The 73-page report, Automotive Industry at the Crossroads, says that the “most effective way to reinvent a company is to build a new, greenfield business next door to the established one”.
The Oliver Wyman consultancy, which has 60 offices across 31 countries, applies specific industry knowledge and expertise to the management of corporate strategy, operations, risk and organisation transformation.
The Oliver Wyman report said the future for auto-makers is clear: “It will be electric (or at least hybrid) autonomous and digitised.
“Yet, despite these certainties in the direction in which public sentiment and regulation are taking the industry, car companies seem in no hurry to get there.
“While key players worldwide are saying the right thing about where they intend to take their companies, they are not following through with enough enthusiasm.”
Oliver Wyman group said most manufacturers were sticking with making only incremental improvements which was “an approach to change that served them well over the decades”.
“The reality is this approach no longer works. Right now, the industry is in upheaval and only a more radical approach to change will suffice.
“To design cars for an era of electrification and digitalisation, auto-makers need to start managing projects like digital natives. That means working in quick sprints to reinvent different aspects of their business, rather than today’s preoccupation with fully validating incremental product improvements.
“If auto-makers execute radical change, they once again have the potential to achieve the kind of profitability they knew in the past — or perhaps even better levels.
“But their companies will not look like they used to.”
The report said that while every top manufacturer was adding new electric vehicle models, they were still heavily reliant on the profit from traditional cars and SUVs.
It said that auto-makers were also investing in autonomous systems, recognising that the future of driving will be digitally aided, but the bulk of R&D money was still being spent on hardware for traditional vehicles, not software for EVs or autonomous vehicles (AVs).
The report said that instead of adding digital experts to an existing R&D centre, OEMs should set up a new software centre. To reduce costs, they should create a single platform for EVs and then move all models to this same basic architecture.
“Once the immediate (Covid-19) crisis has passed, auto-makers will have to act decisively to follow new mega trends and leave behind legacy thinking that is pushing down returns on their traditional businesses.
“The new automotive era requires greater emphasis on bolstering the profit per vehicle, cutting significantly fixed costs, and encouraging more partnerships — both within the industry and outside. The industry needs to reinvent itself starting today, not tomorrow.”
The Oliver Wyman report listed three areas where OEMs could apply the greenfield principle to speed forward into the digital, electric age:
- Create a single platform for conventional cars
“Traditionally, large auto-makers have different platforms tailored to each main product group, based on size. These platforms help to design the best possible conventional internal-combustion autos, but they often lead to technical compromises if used for hybrids or EVs of the same size.
“As the race heats up to provide the best value for customers, car companies need to push for standardisation in platforms for internal combustion vehicles. Like in technology, standardising cuts production costs and subsequently increases value.
“Given the need to invest sizable sums in new technologies, increasing profitability per unit must be a high priority for auto-makers. Standardising the internal combustion platform allows companies to focus on creating platforms designed to fully reap the benefits of EVs and hybrids.
“Auto-makers deploying bespoke EV platforms claim that they can help reduce product cost by as much as 20 per cent if target volumes are achieved. That cost advantage will come with additional customer benefits such as more space and increased freedom in styling and proportions.
“In the future, a range of EVs could run off modular, scalable platforms. Another advantage of standardisation is the ability to use the same microprocessors, electronic controls, and a single kind of driver-assistance technology can be used for all brands built on that platform. Production protocols can also be similar for all models in factories worldwide.
- Emphasise software R&D and projects with the biggest long-term payout
“Even before the Covid-19 crisis, R&D budgets went through a series of cuts, with many auto-makers reducing spending 20 per cent or more. Projects were pushed back — even those of strategic importance, such as work on new powertrains and operating systems and the integration of new suppliers and development partners.
“The R&D of the future needs to correspond to the car of the future — a vehicle based on a single platform, most often electrically powered, with autonomous driving capabilities and a much higher percentage of value-added digital content and software.
“While in the past most R&D was working toward hardware-driven milestones, value in the automobile moving forward will be based on software solutions as hardware complexity is reduced with the gradual reduction in the numbers of internal combustion engines and transmissions.
“Software will become much more standardised, as numerous manufacturers share a common operating system, and then adapt it to specific vehicles, use cases, and customer configurations.
“These measures have great potential for reducing the cost of R&D: Some recent programs suggest that savings of 30 per cent or more could be achieved.
- Digitalise sales – the role of dealers
“For the past several years, the size of dealer networks has been on the decline, dropping at a rate of about two per cent per year. While digital content has been taking the place of dealers, it has not always been the right digital content. Instead of cutting costs, it has increased them.
“The future of sales will be omnichannel with customers selecting their preferred touchpoints.
“Retail needs to digitalise, but that does not mean there will be no physical presence. Most likely we will have the emergence of brand stores that will showcase the latest models, similar to a retail approach pioneered successfully by Tesla.
“There will also be satellites that will offer servicing and handover points where customers can pick up their new or recently serviced autos. The specialisation of these new outlets will yield a higher level of performance.
“They will also be digitally enabled, so that customers will be identified immediately on entering the outlet, and the staff will be aware of their preferences and existing portfolio.
“Separately, we suggest auto-makers build up an online sales process from scratch.
“This will give customers the option of a seamless e-commerce journey, including a broad offering of information, a simple online offering and selection of vehicles that provides various options and the facility to configure a selection online.
“There would be the usual help from qualified call centres and online options for payment systems. Strong, service-focused dealers can be important players in this process, offering such in-person experiences as test drives or showroom visits.
“In the post-Covid era, digitalisation is expected to cut the number of dealerships in half as the industry shifts to an online business model. Sales channels will prioritise client mix, segment allocation, efficiency of promotions, and price quality for different customer segments rather than volume.”
The report said that the ingrained cultures and extensive bureaucracies of large organisations like international auto-makers made changing difficult.
“For the past several years, revolutionary technologies like electrification and autonomous functions on the design and manufacturing side and car subscription and digitalisation on the sales side have already been challenging the industry’s old ways.
“And no doubt, Covid-19 is making the disruption sweeping automotive more complicated and urgent.
“Given the scope of change, auto-makers need to stop pinning their hopes on incremental improvement, and instead set up new projects in areas that have a major impact on their businesses: a scalable electric-vehicle platform; R&D with a strong digital focus; and a digitalised sales system.
“This does not mean abandoning existing models and profit centres, but just a recognition that moving forward they will no longer be their primary source of growth and gains in market share.
“Nor should they be where auto-makers focus their energy and investment. Greenfield projects in these new areas of focus will be what kicks off a new era of profitability,” the report said.
By John Mellor