2017 strategyand digital auto report-v23-2017-09-07 · pdf filethe 2017 pwc’s...

Fast and furious: Why making money in the “roboconomy” is getting harder

The 2017 Strategy& Digital Auto Report

September 2017

www.strategyand.pwc.com

The 2017 PwC’s Strategy& Digital Auto Report

Key facts and main contents

The 2017 Strategy& Digital Auto Report: Insights for an industry in turmoil

2

Key facts

• Sixth annual Digital Auto Report, developed by Strategy&

• Global study, with a focus on the U.S., the E.U., China

• Quantitative market forecasts based on detailed research

• Interviews with key industry executives at OEMs and suppliers, leading academics, and industry analysts

Main contents

Digitization of the car: When can we expect the true ramp-up of connected, autonomous, and electric vehicles? What does it mean for the business?

Industry profit shifts: A perspective on the large-scale changes impacting the industry participants, including OEMs, suppliers, new alliances, new players

OEM success factors: What does it take to reshape the business to weather the upcoming changes? Who will be successful?

Impact from mobility: What are the latest dynamics in the fast-growing new mobility market? What is the market potential? Who will win or make money?


• Cars becoming autonomous, electric, and connected

• Large-scale emergence of mobility and digital services

• Omnichannel, digital commerce, and personalization• Customer insight/data analytics, predictive services• Marketplaces• Always-on service relationship

• IT transformation• ID, cybersecurity, payments• Industry 4.0 — horizontal and vertical integration

between suppliers and partners

Revolutionary phase:Disruptive change

Digital enterprise

Digital customer

experience

Digital products

and services

Primaryfocus of thisreport

2017 has confirmed that technology drives a sustained shift in automotive: autonomous/electric/connected and mobility services as #1 priority

3

Revolution of the automotive industry


Yes, mobility is a $2.2 trillion opportunity, but it will halve today’s players’ share of profits

4

• Yes, the future of mobility is a US$2.2 trillion opportunity — but ...– The digital auto revolution toward a shared/autonomous scenario is sparking intense competition, a margin squeeze, and high

capital expenditure– Competition, technology, and scale will drive down the average cost-per-kilometer for using shared transport to <50% of

today’s levels– That will reduce by 10% the amount that consumers spend on mobility by 2030– In the growing shared/autonomous/fleet-based segment of the market, OEMs, suppliers, and dealers in the U.S. and E.U. will

see their share of industry profits cut in half from 85% in today’s owner/driver/retail model– Automotive markets in the U.S. and E.U. will contract as a result, forcing consolidation of OEMs and suppliers

• All this will be propelled by unstoppable trends– By 2030, up to 37% of kilometers traveled will be done by shared and autonomous (and sometimes pooled) vehicles– Households buying premium vehicles in mature transport markets will spend ~$3,800 per annum on shared mobility– The full shared mobility market — shared fleets, vehicle pooling — will be worth about the same as today’s global e-commerce

market– In 2030, shared mobility will be hypercompetitive and regional/local, involving OEMs, digital tech firms, city councils, utilities,

transport authorities, logistics, and e-commerce fleets


Playing in this space requires a reconfiguration of OEMs’ strategies

5

• OEMs need to fix their strategies and align with shareholders– Shared mobility is barely profitable today, and full autonomy will come by 2027 at the earliest– Large amounts of high-risk capital are required to fund growth of autonomous fleets and customer acquisition– OEM boards need to choose between:

• (1) leaving the field to emerging “carriers” — fleet operators, mobility platform players — and becoming “thin specialists/design shops” and

• (2) making a big commitment to penetrating the mobility market, finding new investors, and running a new diversification strategy

– Whichever is chosen, OEMs will face a talent squeeze as software and Internet firms expand research and development by 15% year-on-year

The 2017 PwC's Strategy& Digital Auto Report 6

Agenda01 Autonomous & electric & connected: By when?02 Scale and impact of mobility … and growth of the roboconomy03 Industry profits reshaped by the roboconomy04 Imperatives for the OEM — organizing for success in services05 Outlook: Flying cars and tunnels on the horizon

The 2017 PwC's Strategy& Digital Auto Report

Autonomous & electric & connected: By when?

7

01


Electric to grow strongly beginning in 2025, autonomous level 4/5 to become mainstream after 2028, niches such as robotaxis to proliferate sooner

8

New car sales — global forecast

• Tech will allow level 4/5 adoption from 2028 on• Pull from launch of robotaxi models from 2025 on

100

80

60

40

20

0

33

63 68

23

45

52

7

20202017

49

14

~0

2025

0513

82

30

75

2030

12

28

11

1

• Strong legislative push from 2020 on• Price tipping point and sufficient charging

infrastructure ~2025• Potential prohibitions for combustion engines

from 2030 on

New car sales: Autonomous(U.S./E.U./China; in millions)

• Legal and customer pull for connected cars means 100% of new cars in U.S./E.U./China will be “connected” beginning ~2022

New car sales: Connected(U.S./E.U./China; in millions)

New car sales: Electric(U.S./E.U./China; in millions)

100

40

80

0

60

2065

8275

8275

56

2020 2025 20302017

63 68

Not connectedConnected

100

80

60

0

40

20

2

2025

29

47568

2017 2020

44

34

8

59

1 2

2030

31

61

14

82

63

HybridCombustion Electric

Note: Totals may not equal sums shown due to rounding. Source: PwC Autofacts; Strategy& analysis

Level 5 Level 1Level 3Level 4 Level 0Level 2


We forecast a population of ~470 million connected cars in the U.S., the E.U., and China by 2025, and ~80 million level 4/5 autonomous cars by 2030

9

Installed vehicle base and key assumptions(in millions; autonomous = levels 4 and 5)

Move to shared/autonomous after policy and technology breakthroughs

Growth of overall distance driven and relative share of vehicle-based mobility (China in particular)

Increased vehicle utilization and turnover due to sharing/pooling

Declining vehicle base due to sharing/pooling

Temporarily increasing overall new car sales


2017 2020 2025 2030Autonomous Electric Connected Autonomous Electric Connected Autonomous Electric Connected Autonomous Electric Connected

U.S. - 0.5 31.3 - 2.2 67.3 2.1 11.3 116.3 20.8 45.0 146.0

E.U. - 0.8 32.6 - 1.5 71.3 2.7 9.5 123.5 27.1 45.4 147.7

China - 1.2 27.8 - 4.0 99.2 2.4 20.5 230.9 33.1 73.7 299.0

Total - 2.5 91.7 - 7.6 237.7 7.3 41.2 470.7 81.0 164.0 592.7


2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

– 5G technology

Autonomous driving

• Infrastructure technology

• Vehicle technology

– Level 5 infrastructure technology

– Level 5 technology

– Operating models

– E-mobility

– E-hailing/car sharing– Robotaxis

– Laws and regulations• Legal (laws and regulations)

• Mobility services

Deep-dive autonomous driving: Mainstream ramp-up of level 5 autonomous driving is expected no earlier than 2027–28

10

Forecast time line for level 5 autonomous driving based on main elements

Battery electric vehicle price tipping point

Source: Strategy& analysis

Pilot projects L5

Pilot applications/exceptions Ramp-up/adaptation to national laws Series application/laws and regulations mandatory


L5 autonomous driving will be difficult to achieve with current tech, confirming need for infrastructure and significant tech innovation

11

Key algorithmic means to achieve L5 autonomous driving

Convolutionalneural

networks

• Convolutional neural networks (CNN)• Long short-term memory neural networks (LSTM)• Reinforcement learning• Pooling of results of mapping and neural network training• Societal acceptance of technology risks/opportunities

Driv

ing

mod

es

All other(e.g., country roads, natural disasters/very low visibility)

Inner-city driving

Predetermined city routes

Predetermined closed campus or suburban

Traffic jam

Infrastructure availability

Visible, consistent road infrastructure

Central traffic informationHigh-resolution maps

V2X (DSRC, 5G) communications with sufficient participants

None of the preceding

Rules engineHighway cruising

Predetermined highway routes

• Next-generation AI algorithms — general purpose intelligence/increased context awareness

• In-car AI training

and/or

• Sufficient tolerance level for accident frequency

• Driving limitations outside designated areas (effectively L4)



Mobility costs for reference vehicles

Deep-dive electrification: Between 2025 and 2030, the cost of battery electric vehicles will fall below the cost of combustion engines

12.

*ZEZ: zero-emission zone**Largely depending on charging power

ContentFull reload

2017 Range (km) Refuel time (min) Access to ZEZ*2030

TCO/mobility cost in €/100km Usability

Zero local emission and low noise

Assuming full tank

✘

o

✔

✔

o

ICE/MHEV

PHEV

BEV

FCEV

ICE/MHEV

Diesel/ gasoline

Electrical energy

Synfuel

Hydrogen

DepreciationFuel cost Other (tax, maintenance, insurance, and bonus)

55.5

23.8 33.4

9.0

12.1 69.3

41.2 5.3

49.96.8

52.29.0

39.5

35.4 7.9

3.5

55.933.4 12.110.4

7.2

8.9 50.7

8.7 10.7

6.5

11.9

36.9

35.4

54.835.8

54.534.8 12.17.7

64.417.5 34.8 12.1

56.2 600

700

700

400

700

5

5

5

5

30–360**

ICE = Internal combustion engineMHEV = Mild hybrid electric vehiclePHEV = Plug-in hybrid electric vehicleBEV = Battery electric vehicleFCEV = Fuel cell electric vehicle

Note: Totals may not equal sums shown due to rounding. Bonus of €5,000 (BEV/FCEV) and €3,000 (PHEV) included for 2017 Source: Strategy& analysis

Good performance Medium performance Weak performance


Scale and impact of mobility … and growth of the roboconomy

13

02


Mobility choices for consumers continue to expand and multiply fast

14

Overview of mobility landscapeActive mobility Passive mobility

Non-motorized Personal car Rental

Car sharing Ride hailing Ridesharing

Public trans-portationStation-based Free-floating Corporate P2P Taxi Private hire P2P

Description Using own muscular strength to move

Possession and usage of car

Renting a car for a day or longer; picked up and returned at fixed stations

Short-term ride;vehicles picked up and returned to specified parking spots

One-way rides; vehicles picked up and parked in area of operations

Company carpoolsaccessible to employees of one or more companies

Sharing of personal cars with others

Official taxi brokered tocustomer

Licensed limousines orvans

Offering rides according to customer demand

Person offering seats in his car to others on a personal trip

Local network of buses, rail, etc.

Driver n/a Vehicle possessor

Renting or authorized person

Registered customers

Registered customers

Employees of companies

Peers (private persons)

Licensed taxi driver

Licensed driver Usually self-employed unlicensed drivers

Private person Professionalemployees

Owner Private person Private person or company

Rental company Car-sharing company

Car-sharing company

Car-sharing company

Private person Taxi company Private hirecompany

Private persons(usually driver)

Private person Cities, municipalities

Customer interface

n/a n/a Website/app or rental stations

Website/app car-sharing company

Website/app car-sharing company

Administrator Website/app service provider

Website/app service provider

Website/app private hirecompany



Shops, website, apps, ticket machines

Examples Walking or bicycling

Private car orcompany car

Hertz, Sixt Flinkster, TeilAuto DriveNow, Car2go

AlphaCity Croove Mytaxi Blacklane, myDriver

Uber, Lyft, Ola BlaBlaCar, MiFaZ MVG, BVG, Metro

On-demand pooling(multiple persons per ride)UberPool BlaBlaCar Hailed shared

taxi or call-a-bus services

Supporting servicesIntegrated mobility Parking E-mobility

Examples FromAtoB, Mobility Map, Moovel, Citymapper ParkNow, Parkmobile, EasyPark, PayByPhone Chargepartner, ChargeNow, PlugSurfing



In the future, key areas of mobility services (fleet, operations, regulation, infrastructure) will be local; global plays are unlikely to remain

15

Mobility services will be mostly regional/localElement Max. scale/level Example

Customer interface

• Website• App

Global Apps from Car2go, DriveNow, Lyft, Uber

Regulation• Legal standards• Safety standards• Competition laws

National P2P ride-hailing restrictions in Germany

Fleet operations

• Vehicle cleaning/maintenance

• Drivers

Local Acquisition/hiring of drivers

Fleet ownership

• Cars• Vans

Super-regional

Large fleet ownerssuch as rentals, OEMs, captives

Mobility infrastructure

• Parking• Charging

Local Parking allowance for car sharing

Infrastructure• Municipalities• Administrations

Local Streets, smart infrastructure

1. Strong regulatory moves on national and/or city level

2. Various regulatory restrictions (e.g., for ride hailing)

3. Continued innovation of mobility services from multiple players (e.g., car sharing, ride sharing)

4. Strong competition among regional players for expansion to get customer access and gain market share

5. Multiple types of players: public transportation, utilities, logistics, municipalities, OEMs, digital tech players, etc.

6. Traffic reduction initiatives in cities and municipalities

7. Development of on-demand public transport services

8. Development of new mobility modes such as high-speed tunnels or “air solutions”

9. Convergence of mobility services due to spreading of autonomous driving

10. Battle of industries for the downstream value-add

Attempts at global plays will face challenges



Consequently, we expect a complex local competitive setup in each city, eventually converging in the autonomous future and driving down margins

16

Long-term development of mobility services

Rentals(e.g., car-sharing fleets)

Short to medium term FuturePersonal car(self-driven)

Personal car(autonomous)

Cities(e.g., on-demand public transport)

Car sharing• Station-based• Free-floating• Corporate• Peer-2-peer Shared autonomous

1. Individual2. Pooled

OEMs(e.g., mobility services)Utilities(e.g., own EV fleets)Tech players(e.g., forcing autonomous driving)Captives(e.g., corporate car sharing)

Ride hailing• Taxi• Private hire vehicles• Peer-2-peerRide sharingPublic transportation Public transportation



49%

26%

100%

40%

20%

80%

0%

60%

50%

30%

10%

90%

70%

2019182017 3029

15%

10%

27 282625232221 24

44%

37%

27

9%

2923 28212017 262524222018 19

10%

30

Shared autonomous will account for 25–37% of total person km driven in 2030; personally owned autonomous highest in Europe

17

Distribution of mobility types(in % of total person km ”road” driven)

Personally owned autonomous Shared autonomousPersonally owned driver-driven Shared driver-driven

55%

25%

2825

11%

9%

2620 3029272423222119182017

Main driver: urban pooled/shared level 4

or 5 robotaxis

Source: PwC Autofacts; Strategy& analysis


Hence, the vehicle base may decline by 25% in the E.U./U.S. and flatten out in China until 2030; new car sales will accelerate to create robotaxi fleets

18

Global mobility development Vehicle-based passenger travel

(in km trillions)New car registrations

(in millions)Vehicle base (in millions)

10

8

12

2

6

4

02025

11.7

9.5

6.1

2017

1.1

2020

3.0

1.6

2030

10.29.7

Shared autonomousPersonally owned driver-driven Personally owned autonomousShared driver-driven

400

0

200

600

300

500

100

19

2030

41629

556

11

560

356

20252017

531

2020

50

40

30

20

0

10

20302017

39.0

2020

36.6 10.6

45.9

2025

11.4

36.0

2.9

20.9

+

8

4

10

6

2

0

3.2

20252017

3.8

0.93.1 0.7

2020

3.95.5

8.6

2030

250

350

50

150

300

200

0

100

8

20302025

16

235

23127617

20202017

306

185

40

30

20

0

10

2030

2.6

2020

31.6

2017

35.7

15.3

11.1

6.8

35.6

2025

27.5


Comments• Increase in distance driven due to rising

population and growth of shared mobility services

• Decline of vehicle population due to higher utilization of shared and autonomous vehicles

• Car ownership is still important, so personally owned autonomous vehicles represent a large proportion

• Driven distances in China will pass indivi-dual levels of E.U. and U.S. around 2025

• Decline of vehicle population will happen later, as distance driven and motorization rate increase strongly

• Due to strong increase in shared mobility, vehicle sales may drop during the transformation, before higher turnover rates push sales


The value of shared mobility (“MaaS”) will reach ~US$1,500 billion in the U.S./E.U./China in 2030, growing at combined 24% p.a. from 2017 to 2030

19

Estimated MaaS market size development, U.S.(in US$ billions)

Estimated MaaS market size development, E.U.(in US$ billions)

Estimated MaaS market size development, China (in US$ billions)

47

2025

292

20302017

458

467

20302025

214

2017

25

2025

97

2030

564

2017

15

CAGR 2017–30

+19%

+25%

+32%

Source: Expert interviews; PwC Autofacts; Strategy& analysis

• Global vehicle-based passenger travel as key underlying driver

• Total (shared/traditional) price per distance traveled derivation based on historical household spending

• Price for shared mobility significantly decreasing due to – reduced vehicle-related costs

(efficiency, maintenance)– autonomous driving– intensification of sharing/pooling

Comments


Some OEMs may choose a broad diversification into mobility, while others may choose to refocus toward “thin specialist/design shop”

20

Potential value chain integration playsBuild and run infrastructure (e.g., charge, park, V2X)

Build cars Design cars Retail cars (where B2C still relevant)

Finance cars Operate local/ regional fleets

Create and operate digital services

Retail mobility and digital car services

Partial-own value chain Full-own value chain

PotentialOEM

ways to play

Whatother

players may do

Today’s OEMs

Fully integrated OEM + mobility provider (comparable to “aircraft + national airlines/carriers + operations”)

Specialist (“ARM of cars”)

OEM + wholesale operations (comparable to “aircraft OEM + fleet operations”)

Mobility service provider

Utilities/energy companies

Ride-hailing firmsRide hailing

Retail/logistics/transport

Local startups

Specialist or general-purpose marketplaces

Cities Cities

Specialized lease/finance companies



Key question: Should OEMs go asset heavy or asset light in mobility?

21

Value chain depths — asset heavy vs. asset light

Asset heavy Asset light

Car2go, DriveNow, ChargeNow, Tesla, Hertz, Amazon, DB

Mytaxi, ParkNow, Uber, Alibaba, Airbnb, Facebook

Offering scope

End-to-end delivery of owned product/service

Brokering of on-demand service/user-generated content

USP Availability, consistency, trust Choice, simplicity, price

Controlpoints Product; service delivery Customer insights and access;

supplier selectionDisruptionrisk

Loss of customer access to OTT providers

Direct buyer–supplier interaction; special interest portals

Business model Service fees, product sales Commission-based brokering (OTT),

marketplaces

Investment approach

Invest in R&D/asset buildup, optimize working capital à EBIT margins 5–15%

Invest in network/inventory growth, optimize user acquisition cost à EBIT margins 15–30%

• Two types of mobility business models: broker (asset light) vs. infrastructureprovider (asset heavy), each with potential competitive advantages (network synergies vs. entry barriers)

• Shareholders will demand a clear investment story that benchmarksagainst digital best practices

• Key question: Fleet financing — own exposure vs. partners vs. P2P?

Source: Expert interviews; PwC Autofacts; Strategy& analysis

Comments


Industry profits reshaped by the roboconomy

22

03


The roboconomy creates opportunity on three levels to earn money for OEMs by addressing major categories of typical household spend

23

Vehicle lease, finance, insurance, maintenance

$3,963

$1,532

$5,245

$5,211

$2,996$6,830

Vehicle purchase, new

$2,832

$3,618

Entertainment (excl. restaurants, hotels)

$14,391

Public and other transportation

Others

Healthcare

Food, apparel

$30,424

Housing, personal insurance, pensions

Gas

Furnishing and housekeeping supplies

$3,603

Vehicle purchase, used

2017 average Western “premium” household annual expenditures:

US$80,644

Fifth-screen ecosystem

services

Cross-modal

mobility services

Augmenting the car through services

• Add digital services directly associated with use of the car, incl. functionality as a service to increase loyalty, sell more cars, achieve higher customer lifetime value

• Comparables: Connected TV/fridge, smartphone• Becoming mainstream, quickly commoditizing • Often substituting legacy value pools

• Provide mobility (e.g., hailing, sharing, parking)• Comparables: Digital category services — Netflix

(entertain), Amazon (shop), WhatsApp (message)• New type of business, displacing or rebundling legacy

mobility spend• Accessible to new entrants and OEMs

• Move beyond individual categories and become a hub for services and commerce (fifth screen)

• Comparables: Amazon, Apple, Facebook• New digitally enabled entertainment/commerce/comfort• Puts new categories in reach of new entrants

2017 Western premium household expenditures (in US$)

Digital services opportunity categories(Gross addressable expenditure per household in US$)

Roboconomy digital services opportunities

Note: Totals may not equal sums shown due to rounding. Source: Destatis; DIW; Eurostat; Trading Economics; U.S. Bureau of Labor Statistics; Strategy& analysis

ca.$6,600

ca.$14,900

ca.$23,300

2017

ca.$5,400

ca.$13,400

ca.$29,700

2030


Cross-modal mobility services/MaaS represents the single biggest opportunity for auto OEMs — both top and bottom lines

24

OEM digital service opportunity, 2030 Western premium household; in US$

2030 addressable household spend (gross)

Relevant household spend (gross)

Value retained by OEMs (gross margin)

5–8% of new car valuein digital services

~ 30% of spend shifted to sharedmobility

~10% of spend occurring during mobility through digital

channel

$5,400

$29,700$13,400

$3,800 $3,000$300

$30–6010-20%

$30–901-3%

$110–1903-5%

Fifth-screen ecosystem services

Cross-modalmobility services

Augmenting the car through services

Source: AAA; eMarketer; expert interviews; Euromonitor; PwC Autofacts; Strategy& analysis


The resulting digital mobility services sector is a $2.2 trillion industry in 2030 — dwarfing today’s smartphone market, matching e-commerce market

25

Digital mobility services industry

437

291465

~2,300

Today’s e-commerce

market

Today’s smartphone

market

Today’s Apple App Store GMV

Today’s Spotify, Netflix,

Apple Music

2030 roboconomy

~2,200

Today’s roboconomy

Scale comparison — digital economy vs. roboconomy (in US$ billions)

158x 77x 5x 1x

Source: Bloomberg; company publications; eMarketer; IDC; Strategy& analysis

• The 2030 roboconomy is projected to be close to the size of today’s e-commerce market

• Roboconomy outgrows today’s smartphone market by a factor of 5, app store/on-demand media revenues by a factor of 75+

• Participants (including OEMs) need to create a new digital services business, which is in total 5x larger than current smartphone market

Comments


In a pure shared autonomous mobility scenario, households spend 20% less on mobility and profits shift drastically toward front-end and fleet players

26

270 13,410

1,0002,360

3,860

14,920

1,1102,490

3,960

2,830

4,260 1,470

1,790

2,93011,520

3,670

1,420

770

3,560

2,100

Distribution of Western premium household spend, 2030 (in US$)

Industry value added

Profit

1,000

100170

70340

260

1,085

170 180170

310220

90

5

140

520

1,090

80

290608301073

570

Today 2030 scenario Pure-play shared scenario

Industry distribution of household mobility spend in shared autonomous scenario

• In pure-play shared autonomous scenario, significant price decline overcompensates growth in household person-km

• In pure-play shared autonomous scenario, profit share of traditional manufacturing/retail of cars declines from 85% to <50%

• 2030 scenario assumes ~35% of total person km conducted in shared mobility

• Realized total profits are assumed to remain stable as a result of downward pressure from decreasing revenue, set off by new value from service value-add and reduced costs of development/production

Comments

Gas

Suppliers

MaaS OEM

Other (used vehicles, public transport) Lease, finance, insurance, maintenanceSource: Euromonitor; Eurostat; Frost & Sullivan; Gartner; HBR; HIS; National Automobile Dealers Association; NHTSA; OEM reports; Oxford Economics; PwC Autofacts; Technavio; Thomson Reuters; Strategy& analysis


The long-term control point in digital services will be AI-powered hubs connecting customers with personalized services

27

Strategic control nodes in the roboconomy?


• Likely future control point for the roboconomy: “Artificial intelligence brain” steering personalized and predictive use of digital services across multiple domains (e.g., mobility, home, health), supported by data insight

• Multiple global contenders to occupy control point — can OEMs play here?

Comments


Imperatives for the OEM — organizing for success in services

28

04


OEMs need to provide tightly coupled hardware and services to fulfill customer expectations and play successfully in the roboconomy

29

Customer perspective on mobility and services


• Mobility experience = hardware + software + services in a seamless, integrated, intuitive environment

• Monetization primarily through integrated experience value (not through individual services)

• Requires symbiosis between device (car) and services

Comments


Digital services will involve the buildup of hundreds and thousands of partners globally, including physical journeys and money flows

30

Ecosystem environment in the digital services cloud

Thousands of services in each market

Dozens of monetization business models

Hundreds of types of physical touch points

Tens of thousands of partners


Outlook• Exponential complexity for

OEMs• Today no OEM ready for

future opportunities at scale


Therefore, digital services are a radical departure from designing and selling cars — leading to tensions in OEMs planning to do both

31

Characteristics of traditional vs. digital services businessVehicle

businessDigital services

business

Portfolio Single category, 10 to 20 variants, numerous options

Many categories, need to be simple

Portfolio changes Low frequency (2 or 3 per year)Long lead times (3 to 5 years)

High frequency (<monthly)Short lead times (months)

Customers Dealers/workshops, few end customers in B2B End customers (direct interaction)

Frequency of interaction with customers

Monthly to yearly (sales, service, maintenance, accident)

Real time to weekly (sales, activation, usage, billing, etc.)

Channel mix Dominant: dealer/service partner Dominant: digital

Direct from end customer, instant reaction and modificationCustomer feedback Only via dealers, modification with

new release/face-lift

Frequent; bugs in services, access, etc.; solved in customer operations centerCustomer problems Infrequent; defects in product; solved

at the dealer


Outlook• Digital services business is

fundamentally different from vehicle business

• Need for a dedicated end-to-end operating model


The implied change for OEMs requires (1) a different way of doing R&D, (2) the buildup of a services business, (3) external innovation, and (4) talent

32

Capability implications for OEMs

Incubate new mobility business(es)

Create digital services innovation/ delivery/scale-up capability

Significantly expand strategic partnerships

Build direct-to-consumer relationship

Rearchitect internal innovation/R&D

Accelerate external innovation

Build ability to run end-to-end services

business

Access relevant talent

Key requirements to support aspirations Capability implications



Top 20 global R&D spenders2016 rank 2015 rank Company Geography Industry R&D spend (in US$ billion)

1 1 Volkswagen Germany Automotive 13.22 2 Samsung South Korea Computing and electronics 12.73 7 Amazon U.S. Software and Internet 12.54 6 Alphabet U.S. Software and Internet 12.35 3 Intel U.S. Computing and electronics 12.16 4 Microsoft U.S. Software and Internet 127 5 Roche Switzerland Healthcare 108 9 Novartis Switzerland Healthcare 9.59 10 Johnson & Johnson U.S. Healthcare 910 8 Toyota Japan Automotive 8.811 18 Apple U.S. Computing and electronics 8.112 11 Pfizer U.S. Healthcare 7.713 13 General Motors U.S. Automotive 7.514 14 Merck U.S. Healthcare 6.715 15 Ford U.S. Automotive 6.716 12 Daimler Germany Automotive 6.617 17 Cisco U.S. Computing and electronics 6.218 20 AstraZeneca Britain Healthcare 619 32 Bristol-Myers Squibb U.S. Healthcare 5.920 22 Oracle U.S. Software and Internet 5.8

Example R&D: Continue to outspend most other industries globally

33

OEMs’ R&D spending

OEM

• Increasing importance of innovative technologies drives increasing R&D spending

• Top OEMs have been among largest R&D spenders consistently for many years

Source: Bloomberg data; Capital IQ data; Strategy& 2016 Global Innovation 1000 study

Remarks


15%

0%

-10%

20%

10%

-15%

-5%

5%

Chemicals and energy

Aerospace and

defense

-12.2

Auto

-3.3

Telecom

-11.5

-4.0

Industrials

-2.8-1.8

OtherCon-sumer

0.7

-2.0

Computing and

electronics

15.4

Healthcare

3.6

Software and

Internet

This model is challenged: There will be a run on critical skills as software and Internet industries heavily increase R&D investments

34

War for talent — strong R&D among tech firmsChange in R&D spending by industry2015–2016

Source: Strategy& 2016 Global Innovation 1000 study

• Significant increase in R&D spend in software and Internet businesses —many of them cited among most innovative companies and active in automotive

• As a result, large share of young R&D talent joining new tech firms

• Auto companies reducing R&D spend

Remarks


... and creation of agile organizational structuresBusiness model focus on digital principles ...

Digital companies organize R&D quite differently — faster, cheaper

35

“Scale-up by design” by digital players

Note: TL = tribe leader, PO = product owner; guild works across tribesSource: Strategy& analysis

Small and autonomous teams with startup spirit/atmosphere

Interdisciplinary teams with clear product instead of functional focus

Fast go-live with minimum viable products —“Think it, build it, ship it, tweak it”

End-to-end responsibility of teams — from planning to development to operations

Extreme customer focus, internal as well as external

Deliberate, fast decision making — different for reversible and irreversible decisions

Amazon

Uber

Lyft

Google

Didi

Apple

Ola

PO PO PO PO

Squad Squad Squad Squad

Chapter

Chapter

TL

Tribe

Spotify model

Principles• Split of applications in

microservices which leverage standardized platforms

• Systematic use of a cloud architecture to ensure scalability by design

• Strong in-house capabilities (product owner, technical owner) and small, agile, and integrated teams with clear responsibility for their own releases

Tribe (e.g., back-end infrastructure)

Squad (e.g., radio experience)

Chapter (e.g., developers)

Guild (e.g., testing)


• Aligned incentive structure for founder/team and corporate

• Willingness for high payout• Balance independence and synergy

potential for parent company• No restriction of the startup even in

case of cannibalization• Minimization of consolidation

requirements• Deliberate choice of exit strategy

and time

• Focused working environment, no distraction by corporates

• Linking of founders with internal organization

• Right level of supervision —investor, not corporate, mind-set

• No overfunding in early phases —“$50,000 instead of $2 million”

• Support for follow-up funding —also externally, particularly round A

Rather than doing only R&D, scaling up new businesses becomes key

36

Lessons learned from scaling of innovations

Ideation and sourcing

• Best startups = “no lemons” • Internal ideas “with real potential”• Selection criteria — “no CEO pet

projects”• Talent “innovator employer brand”• Team commitment — “no return

ticket”

Acceleration Scale up

Typical “stall”



Outlook: Flying cars and tunnels on the horizon

37

05


The future may yet be very different as mobility takes new forms

38

Potential alternative future mobility options


Tunnels/tubesThe Boring Company

• Vision to shift traffic underground either by moving vehicles as fast as 200km/h on electric slides or by supporting Hyperloop (pneumatic high-speed tube) development

• Founded in 2016 by Elon Musk

• Objective to improve tunnel boring technology to increase speed of tunneling and reduce cost by >10 times

• Boring machine, tunnel, and car elevator tested at SpaceX headquarters in Hawthorne, California

• Interest from multiple cities in U.S. announced (e.g., Los Angeles, Chicago)

DronesVolocopter

• Want to provide all people with the opportunity to fly and improve urban mobility

• Founded in Germany in 2010, and prototyped VC1 as global first manned flight with an electric helicopter in October 2011

• Objective to develop an electric, five-seat flying taxi

• Funding partners include Daimler or Federal Ministry of Economics

• Test flight of first autonomous flying taxi in Dubai in 2017

Flying carsPAL-V

• Drive to offer people the most flexible form of mobility and the highest sense of freedom imaginable

• Strive to offer the best of both worlds — “fly-driving”

• Started in 2001, with the first flight of the proof-of-concept prototype in 2012

• Delivery of PAL-V Liberty as the first serial production flying car starting end of 2018

• Requires driver and pilot licenses


Get in touch!

39

Core team: 2017 Digital Car Report

Alex KosterPartner, PwC Strategy& Switzerland, Lead AuthorLead EMEA Digital Automotive

Felix KuhnertPartner, PwC GermanyGlobal Auto Consulting Industry Lead

Dietmar AhlemannPartner, PwC GermanyMobility and Digital Operating Model

Richard VierecklSenior Partner, PwC Strategy& GermanyLead EMEA Auto Consulting Industry

Jonas SeyfferthPrincipal, PwC Strategy& GermanyMobility and New Business Models

Marcus GlogerPartner, PwC Strategy& GermanyAutonomous Driving

Hartmut GüthnerPrincipal, PwC Strategy& GermanyAutonomous Driving

Steffen HoppePrincipal, PwC Strategy& GermanyMobility and Industry Trends

Thilo BühnenSenior Associate, PwC Strategy& SwitzerlandMobility and Industry Trends

Anne PohlmannManager, PwC Strategy& SwitzerlandMobility and Industry Trends

Christoph StürmerGlobal Lead Analyst, PwC GermanyAutofactsIndustry Insights and Trends

Dr. Jörn NeuhausenPrincipal, PwC Strategy& GermanyE-mobility

Michael KoflerConsultant, PwC GermanyAutofactsIndustry Insights and Trends

Further contributors



PwC’s Strategy& provides wide services — from strategy consulting, Experience Centers, analytics, and security to deep functional competence

40

PwC Strategy& digital automotive capabilities

Strategy consulting

“Classic” strategy consulting

Growth strategies, sales concepts, pricing, product road maps,

efficiency programs

Deep operational consulting automotive

Product costs, factory optimization, supply chain, etc.

Digital strategy Business models Connected Car,

ecosystem, data strategy, governance, transformation

PwC Experience Centers Functional implementation Analytics and cybersecurity

Strategic partner networks

Management consultingProcess development, organization, change

Technology consultingIT transformation, new

technologies

Tax, legal, compliance, audit

Analytics, artificial intelligence, machine

learning

Cybersecurity


The 2017 PwC's Strategy& Digital Auto Report 41

© 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www.strategyand.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. Disclaimer: This content is for general purposes only, and should not be used as a substitute for consultation with professional advisors.

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