2017 Automotive Trends

The future will be rocky for auto companies incapable to improve comes back on capital.

The global auto industry is more challenged than many people realize. On the surface, spectacle is strong. Worldwide sales reached a record eighty eight million autos in 2016, up Four.8 percent from a year earlier, and profit margins for suppliers and auto makers (also known as original equipment manufacturers, or OEMs) are at a 10-year high. Nonetheless, viewed through the lens of two critical spectacle indicators, the industry is in serious trouble.

Very first, total shareholder comeback (TSR): Over the last five years, the annual rates of comeback that the S&P five hundred and Dow Jones Industrial Average achieved for investors (including dividends) were 14.8 percent and Ten.1 percent, respectively. In that period, average auto maker TSR was only Five.Five percent. 2nd, come back on invested capital: In 2016, the top ten OEMs returned an anemic four percent, about half of the industry`s cost of capital. The leading one hundred suppliers have done a little better, just hammering their costs of capital to love a petite positive comeback, after many years of negative net comebacks.

These numbers almost outweigh the positive sales and earnings results. They paint a picture of a sector that is a less attractive or less lucrative place to invest than other industries. This assessment suggests that there will be relatively few winners in the auto industry during the next five years and beyond. Those that do stand out will be the companies that corset their limited capital resources in creative ways, to navigate a still-unfolding and unacquainted landscape.

To be sure, rates of come back on capital have been a problem endemic to the auto industry for years, which is one reason for the many bankruptcies – or near liquidations – among OEMs and suppliers, particularly in the past decade or so. Surviving automotive companies have famously leaned over backward to save pennies on every car or component they make. However, the situation is becoming more dire: The cost of capital is unlikely to come down from its already low inflation-adjusted levels, and fresh capital outlays are rising for advances in, among other areas, connected car and autonomous driving technology.

Indeed, what is particularly notable about the current wave of innovation in automobiles is not so much the speed with which it has emerged (tho’ that is remarkable) as the breadth of the innovation – how much it is altering the basic contours and features of the traditional automobile and amplifying the difficulty and cost of manufacturing cars. Ubiquitous electronics, a diversity of digital services, and novel powertrains and connectivity systems are hastening the need for expensive fresh parts, components, and functions. For OEMs, the price tag is high – as much as twenty percent greater than the cost of the previous generation of automobiles.

The front seat may be reoriented to face the back seat, so passengers can converse as they would in their living rooms.

Consider the car`s interior, until recently a relatively stable component in terms of engineering and value to the automobile. Now, interior surfaces are potential real estate for ambitious enhancements of safety or entertainment. Fresh technologies such as 3D laminated glass, haptic sensors, and augmented reality heads-up displays – which suggest drivers alerts, safety aids, and warnings on invisible screens embedded in the windshield – have entered the vocabulary of traditional suppliers. Large navigation and entertainment display screens in the dashboard suggest Web-based information and media as well as data arrays picked up from networked roads and other cars. The autonomous car will further up the ante, and soon. It will switch the «living space» dimension of automotive interiors. The front seat may be reoriented to face the back seat, so passengers can converse as they would in their living rooms while the car cruises to a destination. Or seats could face a windshield that`s become a large movie screen. Little wonder, then, that vehicle electronics could account for up to twenty percent of a car`s value in the next two years, up from only about thirteen percent in 2015.

Innovative software developments may make tomorrow`s vehicles exceptionally expensive: OEMs and suppliers must earmark resources for acquiring fresh technology and recruiting experienced technical talent. Many of the fresh features going into cars require the expertise of software engineers, who by and large choose the ostensibly more dynamic work environments of Silicon Valley startups to those of the automotive industry. As a result, some of the latest mergers and acquisitions in the automobile sector were undertaken to augment in-house technical skill and capabilities. For example, German supplier ZF Group, which paid US$12.Four billion in two thousand fifteen to acquire TRW in order to expand into the electronic safety and connectivity market, took a forty percent stake in vehicle radar supplier Ibeo Automotive Systems in 2016.

Taken as a entire, innovation-related challenges are reshaping traditional auto industry structures and relationships – in particular, by menacing the existing distribution of profits and the boundaries inbetween OEMs and Tier One or Tier Two suppliers, as well as inbetween automotive and tech companies. Some suppliers will fold, as their business goes away fully, and others will fight because switches in technology content will bring OEMs or non-automotive suppliers into their markets as fresh competitors. Decisions about investments and industry alliances that are being made now will determine the superior positions of tomorrow.

The rising cost of safety and environmental regulations is also a concern for the industry. In the U.S., potential regulatory entertainment under the fresh administration has stirred at least some hope that higher costs associated with tightened emissions standards might arrive more leisurely or even be avoided. However, there is a question whether a switch in federal U.S. regulations would make a significant difference because individual U.S. states – and the entire of Europe – can proceed to thrust for stricter standards. In addition, the regulatory requirements in other parts of the world are quickly catching up to those in the more regulated countries. For example, China now has emissions standards for large cities similar to Europe`s, with only a brief (one- or two-year) grace period for smaller cities. Moreover, the real environmental challenges that underlie these trends are not going away and will ultimately have to be confronted.

A fresh road map

Considering these disparate pressures on costs, there is no effortless formula that OEMs or suppliers can use to improve their come back on capital. The solution will likely come from a combination of deeds. Part of the response lies in consolidation, which reduces industry capital requirements by eliminating competition and combining two manufacturing and design footprints into one. To a degree, these goals explain 2016`s sturdy supplier M&A volume, continuing the trend of the previous year`s record deal value, according to PwC`s Global Automotive M&A Deals Insights Year-end two thousand sixteen report.

However, consolidation is not the only solution – and in fact not even an attractive solution for companies fighting to fund fresh innovations. Auto makers in particular will need to examine other strategic channels for ease. We believe that OEMs should consider three deeds:

Share platforms and manufacturing. When the purpose is to improve efficiency in capital outlays, a good place to commence is with platform (or chassis) and powertrain investments. Now that each auto maker is designing and building its own engines, transmissions, and related equipment, the amount of duplication within the industry is extreme. This is especially wasteful because consumers infrequently buy cars for the platform – instead, they concentrate on such attributes as styling, quality, and reliability. Many OEMs, of course, already «repurpose» platforms across brands and models. However, platform sharing among OEMs is uncommon. One of the few examples is Nissan`s deal with Daimler to jointly develop the MFA platform, which is used on Nissan`s Infiniti QX30 model and Mercedes` CLA and GLA models. In the U.S., GM and Ford are jointly designing a fresh 10-speed transmission (their 2nd generation of transmission collaboration). In both cases, the companies expect cost savings, particularly in R&D and materials procurement.
If auto makers expanded their cooperative efforts, the industry would essentially be smart-sizing, the way the airplane manufacturing sector has over its long history. In the very beginning of aeronautics, the Wright Brothers and companies that grew in their wake made their own engines. Before long, a group of separate businesses emerged to produce engines, each of them challenging to improve and advance the equipment. As aircraft engine technology advanced rapidly, jet engines became the superior design – and having a spate of companies making the same part proved costly. The industry responded by consolidating, resulting in just a few independent aircraft engine manufacturers and a more efficient supply market.
The similarity to having many OEMs and suppliers producing virtually the same automobile transmissions is clear. An treatment like the aircraft industry`s may lead to potentially more valuable auto partnerships than platform sharing: namely, jointly manufacturing vehicles. This, too, is already happening in isolated cases. The difficulty of eking out profits from petite cars long ago prompted Toyota and Groupe PSA to share production at a plant in Kolin, in the Czech Republic. Similarly, we have seen rebadging across brands in markets where sales volume is low. For example, Renault, Nissan, and GM have been cooperating in manufacturing some light commercial vehicles, virtually identical products sold under three different brands.
By removing excess capacity and concentrating supply, these collaborative solutions suggest some of the same benefits as industry consolidation – in particular, improvements in capital efficiency and capital comes back.
Offload more development work to technology suppliers. Many automotive companies are very involved in developing the fresh technologies their customers want – whether it is the human–machine interface for infotainment, autonomous features, or the components for electrification. OEMs need to identify which aspects of a vehicle`s digital features they can forearm off to tech industry fucking partners that have more expertise in designing and producing digital components and software.
In these relationships with Silicon Valley, OEMs can retain a proprietary hold on interfaces as well as on connectivity and infotainment systems that distinguish them from competitors. Some early initiatives (such as BMW i Ventures, a venture capital fund based in Silicon Valley, and Toyota Connected, a partnership with Microsoft) suggest peeks of how the auto–tech ecosystem might work.
Redesign distribution models.Upward of fifteen percent of a car`s cost typically goes to distribution. There is of course some variation by country and segment; for example, fleet sales are less expensive than retail. However, the percentage is generally higher than it needs to be. Albeit OEMs are locked into dealer relationships in the U.S. and Europe by complicated and often antediluvian rules, they should begin to explore and lobby for approaches that will reduce their costs by using more efficient channels to reach car buyers. These switches in the distribution system should ultimately aim to cut costs by minimizing the number and expense of retail outlets and using technology for better inventory control.
Savings could come from selling via Web channels. In the U.S., OEMs are barred from bypassing dealerships, a prohibition that electrified carmaker Tesla is campaigning to eliminate. Rather than opposing Tesla, as some auto makers have, U.S. OEMs should view this potential switch as an chance to innovate. OEMs are finding that as customers use the Internet to research car purchases, they do less shopping in person. Car buyers are now visiting inbetween one and one-and-a-half dealers before buying a car, compared with visiting four or five a generation ago. Using analytics to assess this data for demographic and location trends, auto makers hope to build up savings from inventory and dealer facilities management. They can target customer preferences more effectively and place the suitable mix of retail formats in the right areas.
Improving the dealer model would be a plus for OEMs and a ease for customers, who by and large want a haggle-free, elementary practice – and can`t seem to find one. That is why in the U.S., the auto sales program of warehouse club Costco, which represents consumers in negotiations with car dealers, has become popular. Costco assisted on almost half a million car purchases in 2015, comparable to the volume at some of the country`s top dealership groups.

Broadly speaking, OEMs have more leeway than suppliers to implement aspects of this road map – largely because they are at the top of the food chain and in a better position to influence ground rules than those below them. Given these constraints, suppliers should concentrate on two areas. Very first, they should position themselves in a profitable part of the vehicle ecosystem. Whether the end product is differentiated or a commodity, suppliers need to be sure they have the best organizational and operational capabilities for their niche in the current and future industry structure. 2nd, they need to optimize their business model. For suppliers of commodities, this involves a relentless concentrate on minimizing costs. For other suppliers that are able to differentiate their products or operations – through technology innovation, patents, an advantageous manufacturing footprint, or superior logistics and supply chains – the challenge is to build upon these assets by creatively upgrading them while liking the benefits of the price premium. In brief, suppliers must recognize the world they inhabit and make sure that they can effectively navigate it.

2017 Automotive Trends

The future will be rocky for auto companies incapable to improve comebacks on capital.

Very first, total shareholder come back (TSR): Over the last five years, the annual rates of comeback that the S&P five hundred and Dow Jones Industrial Average achieved for investors (including dividends) were 14.8 percent and Ten.1 percent, respectively. In that period, average auto maker TSR was only Five.Five percent. 2nd, comeback on invested capital: In 2016, the top ten OEMs returned an anemic four percent, about half of the industry`s cost of capital. The leading one hundred suppliers have done a little better, just hitting their costs of capital to love a puny positive come back, after many years of negative net comes back.

Indeed, what is particularly notable about the current wave of innovation in automobiles is not so much the speed with which it has emerged (however that is remarkable) as the breadth of the innovation – how much it is altering the basic contours and features of the traditional automobile and amplifying the difficulty and cost of manufacturing cars. Ubiquitous electronics, a multitude of digital services, and novel powertrains and connectivity systems are hastening the need for expensive fresh parts, components, and functions. For OEMs, the price tag is high – as much as twenty percent greater than the cost of the previous generation of automobiles.

The front seat may be reoriented to face the back seat, so passengers can converse as they would in their living rooms.

Taken as a entire, innovation-related challenges are reshaping traditional auto industry structures and relationships – in particular, by menacing the existing distribution of profits and the boundaries inbetween OEMs and Tier One or Tier Two suppliers, as well as inbetween automotive and tech companies. Some suppliers will fold, as their business goes away entirely, and others will fight because switches in technology content will bring OEMs or non-automotive suppliers into their markets as fresh competitors. Decisions about investments and industry alliances that are being made now will determine the superior positions of tomorrow.

The rising cost of safety and environmental regulations is also a concern for the industry. In the U.S., potential regulatory refreshment under the fresh administration has stirred at least some hope that higher costs associated with tightened emissions standards might arrive more leisurely or even be avoided. However, there is a question whether a switch in federal U.S. regulations would make a significant difference because individual U.S. states – and the entire of Europe – can proceed to shove for stricter standards. In addition, the regulatory requirements in other parts of the world are quickly catching up to those in the more regulated countries. For example, China now has emissions standards for large cities similar to Europe`s, with only a brief (one- or two-year) grace period for smaller cities. Moreover, the real environmental challenges that underlie these trends are not going away and will ultimately have to be confronted.

A fresh road map

Share platforms and manufacturing. When the aim is to improve efficiency in capital outlays, a good place to embark is with platform (or chassis) and powertrain investments. Now that each auto maker is designing and building its own engines, transmissions, and related equipment, the amount of duplication within the industry is extreme. This is especially wasteful because consumers infrequently buy cars for the platform – instead, they concentrate on such attributes as styling, quality, and reliability. Many OEMs, of course, already «repurpose» platforms across brands and models. However, platform sharing among OEMs is uncommon. One of the few examples is Nissan`s deal with Daimler to jointly develop the MFA platform, which is used on Nissan`s Infiniti QX30 model and Mercedes` CLA and GLA models. In the U.S., GM and Ford are jointly designing a fresh 10-speed transmission (their 2nd generation of transmission collaboration). In both cases, the companies expect cost savings, particularly in R&D and materials procurement.
If auto makers expanded their cooperative efforts, the industry would essentially be smart-sizing, the way the airplane manufacturing sector has over its long history. In the very beginning of aeronautics, the Wright Brothers and companies that grew in their wake made their own engines. Before long, a group of separate businesses emerged to produce engines, each of them contesting to improve and advance the equipment. As aircraft engine technology advanced rapidly, jet engines became the superior design – and having a spate of companies making the same part proved costly. The industry responded by consolidating, resulting in just a few independent aircraft engine manufacturers and a more efficient supply market.
The similarity to having many OEMs and suppliers producing virtually the same automobile transmissions is clear. An treatment like the aircraft industry`s may lead to potentially more valuable auto partnerships than platform sharing: namely, jointly manufacturing vehicles. This, too, is already happening in isolated cases. The difficulty of eking out profits from puny cars long ago prompted Toyota and Groupe PSA to share production at a plant in Kolin, in the Czech Republic. Similarly, we have seen rebadging across brands in markets where sales volume is low. For example, Renault, Nissan, and GM have been cooperating in manufacturing some light commercial vehicles, virtually identical products sold under three different brands.
By removing excess capacity and concentrating supply, these collaborative solutions suggest some of the same benefits as industry consolidation – in particular, improvements in capital efficiency and capital comes back.
Offload more development work to technology suppliers. Many automotive companies are very involved in developing the fresh technologies their customers want – whether it is the human–machine interface for infotainment, autonomous features, or the components for electrification. OEMs need to identify which aspects of a vehicle`s digital features they can forearm off to tech industry playmates that have more expertise in designing and producing digital components and software.
In these relationships with Silicon Valley, OEMs can retain a proprietary hold on interfaces as well as on connectivity and infotainment systems that distinguish them from competitors. Some early initiatives (such as BMW i Ventures, a venture capital fund based in Silicon Valley, and Toyota Connected, a partnership with Microsoft) suggest peeks of how the auto–tech ecosystem might work.
Redesign distribution models.Upward of fifteen percent of a car`s cost typically goes to distribution. There is of course some variation by country and segment; for example, fleet sales are less expensive than retail. However, the percentage is generally higher than it needs to be. Albeit OEMs are locked into dealer relationships in the U.S. and Europe by sophisticated and often antediluvian rules, they should begin to explore and lobby for approaches that will reduce their costs by using more efficient channels to reach car buyers. These switches in the distribution system should ultimately aim to cut costs by minimizing the number and expense of retail outlets and using technology for better inventory control.
Savings could come from selling via Web channels. In the U.S., OEMs are barred from bypassing dealerships, a prohibition that electrified carmaker Tesla is campaigning to eliminate. Rather than opposing Tesla, as some auto makers have, U.S. OEMs should view this potential switch as an chance to innovate. OEMs are finding that as customers use the Internet to research car purchases, they do less shopping in person. Car buyers are now visiting inbetween one and one-and-a-half dealers before buying a car, compared with visiting four or five a generation ago. Using analytics to assess this data for demographic and location trends, auto makers hope to build up savings from inventory and dealer facilities management. They can target customer preferences more effectively and place the adequate mix of retail formats in the right areas.
Improving the dealer model would be a plus for OEMs and a ease for customers, who by and large want a haggle-free, plain practice – and can`t seem to find one. That is why in the U.S., the auto sales program of warehouse club Costco, which represents consumers in negotiations with car dealers, has become popular. Costco assisted on almost half a million car purchases in 2015, comparable to the volume at some of the country`s top dealership groups.

2017 Automotive Trends

2017 Automotive Trends

A fresh road map

2017 Automotive Trends

A fresh road map

Related movie:

Leave a Reply Cancel reply