Here in the UK, those of us of a certain age remember a TV sketch about the English class system. “I look up to him” said the fedora-hatted middle class Ronnie Barker, eyes raised towards the bowler-wearing city gent to his right. Then, turning to the flat-capped working man to his left, “but I look down on him.” The sketch pokes fun at an England that no longer exists, but it’s a perfect analogy for today’s auto industry.
In the middle are the vehicle manufacturers, making decent returns in good years. They lean on the generally less profitable Tier 1 suppliers which, according to consultancy Berylls, in 2019 (the last representative year before the pandemic) achieved averaged global margins of 6%. In Germany it was just 2.5%. Numbers for 2021 are clearly atypical, but the basic relationship is retained: 11% for suppliers v 13% for vehicle manufacturers, according to AlixPartners’ Global Automotive Outlook published in June 2022.
They both look up to the ‘Tech’ companies where, according to CSI Market, internet and social media firms enjoy an average net margin of more than 60%. Valuation multiples in this sector are also higher: 44 for online services, 31 for software, compared with a modest 19.8 for automotive (including trucks), according to valuation specialist Equidam. What’s the secret source?
For an answer, many analysts point to Apple, the world’s first trillion dollar company, which reached the podium through its exceptional expertise in developing and marketing a synergistic ecosystem of trusted hardware, software and services that together provide benefits that many consumers are happy to pay handsomely for. Can the car industry transform itself into a provider of hardware platforms running trusted, monetised services? Recent announcements suggest a new generation of visionary auto industry leader is going to try very hard to prove it can.
Cloud-based services
“An increasing number of our auto industry customers are developing ambitious plans for a different type of customer relationship that launches exciting new revenue opportunities for them,” states Heiko Wenczel, Director of industry management with Epic Games and head of the company’s Detroit Laboratory. “None of us have a fully formed picture of what the end result will look like, but we have a clear understanding of the opportunities, so the first steps are clear.”
The vehicle manufacturer most open about these opportunities is Stellantis, owner of 14 vehicle brands and recently crowned Europe’s top selling automaker. At its impressive CES press conference, Chief Executive Carlos Tavares announced that to facilitate this digital journey, by 2024 the group will be training more than 5,000 developers and software engineers to ‘accelerate its transformation into a data-driven enterprise in the cloud. He put some very large numbers on their ambition for rapid growth in revenue from software enabled products and services.
“At this early stage, it’s all about enabling the vision,” states Wenczel. “Success will ultimately be driven by the quality of the services and how they are offered and priced. Right now, our task is to put in place the technology that enables this by providing the flexibility to try different services and models without costly hardware change.” Listen to the vehicle manufacturers and there seems to be near-universal agreement that this means a pipeline into the vehicle from the cloud, with impressive software-driven in-vehicle user interfaces that can be updated over-the-air to keep existing vehicles aligned with evolving strategies and offerings.
The main area where strategies currently diverge is equivalent to the different approaches represented by iOS and Android. Vehicle manufacturers must choose if they want a closed ecosystem approach with tight controls or if they are going to offer a more open system, managing the platform and defining edge parameters but enabling developers to freely create within these guidelines. Both roadmaps have been described by major brands setting out their vision.
Controlling customer relationships
It would be wrong to just see this transformation in revenue streams as a move into digital services. It’s also a solution to much greater challenges in the industry.
Today’s vehicle manufacturers have a one-hit profit opportunity. They sell the car, make their money on the metal and the options it carries, then have a trickle of generally high margin but low volume income from their ageing fleet needing replacement parts. Once the vehicle has left the showroom, the customer relationship is owned by the dealer and the major profits are made by the dealer. There may be an on-going relationship through the finance package, but even if it carries the vehicle brand and a monthly payment, the reality is that it’s a sale made at the time the vehicle is purchased.
Can the car industry transform itself into a provider of hardware platforms running trusted, monetised services?
Digital allows vehicle manufacturers to win back the customer relationship and to extend it much deeper into the vehicle’s life. As the business of dealers is transformed by the growing number of electric vehicles, which need substantially less time in their workshops, and by vehicle manufacturers developing a digital sales journey that they control, a whole-life, seamless customer relationship through the cloud becomes both more realistic and an important strategy for flipping challenges into opportunities.
To those who know the online games sector, it’s no surprise that the best companies there are transferring their skills and technology into the auto sector. Wenczel’s employer, Epic Games, is the company behind Fortnite (one of the world’s biggest games) and is a well-established partner for most of the world’s vehicle manufacturers. While many of those relationships deliver real time visualisation systems for styling, engineering, sales and marketing, an increasing number are to provide games-quality graphics in the car. But that’s selling them short.
“We have clients developing astonishingly impressive HMI (Human Machine Interfaces) using our Unreal Engine platform, but being more than cautious about revealing their next-step strategies,” he reveals. “When you map the capability of a software platform like ours against the digital journey, you see why: they have found opportunities to bypass costly and time consuming traditional development and step directly into a proven platform that ensures the long-term power and flexibility they need to enable their digital journey.”
So it isn’t just about the fabulous graphics that show exactly how your SUV is cleverly moving its wheels over every rock as you climb the Rockies, or sensitively indicates those hazards that the active safety systems believe you’ve missed. It’s about providing the vehicle manufacturer with access to proven, totally scalable multi-user systems, with secure, highly robust real-time data streaming, established monetisation techniques built on decades of learning, and an impressive ecosystem of independent expert developers of third party applications.
Wenczel believes the goal is increasingly for each end customer to have an account with the vehicle manufacturer, covering everything from finance, insurance and servicing to the type of apps found on a mobile phone. These will be managed through the vehicle HMI to deliver the brand experience digitally via the cloud.
Tavares summarised the starting point nicely when he stated that digital cockpits are one of the key strategic focusses for Stellantis, delivering as many great immersive experiences as possible.
“People talk about electric vehicles as the major transformation of our lifetimes,” concludes Epic’s Wenczel. “I believe that’s only part of it. Car businesses becoming cloud driven will have an equally transformative impact on our industry,” he states. “That also provides an entry point to something even more exciting: the metaverse.” But that’s another interview.
About the author: Richard Gotch has spent 30 fascinating years providing communications consultancy for many of the world’s largest First Tier technology suppliers. Today he is also non-executive deputy chairman of FISITA, the global mobility engineering association
