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Disruption in the automotive industry

The automotive industry is facing enormous changes and great challenges. IESF partners operate in several different industries worldwide and are always following the market trends. Our German partner Achim Moraw of Topos Personalsberatung is sharing his global insights regarding the 3 biggest disruptions in the automotive industry. It concerns not only the short-term issues, such as the current shortage of semiconductors, which means that millions of vehicles cannot be built because the required semiconductors are unavailable, or the impact of the coronavirus pandemic, which has led to a 16% drop in production from 67 million passenger cars manufactured globally in 2019 to 56 million in 2020, because the car dealerships around the globe were temporarily closed and no vehicles were being sold. Far more serious are the long-term changes that are happening now or are on the horizon, and which could fundamentally change the face of the automotive industry. One or the other of the global players in the industry might lose their standing, for example, or they could disappear from the scene altogether. Just think of Kodak or Nokia, which also dominated their industry before losing their standing on account of a technological revolution.

Disruption No. 1: Replacement of the internal combustion engine by the electric drive

The key component of a vehicle, the internal combustion engine, which marked the transition from the horse-drawn carriage to the automobile and thus the birth of the automotive industry, will soon be replaced by the electric engine. This will devalue existing expertise, and new skills and components will be required. Jobs will be lost as a result of this, because building an electric engine simply requires a smaller team of people than an internal combustion engine. Some suppliers, who have predominantly developed and produced items for the internal combustion engine and do not have the required know-how and capital to switch to new components and modules, will fall by the wayside. By contrast, other companies will grow and new suppliers will emerge. However, the fundamental business model of the automotive industry and its value proposition for the customer will not be affected in principle. Car manufacturers will continue to supply their customers with the means to get from A to B quickly and comfortably, whenever they wish. The alternative drive will not change anything in this regard. In principle, nothing will change for OEMs either if they install an electric engine in their vehicles instead of an internal combustion engine in future. They are in control of their network of suppliers, who supply them with the parts and systems that they put together to make vehicles. It is already apparent that most vehicle manufacturers will overcome this challenge. The first electric vehicles are on the market and the pipeline looks promising. TESLA was the pioneer in this respect, but given the current market offensive by the traditional OEMs, it does not look like they will let TESLA get the better of them on this occasion.

Disruption No. 2: Digitalisation

Traditionally, cars are hardware products, which are developed over several years by the manufacturer and sold in their original form – with the exception of a face-lift – over a period of about seven years until the next model generation is launched on the market. When the first model of the new generation rolls off the production line, the built-in technology is already outdated. And the gap between the built-in technology and the state of the art grows over the time that the model in question is on the market. The new functions made possible by technological progress will only be available to the customer when the next generation of models is launched. That is the way it has always been.

Growing digitalisation, however, is making the automobile more and more of a software product. New functions and completely new business models can be made available to the customer over the air, even after the vehicle has been delivered to them. Just like the iPhone, car makers can sell the customer more services and functions via an app and update their device. For the automotive industry, this is revolutionising its traditional business models and ways of thinking. Rather than freezing the design of a product development and selling the product in its original form for many years, the product that has already been sold is continuously maintained, updated and improved instead. Furthermore, rather than one-off revenue from the sale of the vehicle, additional money is generated through the sale of complementary functions and services over the entire life cycle of the individual vehicle.

TESLA appears to have understood this. For traditional manufacturers, however, this represents a huge disruption to their traditional processes, structures and business models. The development cycles for software are unlike anything ever seen in the automotive industry, and new software is not only launched on the market when it is 100 percent perfect either. Any weaknesses can also be fixed later on by means of updates and new versions. For traditional OEMs, however, this would be a radical change to their previous way of thinking and doing things. Some of them, at least, seem to have recognised the problem and are working on it. But it is difficult and takes time to overcome traditional structures and ways of thinking. It is probably not enough that all OEMs are now expanding their software development capacities on a huge scale. To a certain extent, the lead that TESLA has gained in relation to this disruption may explain the fact that TESLA now has a market value that is many times greater than the market value of the German manufacturers BMW, Daimler and VW combined.

In any case, the importance of software is increasing dramatically in the automotive industry, which is why some people are already calling the car a “smartphone on four wheels”. Another consequence of this development is the increasing importance of companies such as Apple, Alphabet and Huawei, which have been thrusting their software on the car industry. Their activities in the field of autonomous driving in particular are challenging the established OEMs. These three companies have not only the technology, but also the financial resources to become dangerous to the previously dominant OEMs from Europe, the USA, Japan and Korea. That is why there is always speculation that the three of them could stir up the market with their own vehicles. Another fear is that the tech giants with their IT and software expertise could relegate car manufacturers to being replaceable hardware suppliers, thus undermining their dominant role in the automotive arena. To avert this fate, Daimler is developing its own operating system MBOS, for example, and the Volkswagen Group has created the software company CARIAD, which will develop the software architecture that will serve as a platform for all of the Group’s brands in future.

Disruption No. 3: Selling mobility instead of cars

In the long term, however, the solution to our transport problems will not be to simply replace cars that have internal combustion engines, which predominate today, with digital, electric vehicles, which then also end up being parked somewhere for more than 90% of their lifetime. New forms of mobility, such as integrating different transport systems, robo-taxis, car sharing as well as ride hailing and ride sharing, will drastically reduce the number of vehicles on our roads in the medium and long term. For the end customer, instead of buying a car, they will purchase mobility services. As a result, car manufacturers will no longer sell their vehicles to end customers, but to mobility service providers. In relation to the mobility carriers, they will increasingly find themselves in the role that Airbus and Boeing play today in relation to the airlines. Such a scenario would call into question the role of the automotive industry as a key industry far more seriously than the triumphant advance of electromobility. And truly autonomous cars – Level 5 – will give this scenario a huge push. The drastic reduction in the total number of vehicles required to satisfy the need for mobility and a significant increase in the utilisation of individual vehicles would also cause an enormous loss of jobs in the industry. Are the automotive industry and politicians prepared for that?

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