Automakers seek new ways to collaborate and innovate

05 October, 2018

Phil Biggs
Director, PwC US

New investments into electrification, autonomy and mobility are being announced almost daily it seems, and those investments are remaking the auto industry. Carmakers today face a serious dilemma – if they don’t invest substantially in electric and self-driving technology, they won’t curry favor with Wall Street. But as they continue to sink more dollars into these technologies, they risk wasting billions as the electric vehicle (EV) segment to-date remains unprofitable.

Most automotive industry experts suggest that original equipment manufacturers (OEMs) will spend over $250 billion on more than 200 electric cars by 2022 but are likely to lose money due to the daunting cost of production and fierce competition for sales. OEMs are realizing no better than a 2% take-rate for EVs in North America.

It’s an upside-down purchase for the average consumer when the payback on an EV is nearly eight years – it must move to four years to make economic sense, according to the Center for Automotive Research in Ann Arbor. Add in relatively low gas prices and the nagging high cost of batteries and the situation is worrisome to the automakers. While the electric vehicle segment continues to struggle to achieve new market share in key global markets, collaboration is the bridge to enable OEMs to achieve their EV mass production, adoption, and profitability objectives.

A distinct benefit of the electrification shift is the forced collaboration among new tech and traditional automotive manufacturing partners. Automakers have staked their future on electrification, car sharing, and driverless technologies, which move them away from a traditional product to a service focus; this, in turn, forces unique, collaborative alliances. Perhaps more than ever, we need to pay attention to the merits of new collaboration models as we move forward.

From its storied history to its planning processes and its people, the traditional automotive industry is risk averse. It continually faces severe regulatory rigors – in contrast with the attributes of the high-tech industry: risk tolerant, open innovation, open culture. Each day the auto industry readies itself for more culture shock as it embraces technological change by an order of magnitude.

But putting these disparate people and processes together in a complex work environment is daunting, as issues such as connectivity, safety, personal mobility, comfort, and convenience are addressed. With the recent arrival of technology giants Alphabet, Apple, Cisco, and Microsoft, to name a few, the strategic research and development conversation is shifting dramatically. Cars are transforming into autonomous computers on wheels.

The convergence between Detroit and Palo Alto connects innovation and relevance in the auto space. The convergence of technology and innovation in our daily lives by means of our vehicle is mostly consumer demand-driven. Automotive OEMs are aggressively pursuing technology strategies that will complement and differentiate their products but they remain hesitant to be leading-edge. This is partially attributed to obsolescence issues, cost control measures, and operational challenges associated with technology integration. Cost is the constant delta in terms of how and where technology is applied. And even though application costs can, at times, outstrip the economic value of the application itself, it is why demand for new technology adoption in the automobile remains steep.

The nature of disruptive innovation is changing by means of strategic discipline, new product marketing, and new innovation methods, and mostly because of the arrival of Silicon Valley to the auto scene. Collaboration is the only affordable and proven path to innovation. Partnerships with Silicon Valley companies provide OEMs with the means to participate in a wide range of development projects that would otherwise be cost-prohibitive, such as the connected vehicle and the autonomous car.

The business and technology collaboration between Detroit and Palo Alto is not without significant risk. Automakers face infrastructure, legal, insurance, warranty and regulatory hurdles, just to name several. While Detroit clearly understands these complex obstacles, Silicon Valley has not fared as well. There is both risk and opportunity ahead as Silicon Valley now shapes much of the automotive conversation. The future technology trajectory is tricky when you consider Detroit’s distinct traditions, planning processes, and pool of talent, as compared to Silicon Valley. When we acknowledge that the vehicle may be evolving into a rolling IT platform, we must both respect and challenge these “mindset” differences between Detroit and its new tech partners.

Silicon Valley and its internet of everything thinking is a boon to the automotive industry at this time because it is forcing the OEMs to approach problem-solving and ideation differently. But the issues driving auto-tech alliances go wide and deep, creating blurred lines between competitor and partner. The spin-off markets being created – such as Mobility-as-a-Service and new retail-dealer models – are vast. And, when coupled with new infrastructure investments, they force OEMs to re-think their purpose and strategies. The tech firms are shaping these innovation discussions largely because their products and ideas are what’s driving consumer preferences.

What we’re seeing throughout the industry is more than the sizzle of new trends or simply idea generation. We’re now seeing fresh ways to link consumer needs to radically different methods of evaluating, selecting, prototyping, and commercializing new concepts. This is transforming traditional areas of planning, engineering, and applied design. The unique vehicle-connectivity alliances that have come about signal an acceptance of innovation as a new operating standard. And, it brings a fundamental change in how the industry views its competition, solves problems, and creates new products within the context of new mobility.

As global companies struggle to build and hold markets, issues of principle, fighting and losing may seem to be a better outcome than compromise. But collaboration is today a preferred way to gain new perspectives of leading-edge technologies. If indeed the pie is increasing, rather than shrinking, and there is revenue growth projected ahead, why not work together? This business approach is playing out real-time in the auto space, where each party brings its own valuable and unique experiences.

“Picturing yourself on the side of goodness in a battle between right and wrong is self-satisfying, but it can blind you to practical solutions that wouldn’t require anybody to violate their values,” said Michael Wheeler, Professor at Harvard Business School.

Wise words. Helping the other side see the middle ground or a new point of view is worthy when progress is otherwise thwarted. Detroit and Palo Alto are bringing together traditional and progressive views – and making a significant impact on the industry and society.