It’s the make-or-break moment for many of the world’s leading car manufacturers.
Interest in EV technology continues to accelerate. In Asia Pacific, 54% of consumers are considering some kind of EV as their next purchase; in Europe, 56% of consumers fall into the same consideration category – and in North America, a market synonymous with gasoline, consideration has reached 41%, according to Deloitte’s 2020 Global Automotive Consumer Study.
Manufacturers are faced with a challenge. Leading OEMs are sat on $1.3tn worth of legacy investments; factories with systems, processes and highly trained employees built to produce a product that seems increasingly obsolete. Production and demand have stalled. Global car sales plummeted 71% in China in February; 47% in the US in April; and 80% in Europe in the same month. Global sales are expected to decline by 20-25% from pre-pandemic forecasts – with production estimates tracking roughly the same.
So how can the world’s leading automotive manufacturers afford to change right now? Also, can they afford not to?
It’s not all bad news…
Consumers around the world expect intercity travel to shift from plane and train to an increased use of cars. According to McKinsey, one third of consumers value constant access to a private vehicle more than they did before COVID-19.
Google reports that 93% of consumers are using their car more – and search volume for ‘Best Car Deals’ grew 70% globally, year on year. Consumer interest, desire and the need for vehicles definitely exist. The big questions for manufacturers now, though, are how and where to invest to shore up long-term financial viability.
What next for the world’s leading OEM’s?
There’s a one bright spot in this current crisis, which is that manufacturers have learnt from the damage caused by the 2007-2009 financial crash. This time round they have more cash in reserve, they have a greater grip on costs and they have a stronger focus on what is most profitable.
Indiscriminate slashing of budgets is not the solution they are employing this time round – instead, any changes will be made with a careful eye on future strategic goals, inventory weak spots and keeping margins manageable.
So what does that look like in practice? Here are three key strategies that automotive brands should be adopting now.
Get radical and recalibrate your range
Innovation is an imperative at the core of all successful businesses. But for the OEMs in particular, this can no longer be just about incremental product innovations and new models.
In uncertain times, the best way to protect your core is to innovate radically around it. But where should OEM innovation efforts be focused?
The mantra is: Remove the novel. Focus on the core. Execute against demand.
For instance, consumer interest in autonomous vehicle technology has remained relatively flat over the past five years. While it makes sense for the likes of Amazon to spend big and acquire start-up companies like Zoox, the reality is that, in the short term, the man on the street is more interested in control than convenience.
However, interest in EVs is reaching a tipping point in Europe and Asia, so now looks like the right time to double down on investments and collaborations that accelerate EV production and distribution.
Collaborations – and in some instances acquisitions – will be paramount in reducing risk and capital investment. Auto OEMs partnering with tech firms can benefit both sides.
But there’s a subtle but vital difference between focusing on the core and focusing on the profit.
Premium manufacturers like, for instance, Jaguar Land Rover, could learn much from a mainstream success like Toyota.
Car companies need to re-establish their position as pioneers of production. This essential move may not produce lucrative results for some time, but doubling down on change will accelerate not just profits, but survival in the longer term.
This strategy runs along two parallel tracks: Streamlining an already existing process so that it stays productive and profitable, while using the cash generated from that to build a more efficient, future-proof structure. Part of that could involve cutting wasteful and unprofitable low-volume products, while another aim would be to make future production more modular by sharing parts and production equipment across multiple models.
Toyota is one example of a company which has taken those strategies to heart; it maximizes the use of common parts and processes throughout its range, making its capital expenditure one of the lowest in the sector. However, it has also kept a strong focus on innovation, particularly in hybrids, while keeping development costs in check thanks to collaborations with companies such as Subaru and Yamaha.
OEMs should strip back on all but the most profitable elements of their traditional revenue streams, preserving only the essentials and pushing capital investments to the future.
Know your dark side
Anxiety can evoke the dark side of any business, and brands that are blind to theirs are at greater risk of succumbing to problems.
As recession bites, there is an increased likelihood that existing customers may default on car loans – many of which are owed to carmakers’ finance arms. This poses two challenges: short-term cashflow limitation and subsequent long-term investment priority options.
Demand for used cars appears robust in the US and Asia – and showrooms filled with cheaper second-hand models, brought about by an increase in returned or reclaimed vehicles, creates an attractive short-term fundraising option.
But in the immediate short-term, sales data risks boosting the perception of demand, skewing customer desire for traditional carbon-fueled vehicles. This misleading surge could potentially reduce the incentive and/or urgency to switch to an EV-first approach.
OEMs must be sensitive to the fact that urgent change is coming. Now is the time to get ahead of the curve, not to take easy short-term options, no matter how immediately attractive and convenient.
Be shaped by aspiration, not by trauma
In times of crisis, innovative brands must think from the future back, rather than from the present forward.
The dealer model is a case in point. It has been a mainstay of the industry for many years, but it has certainly not been without its pitfalls – it has a reputation for poor standards of customer service, cynical practices and price-gouging, and on the servicing side a real issue with levels of expertise and profiteering.
Consumers aren’t happy with the dealer experience. They’d like their car buying to happen closer to home. Which is where digital comes in. According to Google data, 18% of auto shoppers would buy a vehicle sooner if there was a purchase option online.
The same is true of parts and service. Consumers anticipate increased online ordering of parts and would like to see more traditional servicing to be carried out at home, rather than in the service center.
In the short term, OEMs need to think carefully about how to enhance and complement traditional sales and service center models and build digital platforms that reduce friction, making it easier for customers to access and engage with products, on their terms – ultimately unlocking new, more lucrative revenue streams.
Innovative finance packages, customer-centric pricing strategies, and on-demand subscription models all have the potential to minimize entry barriers for new customers. Luxury brand Porsche, for one, has already started implementing such services through their Porsche Drive and Porsche Passport programs, making even the most exclusive forms of mobility more accessible.
Time for action
The future is not going to wait. There are disruptors and potential rivals waiting in the wings – many from the fast-moving, flexible and well-funded world of technology rather than the solid but staid engineering tradition. Not coincidentally, all of the top five of this year’s Best Global Brands – Apple, Amazon, Microsoft, Google and Samsung – have been linked to vehicle development recently.
Now is the time to rethink everything – which is difficult for a sector that has long product cycles, large and inflexible production processes and a thoroughly entrenched sales model.
But if not now, when?