12/14/2016

2016AutoIndustryTrends

Industryperspectives

2016AutoIndustryTrends
Itsnotclearhowcarswillchangeinthecomingyears,butautomakersandsuppliersno
longerhavetheluxuryofsittingoutthetransformation.

Fortheautoindustry,2015wasamixedbagbyanymeasure.RecordsalesintheU.S.gavethesectoramuchneededboost,but
growingeconomicmalaiseinmuchoftherestoftheworld,particularlyinemergingmarkets,ledtoaflatyearoverall,dampening
prospectsforglobalautomakersandsuppliers.
Meanwhile,indesignroomsandonfactoryfloors,autocompaniesweredabblingwithnewtechnologiesandvehicleconceptsthathave
thepotentialtotransformtheautomobile(andtransportationmorebroadly)inperhapsthemostdramaticfashionsinceFordrolledout
theModelT.Alreadywearebeginningtoseebitsandpiecesofwhatthesocalledconnectedcarwilllooklikeafullydigitizedvehicle
withWiFiadvancedinfotainmentsystemsandappsvehicletovehiclecommunicationsthatletcarsontheroadtalktoeachother,
exchangingbasicsafetydatasuchasspeedandpositionrealtimelocationservicesandroutingbasedontrafficconditionsand
networkedWeblinksthatfacilitatevehiclediagnosticsandrepairs.
Atthesametime,theintelligentcarisfastmovingfromthedrawingboardtothestreets.Asanobviousprecursortotheautonomous
vehicle,theintelligentcarcangivedriversafirsttasteoftheexperienceofrelinquishingcontrolofavehicle,withsuchfunctionsasself
braking,selfparking,automaticcruisecontrolbasedonroadconditions,automaticaccidentavoidancefeatures,computeroperated
powersteering,andelectricparkingbrakes,aswellaselectronicthrottlesandenginecontrol.
Theideaoffullyautonomousvehiclesistoofuturisticformuchofthedrivingpublictoembracerightnow.Butforautomakers,thepath
fromcurrentmodelstodriverlesscarsisgoingtobeanexcitingperiodoftransformation.Thesenewdevelopmentsrepresent
enormousopportunitiesevenastheyauguraperilous,unsteadyphasefortheindustry.Originalequipmentmanufacturers(OEMs)
mustnavigatethechallengesofdesigning,manufacturing,andupgradingtraditionalpowertrainmodelswhilestakingaclaimin
emergingtechnologiesandimprovedcustomerexperiences.
IfyouareanexecutiveatanOEMoranautoequipmentsupplier,your
strategicacumenyourabilitytoplaceyourcompanyinthevanguardof
producttrendswithoutrunningafoulofevermorestringentenvironmental
ruleswillsurelybetested.Thecriticaldimensionsthatyouwillhaveto
consideranddeftlymanagecanbebrokendownintothreecategories:
macroeconomicforces,aneweraofpersonaltransportation,andstricter
regulations.

Yourabilitytobeatthe
vanguardofproducttrends
withoutrunningafoulof
environmentalruleswillbe
tested.

Macroeconomicforces
Longproductcyclesanddeepcapitalinvestmentsmakeplanningintheauto
industryacomplexendeavor.Forthepast10years,OEMsandsuppliershavegenerallychasedglobalsalesgrowthwhilehopingto
improvemarginsbyleveragingautomobileplatformsinmultipleregionsandstrivingforscalewhereverpossible.Theresultsofthis
strategyhavebeendecidedlymixed.In2015,theyturnedsourasglobaleconomicconditionsworsened.Thistrendmakesanynew
commitmenttoinvestinacountryorregionariskyonethatmustbedeliberatelycraftedusingacleareyedassessmentofmarket
conditions.

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2016AutoIndustryTrends
Belowisourviewoftheautomarketrealitiesinkeygeographies:
NorthAmerica:U.S.marketsarepeakingathistoriclevels,settingasalesrecordofjustunder17.5millionvehiclesin2015,up
5.7percentfromtheyearbeforeandtoppingthehighwatermarkof17,402,486in2000.U.S.salesarelikelytoberelativelyflat
inthenexttwoyearsandmayfaceamoderatedownturnin2018,thevictimofeconomiccycles,higherautoloaninterestrates
astheFederalReserveraisesovernightrates,andanexpectedfloodofvehiclesintotheusedcarmarket.Mexicanautosales
outpacedforecastsin2015,jumping19percenttomorethan1.3millionunits,andareexpectedtosurpass1.5millionby2021.
InvestmentsinnewautofactoriesinMexicoaresurgingaswellinstalledcapacityislikelytogrowmorethan50percentoverthe
nextfiveyears(partiallyforNorthAmericanconsumption,butalsoforglobalexport).Theseconditionscompelautomakersand
supplierstomanagesupplychainsandfactoryusagecautiouslyintheU.S.,whilecontinuingtoexpandinMexico.
EuropeanUnion(E.U.):SaleshaveimprovedintheEuropeanUnionsincethefinancialdownturn,buttheE.U.autoindustryis
heldhostagebylocaleconomiesthatareteeteringontheedgeofrecession.In2015,newcarregistrationsintheE.U.rose9.3
percentyearonyear,to12.6millionunits.Butthatiswellbelowtherecordyearof2007,whenmorethan18millionvehicles
weresoldintheregion.AndautomakersinsomeE.U.nationsstrugglingtogrowtheireconomiesnotablyFrance,Greece,
Spain,Italy,andPortugalfacelossesorlowprofits,fragmentedmarkets,andtheinefficienciesofmodelproliferation.TheE.U.
autoindustrymustfigureoutwaystobettermatchproductioncapacitytomarketdemand,whilesimultaneouslyinvestinginnew
potentiallystrongproductareas(forexample,smallSUVsandcrossovers)andinnewautomobiletechnologies.
EmergingNations:Perhapsthebiggestdownwardmacroeconomicforceintheautoindustrytodayistheunderperformanceof
emergingmarkets,whichnottoolongagorepresentedasignificantopportunityformajorgainsintheglobalautosector.While
Indiassalesremainedroughlyflatin2015,Chinasyearoveryeargrowthslowedto7.3percentfroma10percentgainin2014
and16percentgainin2013.NewvehicleownershiprestrictionsinChinaslargestcitieswillfurthercurtailsalesinthecoming
years.Russiahaditssecondstraightyearofprecipitousdeclinein2015saleswerealmost50percentbelowthe2012peak.And
Brazilssalesfellbynearly1.3millionunits,or30percent,fromitsrecordhighin2012,adropthatwaslargerthantheentire
Mexicancarmarket.

Automakershavemademassiveinvestmentsinemergingmarketcountriesandmustbeextremelynimbleiftheyareto
successfullynavigatethenextfewyears.Averyconservativeapproachcloselymanagingcostsandfactorycapacityis
criticaltostayingabovewaterinBrazilandRussia.Chinaisadifferentstory.Alreadytheworldslargestautomarket,Chinais
expectedtoboastannualvehiclesalesofmorethan30millionby2020.SmartjointventureswithChinesecompaniesthatcanbe
countedonforconsistentreturns(anecessarybutdifficultundertaking,asmanyChinesejointventuresstruggle)andincreased
buthighlymanagedproductionofmoreprofitable,priciermodelswillbeessentialforautomakersthatwanttotakeadvantageof
potentialvehiclesalesgrowth.
MiddleEastandAfrica:Overthenextfiveyears,theMiddleEastandAfrica(ME&A),alaggard,relativelyunmotorizedregion,
willlikelyseestrongandconsistentautomobilesalesgrowththebiggestimprovementsareexpectedinIran,Egypt,SouthAfrica,
andNigeria.Alongwiththisgrowth,automakerfactoryactivityintheregionwillincreasesignificantly.By2021,nearly3million
carswillbebuiltyearlyintheME&A,anoutputincreaseofabout50percent,accordingtoPwCAutofacts.Substantialfactory
capacityimprovementsarelikelyinAlgeria,Nigeria,Egypt,andIran.Giventhediversityofthisregiontherearemorethan50
distinctmarketsautomakersfacetheobstacleofsatisfyingmultipleuniquelocalrequirementsinordertothrive.Amongthem
aredomesticassemblyquotas,importandexporttariffsanddutiesforpartsandvehicles,gasordieselpreferences,andlocal
customsthatmaydictatethedesignofinteriorandexteriorfeatures.TogainastrongsalesfootholdintheME&A,automakers
mustalsohaveasubstantialfactoryanddistributionpresence.

Neweraofpersonaltransportation
Asnotedabove,connectedandintelligentcarsarejustbeginningtomakeinroadsintheautoindustry,andalreadytheyhavehada
powerfulimpactonthewayautomakersareadjustingorganizationally.Companiesareenvisioningafardifferentfuturethancouldhave
beenimaginedadecadeorsoago.Twoseparateworldsaremeldinginordertodesignanddevelopthesecars:thetraditional
automotivecompanyandsoftwareoutfits.Theindustriesbringwiththemconflictingcultures,productdevelopmentmodels,and
businessoperations.Forexample,carcompaniesdesigntheirproductsonce,inapainstakingfiveyearlongdevelopmentcycle.
Softwarecompaniesliketofailandfixinarapidproductdevelopmentprocess.
Althoughmanypeoplemaybedrawntoshinynewobjectsandassumethat
electricvehiclesandhovercraftsrepresentthemostlikelytransportation
future,therealityisdifferent:Notonlywillautonomouscarsbeatoughsell
inanymarket,buttraditionalpowertrainsandinternalcombustionengines
aremorethanlikelytobethepredominanttypeofvehicleontheroadfor
decadestocome.Inthatlandscape,newervehicleswillbedistinguished
primarilybytheirinnovativetechnologyinvolvingbothassisteddrivingand
globalconnectivity.Inarecentstudy,56percentofnewcarbuyerssaidthey
wouldswitchtoadifferentbrandiftheonetheywereconsideringdidntoffer
thetechnologyandfeaturestheywanted.Similarly,48percentofcarbuyers
saidtheywouldwalkawayfromavehicletheylikedifthetechnologywas
difficulttouse.

Notonlywillautonomouscars
beatoughsellinanymarket,
buttraditionalpowertrainsand
engineswilllikelydominatefor
decadestocome.

Thetechnologynecessarytomakeconnectedandintelligentcarsspecifically,Webnetworking,sensors,andsoftwareisnotinthe
traditionalwheelhouseformostautomobilemakers.ThatshortcomingisaninvitationtohightechcompaniessuchasAppleand
Google,whicharemakingmovestodevelopthetechnologytoowncriticalcomponentsofthenetworking,autonomous,and
communicationscapabilitiesofautomobiles.Theincreasingpresenceintheautoindustryoftechnologyfirmscannotbeignoredor
downplayedbyOEMs.Thesecompanieswilllikelyprovetohaveanoutsizedinfluenceontheautosectorinthecomingyears,chiefly
becausetheirskillsandtheindustrysneedsalignperfectly:Theyareadeptatseamlesslyconnectingcomponentstocreatenetworks
valuedbyconsumersfortheinformation,entertainment,efficiencies,andexperiencestheydeliver.

Stricterregulations
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2016AutoIndustryTrends
Evenasautomakersmustfocusonupgradingthetransportationandmobilityfeaturesoftheirvehicles,stricterfueleconomy
regulationsareclosingin.By2025,forexample,automakerfleetsinEuropeandtheU.S.willhavetoaverageupwardof60milesper
gallon,agoalthatbecomesmoredifficultifoilpricesremainlow,stokingconsumerinterestinpopularlarger,lessefficientvehicleslike
pickupsandSUVs.Meetingthesestandardswillrequirestepchangeimprovements,notincrementalones.Andconsideringtheshort
timeframe,manyoftheseadvanceswillhavetobeappliedtothetraditionalinternalcombustionengineandpowertrain.Indeed,
expertsbelievethatpetroleumbasedvehiclefueleconomycanbeimprovedbyasmuchas75percentwithcombustionbreakthroughs
focusedonmaximizingengineefficiencyandminimizingtheformationofemissionswithinenginecylindersexhaustaftertreatment
technologiesthatfurtherreduceemissionsandtherecoveryofenergyfromwasteheat.
Inadditiontoimprovingoverallpowertrainperformance,automakerswill
havetotakerisksinproductdevelopment,atrendthatwearealready
witnessing.Forexample,in2014,Fordreplacedthesteelinitspopularand
highlyprofitableFseriestruckwithaluminuminordertoreduceweightand
enhancefuelefficiency,amovethatcouldhavescaredoffcustomerswho
believedthatthelightermaterialwaslessrugged.Sofar,thisapproachhas
paidoff.The2015F150hadthebestmileageofanygasolinepickupand
helditsposition(byalargemargin)asthebestsellingvehicleofanykindin
theU.S.

Toimproveperformance,
automakerswillhavetotake
risksinproductdevelopment.

Hondaistakingasimilarchancewithitsrecentadoptionofcontinuouslyvariabletransmissions(CVTs)acrossthebulkofitscarlineup.
Insteadofcyclingthroughfixedgears,thesetransmissionsoperateonpulleysthatconstantlyadjustgearratiostoprovideoptimal
performanceintransferringpowertotheautomobileswheels.CVTtechnologydeliversmuchbetterfueleconomybecauseiteliminates
inherentinefficienciesinfixedgeartransmissionsthatresultinwastedenergy.However,customersarenotsoldonCVTsyetsome
complainthatthesecarsarelistless,especiallyduringacceleration,becausetheylacktherhythmichigherrevsandforwardmovement
feltduringtraditionaltransmissionupshifting.
Otherautomakers,includingBMW,Mazda,andFiatChrysler,areattemptingtomeetstricterfueleconomystandardsthrougha
combinationofimprovedaerodynamics,betterperformanceusingturboengines,andlightermanufacturingmaterials,amongother
tactics.

Thecombinedimpactofthesethreedimensions(macroeconomicforces,aneweraofpersonaltransportation,andstricterregulations),
whichhavetakencenterstageintheautoindustry,isnoteasilymanagedorblunted.Asanexecutiveleadinganautomobilemakerora
supplier,youarealltoofamiliarwiththeurgencyneededtoconfronteachoftheseunavoidableaspectsoftheautobusinessandtheir
effectonyourcompany,althoughyoumaynotyethaveaplantodoso.Werecommendthatyouconsiderthesestepsasthebasisof
yourstrategicplan:
Step1.Launch,learn,andadaptfasterthaneverbutnotrashly.Youshouldprioritizeagility,butfindwaystotakeriskswithout
sacrificingsoundexecutionthatcanjeopardizebothcustomersatisfactionand,moreimportantly,safety.Inshort,acompany
mustbetruetoitsDNAwhileevolvingasrapidlyaspossible.

Specifically,youshoulddeterminewhethernewintelligentandconnectedvehiclefeaturescanbedevelopedinhouse.Doesyour
companyhavethecapabilitytoestablishaskunkworksadvancedresearchunit?Doyourcustomersexpectthatyourbrandwill
provideuniqueanddistinctiveproprietarysolutions?Ifthisrouteisnottherightoneforyourbusiness,prepareanapproachfor
partneringwithcompaniesfromoutsidethetraditionalautomotivesphere,whichshouldincludeadvantageousarrangements
involvinglicensing,revenuesharing,andownershipofintellectualcapital.

Inaddition,engineerbettervehicleperformancebysmartlyinvestinginnewtechnologies,suchaslightweightmaterials,
advancedtransmissionandenginesolutions,andalternativepowertrains,tosatisfyemissionsrules.
Step2.Inassessingtheproblematicmacromarketforces,thetraditionallargemarkets,liketheU.S.andE.U.,arerelatively
easytosteerthroughcomparedtoemergingregions.Nonetheless,youneedtoprioritizegrowthinAsiaandotherdeveloping
areasbecausetheyrepresentasmuchastwothirdsofpotentialsalesgainsinthecomingyears.Thebestwaytoapproachthis
somewhatperilouseconomicperiodistodiligentlyfocusoncapacitymanagementusingsophisticatedinventoryandsalesdata
systemstomeasuresupplyanddemand.Companiesthathavethebestmarketintelligenceandanalysiscapabilitiesandthat
usetheseskillstomanageproductionoutputonadaytodaybasiswillexcelinemergingregions,asthesecountrieswill
undoubtedlygothrougheconomicebbsandflowsintheirdevelopmentphase.
Step3.Anystrategythatyouimplementgoingforwardshouldbepredicatedoncapturingvalue.Theuncertaintiesand
transformationthatwillpunctuatetheautoindustryinthenextdecadearetoopotentiallydamagingtoconfrontwithoutaclear

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2016AutoIndustryTrends
ideaofrealreturns,ifyourstrategygoesasplanned.Themostlikelyavenuesforvalueimprovementsincludeforecastinggrowth
marketsadeptlyandseizingagreatershareinthoseregionsinvestinginnewtechnologiesandfeaturesthatattractcustomers
andwordofmouth(ratherthancommoditizedcomponents,suchasyetanotherdashboardredesign)developingarightsized
andefficientfactoryfootprintcementinghealthycollaborativerelationshipswithsuppliersandcreatingastrongdistributionbase
withapremiumoncustomerservice.

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(0.37MB,PDF)

Authors
EvanHirsh
JohnJullens
AkshaySingh
ReidWilk

Moreaboutstrategiesthatwork

StrategyThatWorks:
Howwinningcompanies
closethestrategyto
executiongap

2015GlobalInnovation
Study:TheAutomotive
Industry

ConnectedCarStudy
2015

TheNextAutonomous
CarIsaTruck

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