The COVID-19 pandemic has forced automotive companies to rethink their short-term playbook on redefining mobility in the present — and the future. Indeed, the crisis has placed enormous pressure on automakers to free up cash through cost-cutting and streamlining measures across the entire value chain and to prioritize investments that offer the greatest likelihood of capturing returns.
Yet, to stay competitive, automotive companies will still need to make investments that make mobility smarter. For instance, embedding emerging technologies such as artificial intelligence (AI) and 5G telecommunications into vehicles is expected. While the idea of a future of fully autonomous vehicles (AVs) has captured our imaginations — and grabbed headlines — it’s important to note that automakers are integrating smart, connected technologies at a rapid clip in their current models — in both electric vehicles (EVs) and traditional internal combustion engine (ICE) vehicles.
At the same time, automakers need to look beyond the transformative potential that the Fourth Industrial Revolution (4IR) holds for their products. They must apply lessons learned from deployments of 4IR technologies to every part of their business — from the design studio to the factory floor to the dealer showroom — and even extend to functions like finance and human resources. With this more holistic approach, emerging technologies can be integrated to deliver greater efficiencies, enhanced resilience and new ways of working. And, in the face of mounting global uncertainty and a more complex playing field, making the right investments may involve an approach to mergers and acquisitions (M&A) that is increasingly cross-sector, multiple in targets and fiercely agile in adapting to unpredictable change.
Looking ahead, automakers will need to be more discriminating when choosing technology investments. Consider the massive sums of money that automotive companies have invested in technology in recent years. These investments were no doubt aimed at securing a prosperous future, but, in some cases, they have been premature. This has led to some automakers overextending themselves.
As automakers continue to cope with the economic fallout of the pandemic, they are likely to focus their attention on investments that generate returns in the short term. Therefore, it’s expected that over the next year or two, automakers will invest more in EV and ICE vehicles — and less so in AVs.
Companies are also being challenged to keep pace with the growing and ever-evolving mobility ecosystem, which includes not only vehicles, their manufacturers and operators, but also the connected cities in which they will travel. The convergence of the automotive sector with the technology, media and telecommunications sector will have wide-ranging effects.
To meet these challenges, automotive companies should take the following steps as they transform their business and their industry — from the inside out.
It’s easy to be enchanted by technology that promises to change everything. AVs and EVs certainly have the potential to significantly alter how automobiles are made and used. But it isn’t enough to know that change is underway. Auto companies also need to understand the pace of change underway and what their role will be once certain changes arrive.
A clear-eyed view of the forces driving disruption in the movement of people and goods in both the near and long term is more important now than ever. While the future of mobility remains tied to connected, autonomous, shared and electric (CASE) technologies, these have not and will not mature at the same pace. While some opportunities are closer than previously thought, others are further off with their inflection points remaining fluid based on several factors. This lack of understanding has led some to invest too aggressively in the technologies designed to help them compete down the road, to the detriment of profitability today.
Managing this dilemma — particularly during the cash-strapped era of COVID-19 — is one of the key challenges facing automakers and their suppliers today.
What’s needed is a clearer, scenario driven understanding of how the role of both original equipment manufacturer (OEM) and supplier could change as CASE vehicles begin to enter the mainstream. Key decisions should be on auto companies’ agendas now. OEMs, for example, should weigh the costs and benefits of trying to maintain their current position in the automotive value chain, moving into adjacent spaces or expanding aggressively in an attempt to capture maximum value.
Automotive companies would do well to consider what the implications of any such shift may have for their products and markets. If the future of mobility truly is “shared” and autonomous, could that require different assumptions about who is buying and operating AVs, when compared to today’s vehicles? If companies that manage vast fleets are purchasing most AVs, what changes about how those vehicles look and function?
Additionally, OEMs and suppliers of traditional components and systems should take a fresh look at their technological capabilities, capital structures and workforces. This is a particularly pressing strategic need given the entry of an ever-increasing number of new players into the automotive industry from the technology sector — from AV fleet managers to providers of smart-city solutions — as well as stalwarts that may have a head start on reinventing themselves. Indeed, for instance, self-driving software is expected to be one of the most important “parts” under the hood of the automobile of the future. Auto companies are likely going to have to choose between adding new technology firms to their supply chain or developing comparable capabilities in-house. An honest appraisal of current strengths and weaknesses will help inform which future to drive toward.
Automotive companies understand that failing to make digital transformation a top priority could be costly. In PwC’s Digital IQ 2020 survey, 84% of respondents in the sector globally said that without aggressively pivoting toward becoming a fully digital organization, revenue growth and profitability are likely to suffer.
That awareness is crucial, but it has to be matched with intention — and that’s where auto manufacturers and their suppliers may be coming up short. Indeed, only 14% say this evolution will never be over. The largest share (41%) say they will have achieved digital transformation in the next five years, well before we expect AVs to begin revolutionizing the industry.
What can automakers learn from digital leaders from other industries? A number of things. They’re much more likely to see transformation as a state of being rather than a goal. They don’t dabble in digital transformation, preferring to immerse themselves. They excel at empowering employees at all levels to propose new ways of working — and those ideas are more likely to be on point, because they’ve reinvented their training and upskilling processes to make sure workers have the capabilities they need to be difference-makers. And they’re building resilient corporate cultures that are ready to face up to big challenges and don’t fear the future.
Focusing on such cross-industry leading practices can help auto companies develop a culture and approach to business that’s ready for whatever challenges the future may hold.
To build a war chest for future-facing investments, automotive companies should take a hard look at every aspect of their operations to ensure they are aligned for growth. What’s needed is a mindset around costs that looks at the right places to fuel digital investments in support of a growth strategy that can help improve efficiency where needed and reimagine services where it counts. Leveraging new, digitally empowered ways of working can help reduce costs and improve efficiency, freeing up funds that can be spent on prudent CASE projects. It can also strengthen a company’s ability to withstand swings in the business cycle and help prevent cuts that could jeopardize its preparedness for the shifting landscape of the industry.
Unfortunately, when it comes to bringing increased digital acumen to manufacturing, we’re still in quite early days. About four in 10 manufacturers have not even started to experiment with smart factory technology, while an additional three in 10 are at the proof-of-concept stage or in the earliest phases of adoption, according to a recently conducted PwC survey.
Clearly, it’s time to push past pilots and drive digital transformation through to implementation and at scale. One challenge in doing so is determining with a high degree of certainty the returns companies can capture on investments across a wide swathe of 4IR technologies. ROI, naturally, can take different forms — from cost reductions, greater efficiencies, more timely and informed decision-making, to name a few.
Some automakers, for example, have had success in demonstrating returns on 4IR investment through product quality improvements and equipment downtime reductions. By leveraging AI to implement predictive maintenance and quality control solutions or using data from connected devices and equipment to analyze production flows and eliminate potential bottlenecks in real time, automakers are on a perpetual hunt for technology advancements that show returns.
It’s important to embrace digital solutions that can improve operations throughout the enterprise, not just on the factory floor. There are real gains to be had by increasing automation and enabling greater collaboration digitally in areas such as finance and human resources, for example. Across all functions and types of business, PwC estimates that 45% of workforce tasks can be automated for a global savings of more than $2 trillion. The automotive industry’s share of that sum could help underwrite its investments in tomorrow’s vehicles.
Automotive M&A volumes are likely to remain robust in the near term, driven in no small part by tech-centric transactions. But building for the future through deals is never without risk. With the timeline for AV adoption uncertain, that’s especially the case for automakers today. However, given the imperative to balance profitability today and readiness for tomorrow, companies in the space are evolving their approach to deal-making. And, such deliberation could not be more relevant than during the COVID-19 pandemic, which is forcing automakers to weigh the prospective returns of acquisitions with more scrutiny than ever.
This is evident in the increasing prominence of partnerships and joint ventures as a share of automotive sector transactions. When these deals are consummated with the intention of gaining access to or developing the technology needed to power next generation mobility, they can represent a desire to spread risk among multiple parties (rather than concentrating it on one company’s balance sheet). That same calculus has driven an uptick in automakers’ acquisitions of minority stakes in technology companies recently. It’s likely that the need to share costs, talent and capabilities,as AVs and other new technologies approach market readiness, will drive even more deals of this type in the future.
This shift in the kinds of transactions that will shape the future of the auto industry should be paired with new ways of executing deals as well. Using the same M&A playbook that brought success in years past probably won’t suffice as the sector evolves.
Our study of thousands of transactions demonstrated the value of a forward-thinking approach to deals. Our analysis shows that, across all sectors, M&A creates the most value when it’s thoroughly planned, highly strategic and includes careful analysis on prospective returns on investment. For automakers, this underscores that a reactive approach that results in haphazard accumulation of new technology is more likely to impede long term success than foster it.
The challenges facing the automotive industry are real — in our 23rd annual Global CEO Survey 30% of auto company leaders said they were “extremely concerned” about the pace of technological change, putting it ahead of challenges including cybersecurity breaches and supply chain disruption. While some automakers may feel out paced by new technological advancements, opportunities do abound. Companies that can most successfully select which technology investments are strategic to their short- and long-term competitiveness while yielding the greatest and enduring returns will best future-proof their organizations. Together, those approaches will be key to driving transformation industrywide.
Automotive Leader, PwC US
Principal, Strategy& US
Global Automotive Leader, PwC Germany
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