We constantly hear about how globalization and the rapid advances in technology are disrupting every single industry in the world. We can see this new paradigm happening as well in the global automotive sector where the line between automotive and technology has already started to blur. This has produced a new ecosystem with new rules for success. However, we should note that the change drivers in the automotive sector go further than just technology.
An article by Ernst & Young (EY), “Automotive change drivers for the next decade,” identified six change drivers that are expected to shape the automotive ecosystem in the near future.
Turbocharged disruption — New business models and service-based value propositions are challenging the traditional vehicle-centric offerings in the mobility market. The popularity and evolution of the shared mobility market which introduced the concept of access without ownership for mobility has created a service-oriented business model that has not been traditionally considered in this space. We have seen a number of these companies appearing across the globe, notably Uber and Grab. This new concept has expanded the mobility ecosystem to include new stakeholders such as cities, technology companies, ride-sharing operators, government agencies, telecom providers and — most crucially — consumers. While the revenues from vehicle sales and related services will continue to grow over the next decade, revenues from service-based mobility solutions have also been increasing rapidly, confirming that this will be a significant market for the future
Another key disruptor is the rapid penetration of electronics and software, challenging the status quo of component suppliers. New technologies such as keyless entry, voice and gesture recognition, Vehicle-to-Everything (V2X) connectivity and autonomous driving capabilities are likewise challenging suppliers to restructure their portfolios, develop new pricing strategies considering the shorter time-to-market expectations, and also product liability requirements demanded by end users. These disruptions are sometimes led by non-automotive companies that now set the pace for innovation.
Customers versus consumers — Traditionally, brand experience and cost of ownership are the key drivers for the purchasing decisions for vehicle acquisitions. However, with the rise of the shared mobility market, there is now a distinction between customers (the owners of vehicles) and consumers (the users of vehicles). While car makers continue to focus on vehicle and connected car services, new mobility intermediaries such as ride-sharing companies are owning the relationship with consumers and consequently the related revenues. The purchasing decisions of the consumers are made on a per ride basis and are influenced by availability, comfort, ease of use, reliability ratings and pricing. This is drastically different from the considerations of a customer.
Digitalization across the value chain — The increasing volume of data because of digitalization and connectivity are impacting the entire industry ecosystem. This brings about opportunities to monetize consumer, vehicle and ecosystem data. It is clear that those who have relationships with the consumers have access to far more specific and real-time data, and therefore have greater advantage and opportunity to monetize. However, the growing issue of data privacy and security will continue to challenge companies from optimally monetizing in the absence of strict regulations and a heterogeneous global regulatory landscape. Also, given the global scale and complexity of the automotive ecosystem, digitalization presents a significant opportunity for companies to reinvent manufacturing and supply chain operations to improve operational efficiency and capacity utilization.
Securing strategic resources — Disruptions in the market require companies to cope with and invest in strategic resources such as talent, knowledge and intellectual property. Companies should be able to attract and retain the right talent, taking into consideration that the skill sets that were traditionally valued in this space may no longer be adequate to cope with the rapid industry changes. Moreover, access to nontraditional technology and intellectual property is becoming a key differentiator. With the entry of outside players, fresh and new ideas are quickly coming on to the playing fields.
Unpredictability ahead — The global value chain is continuously at risk, exposing the automotive industry to diverse sources of unpredictability — from economic uncertainty and political instability to protectionism and trade dynamics. This requires companies to actively monitor target markets and take proactive risk mitigation initiatives. In addition, they also have to face unpredictability across raw material, foreign exchange and financial markets. These factors may have a direct impact on a company’s profitability.
Unprecedented scrutiny — At present, corporate strategies can be easily influenced by regulators, advocacy groups and activist shareholders. With social media and digital penetration, these stakeholders have the potential to trigger significant risks.
These drivers of change are likely to have a significant impact on the future viability, strategy, business model and performance results of multiple stakeholders across the ecosystem. This creates more urgency for companies to adapt and transform throughout their organizations and also in their business ecosystem.
On the other hand, an EY article, “Changing Lanes 2016-2017: The Automotive C-suite’s Agenda” wherein 140 global executives were interviewed revealed that auto companies lack the readiness to respond to the identified change drivers. A summary of the results of the study are as follows:
• 85% of respondents agree that the demand for app-based transport and mobility services is good for business but just 15% are well-prepared to take advantage of it.
• 50% of car manufacturers surveyed rank customer data analytics as a top priority, but only 5% of them are well-prepared to drive revenue growth in this manner.
• 75% of respondents believe strategic partnerships are vital to innovation, but just 15% feel ready to implement these initiatives.
• 1 in 3 respondents believe talent is the key to driving innovation, but a mere 3% are well-prepared to attract it.
• 82% of respondents believe that currency exchange rates will have a negative impact on business, but only 20% are well-prepared to tackle them.
Given these, there is clearly much to do in order to weather the rapid disruption in the industry. Automotive companies need to adapt their products or service portfolios and processes to meet evolving demands, regulations and cost pressures. An innovative platform should be created to enhance collaboration within the business and external partners. Companies should also build on analytic competencies and capabilities to take advantage of the volume of data to deliver customer value and improve operational efficiencies. Lastly, they should revisit their talent strategies to obtain and retain the right work force.
While the Philippine automotive industry is mostly made up of assembly operations for foreign car makers, a number of local manufacturing entities have identified some of these change drivers and have started to build capabilities and new technologies to address them. Perhaps it is only a matter of time before foreign car makers will not just see the Philippines as a location to establish assembly operations, but as a country that contributes to new technology, ideas and innovation in the automotive industry.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Carlo Paolo V. Manalang is a partner and Jennifer Jeanne S. Lim Bok-Uyking is a Senior Director of SGV & Co.