Future Role of OEMs

Car

The landscape for OEMs in the automotive industry will most likely change in the upcoming decades as a result of the rise of alternative powertrains, autonomous driving and shared mobility models.

Firstly, the shift from combustion engines to alternative powertrains is pushing traditional manufacturers to rethink their product offerings. As a result, OEMs like Volkswagen have increased R&D costs considerably and are now among the top spenders on Research and development worldwide. [1][2] In the long run, the prevalence of electric vehicles could render most of traditional car manufacturers’ expertise less useful, making it crucial for them to heavily invest in research. This also encompasses strong partnerships with manufacturers of crucial components like batteries. Currently, China is dominating global battery production with almost 80% market share but production in Europe is expected to increase from 6% to 25% market share by 2025. [3] OEMs will have to focus their efforts on making compelling electric vehicles, and convince customers that their offerings are competitive compared to current industry leaders like Tesla. Since the traditional core competency of developing internal combustion engines is no longer relevant, other selling arguments increasingly come into focus. Since performance of cars is likely to move closer together, it might be of increasing relevance to leverage a high perceived brand value as a selling argument. Nevertheless, it is crucial for all manufacturers to stress their expertise in manufacturing high-tech electric cars.

Secondly, changing ownership models are likely to heavily alter the business model of OEMs. Traditionally, OEMs sell ownership rights of their vehicles to customers. However, in the future, the revenue stream will likely incur from mobility as a service fee. When the level of car ownership is going to shrink, naturally the number of cars sold to individuals decreases accordingly. As a result, manufacturers will need to look for alternative ways to monetize their business. In the near future, traditional car sales will certainly still be of high importance, especially in rural areas. Additional revenue in this business can be generated with complementary services. As an example, Tesla is currently offering a 199$ monthly subscription for enhanced self-driving capabilities. [4]

In addition, moving quickly in the growing market of mobility on demand and vehicle on demand is crucial in order to secure a strong market position early. For mobility on demand, leading interface providers have already built important competences and a brand that customers trust. It is thus desirable for OEMs to supply providers with their vehicles by offering fitting models at attractive conditions. For vehicle on demand, OEMs can similarly supply vehicle on demand providers with vehicle fleets. However, it is projected that the greatest value can be captured by the interface providers of vehicle on demand applications. It is thus most desirable for OEMs to become a vehicle on demand provider of their own, including an own interface and running on ground operations. Core competences are smooth operations on the ground as well as the according software to provide the customer interface. Since these are not necessarily core competences of OEMs, they face competition from big tech companies like Google as well as from mobility providers like Sixt or Miles. [5]

Thirdly, software is projected to heavily alter the automotive landscape in the near future, including entertainment, connectivity, but also autonomous driving software. Big Tech companies show increasing interest in entering the automotive market. While it might be that they merely act as suppliers to OEMs, it is also possible that they compete with traditional OEMs and capture a large share of the market value. This might either be in a way that big tech companies vertically integrate and become competitors for OEMs, or that big tech companies turn to becoming B2C providers, being supplied with the hardware by OEMs. [6] It is therefore crucial for OEMs to develop competitive software solutions with their vehicles.

On-board entertainment could be a great opportunity for recurring income, however this field is heavily contested by big players in the smartphone and app business. Many former opportunities for upselling (e.g. navigation) have been taken over by big tech companies offering free apps such as Google and Apple Maps. Other fields such as gaming, music and video are already saturated markets with dominant global players. Negotiating special conditions with service providers and offering services to the customer in bundles (just like phone carriers) might be an option here. Focusing on privacy might be another opportunity, since consumers are increasingly concerned with their personal data and who it is shared with. [7] OEMs could therefore focus on data privacy when offering their services. For example, ensuring reliable navigation while promising full data privacy could entice customers to pay additional fees instead of using a free service.

When talking about on-board software it is crucial for manufacturers to focus on improving their software experience in the first place. Apple and Google are currently offering very capable software solutions for cars that mirror a user’s phone interface onto the car entertainment console. [8][9] If the iOS and Android operating systems become a preferred choice in cars in the same way they are for phones, control over the car’s entertainment is largely taken out of the manufacturer's hands. It is therefore crucial for the OEMs to offer capable and user-friendly software in their cars. Tesla serves as a great example here, as their onboard software has become an important part of their product package. [10] In this regard, OEMs might want to treat their vehicles like smartphones: As consumers have become used to continuous (and mostly free) updates which improve their user experience over time, OEMs should consider doing the same.

All in all, it is important for Car OEMs to:

Buses

Intercity Buses

The bus market is a growing one and is forecasted to keep growing, although covid impacted the sales in 2020. [11] While the European market will remain rather constant, especially the Asia-Pacific market is forecasted to grow in the coming years. [12] This is therefore an interesting market for OEMs in the automotive industry. Daimler already has three brands in the market: Mercedes Benz Buses, Setra and BharatBenz. [13] Volkswagen manufactures buses via the brands Scania and MAN. [14] Those already operating in the bus market are well advised to stay in the market, while for OEMs like BMW a market entry in the contested bus market does not appear to be a very promising strategy.

When it comes to future focus points of intercity buses, high comfort and alternative powertrains are the most important. While increasing comfort is easy to implement, alternative powertrains still need research to be conducted and bring along infrastructural challenges. At Volkswagen, Scania wants to focus on electrification, however not offering electric buses yet. [15] MAN offers electric city buses, but does not yet have an electric intercity solution. [16] At Daimler, while Mercedes-Benz buses offers an electric city bus model [17], Setra shows no such efforts according to their website. [18] Overall, German OEMs are not yet capable of providing electric intercity bus transportation, while e.g. BYD offers electric intercity buses [19], also cooperating with major travel providers like FlixMobility. [20] Similarly, German OEMs lag behind when it comes to fuel cell technology. While international competition like Hyundai and Toyota start to roll out first fuel cell powered buses, German OEMs are still in the testing phase. [21] It is therefore crucial for German OEMs to conquer the market with emission free buses, either electric or fuel cell in order to keep up with the mostly Asian competition.

City Buses

Looking at electric city buses in the German market, Mercedes-Benz / Evobus is the only major player based in Germany, having the 2nd largest market share with 160 vehicles. Besides the Polish market leader Solaris (215 vehicles), relevant players are the Dutch manufacturer VDL (80 vehicles), Van Hool (73 vehicles) and the Chinese player BYD (22 vehicles). [22] This amounts to 676 vehicles and a share of electric city buses of 1.4% in the overall German city bus market. [23] Similarly, according to Bloomberg, there are about 300 electric buses in the USA and around 2.250 in Europe. Meanwhile, there are 421.000 electric buses in China, resulting in a market share of 18% in China. Thus, 99% of all electric buses are operated in China. [204] It is therefore little surprising that the world market leaders for electric buses come from China. While there are numerous Chinese manufacturers outperforming all other manufacturers worldwide in terms of electric bus sales , the two largest are Yutong with almost 16,000 sold electric buses and BYD with around 9,000 sold electric buses in 2020. [25] German manufacturers like Mercedes-Benz / Evobus and MAN are rather new to the electric bus market. However, the European is predicted to grow rapidly until 2025, also because of the discussed political EU regulations. [26] This offers an enormous opportunity for European bus manufacturers to establish a leading position in their growing home market, and potentially transferring this position to further national city bus markets that will most certainly be electrified in the future.

One issue in electrifying city bus fleets is the high purchasing price of electric buses. Although operating costs are lower, upfront costs are a burden for bus operators. A potential solution by the battery provider Proterra is the leasing of batteries. This lowers the initial costs for operators, and leasing payments are accepted because they are on the level that was previously paid for fuel. [27] If not already occurring, this might be interesting to copy for OEMs in a similar fashion, in order to attract operators and build a lasting relation.

Commercial Vehicles

Generally, in the automotive industry, four mega trends are on the rise and will play a big role in the future of automotive and commercial vehicles: urbanization, sustainability, individualization and digitalization [28]. As discussed in the previous sections of Commercial Vehicle Mobility, especially urbanization, sustainability and digitalization will contribute greatly in how the business landscape for CV OEMs will look in the future. In order to survive these trends, OEMs must therefore realize that “the real revolution lies in the intelligent combinations of these trends” [29]. In addition to increasing pressure for alternative powertrains to make CVs more future-proof in a sustainable, urban future, previously unknown forms of competition stemming from up-and-coming IT firms specializing in more and more niche markets and services serve as pressure to change the way in which business has been done in the past. [28] [29] Indeed, the business landscape is becoming more volatile and unpredictable — in an already cyclical and volatile market — and thus certainty in established business models is eroding. [29] [30]

The solution, according to Wells [29], is incremental business model evolution, which aims to gradually adopt innovative business models from newcomers to the scene into the prevailing ones. Here, the major incumbent OEMs have highly significant advantages compared to newcomers in the market, such as enormous financial and physical resources, technological capabilities, market understanding and a certain resilience to experiment with business models [30]. These advantages result in high barriers to entry for innovative business models and firms stemming from other markets. Further, incumbents are restrained by prevailing attitudes, existing capabilities, as well as the concern not to jeopardize their vast business entities [28]. This risk aversion is a powerful urge for OEMs not to change a successful formula; therefore, an incremental shift is needed. OEMs should therefore continue the already present gradual evolution towards a product-service system approach (and away from “shifting the metal”) in order to give way to the mounting pressure exacted by the changing market landscape as well as regulation. [29]

Others go further to say that the ultimate solution to the changing demands of the future is the cooperation between old and new. [31] According to Keith and MacDuffie, “neither auto nor tech companies can come up with winning mobility offerings on their own”. [31] This is therefore also the case for the CV industry [30]. New entrants have niche technological expertise and innovative ideas to offer, while incumbents have the aforementioned advantages of already being established in a complex, low-margin world of vehicle production. [29] [30] [31] Many seem to think that neither the newcomers nor the incumbents can master the increasingly complex needs of customers as well as changing regulations and standards on their own; the winning combination is thus cooperation.

[1] Volkswagen. (2021). The future at hand - annual report 2020. https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2021/volkswagen/Y_2020_e.pdf

[2] PwC. (2018). The global innovation 1000 study. https://www.strategyand.pwc.com/gx/en/insights/innovation1000.html

[3] Yu, A., & Sumangil, M. (2021, February 16). Top electric vehicle markets dominate lithium-ion battery capacity growth. S&P Global. https://www.spglobal.com/marketintelligence/en/news-insights/blog/top-electric-vehicle-markets-dominate-lithium-ion-battery-capacity-growth

[4] Lyons, K. (2021, July 17). Tesla Full Self Driving subscriptions are now available for $199 a month. The Verge. https://www.theverge.com/2021/7/17/22581394/tesla-full-self-driving-subscription-available-199-month-elon-musk

[5] Gartner. (2016, October 12). Scott Galloway and NYU Professor Arun Sundararajan: Auto Industry Disruptors [Video]. YouTube. https://www.youtube.com/watch?v=WFxvf1du4Ms

[6] Peters, S., Chun, J. H., & Lanza, G. (2015). Digitalization of automotive industry–scenarios for future manufacturing.

[7] Anant, V., Donchak, L., Kaplan, J., & Soller, H. (2020, April 27). The consumer-data opportunity and the privacy imperative. McKinsey & Company. https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/the-consumer-data-opportunity-and-the-privacy-imperative

[8] Android. (2021). Android Auto. https://www.android.com/intl/de_de/auto/

[9] Apple Inc. (2021). iOS CarPlay. https://www.apple.com/de/ios/carplay/

[10] Tesla. (2021). Software-version 10.0. https://www.tesla.com/de_DE/support/software-version-10-0

[11] MAN Zahlen und Fakten. Retrieved: December 14, 2021 from https://www.mantruckandbus.com/de/unternehmen/unser-unternehmen/zahlen-und-fakten.html

[12] Mordor Intelligence (2020). Bus Market - Growth, Trends, Covid-19 Impact, and Forecasts (2021 - 2026).

[13] Daimler Trucks & Buses. Retrieved: December 14, 2021 from https://www.daimler.com/konzern/geschaeftsfelder/daimler-trucks/https://www.daimler.com/konzern/geschaeftsfelder/daimler-trucks/

[14] VW brands and models. Retrieved: December 14, 2021 from https://www.volkswagenag.com/en/brands-and-models.html

[15] Scania. Sustainable Transport. Retrieved: December 14, 2021 fromhttps://www.scania.com/group/en/home/sustainability/sustainable-transport.html#

[16] MAN. Alternative Antriebe für Umsteiger. Retrieved: December 14, 2021 from https://www.man.eu/de/de/bus/der-man-lion_s-city/neue-antriebe.html

[17] Der eCitaro. Retrieved: December 11, 2021 from https://www.mercedes-benz-bus.com/de_DE/models/ecitaro.html

[18] Setra. Unsere Fahrzeuge. Retrieved: December 14, 2021 from https://www.setra-bus.com/de_DE/home.html

[19] BYD. Bus & Coach. Retrieved: December 14, 2021 from https://www.bydeurope.com/pdp-bus-coach

[20] Schreiber R., (2018). Im BYD von Mannheim nach Frankfurt. Retrieved: December 14, 2021 from https://www.eurotransport.de/artikel/flixbus-startet-elektrobus-betrieb-im-byd-von-mannheim-nach-frankfurt-10486570.html

[21] Schmitt T., (2021). Kleiner Boom bei Wasserstoff-Bussen – Deutsche Hersteller außen vor. Retrieved: December 14, 2021 from https://www.automobil-industrie.vogel.de/kleiner-boom-bei-wasserstoff-bussen-deutsche-hersteller-aussen-vor-a-1036141/

[22] Autonomous Driving. Retrieved: December 11, 2021 from https://en.yutong.com/technology/autonomous-driving/

[23] Zajonz, D., (2021) Elektrobusse kommen ins Rollen. Retrieved: December 13, 2021 from https://www.tagesschau.de/wirtschaft/elektrobusse-103.html

[24] 61.044 neue E-Busse in China. Retrieved: December 13, 2021 from https://omnibus.news/61-044-neue-e-busse-in-china

[25] Kane, M., (2021) There Is One Company That Sells More EV Buses Than BYD: Yutong. Retrieved: December 13, 2021 from https://insideevs.com/news/481987/ev-buses-sales-2020-china-byd-yutong/

[26] Bloomberg, N. E. F. (2021). Electric Vehicle Outlook 2021

[27] Financing EV Fleets with Proterra Battery Leasing Program (2019). Retrieved: December 14, 2021 from https://www.proterra.com/financing-ev-fleets-with-proterra-battery-leasing-program/

[28] Bormann, R., Fink, P., Holzapfel, H., Rammler, S., Sauter-Servaes, T., Tiemann, H., Waschke, T. & Weirauch, B. (2018). The future of the German automotive industry: transformation by disaster or by design?.

[29] Wells, P. (2015). New Business Models and the Automotive Industry. 10.1002/9781118802366.ch18.

[30] Renschler, A. (2020). The commercial vehicle industry at a glance. Munich.

[31] Keith, D. R. & MacDuffie, J. P. (2020). Why ‘Autos Plus Tech’ Is the Best Path for Automated Vehicles. MIT Sloan Management Review.