As four technology trends reshape the global automotive sector, customer preferences are moving away from its traditional strongholds, such as chassis and engine development. This shift in customer preferences and the sheer size of the automotive sector have attracted new players: a potent mix of large high-tech companies and start-ups. Both differ from the automotive incumbents on virtually every level.
These new entrants and the disruptive trends they bring—electrification, autonomous driving, diverse mobility, and connectivity—will transform typically vertically integrated automotive value chains into a complex, horizontally structured ecosystem. The newcomers are well positioned (and expected) to make moves in novel areas such as autonomous driving. Consequently, today’s OEMs and tier-one suppliers must abandon strategies aiming at total control of vehicles and instead pick and choose where and how to play by shedding assets, streamlining operations, and embracing digital acquisitions.
Four trends that favor software-driven innovation
The fortunes of players in the automotive sector have always depended on what customers see as valuable. Most of this value has resided in the hardware of vehicles and in the automakers’ brands. However, future innovations will probably focus on disruptive technology trends, so the customers’ perceptions of value will shift, increasingly putting incumbents in danger. The four trends that willfavor the newcomers are these:
- Electrification. Drivetrains will shift toward hybrid-electric, electric, and fuel-cell technologies as they mature and become cheaper.
- Autonomous driving. The operation of automated cars will move from advanced driver-assistance systems to fully autonomous driving as the technology matures.
- Diverse mobility. As the sharing economy expands and consumer preferences change, the standard model will continue to evolve from outright purchase or lease to rentals and car sharing.
- Connectivity. The possibilities for “infotainment” innovations, novel traffic services, and new business models and services will increase as cars get connected to each other, to the wider infrastructure, and to people.
Attracted by the shift in customer preferences, the importance of the new trends, and the global automotive market’s massive size and value-creation potential, technology players are making their way into the sector. As they develop new software options, cars are evolving into computers on wheels, a change similar to events in the computer industry 20 years ago and the cellphone industry10 years ago. As a result, we anticipate that a complex ecosystem will emerge in the automotive sector (Exhibit 1).
Although the sector adheres to a vertically integrated business model, with OEMs in full control of their supplier networks, the new tech players are more focused on horizontal moves:
- A number of high-tech players are developing autonomous-driving systems that are quite likely to merge into what the computer industry calls an operating system (the central system that makes a unit run).
- Disruptors from the taxi and ride-sharing industries are developing innovative new business models.
- Two leading online and technology companies are focusing on in-car entertainment platforms, which they hope will become the standard for applications.
No single player is likely to dominate any part of such a horizontally organized, complex value chain by itself. But many of the new tech entrants are well positioned to take the lead in the software-focused parts. For each part of the ecosystem, there might be room for only a few winners, since few players will be able to invest the resources necessary to reach scale (Exhibit 2).
The automakers have invested billions in car hardware, from engine plants to stamping facilities and beyond, so they have the best position to dominate the hardware-focused areas. In software, the tech players enjoy significant advantages, including leading-edge capabilities, agile operating models, and the financial muscle required to pursue exploratory investments aggressively. For the automakers and tech players, success in tomorrow’s mobility sector will depend on how well they build on these natural advantages.