Building a digital automotive industry
Digitization is set to enhance efficiency, reduce costs and spark innovation throughout the automotive industry.
Digitization has the potential to drive substantial improvements in the industry’s value chain. As original equipment manufacturers (OEMs) seek to expand from business-to-business through their dealerships to a business-to-consumer model, there will be new ways to engage with customers, partner with suppliers and interact with data. The increasingly connected vehicle will alter business strategies from selling a product to providing a customer experience-centric value proposition.
Digitizing the enterprise/ecosystem is one of three themes that we believe will be central to the digitization of the automotive industry over the next decade. The other themes we examine are connected traveler and autonomous vehicles.
Connected supply chain
The primary benefit from interconnecting the supply chain is cost reduction through a better managed end-to-end process. Historically, the supply chain has been characterized by long lead times in a complex structure. Digital will lower costs and accelerate supply chain transparency through continued partner system integration, and data gathering and analytics will reduce the number of defects and speed up the whole process of component design, manufacture and delivery. Much of this integration will be facilitated through the cloud, where every party in the chain will be looking at the same data, thereby creating better flexibility and stability.
Social media monitoring across the supply chain can more quickly identify component quality breakdowns where a supplier rather than the vehicle manufacturer would have to redesign, rebuild and resupply a part. The exploding growth of data from the connected Internet of Things throughout the supply chain will demand new skills for workers and managers.
One of Bosch’s projects in development would put sensors throughout its factories and third-party logistics providers. The data would present a complete view of all shipments in transit from assembly to point of delivery.¹
The automotive industry has been one of the most aggressive in replacing manual labor with automation. On the assembly line, robots now work alongside humans. New-generation robots can do multiple assembly tasks. Robotics, artificial intelligence and the Internet of Things have all become part of a new industrial revolution.
Over its evolutionary cycle, the smart factory requires heavy investment in connectivity and automation, advanced algorithms for managing workflow, scheduling jobs, creating supply-side and customer-side information sets. Investment is also required in technologies that enable virtualization of design and testing to achieve faster time-to-market and lower physical prototyping and testing costs. Predictive asset maintenance will also more accurately anticipate and pinpoint machine and part failures.
Siemens operates a small electronics plant in Amberg, Germany. In 1990, it was 25% automated. It is now 75% automated and defect rates have dropped to below 12 per million. Output has increased 8.5 times with little change in the number of employees.²
Relationships across the entire retail landscape are being altered by the digital revolution (see Figure 1). OEMs, dealers and customers are dynamically redefining how they interact with each other, with consumers increasingly expecting a seamless experience across both digital and physical touchpoints, regardless of who they are interacting with. Customers are using the manufacturer’s digital options (such as its website or online reviews) to educate themselves, comparison-shop and virtually test-drive and build their dream cars.
OEMs and dealers must fundamentally reconsider how they engage with customers before, during and after the sale. When and how customers interact with sales people require different skills across the sales cycle in and out of the showroom. The paper-intensive purchase transaction will need to be digitized.
We anticipate around $90 billion worth of operating profits will migrate from traditional to digital channels open for competition among OEMs, dealers and third-party online platforms. This migration will also drive advertising and lead generation revenue streams for car comparison websites and third-party online retailers, potentially adding an estimated $28 billion to their bottom line.
Audi’s virtual showroom in London is designed to sell both cars and the Audi brand. Only four physical cars are on display. On the walls are enormous video screens on which customers can see all specifications for their chosen model. With authentic sound effects, they can open the doors, look inside and watch the car zoom away. Audi is also piloting a wearable virtual reality device that gives car buyers a first-person interactive experience. The computer program includes tens of millions of different renderings of a model’s various components and features which the device wearer can see from any angle.³
Connected service and maintenance
Predictive maintenance. Increasingly sophisticated in-vehicle diagnostic systems, smart components and ubiquitous connectivity allow the vehicle and even some components to proactively signal when they need maintenance or replacement. Continuous data analysis creates new opportunities for preventive maintenance. This dramatically reduces critical, unanticipated failures and reduces the frequency and severity of recalls. We expect remote diagnostics enabled by telematics to add $60 billion of profits to OEMs, suppliers and telematics service providers. OEMs can expect to see added benefits of reduction in warranty costs for subscribers. As a consequence, dealers and independent service centers stand to lose $44 billion in operating profits over the next 10 years.
Next-generation service. The explosion of cheap sensors has brought down the cost of predictive maintenance and is enabling next-generation servicing. Increasingly, service is becoming not only a mechanical adjustment or part replacement but also a software upgrade, with the service technician acting more as a computer diagnostic expert. Software improvements create performance improvements in both the overall engine and in individual mechanical systems, contributing to parts lasting longer and optimal performance being maintained.
Instead of switches, knobs and gauges, most car functions and performance metrics in a Tesla Model S come through a single 17-inch touchscreen. For the driver, this digital interface reduces complexity and adds flexibility. Periodic over-the-air software updates allow some of the vehicle’s original mechanical design features, including the look and feel of the touchscreen, to be upgraded to continuously meet consumer expectations.⁴ Tesla is the only manufacturer providing automatic over-the-air firmware updates to allow the car to improve safety, performance and infotainment capabilities.⁵
Where will the servicing be done? For dealers, service is their primary profit center and they’re going to do what they can to protect and expand this. Unless regulators step in, OEMs might release their proprietary software updates to their dealers and not third-party repair shops. With the complexities of computer code, customers could also have greater confidence in the work of a factory-authorized dealer than an independent service shop especially for major software upgrades.
We expect a potential shift of $105 billion over the next 10 years from independent service centers and smaller dealerships to high-end, authorized service centers. Loss of business through remote servicing could potentially erode $6 billion in operating profits derived from the auto-servicing profit pool.
Transformed digital aftermarket
The average age of cars in the European Union is 8.6 years.⁶ In the United States, it’s 11.4 years.⁷ In consumer electronics, older computers eventually cannot accept operating system upgrades; will the same be true with vehicles? Second ownership is more common and the sale and service of used vehicles is an important revenue stream for dealers. Second owners also have expectations that all of a vehicle’s systems will be current.
A transformed aftermarket will be where a vehicle’s connected navigation and infotainment components can be upgraded. Existing aftermarket players will shift sales and services to meet this burgeoning demand for upgrades that allow the consumer to stay connected. To better facilitate software and hardware upgrades, manufacturers and suppliers will be expected to make their systems forward compatible.
Close to $26 billion of operating profits will be at stake for parts retailers that wish to capitalize on digital channels for customer engagement. However, approximately $2 billion of operating profits could be eroded due to weaker pricing versus offline channels.
Automotive data marketplace
One of the most transformative impacts of digital is the development of a data economy. Companies in all industries are seeking to understand what data they have and can potentially collect, what data others might have, and how they can use all this information to better serve customers and constituents. This is especially true in the automotive industry, which is one of the most data generation-intensive industries in the world – second only behind utilities.
To fully realize the commercial and social benefits of the data that is generated across the industry, industry participants need a secure and robust data market where they can come together to trade data. This will allow organizations to be more targeted and efficient in their data collection processes, both to support their own business objectives, and to transact in the data marketplace.
We are already seeing early stages of this. For example, TransportAPI consolidates data feeds from some of the United Kingdom’s transport services and makes them available to developers, which use the information to build applications that track buses or tell you where the nearest Tube stop is. Transportation infrastructure has been computerized for a long time, but what is new is making the data available publicly on the Internet.⁸
Data exchanges are expected to create $36 billion of operating profits for OEMs from jointly run data exchanges operated at scale, with benefits derived mainly through third-party monetization and reduced cost of data acquisition for OEMs contributing to the exchange.
Imagine if vehicles could talk not just with each other (vehicle-to-vehicle, or V2V) but also with roadside infrastructure (vehicle-to-infrastructure, or V2I). Telecommunications companies are seeing opportunities in machine-to-machine communication in vehicles. In the third quarter of 2014, AT&T, for the first time, connected more new vehicles than it sold new smartphones.⁹ V2V and V2I are key enablers of intelligent transportation. Sensors, transponders and RFID readers on the road, traffic lights, bridges and parking lots will create an integrated communications network of continuously moving digital information to increase safety and improve traffic flow.
An integrated infrastructure-based network would be a boon to infotainment functionality for the connected traveler. Moreover, government agencies could use data from V2V and V2I communication to better mitigate traffic congestion and improve public safety. The National Highway Traffic Safety Administration in Washington has stated that this technology could address 80% of crashes involving unimpaired drivers.¹⁰
2. WEF DTI Automotive Phase 1 Working Draft PPT deck
4. http://www.teslamotors.com/models (and author commentary)
7. Source: IHS Automotive reports
The automotive industry is one of six sectors (along with consumer, electricity, healthcare, logistics and media) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth findings about the digital transformation of the automotive industry are available in a white paper, which can be downloaded here.
To explore a selection of related articles and case studies, please select one of the tags below.