New Auto Industry Keywords: Flexibility with Participation

By Martha Hindes
Senior Editor
The Auto Channel
Michigan Bureau

As the American auto industry enters a mixing bowl phase of autonomous cars, ride sharing, shared mobility, morphing to electrification and a questionable future for the long-lived internal combustion engine, surviving as a dominant player could depend on some unforeseen factors.

One of those, according to a new automotive study, is the ability to partner. That was a point made by John Hoffecker, global vice chairman and Mark Wakefield, global co-head of automotive and industrial, from AlixPartners, a Michigan-based global business advisory firm. They presented their latest Global Automotive Outlook studies before the Automotive Press Association in Detroit on Tuesday.

“The future is coming at us very, very quickly,” said Hoffecker in explaining some or the factors that are turning a somewhat predictable industry virtually upside down. Companies that try to go it alone with their own proprietary developments will be spending vast amounts of development money that could have been saved with some interaction.

According to the analysis, more than 50 major companies and a vast array of smaller ones, including start-ups. now are working to develop autonomous or fully-autonomous vehicle systems. Unlike the traditional, well-established OEMs, those new high-tech entrants have an entirely different DNA.

The result is likely to be a few big winners out of the new “Wild West” vehicle environment. And those are the competitive ones with the flexibility to interact that can capture consumer interest.

Those companies – from OEMs to suppliers, software developers and fleet managers – need to communicate and cooperate or be left behind as the industry gallops toward a new normal that no one yet can anticipate.

What might have been seen as a joke a dozen years ago – with high tech companies now including Google and even Apple leading the advancement – have become the major driving force in what AlixPartners calls a “New Automotive Ecosystem.” The company has coined the term “CASE” to describe it: “Connectivity,” “Autonomous,” “Shared Mobility,” and “Electric” for the four factors that are driving the change.

Those emerging facets not only are impacting the industry globally, but are significant reasons vehicle sales in the U. S. will not reach new plateaus in the coming years. According to the study an additional factor is the “used car time bomb” of the return of 500,000 off-lease vehicles that will help push sales down from an expected 16.9 million new light vehicle sales during 2017 to a “cyclical trough” of 15.2 million by 2019.

Other factors impacting the potential new vehicle market are trends away from personal vehicle ownership such as car sharing (Zipcar) or ride sharing (Uber and Lyft) that has caused many potential new car buyers to delay getting driver’s licenses or to consider the need for a vehicle at all.

Each single vehicle used for car sharing that rents a car’s usage short term such as hours not days removes about 19 personal vehicles from being sold. Even that trend is volatile. Ride sharing, where one rides but doesn’t drive, is pushing car sharing off the front pages toward anonymity, according to the study.

While electric vehicle sales have not caught fire in the U.S. they are getting a major push outside the U.S. particularly in Europe and in China. As of 2016, Tesla was the only American company making a small dent (4 percent) in Chinese EV sales which is dominated by a group of Chinese auto -companies with 96 percent.

But the big push towards autonomous vehicles is the cream rising to the top as virtually every auto maker participates. It will gain more consumer acceptance as it underscores the industry’s move to a “Brave New World of Everything,” Wakefield predicted.

While much has been written about consumer reluctance to trust vehicles that don’t allow a driver to override automated functions, the companies that stress convenience and put less emphasis on security concerns are more likely to gain converts, he added.

An ironic example is electric car Tesla, with its earlier fatal crash involving semi-automatic controls. Logically that could have been a death knell for the company’s high-end, all electric vehicles. But the opposite has happened, with more public awareness and a growing interest in Tesla and its position as a leader in advanced EV technology.

Is flexibility the new keyword for the auto industry? Wakefield was asked. “Not just flexibility, but flexibility with participation,” he responded.

Press Release

The Fast-changing ‘New Automotive Ecosystem’ Is Leaving Many Players Behind, Says AlixPartners Report

New consumer survey shows how quickly things are changing, as car-sharing dips in popularity and ride-sharing soars; to survive, companies will need different partnership strategies and organizational structures, all while coping with a sales downturn

Detroit, July 12, 2017 (GLOBE NEWSWIRE) -- Backdropped by what AlixPartners two years ago identified as the “CASE” trends that are completely revolutionizing the automotive industry – the connected, autonomous, shared and electric vehicles of the not-too-distant future -- the global business-advisory firm today unveiled an analysis detailing how automakers, suppliers and other industry players need to evolve their organizations and their partnering approaches to successfully transition to a “new automotive ecosystem.” Using several examples, the firm detailed where companies, often relying on traditional auto-industry approaches, are falling behind and why they should consider revamping their operating models. Meanwhile, the report also forecasts a significant downturn in US sales ahead, to 16.9 million light-vehicle units this year and to a cyclical trough of 15.2 million units in 2019 – partly driven by a “used-car time bomb” of 500,000 more off-lease vehicle-returns in 2017 vs. 2016, on top of the 500,000 more in 2016 vs. 2015.

On the connectivity front, the analysis points to the example of Tesla Inc.’s “high-spec” center-stack display, featuring over-the-air upgrades from the company and iPad-like features. Though this feature has been on the market since the 2012 model year, and has garnered very strong reviews from consumers, no other major automaker has moved to match the system.

On the autonomous-vehicle front, the AlixPartners analysis finds there are now more than 50 major companies are now working on autonomous vehicles or full autonomous-vehicle systems, as well as a plethora of smaller companies and start-ups. This “Wild-West” environment will likely result in a handful of big winners, says the study, but on the other hand, also many disappointed investors. The report also notes that many of the newer high-tech entrants have completely different “DNAs” than traditional automotive companies, including being used to very high returns on capital. Given the white-hot competition brewing, the analysis predicts that AV systems-costs could drop 78% by 2025.

On the shared-mobility front, the analysis includes a survey of a total of 2,000 US adult consumers that shows just how fast things are changing in today’s automotive world. The survey polled 1,000 consumers across 10 large markets where both car-sharing and ride-sharing are popular (the metro areas of Austin, Boston, Chicago, Los Angeles, Miami, New York, Portland, Seattle, San Francisco-Oakland and Washington, D.C) and, as a control group, 1,000 respondents across the entire US. This mirrored a consumer survey by AlixPartners in November 2013. In this year’s survey, consumers in the 10 trend-setting markets said their awareness for virtually all major car-sharing brands (names such as Zipcar, Car2Go and Enterprise CarShare) has decreased, and 21% of respondents were unable to name any brands at all.

By contrast, this year’s survey also asked users of ride-sharing (brands like Uber and Lyft) in those same 10 markets about their intended usage in the next 12 months vs. their past usage, and 24% said their usage would be or more than in the past, vs. just 5% who said less – an 18-percentage-point difference. Meanwhile, just 17% of car-sharing users surveyed in those markets said they’d employ car-sharing more in the coming 12 months than in the past – vs. 16% who said they’d use that mobility service less in the year ahead. Moreover, among respondents in the 10 markets, the survey found that ride-sharing was five times more likely to be a top-three transportation mode than was car-sharing (11.6% vs. 2.5%), and three times more likely than traditional taxis (11.6% vs. 4.2%). In addition, among millennials surveyed in the key markets, 9% said ride-sharing has allowed them to postpone or avoid getting a driver’s license – another indicator of today’s fast-changing times.

Another key finding of the survey, coupled with AlixPartners analysis, is that in the 10 key markets each vehicle used in car-sharing is likely replacing the need for 19 personal vehicles -- a decrease from 32 vehicles based on the results from AlixPartners’ 2013 survey. Meanwhile, according to the same analysis, one vehicle used ride-sharing is likely displacing four personal vehicles. The report goes on to note that both ride- and car-sharing vehicles are typically replacing vehicles driven less than 5,000 miles per year, not typical commuting vehicles.

On the electrification front, the AlixPartners study reveals that China is investing heavily to take a leadership role in electric vehicles. In an example of that, the report notes that Chinese automakers commanded 96% of the 2016 market in China for full electric vehicles (not including hybrids), more than double their share (43%) for all types of light vehicles. It also finds that of the 103 EVs to be launched globally by 2020, 49 of them will come from China-based automakers The report additionally predicts that China is targeting to have two-thirds of the world’s manufacturing capacity for lithium-ion batteries by 2021 (175 GWh of power, or the equivalent of five Tesla
“giga-factories”).

Meanwhile, the report notes that hybrid sales in the US have slowed, from 3.2% of the market in 2013 to just 2.1% so far in 2017, while plug-in and battery-electrics sales, while increasing, still represent only 1.0% of the market. This, says the study, underscores the need for maximum flexibility in both organizations and partnerships to handle the expected, but bumpy, shift to the new automotive ecosystem that’s coming.

Against this fast-moving, uncertain background, the AlixPartners report forecasts a downturn – vs. the plateau some others are predicting – in US vehicle sales. The report forecasts US light-vehicle sales for 2017 of 16.9 million units, dropping to 15.2 million in 2019. Underlying these forecasts is the report’s findings that for the last 11 months sales incentives in the US have averaged more than 10% of vehicle prices – a historical harbinger of downturns, and that there’s a “used-car time bomb” about to explode in the market – 500,000 more off-lease vehicle-returns hitting the market this year than last, likely depressing used-vehicle prices double the 13% drop already since 2014, and costing automakers’ captive finance companies up to $5 billion.

This all, notes the reports, will likely be a double-whammy to new-vehicle sales, displacing sales to cheaper used cars while increasing lease payments on new vehicles as leases get written with anticipated higher residual rates and tighter credit standards.

Finally, and also in a way on the partnership front, the AlixPartners study finds that private-equity firms have switched, in droves, from being buyers to sellers – most often to “strategics” (companies in the auto industry already), as private-equity-to-strategics deals skyrocketed from 6% of total auto-M&A transaction values in 2013 to 84% in 2016.

John Hoffecker, global vice chairman at AlixPartners and a 30-year automotive veteran, said: “There’s an all-new automotive ecosystem developing, and I fear that many players really aren’t prepared for it. The changes coming are the biggest since the internal-combustion engine pushed aside horses and buggies, yet what the exact changes will be are as unpredictable as trying to guess which app is going to be most popular on next year’s smartphones. Leading players will be those that both study hard and are fast on their feet.”

Mark Wakefield, global co-head of the automotive and industrial practice at AlixPartners, said: ”With the rapid but uncertain developments in connectivity, autonomy, shared mobility and electrification, traditional approaches to partnering and running organizations could well be setting up the auto industry up to be disrupted. Fast and savvy organizations that build their own agile ecosystems and create smart partnerships, but without locking themselves into technologies that may become quickly outdated, will be best positioned to afford the needed ‘CASE’ investments of the future and to prosper from the coming industry changes rather than being rolled over by them.”

About the Survey:

The 2017 AlixPartners consumer survey mentioned above was fielded in the United States online May 19-25, 2017.

About AlixPartners

In today’s fast paced global market timing is everything. You want to protect, grow or transform your business. To meet these challenges, we offer clients small teams of highly qualified experts with profound sector and operational insight. Our clients include corporate boards and management, law firms, investment banks, investors and others who appreciate the candour, dedication, and transformative expertise of our teams. We will ensure insight drives action at that exact moment that is critical for success. When it really matters.