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Automotive brands are going to have to take some previously uncharted routes if they want to survive; the sector is looking ripe for disruption by technology, new entrants and rapidly changing consumer demands.
For a long time, automotive has accounted for the largest sector among the Best Global Brands. In 2019, 15 of the top 100 brands were automotive Original Equipment Manufacturers (OEMs), thriving on global business reach in a high-involvement category where brand plays a vital role. And most of these brands have been successful for decades. But today, this industry is under pressure. Tech brands have quickly become the dominant sector in the ranking – both in terms of numbers, but even more so in terms of brand value growth.
One factor that we believe could define the next generation of auto manufacturing is a pivot from being hardware companies to software companies. Currently, about 90% of the value of an automobile lies in the hardware, but this is changing. New entrants are proving that the capital-intensive nature of the automotive industry, which once served as a barrier to entry, is in fact becoming a liability. Electric vehicles are very different beast to the internal combustion engine vehicles we drive today, essentially composite machinery.
This diminished complexity lowers barriers to entry significantly for new entrants. Tesla is the perfect example. For a company barely 16 years old, it has a larger market capitalization than Ford, which literally invented modern motoring, and isn’t far behind General Motors, despite manufacturing fewer new vehicles by many orders of magnitude. While Tesla’s brand value is lowered by the missteps of its CEO and a couple of high-profile incidents, it’s demonstrated that disruptive technology is creating lucrative, scalable business models within the automotive space.
Just who traditional automakers will compete with in the future is hard to say. As building vehicles becomes much less complex, what’s to stop car brands becoming like Apple? A car company could essentially just become a brand, designing in Silicon Valley but outsourcing everything to China. What’s to say Apple or Samsung won’t make a vehicle? Google already has Waymo, after all. But it’s the onboard computer systems that will be the next battleground for auto supremacy. Software competence is increasingly becoming one of the most important differentiating factors for the industry, for various domain areas, including advanced driver-assistance systems, active safety, connectivity, and infotainment. And developments in related ecosystems like 5G in telecommunications will further accelerate this and contribute to industry growth.
Morgan Stanley predicts that in autonomous vehicles, 40% of the value of an automobile will come from hardware, 40% from software, and 20% from the content that streams into the vehicle. Other surveys indicate the quality of a car’s onboard technology accounts for as much as 50% of purchase decision-making. It is the onboard technology of a vehicle that will differentiate it against competitors. User friendliness and available features certainly contribute to this differentiation, but unlike a smartphone, which the average person upgrades every 2 years, one is likely to hold onto a vehicle for at least 7 years, making upgradability of tech prerequisite. In the near future, as driverless, or driverassisted vehicle become more common, how a vehicle entertains – how it creates a their time in transit to consume novel forms of media and services, or dedicate the freedup time to other personal activities – will encourage purchase decision. Auto brands’ differentiation in the future will be reliant on creating a unique brand experience. Most of the features available in cars today – GPS, connectivity, driver assistance, safety features – are essentially one and the same. Think about a sports car that could track a users’ heartbeat or adrenaline. Or how Tesla’s giant screen has Atari video games onboard to keep you entertained while charging the battery. Tech that keeps kids entertained for long journeys, beyond screens in the back of the seats. Everything you can order from home via a digital assistant, you will order from your car. These are the sorts of brand experience innovations traditional automakers need to be thinking about. In this context, deep greater relevance. With the sharing economy two trends converge. As the importance of private-car ownership declines, so the shared vehicle revolution grows in importance to auto manufacturers. According to McKinsey, up to one out of ten cars sold in 2030 could potentially be a shared vehicle, diversifying further the auto market towards on-demand mobility services and data-driven services. With the current utilization of cars being only 5%, an increase in the utilization of shared car services has the capacity to reduce world car sales by up to 50%.
Owning a self-driving vehicle that could essentially pay for itself – by driving those who need a lift around at night before arriving back on your driveway before work – may seem like science fiction, but is a reality auto brands are preparing for. Imagine Uber, without the Uber driver. A sort of urban diaspora will factor into this uptake. Consider that in 1970, just 30% of the population lived in urban areas, yet, by 2050, 66% of a much larger global population will live in cities and urbanized areas. Consider also Europe, as an example, where some 81 million people will be living in large urban areas by 2021, yet only 46 million of them will have a valid driver’s license. We’re approaching a world where there will be more people than ever, but fewer of them driving. Public transport can only cope so far. The incentive to own a car will be compounded by a reduction in the cost of ownership, offset by ride sharing. This is hugely disruptive to traditional revenue streams of auto brands. While these services may cause a decline of private vehicle sales, in theory, it could be offset by an increase in shared vehicles. If your car is driving people around all night, it seems likely it will need to be replaced more often due to far higher utilization and related wear and tear. The sorts of cars people in cities require, compared to those in rural areas, will be more distinct than one another not just in utility, but shareability. Plainly, the nature of the relationship between car brands and consumers is changing. They will move from product brands to service brands. But an often-overlooked element is that these mobility solutions mean the car brand will become a lot less visible, leading to issues around brand loyalty. If your only interaction with a car is someone else’s shared vehicle, booked through an app, brand takes a back seat to price and utility, availability, comfort, ease of use and reliability.
This is entirely different from the world of vehicle purchase decision-making where quality, reliability, brand perception, driving experience and total cost of ownership are principal considerations. With lower visibility, what can car brands do to encourage purchase when a younger consumer wants their own vehicle? First, the automotive industry must view the future needs of car consumers based on what a car ‘does’ not simply how it ‘drives.’ We are about to witness a paradigm shift from auto manufacturer to mobility as a service.
The Best Global Brands 2019 report shows that the fastest-rising brands and businesses are those that are firmly built around people’s needs and that constantly evolve to provide immediate, seamless and often simultaneous access to knowledge, relationships, experiences, products and services. Auto brands exemplify this notion. In many senses, brands are replacing sectors. Over the past few years, the sources of competitive advantage have shifted from the supply side – such as manufacturing and economies of scale – to the demand side, such as needs and attention. Therefore, while we have traditionally been accustomed to making sense of the business world through the lens of supply – ie sectors, industries, competences, product categories – today’s economic reality can only be understood through the lens of demand – ie needs, desires, experiences, benefits.
This will inevitably force traditional car manufacturers to compete on multiple fronts. As mentioned throughout this piece, the pace of innovation and competition to the auto industry comes mostly from outside of it. Uber and Amazon could be more of a threat to Nissan than Toyota. These shifting market positions in the evolving automotive and mobility industries will potentially lead to consolidation or new forms of partnerships among incumbent players. When you take away the steering wheel, consumers are much less likely to care what type of car they are in. A BMW Group survey last year found that 73% of people would change their car brand for a comparable one if that brand would allow them to bring their digital lives into their new car. The new battleground will be technology and experience. Strides have already been made to achieve this – for example Toyota’s self-driving vehicle collaboration with a motley line-up ranging from Amazon to Uber to Pizza Hut – though it is uncomfortable for traditional carmakers to do so.
Unsurprisingly, firms like Google and Apple, and Baidu in China, are way ahead of the in-car tech game. Uber and Lyft, and DiDi in China, dominate ride sharing. To maintain brand relevance and longevity – and the largest slice of the auto industry pie – viewing your competitors as collaborators that can embellish the car experience is essential to win over the next generation of buyers.