Transforming Automakers Into Connected Platform Makers

William Newman

I love January. As the saying goes, “New Year, New You.” And new cars. Lots of new cars, announcements and demonstrations of how the car will evolve with new features, content, and systems.

This year the volley started early, with huge announcements in week 1 at the Computer Electronics Show in Las Vegas, and it will continue in weeks 2 and 3 the Automotive News World Congress and North American International Auto Show in Detroit. There are some megatrends emerging from these recent announcements and from research SAP has conducted over the past six months, which will become available through social channels over the course of 2016.

Economically, a number of factors are at work. With the fall of crude oil prices and other commodities, and North American volumes hitting pre-recession levels of 17.5M units in the passenger vehicle segment, growth is expected to continue. However, it will be a different kind of growth, based on the evolution of the value chain and the expectancy that global AGR levels will taper from 7.8% (from 2009 to 2015) to 2.8% (from 2016 to 2020) according to IHS, and the retention length of vehicles rising to over 12 years on average. OEM consolidation will also likely follow in the next decade to help keep growth moderate and remove industry structural costs.

The future of the car is changing as well. Cars are evolving from mostly mechanical, metal-based vehicles to a connected set of component platforms, plastics, and next-generation materials, essentially becoming a rolling data center providing safety and entertainment going from Point A to Point B.  Social acceptance of a fully autonomous vehicle – and the regulatory environment supporting that – is likely 5 to 10 years out based on current forecasts (OESA, CAR). However, a connected vehicle – depending on your definition of “connected” and which services that uses – is here today, both on the public highways and in prototype communities like M City.

What does all of this mean for automotive OEM and supplier customers? It means companies have significant choices in product design, value chain placement (and respective participation), and customer experience to define the organization for the next few years to come. Last year I asked executives, “Are you buyers or sellers?” This year I am more likely to ask, “Are you a platform maker or owner?” as makers and innovation will rule the ability of OEMs and suppliers to not only have the profit to make acquisitions but also determine the position of the portfolio in the value chain where they will drive content. Content is profit, and profit means growth. And growth means you survive and prosper in an ebbing business cycle.

Here are some disruptors coming out of this month’s automotive announcements.  As more become available during the month (or as forecasts change, which of course they will) I will update this post.

  1. Technology is not the long pole in the tent. Regulatory needs to catch up. The big database technology to manage petabytes (1,000 terabytes) of information such as music, images, maps, and consumer behavior is already here. How we use these – based on location-based privacy and social norms – and what we are able to implement in products – based on regulations – have only partially been defined. This is a real bummer to consumers and tech-savvy developers, who essentially are releasing only parts of consumable disruption based on business environments. Uber, for example, has taken its disruptive model to court in a number of cities and states, and won. Google has sent its driverless, autonomous vehicles to a number of cities with some relative success. Are we ready to give up control of our driving abilities? Not yet. In Michigan you can’t take a driver’s test at the Secretary of State office using a park assist vehicle to parallel park. Clearly, we aren’t there yet.
  1. The notion of a vehicle platform and how it scales and connects has changed. Typically a vehicle has a number of trim packages, platform sizes, power plants, and features. When a manufacturer builds to a variable platform, usually the platform itself is constant down an assembly line and the features and cosmetics adjust per spec of the vehicle. Faraday Future’s announcement at CES of the FFZero1 platform for variant configuration, where the platform itself can stretch and modularly accommodate different power plant designs (e.g. battery pack stacking), has the potential to change how vehicles are designed at the platform level. Also at CES, Delphi announced its vehicle to everything (V2E) platform, allowing vehicles to sense devices, social behaviors, and “things,” an example of how automotive suppliers are moving to become “connected platform makers.” Other suppliers such as Bosch are developing their own platform to connect devices, components, homes, and information. And GM announced a major $500M investment partnership with Lyft to enable fleet connected B2C vehicles. Being able to scale physical and information platforms using very large data sets with consumers is key to transformation success.
  1. The aftermarket segment will collapse, and everyone wants a share — and for you to love them. The bidding war over Pep Boys is likely the first of many acquisition plays and direct-to-consumer moves by auto parts suppliers to converge its OE and aftermarket businesses. With each stage of the aftermarket value chain adding a full price share of margin from one step to the next (usually 80-100% of margin per value chain step, according to the Automotive Aftermarket Supplier Association), it’s no wonder that auto part makers want drivers to access their products directly, to harvest margin otherwise flowing through more expensive OE dealer channels. Will drivers who hold vehicles longer buy directly? Most do already, through eBay, Amazon, NAPA, and AutoZone, to name just a few of the big players. Often this competes with OE interests to leverage their own proprietary dealer networks. How suppliers go after this high margin space, and how they communicate brand interest and customer experience to drivers who normally buy through dealers and distributors, will be key to success.

Platform makers OEMs as well as suppliers – will garner market share moving forward. Tesla, Google, Faraday, Bosch, and Delphi (among others) have stated their interest and staked their claim as disruptors owning a platform,  not necessarily as classic car companies. Companies that are unwilling to digitize their product portfolio along with their business operations and unleash new platform business models will be relegated to “seller” status as we move toward the 2020s.

Based on these and other mega-trends, automakers and suppliers must stake their claim now in order to build their financial assets and continue growth throughout this decade and beyond.

For more on what the future holds for the automotive industry, see Why This One Decision Will Make Or Break Automakers In 2016.

This blog originally appeared on the LinkedIn Pulse


William Newman

About William Newman

William Newman is a Strategic Industry Advisor, providing industry perspective, strategic solution advice, and thought leadership to support SAP automotive and discrete industry customers and their co-innovation programs. He helps build and maintain SAP's leadership position in the automotive industry and associated industry segments. He manages SAP’s annual digital aftermarket survey program and serves as the ASUG Point of Contact for the NA Automotive SIG. He is the author of two SAP Press books and a LinkedIn Editor’s Choice contributor.