Au­to­mo­tive’s New Value-cre­at­ing En­gine

Rotman Management Magazine - - FROM THE EDITOR - by J. Brock­haus, J. De­ich­mann, J. Pulm and J. Repen­ning

In re­cent years, the au­to­mo­tive in­dus­try has been in­tensely dis­cussing four dis­rup­tive and mu­tu­ally re­in­forc­ing trends: au­ton­o­mous driv­ing, con­nec­tiv­ity, elec­tri­fi­ca­tion and shared mo­bil­ity. Th­ese ‘ACES’ trends are ex­pected to fuel growth within the mar­ket for mo­bil­ity, change the rules of the sec­tor, and lead to a shift from tra­di­tional to dis­rup­tive tech­nolo­gies and in­no­va­tive busi­ness mod­els.

Ar­ti­fi­cial in­tel­li­gence is a key technology for all four ACES trends. Au­ton­o­mous driv­ing, for ex­am­ple, re­lies in­her­ently on AI be­cause it is the only technology that en­ables the re­li­able, re­al­time recog­ni­tion of ob­jects around the ve­hi­cle. For the other three trends, AI cre­ates nu­mer­ous op­por­tu­ni­ties to re­duce costs, im­prove op­er­a­tions and gen­er­ate new rev­enue streams. For shared mo­bil­ity ser­vices, AI can, for ex­am­ple, help to op­ti­mize pric­ing by pre­dict­ing and match­ing sup­ply and de­mand. It can also be used to im­prove main­te­nance sched­ul­ing and fleet man­age­ment.

Th­ese im­prove­ments through AI will play an im­por­tant role for au­to­mo­tive firms be­cause they en­able them to fi­nance and cope with the changes ahead of them. One ex­pected key re­sult from the ACES trends is a marked shift in the in­dus­try’s ‘value pools’. This change will pri­mar­ily af­fect large au­to­mo­tive orig­i­nal equip­ment man­u­fac­tur­ers (OEMS) and their busi­ness mod­els, but the im­pact will be felt through­out the in­dus­try and be­yond.

The prod­ucts and ser­vices made pos­si­ble by the ACES trends will not only im­pact the busi­ness of all in­cum­bent and tra­di­tional in­dus­try play­ers, but will also open the mar­ket up to new en­trants. Many com­pa­nies that were pre­vi­ously fo­cused on other in­dus­tries — e.g. technology play­ers— are heav­ily in­vest­ing in the ACES trends and the un­der­ly­ing key tech­nolo­gies.

As a re­sult, a new ecosys­tem of play­ers is emerg­ing.

New play­ers will be im­por­tant part­ners for tra­di­tional au­to­mo­tive com­pa­nies. While au­to­mo­tive OEMS can use new play­ers’ technology ex­per­tise to un­lock value po­ten­tial from AI, new play­ers will have op­por­tu­ni­ties to claim their share of the au­to­mo­tive and mo­bil­ity mar­kets. To mas­ter the ACES trends, OEMS need to in­vest sub­stan­tially into each of the four ACES — not just in their de­vel­op­ment, but also in their in­te­gra­tion.

Our analy­ses has yielded the fol­low­ing key in­sights:

• In the short to medium term, there is a sub­stan­tial in­dus­try-wide Ai-en­abled value op­por­tu­nity,

which by 2025, will reach a to­tal ac­cu­mu­lated value po­ten­tial of around US$ 215 bil­lion for au­to­mo­tive OEMS world­wide. This cor­re­sponds to the value of nine EBIT per­cent­age points for the whole au­to­mo­tive in­dus­try, or to an ad­di­tional av­er­age pro­duc­tiv­ity in­crease of ap­prox­i­mately 1.3 per cent per year—a sig­nif­i­cant value to boost the in­dus­try’s reg­u­lar ~2 per cent an­nual pro­duc­tiv­ity

as­pi­ra­tion. Most of this value is de­rived from the op­ti­miza­tion of core pro­cesses along the value chain.

• Even in the short term, AI can lead to ef­fi­cien­cies and cost sav­ings across the en­tire value chain

and can cre­ate ad­di­tional rev­enues from ve­hi­cle sales and af­ter-mar­ket sales. Most of the value is gen­er­ated through four core pro­cesses. In pro­cure­ment, sup­ply chain man­age­ment and man­u­fac­tur­ing, ef­fi­cien­cies lead to cost sav­ings of US$ 51 bil­lion, US$ 22 bil­lion, and US$ 61 bil­lion, re­spec­tively. In mar­ket­ing and sales, Ai-based ef­fi­cien­cies both re­duce cost and gen­er­ate rev­enue, lead­ing to a to­tal value po­ten­tial of US$ 31 bil­lion for this process.

• While Ai-en­abled ve­hi­cle fea­tures can gen­er­ate sub­stan­tial in­dus­try-wide value in the long term, th­ese fea­tures and ser­vices will only cre­ate lim­ited value at the in­dus­try level in the short term.

Nev­er­the­less, gen­er­at­ing value from th­ese fea­tures and ser­vices is im­por­tant as in­di­vid­ual OEMS that out­per­form com­peti­tors with their driver/ve­hi­cle fea­tures and mo­bil­ity ser­vices can gain sub­stan­tial mar­ket share. Th­ese gains in mar­ket share by technology lead­ers are, how­ever, small com­pared to the risk of los­ing a sig­nif­i­cant part of the cus­tomer base for OEMS that are fall­ing be­hind on th­ese fea­tures. Four key suc­cess fac­tors will en­able OEMS to pre­pare for the AI trans­for­ma­tion and to cap­ture value from AI in the short term: Col­lect­ing and syn­chro­niz­ing data from dif­fer­ent sources; set­ting up a part­ner ecosys­tem; es­tab­lish­ing an AI op­er­at­ing sys­tem; and build­ing up core AI ca­pa­bil­i­ties and a core AI team to drive the re­quired trans­for­ma­tion.

OEMS need to be­gin their AI trans­for­ma­tions now by im­ple­ment­ing pilots to gain knowl­edge and cap­ture short-term value. They should then es­tab­lish their AI core to de­velop an in­te­grated view on AI across the or­ga­ni­za­tion. This will en­able OEMS to scale up and roll out an end-to-end AI trans­for­ma­tion to sys­tem­at­i­cally cap­ture the full value po­ten­tial from AI and build up ca­pa­bil­i­ties for their long-term ACES strate­gies.

Jan Brock­haus is a Se­nior As­so­ciate in Mckin­sey & Co.’s Cologne of­fice. Jo­hannes De­ich­mann is an As­so­ciate Part­ner in Mckin­sey’s Stuttgart of­fice. Jeldrik Pulm is a Fel­low in the Cologne of­fice. Jas­min Repen­ning is an En­gage­ment Man­ager in Mckin­sey’s Ham­burg of­fice. For more, the full re­port from Mckin­sey’s Cen­ter for Fu­ture Mo­bil­ity, “Ar­ti­fi­cial In­tel­li­gence: Au­to­mo­tive’s New Value-cre­at­ing En­gine,” is avail­able on­line.

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