Automotive transformation is tough.
Five reasons why and five ways to help you achieve it faster.

News from the automotive sector is remarkably mixed these days. A small number of brands are posting record sales, while others are shutting down plants or scaling back on planned investments. And we continue to hear and read more about new players (e.g. from China) threatening to disrupt the established order in important markets like Europe and North America.

It’s been clear to most established automotive companies for some time that they need to transform – to embrace digitalization, electric mobility, and software-defined vehicles – if they are to remain competitive in the future.

But transformation – as alluring as the word sounds and the ease with which we say it – is no small feat. Quite the opposite. Transformation is tough.

Five reasons why transformation is tough and five ways to make yours speedier and smoother:

1. Transitioning to electric mobility while satisfying combustion customers

The automotive industry was already highly competitive before electric vehicles became viable. But, for traditional automakers – many of which have spent decades building up competencies, infrastructure, and intellectual property around internal combustion engines (ICE) – the transition to electric mobility represents a uniquely difficult challenge. Today, many brands find themselves caught between two worlds, and thus trying to cater to an increasingly diverse customer base that, includes existing customers, potential customers with no near-term intention of switching to electric, and existing and potential customers who are keen for their next vehicle to be electric.

This is problematic for many reasons. Supply chains, R&D processes, and production lines for combustion vehicles and electric vehicles are very different. Electric vehicles require large batteries, have far fewer moving parts, and their production and assembly is simpler. They are inherently different, with contrasting weight distributions and aerodynamic characteristics. In a market that’s growing more competitive by the week, legacy automakers are finding themselves stretched as they try to compete in two or even three (pure EV, plug-in hybrid and combustion) very different races.

They must find a way to transition to the future in a way that is both profitable and addresses the many different appetites within their customer base. This requires significant investment and commitment, which – in the current climate – can be challenging. This goes some way to explaining why we’re seeing varying levels of conviction, as well as cancellations of investments and delays to previously announced plans.

2. Becoming a software company

Research conducted recently by Capgemini revealed that 23% of automotive companies already consider themselves to be software companies, with a further 47% expecting to become software companies within the next 3-5 years. Software is clearly key to the success or failure of automotive companies in the future.

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But becoming a software company when your history and brand are built on mechanical engineering excellence is no easy task. You need to acquire new talent and new skills profiles, and it’s not enough to simply ‘plug-in’ that new talent into your existing organization and expect the transformation into a software company to happen seamlessly. You need to build a culture in which that talent and those skills can thrive, add value, and grow. Building culture is notoriously difficult – to achieve and even to articulate. It requires efforts large and small in all areas of the business – it is the result of almost everything you do as a company.

Becoming a software company also means re-architecting your business and many of its key processes and functions, as well as embracing new technologies and ways of working (AI, agile and more).

The stakes are incredibly high and yet – given the recency of this strategic imperative – a proven path to success has not yet emerged. Some companies have created extensions outside the core (like VW Group’s CARIAD, Renault Group’s Ampere or Woven by Toyota), some are building dedicated software hubs in near- and offshore locations, and some are encouraging the transformation within their existing organizations or with the help of external partners. Is there a best way forward? Time will tell, but the stakes in software transformation are high and the topic undoubtedly occupies significant resources and attention at a time of already significant disruption. No OEM can afford to fall behind in this most crucial of races.

3. Differentiating through customer experience (CX)

Customer experience has emerged as one of the most important – perhaps the most important – areas of competitive differentiation for carmakers.

What do we mean by customer experience in automotive? Quite simply, every interaction between the customer and the brand from the first moments of awareness and consideration, through the ordering and collection process, the useful life of the car, the ease of charging (if electric) or updating over the air, right through to the moment when it’s time to hand back the keys and pick a new vehicle. It’s a long journey with many touchpoints.

Today, automotive companies need to be able to blend the best of digital and e-commerce experiences with the value of face-to-face contact provided by the dealer experience. They need to deliver compelling connected in-car experiences that delight customers and generate revenue. They need to determine how to compete with or complement the in-car experiences provided by CarPlay and Android Auto, without ceding too much control or revenue-generating opportunities. Again, there are no clearly right or wrong answers – some OEMs have resisted or eliminated the CarPlay and Android connection, some have deepened integration with brand-specific experiences and we even see automotive brands becoming smartphone builders and smartphone companies becoming OEMs. Cars occupy an important position in the digital ecosystem of many customers, and their ability to integrate with other aspects of daily life – such as working, recreation, and socializing – will be important to future appeal.

This is potentially a huge challenge – after all, digital integration isn’t among the core competencies of most traditional car companies. And it’s also a huge opportunity – established brands and automakers are recognized and trusted by millions of people the world over, which means there are strong foundations to build on and – for now at least – they have an advantage over new entrants. It’s how OEMs build on this trust and familiarity in the digital age that will strongly influence their future success or failure.

4. Talent and workforce transformation

Legacy automakers have built up their workforces around parameters (combustion-powered mobility, dependent largely on mechanical engineering) that evolved at a steady pace over decades.

The speed and deep-reaching nature of today’s transformation requires an almost entirely new approach, and yet it is important to consider the impact on the existing workforce – often tens or hundreds of thousands of employees – and how to ensure their safe passage on this journey. Mechanical engineering, of course, remains highly valued, but there’s now a more pressing need for digital skills, and it goes far beyond vehicle design and production (although this too is undergoing its own digital transformation). From digital manufacturing to intelligent supply chains, to value-adding customer experiences, a whole host of new skills are needed – software engineers, data scientists, battery experts and scientists, AI experts, UX and CX designers, and many more.

When you combine this with the fact that electric vehicles contain fewer moving parts (and so less assembly effort), it makes the transformation much more complex. It means optimizing workforce size for a new, still-to-be-defined future while adding new capabilities. It requires a complex mix of re-skilling and upskilling existing workforces, as well as hiring and acquiring talent.

The race to acquire digital skills and talent is being felt across all major industries, which is exacerbating the shortage and driving up competition. This means automotive brands need to work extra hard to appeal to top talent and differentiate in a crowded market or develop entirely new ways to access talent.

5. Replacing revenue streams

With electrification and software-defined vehicles, it’s generally accepted that there will be a reduced requirement for physical servicing and maintenance of cars. Provided that the car functions as intended, this will likely result in fewer physical interactions between dealer and customer, which could mean undermining the ongoing revenue currently provided by servicing and maintenance. This will need to be replaced.

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There are several ways in which automakers are approaching this. Some are developing and selling proprietary technology, like batteries or vehicle platforms, though this isn’t an option for all manufacturers. Connected services, features on demand, or subscription-based services (e.g. sport mode, activation of heated seats, etc.) represent a promising option, though success in this domain will require a change in mindset on the part of consumers, some of whom aren’t (yet) willing to pay extra for these additional services.

Mobility as a service (MaaS) continues to be pursued by some companies and, in theory, presents strong potential for increased fleet utilization, accessibility to mobility for more people, and more ways to extract revenue from vehicles, for longer. At the same time, it requires scale and availability (beyond just cars), competitive pricing, and a compelling customer experience wrapper to make it truly viable as a concept.

And new revenue doesn’t necessarily mean creating something new. Vehicles already generate huge volumes of data and this will only grow. This is a potential goldmine – as a means of understanding customers better, for direct monetization opportunities, or the development or refinement of new products and revenue-generating services.

Five recommendations on how to achieve a speedier, smoother transformation

Despite the challenges being faced today, established automotive OEMs have a lot going for them – brand strength and loyalty, dealer networks and established sales models, and a strong understanding of what their customers want (e.g. transition to electric mobility at their pace). These are strong foundations that companies can build on during transformation. But these advantages won’t last forever. To speed up their transformation, they need to consider the following actions:

1. Partner up on software

The stakes are too high to go it alone – share the risk, move faster, and contribute to industry standards by working with fellow OEMs, major technology partners, and proven software service providers.

2. Leverage brand loyalty and focus on using data to build stronger customer relationships

Access to data and the loyalty of existing customers is a key differentiator for existing brands over new players. This is especially true with older customers, who continue to account for the most purchases of new cars. Building an enterprise-wide data ecosystem and data strategy is crucial to maximizing this unique opportunity.

3. Focus on satisfying customers by blending the digital and physical worlds

E.g. dealership networks, to deliver a compelling customer experience across all touchpoints and to be available to your customers wherever and however they prefer, whenever it’s right for them.

4. Outsource non-differentiating enterprise functions

E.g. some parts of enterprise IT/business processes, so you can enjoy the benefits of industry- and domain best practices and free up resources to focus on innovation and the areas that make a difference to customers. 

5. Explore new business models and partnerships

Look across your business and product portfolio to understand where it makes sense to share investment burdens or benefit from work already done by leading players. It could be through the joint development of vehicle platforms, battery production capabilities, software or the sharing of agency/dealer networks.

Transformation is tough, but not impossible

Automotive transformation is tough and there’s a lot riding on the outcome. Thankfully, it’s not impossible and – with the right partners – automotive companies can succeed in their efforts and emerge stronger as a result. Get in touch if you’d like to accelerate your transformation.