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.
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.
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.
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.