A Google search on where experts see the automotive industry going reveals one key takeaway: no one knows exactly where it’s headed. Some once thought that level 4-5 automation was a handful of years away (the estimate has now been revised upward to 15-20 years). Others believe that innovation will center more around vehicle drivetrains (swappable electric batteries or lightning-quick charging) and infrastructure (smart highways). In a world where the future could go in so many different directions, how are auto manufacturers to survive, let alone thrive? The good news is that there are things companies can do to adapt. Here are some popular strategies to consider.
Partner Up to Share the Risk
Partnerships in the auto industry are nothing new—brands like Chrysler and Maserati partnered to produce a vehicle, the Chrysler TC by Maserati, as far back as the 1980s. However, these partnerships are becoming more common as automakers look to mitigate the risk that comes with investing in the development of new vehicle platforms, which can cost over a billion dollars, when the trajectory of the entire industry is likely to change rapidly. Here are a few recent examples of automakers joining forces:
- The Next-Gen Toyota 86 Will Reportedly Be Another Joint Venture with Subaru (Learn more)
- FCA Partners with Mazda to Split New Roadster’s Costs 50/50 (Learn more)
- Toyota and BMW Team Up to Revive the Iconic Supra Nameplate (Learn more)
And just as OEM auto manufacturers are partnering to get ahead, automotive suppliers are doing the same. Examples of recent consolidation mega-deals include American Axle’s $1.5B acquisition of MPG, Tenneco’s $5.4B acquisition of Federal-Mogul, and Dana’s rejected $6.1B acquisition of GKN (GKN shareholders later chose a bid from private equity firm Melrose to take over the company).
Automakers that decide to partner do risk competing with each other to sell a nearly identical product. So, while the cost of developing a new platform is limited, so is the profit upside.
Automakers partnering is not a new concept, however, what is new is automakers partnering up with tech companies to tackle the huge technological changes that lie ahead. Over the last few years, we’ve seen the top three US automakers—GM, Ford, and Chrysler—make large investments in Silicon Valley-based autonomous driving startups: GM with Cruise, Ford with Argo AI and Chrysler with Aurora. Partnering with these companies not only spreads the risk, it is also a rightful acknowledgement that cars are becoming more computer-like and carmakers’ manufacturing know-how will need to be supplemented with strong technological prowess in the coming age of Automated, Connected, Electric and Shared Vehicles (ACES). Expect more of this in the years ahead.
Focus on Core Competencies
More isn’t always better. That was the key finding of a 2000 study by Columbia University psychologists Sheena Iyengar and Mark Lepper, who decided to test how consumers react to having a lot of options when making purchasing decisions. They claimed that while people like the idea of choice, they overestimate their own capacity for managing those choices and often, when faced with too many choices, forego making a choice altogether. In their study, shoppers were six times more likely to buy a product when given fewer varieties to choose between.
Similarly, some auto manufacturers are noticing that their model ranges give the consumer too much choice. Cutting unsuccessful models can help these manufacturers focus on producing only the vehicles they’re good at producing, or the ones that have higher profit margins. For example, last year Ford announced plans to trim $25.5B in operating costs (and 80% of its vehicle lineup) by 2022 by eliminating the Taurus, Fiesta, Fusion, C-Max and Focus in favor of higher margin trucks, SUVs and Mustangs.
GM recently announced plans to trim its offerings within the SUV segment by reducing production of the Chevrolet Trax and GMC Terrain to “focus on profitable sales and doing things that make good business sense.”
Besides making good business sense now, concentrating on strengths will allow automakers to be more flexible in the future, putting them in a better financial position to invest in any technologies or trends that gain traction.
Make Supply Chains Flexible
When the auto industry took a downturn during the financial crisis of 2008, many auto manufacturers trimmed inventory levels and cut supply chain costs. As the economy recovered, however, these companies found their weakened supply chains couldn’t keep pace with the economic recovery. As some analysts think that we may be headed towards another recession in the coming years, auto manufacturers should be wary of repeating similar missteps. Here are some of the many benefits of a flexible supply chain:
- Ability to exploit new market opportunities as fast as possible
- Reduced costs and minimized disruption risk
- Ability to cater to more tailored products with a faster order-to-delivery time
More and more, flexibility in the supply chain is becoming a “need to have” rather than a “nice to have.” Some companies have even elevated their supply chain leaders to C-suite status. Look for this to become the norm as disruption in the automotive space continues to accelerate.
Prepare for Everything but Expect Nothing
The only thing for certain in the automotive industry these days is uncertainty. That’s why manufacturing companies need to be agile enough to effectively respond to change. QAD Adaptive ERP and QAD DynaSys DSCP solutions (e.g. scenario planning) allow companies to do just that. Take QAD Customer Veoneer (formerly Autoliv), for example, rapid implementation in the cloud was instrumental in saving the company precious time and money in the face of ACES disruption. For other automotive companies up against similar challenges in an age where anything can happen, it’s best to be prepared for everything.