Value Chain

Digital Is Recasting The Automotive Value Chain

The age of autonomous driving is doing much more than ushering in new types of smarter cars and trucks. The value chain underpinning the whole automotive market — as well as its adjacent industries — is being forced to change.

Electric vehicles, autonomous driving, mobility (ride-sharing) and connectivity with media and IoT infrastructure are four major trends redefining the auto industry value chain. Or as James Hines, research director at Gartner, puts it: “The connected vehicle is the foundation for fundamental opportunities and disruptions in the automotive industry and many other vertical industries.”

Management consultant like McKinsey & Company, meanwhile, argue that to compete in the new world traditional OEMs must abandon strategies aimed at total control of vehicles. Instead they must pick and choose which part of the market they will play. That, in turn, will force participants to shed assets, streamline operations, embrace digital acquisitions, and partner with technology specialists.

In a report called How the convergence of automotive and tech will create a new ecosystem, the consultants say, “As automotive software is developed, cars are evolving into computers on wheels — a change similar to events in the computer industry 20 years ago and the mobile phone industry 10 years ago.”

McKinsey & Company argue that the disruption posed by these trends and the entry of high-tech players into the market will transform vertically integrated automotive value chains into a complex, horizontally structured ecosystem.

Connected car production is growing rapidly in both mature and emerging automobile markets. The production of new automobiles equipped with data connectivity — either through a built-in communications module or tethered to a mobile device — is forecast to reach 12.4 million units in 2016 and increase to 61 million in 2020, according to Gartner.

“Connected vehicles will continue to generate new product and service innovations, create new companies, enable new value propositions and business models, and introduce the new era of smart mobility, in which the focus of the automotive industry shifts from individual car ownership to a more service-centric view of personal mobility,” Hines said.

As the car becomes the ultimate mobile device, Gartner predicts that by 2018 many automakers’ connected-vehicle platforms will offer a retail marketing tie-in based on a consumer’s location.

The in-car data connection gives car makers a closer relationship with drivers, creating opportunities for automakers to generate post-sale profits through sales of additional services and feature upgrades. That means OEMs may bypass the dealer — whose business model relies on selling labour and parts — adding a source of tension in the dealer-OEM relationship.

A focus on service could become essential in the coming decades. A business model built on selling cars may not be a feasible strategy in a world of on-demand driverless cars. A 2015 Gartner survey showed that 33 per cent of Americans surveyed would forgo purchasing a new vehicle if they could pay for a service that would deliver an on-demand autonomous vehicle. Although the technology development is moving quickly, widespread use of such vehicles may be some time off.

Connected car technology is set to reshape not only the automakers’ business. It will also enable innovations in adjacent businesses, such as insurance, car rentals, car- and ride-sharing services, and electric vehicle charging.

Insurance is one area which may look very different in the future thanks to computers on wheels. What’s the point of insurance if your driverless vehicle never crashes? Or will data be used to provide cheaper insurance to safe drivers?

Cecilia Warren, future motor director for insurance company IAG, said the company is exploring the impact of vehicle technologies on safety and risk.

“IAG supports the safe introduction of autonomous vehicles as a new way to help solve transport and safety problems for our customers,” Warren told Which-50.

“In the future, we anticipate a mix of autonomous, semi-autonomous and traditional vehicles on the road, and we are committed to evolving our models to make sure our customers are protected, regardless of the vehicle they choose to travel in.”

IAG is already encouraging the uptake of autonomous technology that improves safety, by offering price discounts on things like autonomous emergency braking.

“Connected vehicles can generate data that has a range of potential applications —from helping drivers better navigate their journeys, to vehicle servicing alerts and trip-based products.”