Carmakers’ Reshuffled Priorities: An In-depth Analysis
Automotive OEMs have significantly altered their priorities and their resource allocation in the past few years to reflect radical market shifts, emerging competition, new regulations, geo-political challenges, and technological opportunities. Some domains benefit from a lot more resource whereas others have moved to the back burner. This reshuffling comes with major make—or—buy decisions, the accelerated development of in-house capabilities, the shedding of non-strategic activities, an increased amount of open innovation and more. Yet this very deep transformation is by no means complete.
What are the strategic domains affected by this reshuffling? Electrification has clearly moved beyond the tipping point with battery EVs exceeding 10% of the global market in 2022, which drives massive investments and increasing vertical integration. Everything related to software and connected services continues to gain steam and has become a top priority with significant staffing growth and ambitious sales targets. In the assisted and autonomous driving space, mid-term expectations related to autonomous driving have been toned down drastically to focus on ADAS (Level 2 or 3) which offer achievable revenue goals.
Shifting to Sustainable Mobility
Battery EVs (BEVs) have built significant momentum, exceeding 21% of new vehicle sales in China, 12% in Europe and 5% in the USA to reach 7.8 million units sold globally 2022 (+60% YoY). This is the result of a larger product offering, significant incentives and increased public acceptance.
Regulations will continue to drive BEV penetration. The EU parliament recently approved a requirement for OEMs to achieve zero CO2 emissions for new cars sold by 2035 — though Germany and Italy are challenging Brussels to relax this constraint. California has set the same deadline and several US states are following suite.
The US federal government has proclaimed the ambition for zero-emission vehicles to reach 50% of sales by 2030. In August 2022, it passed the Inflation Reduction Act (IRA) which heavily incentivizes the localization of the complete supply chain, from mineral extraction and refining to vehicle assembly. This America-first agenda will likely trigger reciprocal policies in the EU. In the end, this drives massive investments across the whole supply chain from mineral mining to recycling (see my Sept 2022 article) as well as demand for BEVs. Above all, it is paramount for the USA and Europe to gain independence from the Chinese domination of the battery supply chain.
In 2020, OEMs started contracting with companies mining lithium, cobalt, nickel, and manganese, battery producers, and recyclers, however, the pace of such investments has really accelerated in 2022. The objectives are to secure future capacity and pricing, onshore (or at least “friend-shore”) where possible, as well as increase transparency and resiliency of supply chains. These are moves very few would have imagined just a few years ago.
OEMs and their suppliers are also racing to increase BEV efficiency and affordability. The scope of activities is wide including battery chemistries, battery management systems (BMS), motors, power electronics, aerodynamics, etc. (more in my Feb 2022 article). Given the number of domains in which OEMs — and to a lesser extent Tier 1 suppliers — have limited or no expertise, partnering with and sometimes investing in startups is essential.
Other major moves associated with the shift to clean vehicles include the separation of ICE activities (e.g., Ford Blue and Renault’s Horse) and the deployment of proprietary EV charging infrastructures (Mercedes will deploy 10,000+ charge points by 2030).
Software-Defined Vehicle and Connectivity
Tesla again showed the way with over-the-air (OTA) updates starting back in 2012. This has enabled the OEM to deliver new features and functionalities, fix bugs remotely and perform recalls without bringing vehicles to the shop, thus avoiding costly campaigns. Yet, VW’s latest “OTA” update still requires that owners take their cars to the dealer. Delivering new software solutions has clearly proven to be more challenging for OEMs than they expected.
The concept of software-defined vehicle (SDV) is more than OTA updates. It is also about new, streamlined electronic architectures (i.e., zonal / domain compute), cloud connectivity, the ability to enable features-on-demand and subscriptions, to automate functions on-board the vehicle or to selectively stream data to the cloud (more in my Feb 2021 article).
SDV provides vehicle owners with a better user experience. For instance, Mercedes offers extra maneuverability (increased rear-wheel steering angle) on an S-Class and EQS for 489€ per year. Tesla’s Full Self-Driving Capability is available for $199 a month and connectivity features for $10 a month. You can also unlock an extra 67 hp and 20 Nm on your Polestar 2 for a one-time fee of $1,195. Features accessed via one-time upgrades, subscriptions or pay-per-use will become increasingly common and will generate recurring revenue, potentially throughout a vehicle’s life.
SDV will also help OEMs and suppliers unlock new revenue streams and operational efficiencies. Stellantis and GMeach expect software and related services to contribute $20-25B to their top lines and Mercedes $10B (vs. $1B in 2022) by 2030. SDV will also help engineering teams diagnose issues and develop better products by providing key insight as to how vehicles behave, streaming targeted data to the cloud when specific events occur. Silicon Valley-based Sonatus is at the forefront of this shift, enabling OEMs and Tier 1 suppliers to make SDV a reality.
Balancing Assisted and Autonomous Driving
Hype around fully autonomous driving (a.k.a. Level 4) has come down drastically over the past 12-18 months, whether it be for robotaxis or trucks. Conversely, interest in Level 2 (L2) ADAS and Level 3 (L3) conditional autonomy has continued to gain momentum at OEMs and suppliers.
OEMs accelerate the development of L2 and L3 oftentimes leveraging external resources through either acquisition or partnership. Stellantis recently acquired ADAS developer aiMotive and collaborates with BMW with plans to bring L3 to market in 2024. Volkswagen / Cariad partnered with Bosch to develop L2 and L3 solutions.
In the L4 space, major consolidation has already occurred (see my Nov 2022 article) and more is yet to come within the startup community. VW and Ford recently closed Argo AI (each owned 40%) after the L4-focused startup had raised $3.6B and grown the 2,000+ employees. Navya (L4 shuttle) and Embark (L4 trucking) among others are winding down. This is an opportunity for others to get stronger. Ford formed Latitude AI with the 550 Argo employees they integrated with the objective to bring L3 to market.
Nevertheless, Mercedes’ CTO still said recently that L4 is “doable” for its personal vehicles by the end of the decade — the OEM is already a pioneer with L3. The OEM expects these functions to be the main driver for software-enabled revenue streams by 2030. Likewise, a select group of autonomous driving players who have have built a strong competitive advantage forge ahead with small scale deployments. In the USA, Waymo, Cruise just reached one million miles without safety operator on public roads. In China, AutoX, Baidu or Pony.ai continue to expand their robotaxi service (with operator) to new cities. This consolidation is the natural evolution of a nascent industry.
Revamping Automotive Distribution
Tesla has pioneered direct sales to consumers, bypassing traditional auto dealers — Rivian and Lucid have since followed the same path. As a result, the EV leader has an exclusive relationship with its end customers, which means full access to data, the ability to sell new services during a vehicle’s life (e.g., new features, service subscriptions, or insurance products).
Tesla also gets to control its retail pricing, balancing demand with supply to maximize profitability — the company adjusted its pricing up and down many times over the past 3+ years to “manage” demand. It also brings the dealer’s margin in-house (typical gross margin of 8-10% for full-line brands and 10-15% for premium ones in the USA). Autonation, one of the largest American dealer groups generated an average of $5,942 of gross margin across 230k new vehicles sold in 2022.
Incumbent OEMs are all trying to emulate Tesla’s model for all the good reasons stated above. Part of their strategy requires that they establish a direct relationship (access to data, new recurring sales opportunities etc.). Just as important, access to dealers’ profit pool can either fatten up OEMs’ margins, fuel their investment in new products or make EVs more affordable.
Yet, local regulations in Europe and the USA limit OEMs’ ability to sell directly to and engaged with their end customers. The agency model is an option, though dealers reject the idea of receiving a fixed commission for their service. An alternative consists in creating new brands which can operate outside existing dealer contracts, thus taking advantage of direct-to-consumer (DTC) sales options made possible by Tesla’s past legal fights. This is the approach Geely / Volvo has taken with Polestar and VW Group will likely take with Scout.
Another path consists in finding a middle ground within the existing legal framework. In the USA, GM and Mercedes will give their dealers a commission on revenue the OEMs generate during the life of a vehicle the former distributed. It will represent 13% of sales in 2023 for Mercedes. This is in fact an operating model dealer groups are lobbying for in many state legislatures.
The reshuffling of OEMs’ priorities is not limited to the domains reviewed above though I believe these are the most critical ones. This forces companies to become more agile, transform faster and quickly learn about domains they knew nothing about just a couple of years ago. That’s a tall order!
Managing Director, Orsay Consulting
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