Nearly every day, headlines from around the automotive industry herald the imminent deployment of electric, connected, autonomous, shared, personalized and on-demand vehicles en masse. While 2017 confirmed that technology is driving a sustained shift in related trends – and confabs, such as CES, the North American International Auto Show and Automotive News World Congress, will naturally emphasize the rapid pace of that shift in 2018 and beyond – there is a different perspective that may surprise some. Vehicles are undoubtedly becoming increasingly connected, and while disruption will remain a continuing theme for the automotive industry as the mobility economy expands, the pace of change may not come as quickly as many believe.
In our latest report, Strategy& Automotive Industry Perspectives: How to Overcome Five Myths that Are Distracting Your Auto Company, my colleagues and I delve into areas of consideration in preparing for the automotive revolution that is underway. Myriad companies – from auto incumbents and tech giants to ambitious startups – continue to pour resources into new technologies for automobile connectivity, alternative propulsion (hybrid, electric, fuel cell), and self-driving features. As with any unproven technology, the potential for both significant reward and risk awaits companies who serve as front-runners. So while some may be able to benefit from careful planning and investment, the margin of error remains thin. This is particularly relevant given the current state of the industry. 2016 was a record year for the US in both unit sales and profitability. However, the actual return on invested capital was a mere 6.6% for the top 10 OEMs. This equates to just over half the cost of capital, according to our analysis.
Given these dynamics, companies should thoughtfully consider the following five myths that have gained credence and are potentially distracting some traditional and emerging players:
Myth: Electric vehicles will surge in sales within the next few years.
Reality: The tipping point for electric vehicles won’t occur for about a decade. After all, the market penetration of electric vehicles (EVs) is currently hindered due to the high overall price tag that is directly connected to battery cost and also because of the limited number of miles per charge. Even while a tax incentive for plug-in autos remains intact, the present-day US appeal is primarily driven by a “green cool factor” – whereas in Europe, political and regulatory matters are hastening adoption. That said, we expect sales of EVs to begin growing steadily in 2025, but still only account for about 4% of annual US new car sales around 2027. The true tipping point is likely to follow soon after this time period, upon which sales are expected to rise significantly.
Myth: A landscape dominated by fully-autonomous vehicles is on the near horizon.
Reality: Sales of fully autonomous vehicles are even further off than electric vehicles. We forecast that autonomous vehicles will amount to less than 1% of new car sales in the US by 2027. Cost and technology hurdles, as well as liability, infrastructure and regulatory issues that must be overcome in order to address safety and consumer concerns, will likely restrict autonomous vehicle acceptance.
Myth: The ride-sharing phenomenon will radically transform the industry and facilitate the transition to the fully-autonomous era.
Reality: Shared mobility will likely transform the way we commute, but it will take time to get to that point, with the continued widespread proliferation mainly in urban areas. In 2016, personal vehicles accounted for 96% of passenger miles traveled in the US. Of the remaining 4% (which includes rental cars and public transportation), ride-hailing and car-sharing services garnered only a sliver of the business (8%).
Myth: Traditional OEMs and many suppliers face an existential threat from new competitors.
Reality: Although Silicon Valley players are eyeing the auto industry lately, we do not believe that the incumbents are under substantial threat. Automakers should assess the need to expand collaboration efforts to improve their in-house technology through acquisitions, joint ventures and partnerships or seek to obtain these cutting-edge skills by attracting an evolved pool of talent. The reality is mass producing vehicles is a difficult task with high barriers to entry, which is a significant advantage for OEMs.
Myth: Automakers can thwart the competition and bolster their revenue via downstream vertical integration, such as owning ride-sharing businesses or providing connectivity services.
Reality: We anticipate a potential downturn in global automobile sales in the next several years as the current positive business cycle approaches the 10-year mark; a slowdown will negatively affect the revenue goals for downstream integration and put further pressure on industry returns.
In addition to dissecting these myths-versus-realities, companies should align with strategic frameworks that guide their corporate identity, leverage new and existing assets, and amplify their strengths. More specifically, they should:
Furthermore, increasingly demanding consumers and growing competition require that industry participants develop an “also” strategy that distinguishes their place in the new mobility economy. Throughout the journey, it is essential to reassess the plan and continue building upon capabilities that will help drive profits for funding the future. Because the one reality we all can agree on is: change is inevitable (and costly).