June 3, 2020

What’s Next for Automotive Industry Post-COVID?

The automotive industry is undergoing major transformations that will continue to unfold over the next 10 years:

  1. Attitudes about vehicle ownership are changing, especially among younger commuters in urban centers. Ride sharing and car sharing business models are emerging as an alternative to vehicle ownership and public transportation.  The emergence of these new business models and use cases are increasingly influencing vehicle design decisions.
  2. On the technological side, automation, connected car, and electrification trends are hitting the industry at once, requiring a near-complete redesign of core vehicle systems, massive upheavals in the automotive supply chain, and expansion of software development core competencies within traditional OEMs and SIs. Even before Covid-19 this was a lot for OEMs to manage, and planning the right investments and at the right time continues to be a massive challenge.

These transformations are being driven by megatrends that will not be derailed by Covid-19, although it could potentially slow or stunt some of these market changes. While some are predicting an exodus from the city, large-scale de-urbanization is unlikely and traffic problems will not just resolve themselves, suggesting ride sharing and automation trends will continue.  However, Covid-19 does have the potential to reshape aspects of the automotive market by accelerating trends, influencing design requirements, and driving development of new business models.

1. Software development dynamics

OEMs cannot allow their massive software development efforts to be derailed, but they may need to change their approach to deal with cash flow issues. OEMs with robust in-house systems integration and software capabilities (BMW, Audi, GM, Daimler, etc.) may find themselves burdened by the unexpected market downturn, and may pivot back to Tier 1s or other third parties to meet integration needs.  Or we may see more partnerships inked as companies look to pool software development resources.

2. Industry consolidation

Executing on the type of long term technology pivot that’s needed to be competitive in the future requires significant cash, and OEMs that went into the crisis with a strong balance sheet are likely to emerge with an even greater edge over those who were struggling.  Auto sales have been stronger than anticipated, but manufacturers can’t continue to survive in this environment indefinitely.  The impact will ultimately be determined by depth and breadth of the global economic downturn, but it would be surprising if every major OEM survives in its current form.

3. New business models in the software value chain

OEMs have increasingly made their preferences for SaaS (or other pay-as-you-go business models) known to their value chain. Unsurprisingly, OEMs want to pay vendors only for technology they sell, and only when they sell it.  These models limit risk and improve cash flow for OEMs, two highly desirable outcomes in this period of unprecedented risk.  Vendors that are set up to do business in this way will have an opportunity to further differentiate and capture share, while those that do not will likely be hit harder.

4. New customers

Assuming the pandemic has a lasting impact on perceptions of ride-sharing and public transportation (a big assumption), then new customers may be looking for vehicles in the next 1-2 years. People who have relied on public transportation and ride sharing may suddenly be in the market for affordable vehicles that are well-suited to urban environment – resulting in a marginal bump for the economy segment. At the same time, if we do see an exodus from major metro areas that could buoy a broader range of vehicle segments.

5. Demand for new features

Many OEMs have partnered or invested in ride and car sharing businesses, and some have clearly intent to design purpose-built vehicles for these applications. Covid-19 could well impact design decisions related to these vehicles, from interior lay outs to AC systems to IVI features.

6. Demand for electric vehicles

For a few weeks, residents of cities all over the world got to experience clean air. Interest in full and hybrid electric vehicles is likely to be reinforces, but lack of affordability and charging infrastructure will limit any real shifts in the U.S. market.

Related team members

Craig Belanger
Senior Partner & Co-Founder Boston
Rachel Eschle
Partner & Co-Founder Boston
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