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Are auto manufacturers placing risky bets to prepare for autonomous vehicles?

03 March, 2020

Akshay Singh
Partner at Strategy&

Automobile manufacturers are taking huge risks by investing heavily in autonomous vehicles (AVs). Some are partnering with or acquiring companies specializing in AV technology, while others are moving into fleet management. It is understandable that companies are trying to position themselves for the coming disruption, but it is critical they do not jeopardize their core business of vehicle manufacturing.

Many important technical, regulatory, and infrastructure challenges related to AVs are still unresolved. It’s now apparent that AVs will not become a common sight on the roads anytime soon. Even once most issues are resolved, it will take a long time before the average car buyer will be able to afford a self-driving vehicle. Given the significantly high upfront cost, we expect early buyers will be companies that manage large fleets. They have the upfront capital to purchase AVs and also stand to benefit from reduced labor costs and increased asset utilization.

Auto manufacturers that take on radically new functions are facing a tough, uphill climb. They do not have experience or expertise in software development or fleet management. If we consider aerospace as an example, we find that airframe makers do not also manufacture avionics or jet engines, nor do they operate airlines. The differences in scale, capabilities and capital structures are too great for one company to successfully compete in all of those areas.

But the industry is already facing disruption, and more is to come. What should auto manufacturers do? They can focus on their current strengths in manufacturing or try to subsume more of the value chain. Below we consider three possible scenarios, which are also addressed in our recent report:

  1. OEMs acquire or form joint ventures with AV software providers. This would give OEMs control over the finished product and provide the opportunity to determine and build new features into vehicles early in the process. But it could require significant investment in technology and high-tech workers, which could prove challenging in a competitive marketplace. It may prove difficult to reconcile two very different financial structures and corporate cultures. Also, AV systems need real-world data to improve and only the largest OEMs have a chance of generating that data. Smaller automakers would have to form partnerships or alliances to capture adequate amounts of data.
  2. OEMs buy or build fleet management and/or ride-hailing businesses. OEMs would actively manage large fleets, collaborating with inventory management companies to track the location and condition of vehicles and other companies to clean and maintain vehicles. OEMs could offer mobility as a service (MaaS) directly to the consumer or serve as the fleet manager for a company providing vehicle-sharing services. This strategy would require a massive network of maintenance facilities and the sophisticated digital platform necessary to connect customers and vehicles. Both of these capabilities are outside OEMs’ current expertise and require significant changes to their financial structure.
  3. OEMs expand across the value chain. This is by far the most complex option as OEMs aim to do it all by developing and maintaining AV software as well as fleets of self-driving vehicles. It is a huge logistical challenge and would require a massive amount of capital, increasing the probability that failure could severely hurt an OEM’s core manufacturing business.

OEMs will be facing a radically different marketplace in the future. The good news is that they have the time to carefully weigh potential strategies. To determine the best path forward, auto companies must first rigorously assess their capabilities, financial structure, workforce, and assets. By doing their homework upfront, companies can avoid costly failures and maximize their opportunities in a transforming industry.