especially in dense urban environments that proactively discourage private car use. Consumers today use their cars as “all-purpose” vehicles for commuting alone on one day and taking the whole family to the beach on another. In the future they may want the flexibility to choose the best solution for a specific purpose, on demand and via their smartphones. We can already observe significant, early signs that the importance of private car ownership is declining and shared mobility is increasing. In the US, for example, the share of young people (16 to 24 years) that hold a driver’s license dropped from 76% in 2000 to 71% in 2013, while the number of car sharing members in North America and Germany has grown by more than 30% a year over the last five years.

The shift to shared mobility enabling consumers to use the optimal solution for each purpose, will lead to new segments of specialized vehicles designed for very specific needs. For example, the car parc for a vehicle specifically built for e-hailing services - i.e., designed for high utilization, robustness, additional mileage and passenger comfort. As a result of this shift to diverse mobility solutions, up to one out of 10 new cars sold in 2030 may be a shared vehicle, which could reduce private-use vehicle sales, an effect partially offset by a faster replacement rate for shared vehicles. This would mean that more than 30% of miles driven in new cars sold could be from shared mobility. On this trajectory, one out of three new cars sold could potentially be a shared vehicle as soon as 2050.

Different market segmentation

Understanding where future business opportunities lie requires a more granular view of mobility markets than ever before. Specifically, it is necessary to segment these markets by city types based primarily on their population density, economic development, and prosperity. Population levels are growing most significantly in low-income cities, while higher income cities remain relatively stable.

Consumer preferences, policy and regulation, as well as the availability and price of new business models will strongly diverge across these segments. In megacities such as London or Shanghai congestion fees, a lack of parking, traffic jams, etc. mean car ownership is more of a burden for many, and shared mobility presents a competitive value proposition. Such cities also provide sufficient scale for new mobility business models. By contrast, in rural areas, where low density creates a barrier to scale, private car usage will remain the preferred means of transport.

Similarly, penetration of autonomous technology and electric powertrains would most likely be led in dense high-income cities which have a well-established car base, increasing regulatory pressure against vehicle emissions, and where the cost of technology features represents a lower proportion of income. The type of city will thus become the key indicator for mobility behavior and car sales, replacing the traditional regional perspective on the mobility market. By 2030, the car market in New York City will likely have more in common with the market in Shanghai than with that of Kansas.

Fully autonomous vehicles

Fully autonomous vehicles (AVs) are unlikely to be commercially available before 2020. Meanwhile, advanced driver assistance systems (ADAS) will play a crucial role in preparing regulators, consumers, and corporations for the medium-term reality of cars taking over control from drivers.

 

The market introduction of ADAS has shown that the primary challenges impeding faster market penetration are pricing, consumer understanding, and safety/security issues. The technological challenges are not insignificant, and will likely drive the delay between conditionally autonomous cars which allow the driver to cede control in certain situations (Level 3 according to the National Highway Traffic Safety Administration (NHTSA)), and fully autonomous cars, which require no driver intervention for the entire trip (Level 4 NHTSA). Tech players and start-ups will likely play an important role in achieving this level of technical complexity.

Regulation and consumer acceptance represent additional hurdles for autonomous vehicles. However, once these challenges are addressed, autonomous vehicles present a tremendous value offering for consumers (e.g., ability to work while commuting, convenience of using social media, or resting while traveling). A progressive scenario could see 50% of passenger vehicles sold in 2030 being highly autonomous and 15% being fully autonomous.

Electric vehicles

Stricter emission regulations, lower battery costs, widely available charging stations, and increasing consumer acceptance will create new and strong momentum for penetration of electrified vehicles (hybrid, plug-in, battery electric, and fuel cell) in the coming years. The speed of adoption will be determined by the interaction of consumer pull (partially driven by total cost of ownership) and regulatory push, which will vary strongly at the regional and local level.

Hence, in 2030, the share of electrified vehicles could range from 10 to 50% of new vehicle sales. Adoption rates will be highest in developed, dense cities with strict emission regulations and consumer incentives (tax breaks, special parking and driving privileges, discounted electricity pricing, etc.). Sales penetration will be slower in small towns and rural areas with lower levels of charging infrastructure and higher dependency on driving range.

Through continuous improvements in battery technology and cost, those local differences will become less pronounced, and electrified vehicles are expected to gain more and more market share from conventional vehicles.

With battery costs potentially decreasing to US$150 to 200 per kWh over the next decade, electrified vehicles will achieve cost competitiveness with conventional vehicles, creating the most significant catalyst for market penetration. Advances in charging technology, range, and awareness will further improve the customer value proposition. At the same time, it is important to note that electrified vehicles include a large portion of hybrid electrics, which means that even beyond 2030 the internal combustion engine will remain very relevant.

Cooperating with competition

While markets such as mobile handsets have recently experienced significant disruption, the automotive industry has not seen fundamental change in recent decades. For example, over the last 15 years only two new players have appeared on the list of the top 15 automotive OEMs, compared to 10 new players in the handset industry.

A paradigm shift to mobility as a service, along with new entrants, will inevitably force traditional car manufacturers to compete on multiple fronts. Mobility providers (e.g., Didi Kuaidi, Uber, Zipcar), tech giants (e.g., Apple, Google), and emerging OEMs (e.g., BYD, Tesla) increase the complexity of the industry’s competitive landscape.

While emerging manufacturers take a share of new vehicle sales, established suppliers will increasingly capture a larger portion of the vehicle’s total value. As Tier 0.5 suppliers move to provide more complete vehicle sub-systems, they will even establish their own touch points with the end consumer to further capture aftersales mobility spend. Traditional automotive players, who are under continuous pressure to reduce costs and become

more capital efficient, will feel the squeeze. This will likely lead to shifting market positions in the evolving automotive and mobility industries and may even lead to consolidation or new forms of partnerships among incumbent players.

In another game-changing development, software competence is increasingly becoming one of the most important differentiating factors for the industry. The program code for the modern car has approximately as many object instructions as an aerospace flight control system. Software will be used to deliver a wider range of features and services, including mobility services, advanced safety, location-based services, in-vehicle content, and remote analytics.

Partnerships across technologies and services will grow the user base and reduce costs leading to increased value for consumers. These partnerships also serve to solidify rising connectivity ecosystems. Automakers need to be strategic about which parts of the connectivity ecosystem they control in order to profit from connectivity and keep the vehicle itself from becoming a commoditized content platform.

New market entrants

Diverging markets will open opportunities for new players, who will initially focus on a few selected steps along the value chain and target only specific, economically attractive market segments - and may expand from there. While Tesla, Google, Apple, Baidu, and Uber currently generate significant interest, we believe that they represent just the tip of the iceberg.

Many more new players are likely to enter the market, especially start-ups and cash-rich high-tech companies. These new entrants from outside the industry are also wielding more influence with consumers and regulators (i.e., generating interest around new mobility forms and lobbying for favorable regulation of new technologies). Similarly, some Chinese car manufacturers, with impressive sales growth recently, might play an important role globally by leveraging the ongoing disruptions and leapfrogging established competitors.

Total revenues from personal mobility will accelerate by 2030, but shifting markets and new technologies ensure that future automotive growth will be more granular than in the past.

Growth across the traditional markets and segments is no longer a given. Automotive OEMs will need to capture growth from a variety of sources such as mobility in dense cities and recurring, post-sale revenue streams. With the emergence of non-traditional revenue channels, ownership of the mobility value chain has the potential for disruption.

This also means that automotive incumbents cannot predict the future of the industry with certainty. They can, however, make strategic moves now to shape the industry’s evolution. In order to get ahead of the inevitable disruption, incumbent players should implement a four-pronged strategic approach:

Prepare for uncertainty

Success in 2030 will require automotive players to anticipate market trends sooner and to explore new mobility business models as well as their economical and consumer viability. In order to do that, they need to proactively analyze consumer preferences and be aware that there are more similarities across city types than across regions.

They also need to pay close attention to the changing demographics in key markets, especially the increasing urbanization and the volatility of the emerging economies, which make it difficult to predict sales volumes beyond 2020 in markets like China. A sophisticated level of scenario planning and agility is required to identify and scale new, attractive business models.

Leverage partnerships

With the industry evolving from competition among individual players towards new competitive interactions, but also partnerships and open, scalable ecosystems, OEMs, suppliers, and service providers need to form partnerships across and beyond the industry. They need to benefit jointly from sharing the costs of electric and autonomous vehicle technology and the necessary infrastructure. Those partnerships should also engage governments to develop regulation and architectures for new mobility solutions together. This extends to joint efforts in public outreach for consumer education on the benefits and challenges of new technologies. However, OEMs in particular need to maintain control over their individual value creation and success in the emerging ecosystems.

Adapt the organization

As the entire industry is undergoing transformational changes driven by the four key trends, players must adapt their organizations to facilitate greater internal collaboration. Internal processes need to reflect that software is the key enabler for innovation and new business models. This requires strategic decisions regarding how to acquire the necessary expertise and whether this will be built up internally through hiring or outsourced to external vendors. A two-speed R&D model is needed to catch up with short-term market trends and enable lifecycle product upgrades. This has to cover the needs of hardware’s longer lifecycle as well as the shorter lifecycle requirements of software and business development.

Reshape the value proposition

To retain their share of the automotive profit pool, OEMs need to find the right strategy for differentiating their products and services, which largely means evolving their value proposition from “hardware provider” to “integrated mobility service provider.” Product differentiation should be pursued through a digital end-to-end user experience with a customer focus similar to software companies keeping products attractive throughout the lifecycle. Given the trend towards centrally operated fleets of shared vehicles, OEMs also need to further strengthen B2B sales and large-scale aftermarket services for those businesses.

Timo Möller is a Senior Knowledge Expert in McKinsey’s Cologne office. He is a lead author of a McKinsey report: Automotive revolution – perspective towards 2030.



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