In terms of the transformation the automotive industry currently faces, Ford’s incoming CEO Jim Hackett hit the nail on the head when he said that mobility services, connected vehicles and the related data – powered by some strategic investments and acquisitions – could be the road to better financial returns than the traditional building, selling, and financing of cars.
For a typical Silicon Valley company those returns would equate to 10% to 20% margins, compared an optimistic 10% for a mass-market automaker. Add to the mix that global vehicle sales have been hitting record sales post-recession, with 88 million light vehicles sold in 2016, outside of the hot spot of Asia, sales growth is expected to slow sharply, going into a down cycle. There is a massive impetus to change the mind-set right now.
It’s possible to see that the hundred year-old culture built up around car ownership, mobility in our daily lives and the status associated with the motor vehicle, are all likely to change.
Cyclical to non-cyclical revenues
Selling ‘metal’, the traditional OEM business is highly cyclical, as we know. But the data and the digital business that goes with the software side of the vehicle can help add stability to the auto business: in fact it is what’s going to help strengthen the balance sheet of the automakers. Analysts agree it’s the right place for the OEMs to focus, and it represents the future.
According to the KPMG Global Automotive Executive Survey 2017, 84% of auto industry execs agree that data is the fuel for the future business model. Another 82% said the motor vehicle should have its very own digital ecosystem and 52% rank data privacy and security as the most important criteria in terms of securing up-stream and down-stream information to the vehicle.
In future the digital eco-system associated with vehicles and mobility is going to generate higher revenues than the ‘hardware’ of the vehicle itself. Roles throughout the value chain are still being decided.
To put some context on all this complex transformation, here are some of the major challenges and opportunities for the automakers:
- Emergence of third-party connectivity: On average, 20% of new car buyers state they would switch to another car brand for better connectivity features. In some regions and for some segments this share is even larger, for example, up to 41% of drivers who spend more than 20 hours in the car per week.
- Connectivity hardware subject to competing and inter-related business models: The impact on revenue pools indirectly affected by connectivity, such as vehicle price (through market share shifts) as well as insurance and maintenance, is much more significant than the connectivity revenue pool itself.
- Vehicle cost pressure and complexity: This is changing the traditional linear supply chain, pushing OEMs into new partnerships, new powertrain technology and data platforms. Government intervention and the prospect of ‘robo-taxis’, expected to live a very high-mileage life, will also accelerate the tipping point towards battery power and advanced battery technology.
- Diverging markets: To an increasing degree, global car demand is being driven from emerging markets such as Asia, which will require some realignment of production and supply bases.
- Digital is changing everything: The growing role of digital and data applies to everything from car health data/ service data, HMI, personalization, Uber-like ride hailing/ride sharing, dealerships, insurers, claims and accident reconstruction, data service providers/data intermediaries and others in the connected car eco-system.
- The underlying technology landscape: The value-added content for the car is changing fast and moving away from ‘metal’, towards connectivity, vehicle-to-vehicle and vehicle-to-infrastructure applications, electric vehicle (EV) technology as well as hydrogen, gas-electric hybrids and biometrics. Several European governments have pledged to reach all-electric for new car sales by 2035 or 2040. In the US, a combination of targets, mandates, state and city regulation will see hybrids and EVs reaching over 50% of auto sales by 2030.
Automotive at the crossroads
“We are in the midst of seeing more change in the next five years than we’ve seen in the last 50 years,” said Mary Barra, General Motors CEO.
An estimated 130,000 semi-autonomous (Level 2) vehicles will be sold in 2017 and this segment will occupy a rising share of all new vehicles. An estimated 98,000 fully-autonomous (Level 4 and Level 5) vehicles will make their way into the global market by 2020.
In practical terms, the internal combustion engine (ICE) is not going to disappear: in 2030 the market will of course still feature in a large number of hybrids. But essentially any competitive advantage that exists today in terms of ICE technology is likely to be diminished to almost nil by 2040.
GM is aiming for an all-electric future by 2020, when it expects to offer 20 model options powered solely by batteries. Ford plans to reduce costs by 50% through 2020 and shift away from lower-margin passenger cars. The company is also intensifying a planned roll out of electric powertrains and it is looking to accelerate its network of partnerships that come together to enhance the connectivity of the vehicle.
“When you’re a long-lived company that has had success over multiple decades the decision to change is not easy, culturally or operationally,” said Jim Hackett recently, speaking to analysts.
“Ultimately, though, we must accept the virtues that brought us success over the past century are really no guarantee of future success.”
Building inter-connectivity and security
All of the above is why we, at LexisNexis Risk Solutions, are committed to building the necessary inter-connectivity and communized platforms, working through the LexisNexis® Telematics Exchange and the Pan-European Connected Car Insurance Panel for example, building bridges between the different market participants.
The OEMs are investing billions into their connected vehicle programs and branding services to create stronger awareness for these services. Although they are maturing and building capabilities, they are less-evolved than the insurance world in terms of data processing at scale.
The OEMs need strong partnerships in building data monetization programs to continue the investments in connected services. Usage-based insurance (UBI) is one of the key consumer benefits of the connected car platforms.
The insurance industry for its part, is building the awareness and appeal of UBI, but the insurers will also require a partner to aggregate the data and manage the OEM relationships. LexisNexis Risk Solutions is well positioned to work with the two giant industries to build this marketplace to benefit the shared consumer.