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Driving auto mobility transformation from the inside out

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From future-ready operations to smarter investments − the auto industry’s mobility imperative is upon us.

Automobiles are getting smarter every day — better able to sense, navigate and communicate with the world around them. And the integration of emerging technologies like artificial intelligence (AI) and 5G telecommunications into autonomous vehicles (AVs) is on the horizon. Yet the coming age of advanced mobility will present automotive companies with difficult business issues that will require equally imaginative solutions and decisions.

Simply put, it won’t be enough for automakers and their suppliers to embrace the transformative potential that the Fourth Industrial Revolution (4IR) holds for their products.1 They must apply its lessons 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. It is through this more holistic approach that emerging technologies can integrate to deliver greater efficiencies, enhanced resilience and new ways of  working.

Without a solid foundation on which to build, even the best technologies fall short. Consider the massive sums of money that automotive companies have invested in technology in recent years.2 These investments were no doubt aimed at securing a prosperous future, but in many cases, they have been premature and uncoupled from the reality of when driverless vehicles will enter the mainstream — let alone become a source of industry profit. This has led to some automakers overextending themselves. A lack of strategic scenario planning likely played a role in their compromised balance between short-term profitability and long-term  investments.

Companies are also being challenged to keep pace with the ever-evolving (and growing) 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 and technology, media and telecommunications sectors will have wide-ranging effects.

Identifying the right role in this new paradigm, whether from a competitive standpoint or in terms of the automotive value chain, will be critically important. Industry leaders will be challenged to carve out new relationships with customers and suppliers. 

Operational transformation in manufacturing, supply chains and support functions will also require immense flexibility to take advantage of new technologies that will fortify the bottom line. 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.

Automotive companies should take the following steps as they transform their business and their industry — from the inside out.

Stake out a place in an evolving, increasingly connected auto industry

It’s easy to be enchanted by technology that promises to change everything. AVs and electric vehicles (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 how rapidly change is occurring and what their role will be once it arrives.

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 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.3 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” as well as autonomous, could that require different assumptions about who is buying and operating AVs, when compared to today’s vehicles? If companies manager 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 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. Self-driving software will 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 software 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.

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Learn from businesses that get the most mileage from digital

Automotive companies understand that failing to make digital transformation a top priority could be costly. In PwC’s Digital IQ 2020 survey,4 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. How can a company finish future-proofing itself while the impact of the future it’s preparing for is still unknown?

To  succeed, auto companies should take a lesson from the 5% of businesses across all industries whose digital initiatives consistently pay off. These Transcenders make up the vanguard of global business thanks to certain attitudes and practices that help them embrace change.

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.

Staying focused on these best practices can help auto companies develop a culture and approach to business that’s ready for whatever challenges the future may hold.

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Rethink operations from the factory floor to the back office

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.5

Clearly, it’s time to push past pilots and drive digital transformation through to implementation. One impediment to doing so is uncertainty about how to trace the impact of 4IR technologies to the bottom line. Remaining focused on the potential to improve key processes can help overcome this hurdle — for instance, 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.

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.6 The automotive industry’s share of that sum could help underwrite its investments in tomorrow’s vehicles.

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Evolve how deals are done to meet new challenges

Automotive M&A volumes are likely to remain robust in the near term, driven in no small part by tech-centric transactions.7 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.

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.8 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 showed in stark terms the value of a forward-thinking approach to deals. Our analysis shows that, across all sectors, M&A creates the most value when its more strategic and less opportunistic, when value creation is planned for across numerous dimensions and when people and culture are put front and center. 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.

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Conclusion

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.9 But opportunities also abound. And they’ll be more available to companies that put in time and energy today to balance cost-saving, efficiency-boosting operational transformation and a prudent, future-ready approach to investments. Together, those approaches will be key to driving transformation industrywide.

1. "The Fourth Industrial Revolution: Are You Ready?", PwC, January 2020
2. Evan Hirsh, Rich Parkin and Reid Wilk, "Facing Up to the Automotive Innovation Dilemma", Strategy+Business, April 30, 2019
3. “Changing lanes: As autonomous vehicles transform the value chain, what moves will you make?”, PwC, November 2019
4. "PwC’s Digital IQ 2020 Survey", PwC, February 2020
5. “Navigating the Fourth Industrial Revolution to the Bottom Line”, PwC and The Manufacturing Institute, August 2019
6. “Where Should Finance Transformation Begin”, PwC, July 2019
7. “Global Automotive Deals Insights: Year-End 2019”, PwC, January 2020
8. “Global Automotive Supplier Consolidation Study 2019: Executive Summary”, PwC, August 2019
9. “Navigating the Rising Tide of Uncertainty: 23rd Annual Global CEO Survey”, PwC, January 2020
 

Contact us

Ray Telang

Automotive Leader, PwC US

Paul Elie

Industrial Manufacturing Deals Leader, PwC US

Akshay Singh

Industrial and Automotive Industries Principal, PwC US

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