Automation to hand automotive firms $4.3 trillion revenue opportunity

02 April 2019

The effect of automation on the automotive industry and wider society is likely to be significant. Significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels may help lead to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue opportunities arising by 2030.

With the automotive sector facing an increasingly difficult road ahead, companies in the market are increasingly hard pressed to find new ways to improve their bottom lines. In the UK in particular, the pressure is on for firms looking to find ways to improve their value creation. The UK endured a 7% fall in car sales throughout 2018, and while Brexit was predictably cited as a cause of this, the nation’s automotive sector is unlikely to have seen the worst of that particular storm yet – meaning innovation is even more essential.

Automation and AI offer vast implications for engineering, production, supply chain, customer experience, and mobility services which could well help the industry combat its flagging performance. To that end, a recent study by Capgemini found car motor vehicle manufacturers are working hard to cash in on the innovation. The share of automotive companies deploying AI at scale has grown from 7% in 2017 to 10% today, with OEMs generally making better progress than suppliers or dealers.

Global investment in future mobility

Now, new analysis from McKinsey & Company has further explored the key trends of automation and electric vehicles – which it claims could have as large an impact on mobility as the car originally had on horse-drawn transport. The full-scale development of the internal combustion engine (ICE) able to self-propel a land vehicle took almost 200 years, with the early 20th century the period of rapid development. That period saw such vehicles become accessible not merely to the gentry, but also to the masses, as increasingly sophisticated industrial processes drastically lowered production costs. 

The decades that followed saw increasingly sophisticated designs, developing into the plethora of vehicles available today for commercial and private use: from people carriers to sports cars, light commercial vehicles and trucks. Vehicles became one of the backbones of modern economies, with dependence on them driving sales.

However, while vehicle engineering and cost improved, their negative externalities became increasingly hard to ignore. Pollution in particular has created considerable harms to the environment and public health. Lead in fuel, added in 1922 to prevent knocking by a chemist who also developed CFCs, was particularly harmful. The negative impacts of diesel exhaust are also becoming increasingly understood, with one estimate placing the cost to public health in Europe at €70 billion. Road accidents kill more than 1.35 million people annually, as well as causing many debilitating injuries.

Shift of autonomous robo-taxi could be below owning a traditional driven vehicle by late 2020s

Even cities with strong public transport options can have a high proportion of their total emissions stemming from vehicles. Current efficiencies for vehicle use are also relatively low, with high congestion rates giving rise to lost GDP, up to 2-5% annually, as well as wasted time, wasted fuel, and increased business costs. Furthermore, long-commute times from congestion itself has negative impacts on human health, including lower life satisfaction and increase risk of anxiety, poor fitness, obesity, high blood pressure, and other physical maladies.

Automated automotive

Mitigating negative externalities is part of the large-scale trend set to change mobility over the coming decades. The changes are necessary to meet global agreements around climate forcing emissions as well as local targets to reduce exhaust pollution. The transformation is also likely to create more efficient, convenient and reliable forms of mobility, that could significantly reduce people’s dependence on sometimes expensive capital expenditures. This is not to say that personal vehicles will no longer be an option; however, their necessity for many commuters could become a thing of the past.

However, the transformation is likely to be as disruptive as the transition from horses to combustion-driven vehicles. The disruption is set to cut across various industries. Autonomous vehicles could see people tasked to operate vehicles out of a job. The industry that supplies and services ICE vehicles, which tend to have more moving parts requiring more maintenance than electric vehicles, would consequently endure significant impacts. 

While the technological change is projected to slash revenues currently depended upon by the automotive industry, with a potential decrease in revenues of $2.1 trillion by 2030, there is also a large potential for revenues stemming from the disruption, which could see $4.3 trillion added to the industry as a whole. Thus, while the impact on various industries could wipe out entire sub-sectors, others are likely to spring up to take their place.


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Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”