Within the past several months I:
- Participated in a seminar whereat one of the speakers discussed the various advances in powertrain technology that would permit greater variation in vehicle design and production
- Participated in a seminar that was focused on the growth of the A- and B-segments in the U.S. market
- Finished a study on the new “coach builders,” manufacturers that are offering high-end vehicles that start where traditional luxury builders end (e.g., producers of vehicles that start at $100,000).
What do all of these have in common? Each of them points to the fact that the traditional, relatively stable automotive market as we have known it is becoming a much more complicated place.
There are various issues driving the fragmentation of the traditional auto market. For one thing, there’s industry globalization. The rapid growth of the Asian region has forced suppliers and OEMs to scramble as they attempt to participate in this burgeoning market. While some of the growth will be to support lower cost parts production for shipment back to traditional automotive centers like North America, most of it will be for vehicles designed for and produced in Asia. This will significantly increase the number of vehicle variants offered by the OEMs (in order to appeal to regional differences) and strain already limited resources to keep up with this new global complexity. This will force OEMs and suppliers to become truly global players as they begin to participate in all key regions of the world.
Then there are the issues of affordability and globally dense population clusters. The growth in the A- and B-segments is going to be large during the next few years. While there will be some growth in traditional markets, such as North America and Europe, the most significant areas for this segment are in developing markets such as India and China. The A- B-segments represent not only cars that have the affordability for first-time buyers, they are designed for dense urban centers. Given the price constraints (most target pricing is under $10,000 per vehicle) and the need to appeal to various regional tastes, this segment should experience the most innovation over the next 10 years.
Meanwhile, the Echo Boomer demographic will drive more vehicle variation in North America. These are the children of the Baby Boomers. They are/will be looking for their first new car, just like their parents were 35 to 40 years ago. They will want affordable, economical transportation, given their stage of life. This is the market that the automakers are gearing up to serve, as they turn their attention beyond the Baby Boomers.
At the other end of the spectrum from the A- and B-segment is the Prestige automotive segment. These are vehicles that start where traditional OEMs leave off. While historically dominated by niche OEM producers like Aston Martin and Ferrari, given all the developments in vehicle design and powertrain, numerous micro niche players are beginning to emerge. Many of them are on the West Coast and they offer high-end buyers the ability to have truly customized vehicles suited specifically to their personal tastes.
Any doubt that a focus on environmentally friendly vehicles is of growing importance to consumers should be gone by now. Regardless of which side you come down on in the global warming debate, fuel efficiency, low emissions, and recyclability are all becoming more important in vehicle design and production. Like so many other areas where Toyota is ahead of most OEMs, that manufacturer realized several years ago that aligning themselves with green would be a competitive advantage and so they were one of the first to aggressively market hybrids. Many other OEMs are getting serious about getting on the green bandwagon and several of the niche players referenced earlier plan on incorporating innovative green approaches in their vehicles.
And finally, consumers will continue to want to expand electronic usage in vehicles. This merging of home, office, and transportation electronic usage will drive vehicles to more of a “plug-and-play” architecture, where the consumer can enjoy seamless usage of their electronic products.
So what does this mean to the automotive OEM’s and suppliers?
- Centers of Vehicle Design Tilt East. Most of the smaller car segment is going to be designed in Asia. Some predictions are in excess of 50% of car design globally will originate in Asia within 10 years. This will require suppliers to have robust engineering and technical centers somewhere in Asia in order to compete.
- Successful Business Models will Become More Flexible. All of this growing complexity and rapid change will require OEMs and suppliers to reduce their fixed cost dependency and significantly enhance their ability to move with market changes. Less bricks and mortar, for example, and more contract manufacturing will be one key success factor. Identifying critical elements of your value proposition that you need to control is another. Many companies will address these industry demands through more strategic alliances.
- More Rapid Commonization of Parts. The increasing fragmentation of the marketplace will force OEMs and suppliers to think more in terms of modular design where they can mix and match various elements to create differentiated product. This will be particularly important for suppliers as they deal with multiple traditional OEMs and emerging niche players.
- Huge Pressure on Program Launch Capability. Last but not least, program launch ability will be a key determinant of future success. With shorter product lifecycles and greater vehicle complexity, companies that do not address this issue will find it increasingly difficult to compete.