The automotive industry is known for driving innovation, with today’s vehicles often representing some of the most cutting-edge technology available in the consumer world today. And indeed, performance seems to be strong, with Statista forecasting global sales of passenger car sales to hit 77.7 million in 2017.
But underneath the surface, the automotive industry has some major challenges to face now and in the next few years. It’s not just a question keeping up with innovation and technology – globalization, regulation and the environment also topics which will be keeping automotive CFOs and CIOs up at night. We will dive into some of these areas, offering advice on building strategies to win in a tough and competitive market.
Automotive industry overview
According to Statista, experts project that approximately 81.5 million vehicles will be sold worldwide in 2018, up from the estimated 78.6 million sales that were forecast for 2017. This also represents an increase from the 73.5 million vehicles that were produced globally last year.
Along with China, the United States represents one of the world’s largest and most active automotive markets, accounting for approximately 6.9 million purchases during 2016. However, German brand Mercedes-Benz has emerged as a leader within the luxury car market, selling more units than any other brand.
Automotive business strategy
Like any industry, the automotive industry must both adapt and pioneer in order to survive. Here are three automotive business strategies that can enhance success when applied effectively.
- In the automotive marketing sphere, businesses can benefit at low cost by harnessing social media like Facebook. For example, research based on data from 2016 has shown that automotive dealerships had a better marketing ROI when they advertised on Facebook, compared to dealerships which did not.
- With the advent of technologies like self-driving capabilities and “connectivity” – discussed later in this article – automotive companies need to innovate to remain competitive. Investing in research and development will be essential to remain relevant and avoid becoming obsolete.
- With regard to automotive manufacturing, suppliers should rethink their production footprints. By lowering costs and finding sustainable production strategies, businesses will be better positioned to access new markets.
Globalization and the emerging markets
Because of globalization, businesses around the world have unprecedented amounts of competition, with emerging companies competing with multinational giants across international borders and in multiple markets. Challengers like Tesla are disrupting the industry, and have the potential to be global leaders themselves.
Globally, there is a cool down of automotive demand, but there is still a lot of potential for growth in the emerging markets. According to PwC, growth markets like China, India, Southeast Asia and North Africa are the main engine for volume growth in the automotive industry worldwide, driving an 18.8m increase in vehicle assembly volumes from 2016 to 2023.
Many businesses aren’t ready to take full advantage, with Boston Consulting Group stating that there is a geographical misalignment between their global sales and car production. It said that suppliers needed to localize their production to where car production was moving – or put more simply, they must expand in emerging markets.
BCG spoke to executives that believed expansion in emerging markets requires:
- A long-term coherent strategy rather than individual opportunistic decisions
- Necessary capabilities built step-by-step, rather than through a one-time effort
- Decisions on which cases require pro-active investment to secure further business
- The consideration of alliances with domestic manufacturers and distributors
The effect of regulation
Any kind of regulation will directly affect the way vehicles look and the way components are built, as well as affect production costs and the way they are sold. Changes in regulation could force automotive businesses to make changes with their suppliers and where they manufacture vehicles at short notice.
There are big global changes which may require automotive companies to move quickly. For example, in the US there is the re-negotiation of the North American Free Trade Agreement (NAFTA), which may limit market access to Mexico. In the UK you have Brexit, which may involve higher duty rates for vehicle and vehicle parts going in and out of the country.
In a blog post, Taneli Ruda, SVP and Managing Director, of Thomson Reuters OneSource Global Trade said, “The problem here is that regulation can change overnight, and in many countries, it often does. And for supply chains where you have a lot of manufacturing and thousands and thousands of suppliers tied to the design of individual automobile models, it is very difficult for automakers and their suppliers to react as quickly as the regulators can change the regulations.”
Brian Peccarelli, President of Tax and Accounting at Thomson Reuters, advises businesses to:
- Build dispersed supply chains that spread production and capacity among multiple vendors.
- Diverse production can help auto companies avoid location-based supply shocks and continue to service regional markets despite changing trade dynamics.
He said, “Such moves are essential now to future-proof manufacturers from wide swings in global trade policy and, correspondingly, dramatically different sets of rules for managing global supply chains.”
In much of the world, governments have enacted laws to reduce carbon emissions due to the threat of climate change. Much work has already been done with conventional technologies to cut emissions, but it may be the case that innovation and investment in electric car technology may become more necessary. High-profile companies like Tesla regularly make the headlines, but there are many other companies in the space such as Pod Point, which specializes in electric vehicle charging for homes, workplaces and commercial organizations.
Erik Fairbairn, CEO of Pod Point said, “The electric vehicle industry is an incredibly exciting place to work and one in which the UK is well placed to be global leaders, creating new products, services and career opportunities. Continued government support can really help add momentum to a fast-growing sector.”
Automotive business leaders will certainly be challenged to invest in environmentally-friendly technology which will help them meet future emission targets. They should think about:
- Building alliances with companies and suppliers to drive innovation
- Getting involved with businesses that are part of the shared economy to provide more consumer awareness of electric vehicles.
The Connected Car
As well as electric cars, the ‘connected car’ is also a challenge to automotive businesses, both old and new. Thanks to the cloud, the connected car can now act as a communications hub that can transmit and receive data. It offers huge potential – it’s what makes the possibility of autonomous driving possible, while the transfer of data makes it possible to connect the car to the outside world and enhance the driver experience.
Many of today’s cars and packed with technology, and usually focus on internal functions. However, it’s becoming more common for vehicles to offer Internet connections that can provide data to external sensors. This can create important benefits for drivers like lower insurance costs, concierge services, and the reduction of congestion and accidents.
For the business leaders of original equipment manufacturers and suppliers, it’s crucial to develop a strategy that considers the growth in popularity of connected cars. For example, they might:
- Think about offering connected technology or making investments in technology companies that are working in the space.
- Invest and gain access to IP and solutions that can protect against future competitive threats
- Consider increasing the skills of their workforces, bringing in experts that specialize in areas like connected technology, big data and the cloud.
Making the right spending decisions
When it comes to technology, Brian Peccarelli says, “We’re living in a world where original equipment manufacturers, tech companies, and third-party suppliers are vying for control of the automobile “center stack,” which has become a more desirable feature to many customers than the engine. But manufacturers cannot afford to be distracted by the latest bright, shiny thing.”
“Rather, they need to focus on what they’re best at – integrating technologies into a complex system, regardless of whether those technologies are homegrown or outsourced from third parties.”
Peccarelli believes that the finance department plays a key role in enforcing discipline, allowing senior management and research departments to make sure innovation is profiting the business as much as possible.
He says CFOs:
- Need the right data – comprehensive information from across the business that captures not just high-level profit-and-loss data, but also regional information, including changes in local regulatory policy, and tax exposures.
- Must track and forecast the effect of such things as the changing regulatory and tax consequences of incorporating new wireless connectivity into cars.
Dealing with globalization, regulation, and technology could make or break an automotive company, and that’s why it’s so important for the finance department to get it right when it comes to spending on allocating funding. CFOs will be making serious decisions, and data is important – whether they’re looking at sales data from various countries, or business intelligence to make plans on what to research, develop and acquire.