The COVID-19 pandemic is accelerating the departure from the internal combustion engine and calling previous strategic certainties of the automotive industry into question. Three fundamental trends will determine the future success of German manufacturers.
It was to be expected that 2020 would be a year of great change for the German automotive industry. Twelve months ago, I wrote a guest article in this space about the beginning of a critical decade for the country’s largest industry: the mental departure from the internal combustion engine. At the time, none of us, including me, had any idea that the key operational challenges for the industry this year would not be technological, but the disruption caused by a pandemic.
However, even COVID-19 has by no means stopped the main trends but has only been superimposed on them. In some cases, they have even been reinforced; some are being absorbed into structural market changes or are fading into the background for the outlook for 2021. In the year ahead and probably through the entire decade of the 2020s, three long-term developments will be decisive for companies in the automotive sector; developments that managers must respond to urgently—with investments, restructuring and innovations.
1. Anticipate the next technology leaps
Electrically powered vehicles have a market share of around 8 percent in Europe. This means that the region now leads the world in sales of electrified models. In particular, plug-in hybrids, which accounted for more than 50 percent of all electric vehicles in Germany in the past year, are the rising stars in the country’s registration statistics. The number of battery-powered vehicles is also rising steadily worldwide, thanks to government subsidies. This makes it clear that the lever has finally been pulled in the direction of electromobility in 2020. Electrification is becoming the defining drive technology of the decade and is driving a complete transformation among manufacturers toward electrified and connected vehicles.
Companies that miss out on this trend may end up like those suppliers whose product strategy is still focused on internal combustion engines: with up to 75 percent fewer components in the electric powertrain, they face massive predatory competition—unless they align their business model to future-oriented technologies in 2021 through massive restructuring or transformation. As always, the winners in the market will be those companies that are already anticipating the next technological leap, or even the one after that.
There are certainly opportunities here, for example in sensor technology, autonomous driving, electric motors, battery technology and hydrogen. The latter can be a viable alternative for heavy transport and long-distance journeys and, with green production, can also play a significant role in solving the CO2 problem. Europe is predestined to take the lead in the research and production of hydrogen drives, as the region has set itself binding CO2 targets: Complete climate neutrality is to be achieved by 2050.
But when it comes to development, Asian carmakers are a step ahead of their European counterparts. In autonomous driving, China, Korea, and Japan are already creating the conditions for future market leadership.
Especially China operates in a much more favorable legal environment. This is where there is a clear goal for European companies in the coming years: they must decide in which technology they want to—and can—be leaders.
2. Keeping an eye on the increasing regionalization of markets
COVID-19 has put the brakes on globalization, at least temporarily, and forced us all to look more closely at our immediate neighborhood. It is striking that the automotive markets are increasingly developing regional characteristics, some of which are very different. The USA, for example, could become a predominantly pick-up and SUV market by 2025, with these vehicle classes accounting for up to 80 percent of the total market. In contrast, Europe’s car buyers are increasingly focusing on the compact class and compact SUVs with partial or full-electric drive. China, in turn, is striving to become the global leader in electric and autonomous driving.
For automakers, therefore, a “one size fits all” approach will not work. The different sales regions currently seem to be moving at different speeds. At the same time, a global presence may become less critical to an automaker’s success or failure. Managers must now select the wedding at which they will dance, specifically, which market and which technologies seem most promising for their company.
A year ago, I argued for maximum reduction and optimal utilization of vehicle platforms and modular systems in order to implement new technologies and drive forms in different models in a timely and cost-effective manner. The regional differences in the development of the major global sales markets take this thesis in a new direction: modular systems are still critical to success, but they must now be designed so flexibly that different models can be fully, efficiently and cost-effectively adapted to the respective regional requirements.
This strategic alignment will also be reflected in the value chain, as the pandemic led to the temporary disruption of global supply chains. Consequently, many manufacturers returned their focus to the long-neglected regional supply chains.
This trend will continue in the coming years. In the 20s, companies will push to build more stable, regional supply chains. As a result, suppliers will also have to concentrate much more on their local focus than on the previously critical internationalization.
3. Significantly streamline the corporate organization
This change in orientation and value creation inevitably entails a change in corporate organization and, as a consequence, a restructuring of central overhead areas. As a result of COVID-19, this upheaval has become apparent to everyone for the first time in the ubiquitous home office and in remote working. In recent years, automotive companies have already increasingly focused on core competencies such as engineering development and IT. Specialization continues to gain in importance. Classic administrative functions, on the other hand, are increasingly being questioned: How much do they contribute to the actual value creation? Is the service really being provided as effectively as possible? Here, too, COVID-19 acts like the proverbial catalyst.
If managers do not find the answers to these questions convincing, these functions will be scaled back to a minimum or covered by partners or automation. The most important thing here is to take a self-critical look at one’s own company and the existing processes. In the future, performance in higher-level functions will be measured much more by their results than by attendance or hourly billing.
2021 will be the year of landmark decisions
What all three trend-setting developments in the automotive industry have in common is that they depend to a large extent on the decisiveness of the responsible managers. Half-hearted changes in the orientation of companies will not lead to the goal - but may even be harmful to a company. COVID-19 has irreversibly strengthened some trends, forcing companies to make a directional decision. This applies to the orientation of products and services as well as to the development of a strategic value chain. The technological disruption of an entire industry must be followed by a holistic transformation in the way companies think and act.
It is precisely this directional decision that will determine the ability of individual automotive companies to survive in the 2020s.
This article appears (in German) in Manager Magazin.