THE FUTURE OF AUTOMOTIVE:Transformation to tech company

Ever since Gottlieb Daimler first added a gasoline engine to a conventional four-wheeled carriage in 1886, the automotive industry has steadily expanded its role as a technology leader – by optimizing its processes, streamlining its supply chains, and pioneering the evolution of technology. Since the advent of the digital age, however, the foundation for this decades-long success story has started to erode. This is because new customer needs, new regulatory requirements, new competitors, and new technological trends are now emerging in an innovative mobility market. In an interview with Handelsblatt, VW CEO Herbert Diess rightly describes the impact of these four trends as a historic turning point: “The transformation in the automotive industry over the next ten to fifteen years will be like nothing we’ve seen before.”

1_DIGITAL
We are all living in the age of smartphones and have developed a unique digital identity. Consequently, we want the services and options we now rely on every day to be available in our vehicles as well – whether we need them for entertainment, work, health, navigation, e-commerce, or smart home applications. We expect our cars to keep evolving in terms of handling and ride comfort through regular updates even after we have purchased them. This, in turn, means that automakers with their increasingly connected vehicles will need to find ways to keep up with the speed of innovation in the mobile app space.

2_ELECTRIC
Drive technology is another area where radical change needs to happen and where forward-thinking technologies must be made feasible and attractive for consumers. Environmental and climate protection regulations are forcing vehicle manufacturers to reduce CO2 fleet emissions to 95g/km by 2025. This is where the internal combustion engine is coming to the end of its road. New hybrid drives and hydrogen- or battery-powered engines, on the other hand, are leading the way into a new era of vehicles, providing automakers with ample opportunity to put their stamp on the future.

3_MODULAR
Owning a personal car is quickly losing its appeal. There are more and more young adults who prefer not having their own car parked in an underground garage somewhere. To them, cars have a become just one part of a mobility chain that will only grow in complexity. From rail transport and air taxi to rental cars and electric scooters, there are many conceivable modes of transport that, depending on the occasion, can be seamlessly integrated. Conventional car makers simply cannot afford to miss out on the advantages that playing a leading role in these tightly integrated and digitally connected mobility systems of the future sharing economybrings.

There is now a wide gap for connected and digital vehicle technologies, bringing new manufacturers onto the scene. California-based automaker Tesla, ridiculed and made fun of only ten years ago, is now the role model for the entire industry in terms of batteries, drive technology, and software-driven configuration and update options for its vehicles. Its electric powertrain is simple, but offers numerous configuration options, making the decision regarding a vehicle’s engine a secondary thought for buyers. The focus has shifted to new customer expectations regarding digital individualism and passenger comfort amenities and the new understanding of cars as an evolving part of a customers’ digital everyday life.

As a company with its roots firmly in Silicon Valley, Tesla is a challenger that is making giant strides in the race towards the future of mobility. In the past, traditional carmakers have focused on purchasing as many vehicle components as possible from a large number of suppliers. The result is a sprawling jungle of electronic components with often no less than 100 control systems that need to be able to communicate. This is an approach that really put the brakes on innovation. Completely unencumbered by such baggage, Tesla can rely on the agile principles of software development and a digital control system inside the vehicle that is powered by an operating system that takes care of pretty much everything. As a one-stop-shop, Tesla can easily expand on or add new features and roll them out via an over the air interface.

In order to stay competitive in a disrupting mobility market that is moving towards the future at breakneck speed, conventional automakers have no option but to embrace less rigid, more targeted and agile development sprints with quick feedback loops that rely on flat hierarchies and adaptive partner ecosystems. Only if they transform the way they think, act, and work can they expect to play the role of dynamic innovators that lead the charge towards future mobility and make money for themselves.

The evolution from carmaker to software-driven company is the only way forward for the legacy automotive industry. And there is no doubt that this transformation will challenge their traditional business models. Until now, vehicle leasing and maintenance have traditionally been the industry’s biggest revenue drivers.

In the future, however, the focus of value creation will shift to car-related digital services that generate revenue at every stage of the vehicle’s lifecycle. A survey by WAVESTONE shows that these types of on-demand car functions (ODCF) are becoming a major buying factor for more than one in two younger motorists. Carmakers that want to be able to offer these functions going forward will need to break up traditional controlling and supplier structures, strengthen their in-house development, and establish new partnerships in development ecosystems.

The good news: customers are more than willing to pay. German manufacturer BMW puts the annual sales potential from digital updates at five billion euros by the end of the decade (Next-Mobility). Tapping this potential, however, will require carmakers to go beyond the purely technical perspective and develop a deep understanding of their customers. They need to quickly identify and respond to emerging data-driven customer needs and digital trends, vet them for technical and financial feasibility, and then ensure a rapid time to market.

This is also true for the channels through which cars are sold. Today, prospective buyers take to configurators long before they even take a first real-life look the vehicle of their choice. This is because there is yet another dimension to the new world of mobility: half of all car purchases will be done online in the future.[1] Carmakers need to respond to this trend by delivering a seamless customer experience across all analog and digital channels. Dealerships that know ahead of time what their customers are looking for can strengthen brand loyalty through customized offerings that go beyond the traditional one-time purchase – in order to provide the digital identity that customers want.