The automotive sector is entering a period that will result in fundamental changes to how business is conducted up and down the value chain. A convergence of new technologies, evolving consumer preferences, and business model shifts points towards new opportunities – and new risks – particularly for those businesses that currently supply goods and services to the OEMs. Preparing for these changes today might mean the difference between success and failure five or ten years down the road.
At first glance, things are running smoothly for the U.S. auto industry: the sector has experienced over 60% sales growth in the last decade. From a low of 10.4 million cars sold in 2009, the sector has largely recovered and experienced seven years of continual growth until 2016. Annual car sales have been steady since 2015, at or around 17 million.
The auto sector is facing some uncertainty in the near term, however, due to the U.S.-China trade dispute and a potential economic downturn, and forecasts for 2019 are mixed – although the National Automobile Dealers association has forecast 16.8 million new vehicle sales in 2019, the Economist Intelligence Unit expects car sales to drop by 3.6%, with commercial vehicles sales to edge down by 0.3%.
Change within the industry is also happening at a more fundamental level, as consumers are altering how they choose, purchase and use vehicles. Additionally, technological changes have shaped consumers’ expectations, and they are increasingly demanding a “smart” personalized user experience inside their vehicles.
Changing consumer preferences lead to new business models
Historically, auto manufacturers relied on a certain number of sales per household, selling most vehicles through dealerships as well as car rental agencies. Although sales are currently stable, the industry’s business model is changing as follows:
- A diverging path for smaller vehicles. U.S. consumers currently prefer to buy larger, heavier vehicles such as crossovers, SUVs and trucks. In 2018, the market share for sedans was at its worst level since 2009, falling below 30%. U.S. automakers have adjusted their lines accordingly, and nearly abandoned the sector. However, sedans continue to represent a sizeable proportion of the U.S. market, and long-term trends point towards an increasing market for lighter, more energy-efficient vehicles.
- Direct-to-consumer car sales. This continues to be a controversial topic, as direct manufacturer auto sales are completely or partially prohibited in some states, but permitted (and regulated) in others, following challenges by electric automaker Tesla. While such restrictions were initially adopted to protect dealerships from coercive practices by manufacturers, and to increase competition among franchises, it is increasingly at odds with consumers who prefer to research and even buy their cars online. In 2015, the FTC came out in favor of direct sales to consumers, for any manufacturer, as it argued that “consumers would be better served if the choice of distribution method were left to motor vehicle manufacturers and the consumers.” If this business model becomes more widespread in the future, it will likely impact pricing and profit margins.
- Transportation as a service. Consumers – especially younger consumers – are increasingly choosing not to buy cars, instead relying on ridesharing and public transit, especially in areas with more access to these services. Car rental is also becoming less common, as consumers prefer the convenience of being picked up and dropped off in the location of their choice. In response to these changes, car manufacturers are increasingly looking to ridesharing services as potential clients. In 2016, GM invested $500 million in Lyft, and set out plans to develop a network of self-driving cars with the ridesharing service. GM has since expanded its car-sharing service, Maven, to 10 cities and is focusing on drivers for rideshare apps such as Uber and Lyft. Meanwhile, GM’s subsidiary Cruise Automation is currently testing driverless food deliveries in partnership with DoorDash. Similarly, Toyota invested $500 million in Uber for self-driving cars, and $1 billion in southeast Asian ridesharing service Grab.
Although an economic downturn might slow the pace of technological investment, it could also accelerate some of the trends listed above, to the extent they are counter-cyclical. The more consumers need to be mindful about their expenses, the less likely they are to buy expensive vehicles, or to buy vehicles at all. Manufacturers are closely monitoring consumer preferences, not only as an indicator of potential economic headwinds, but also as a sign of potential business opportunities.
Electric, autonomous vehicles to impact automotive value chain
The auto sector is rapidly moving towards electrification and autonomous vehicles. Under the current growth trajectory, global sales of electric vehicles are expected to almost quadruple by 2020, to 4.5 million units or 5% of the global light-vehicle market. Additionally, global automakers are expected to launch approximately 340 models that are either electric or hybrid within the next three years, which should reduce supply as a barrier to adoption.
There are other barriers, particularly in the U.S. According to consulting firm Capgemini, U.S. consumers currently list battery capacity and the availability of charging stations as the biggest obstacles to purchasing electric vehicles. As for autonomous vehicles, American consumers are reportedly among the most reluctant to embrace the technology, due to concerns over safety, comfort and ease-of-use, with close to 25% of American drivers in one Ipsos survey saying they “would never use” an autonomous vehicle. Other notable barriers to adoption include a lack of support infrastructure, and data privacy.
However, consumers are also increasingly demanding a personalized user experience and in-vehicle connectivity, and younger drivers have more favorable views of autonomous cars and their benefits. These might include traffic congestion tracking and road-safety alerts, and could be more widely available if supported by regulation.
Developing, manufacturing, and selling electric and autonomous vehicles requires enormous investment from car manufacturers and suppliers. Although tech giants such as Apple and Google have also made large investments, car manufacturers and suppliers must generally contend with smaller profit margins. In the short term, these investments might decrease automakers’ profitability, as consumers’ appetite for electric or autonomous vehicles is tempered by lagging infrastructure and regulation, and uncertainty over the safety and effectiveness of new technology.
Automakers embrace new business models
This is a critical junction in the auto sector, because the auto itself is being reinvented amid the arrival of new entrants, new technology and innovative business models. As a result, automakers are rethinking their relationship to consumers, suppliers, and dealerships.
Manufacturers and suppliers are currently making significant investments in vehicle connectivity, renewable fuel, and varying degrees of automation. Although some consumers are skeptical of autonomous vehicles, and cautious about the range of electric vehicles, global sales of these vehicle types are poised for rapid growth in the next few years.
The bottom line is that the automobile as a product is about to be reshaped from the inside out. Parts and services suppliers that have become accustomed to working with major manufacturers based on today’s environment will need to adopt their own approach as well, or risk being left behind.
Insights provided by:
Sheldon Stone, Partner
Restructuring Practice Leader