Over the last century, the auto industry has put more than 1 billion vehicles on the world’s roadways—and continues to add more. Over the last five decades, the industry has averaged sales growth of 3% per year—double the growth of the world’s population over that period.
Yet the automobile industry is undergoing a dramatic transformation. Sales in what have traditionally been the industry’s strongest markets have leveled off in recent decades, but they continue to grow rapidly in emerging markets, especially China.
Governments and consumers are stepping up pressure to put more sustainable (i.e., alternative-fuel) vehicles on the road. And the integration of innovative technologies into new vehicles is transforming automobiles into digital platforms. Even the concept of a car—long seen as a romantic symbol of individual freedom, independent mobility, and personal expression—may be changing.
In October 2014, McKinsey & Company published “A Road Map to the Future for the Auto Industry,” which examines current drivers of change in the automotive industry, suggests new directions in which these drivers may be pushing the industry, and describes some of the challenges the industry will face as it transforms itself and its products.
McKinsey focuses on three drivers in particular that are exercising a transformative influence: globalization and rising competition (particularly from China); increased government oversight (worldwide); and revolutionary technological advances.2
3 KEY FINDINGS
- The growing presence of China, increased regulatory pressure, and the incorporation of new digital technologies are dramatically transforming the auto—and the auto industry.
- The auto industry faces the challenge of new competitors from China, other emerging economies, and the tech industry.
- Technological advances will make driving safer and clear the way for the advent of autonomous, self-driving, crash- resistant cars.
3 DRIVERS OF CHANGE IN THE AUTO INDUSTRY
Automobiles and the auto industry are shaped by the interplay of a complex array of forces. Among the most powerful of these forces today are soaring demand and the emergence of auto manufacturers in China; the variety of national, state, and local regulations imposed on motor vehicles and the auto industry; and the development and integration of digital technologies in the automotive space.
- Automotive growth in China
- Increasing regulations
- New digital technologies
3 OUTCOMES: WHAT’S COMING AROUND THE CORNER
The transformation of the auto industry is likely to lead to any or all of the following outcomes:
- New competitors. Traditional leaders in the auto industry will face new competition, not only from an increasingly global auto industry, but from new players as well. The exponentially growing importance of digital, for example, will bring in new competitors from outside the industry who are well-versed in digital technologies. Disruptive technologies will allow smaller companies and non-automotive companies to leapfrog ahead of established automotive leaders whose competence lies in more traditional technologies.
- Talent shift. Digital and software-driven innovation may begin to dominate automotive research and engineering. As a result, talent may increasingly be centered in high-tech hubs— such places as Silicon Valley, Bangalore, and Tel Aviv. The auto industry may find it challenging to attract the talent needed to stay on top of digitally driven innovation.
- Safer and more efficient travel. As cars and roadways become intelligent and interactive, safety and the efficient use of roadways should both improve. V2V and V2I communication will optimize traffic flow, easing congestion and reducing commute times. And these communication systems, coupled with improved crash-avoidance technologies, should result in safer rides for all travelers.
3 BUSINESS IMPLICATIONS
- The transformation of the auto industry will open up new opportunities for automakers to go beyond traditional industry competencies. Some automakers, for example, are already exploring the development of alternative fuels and/ or investment in wind farms to generate power for EVs— developments that would help offset overall vehicle emissions by enhancing the viability and appeal of EVs.15
- The Chinese auto industry’s desire to expand its international presence could work to the advantage of established auto manufacturers in World 1 economies. Entering into joint ventures or partnerships with international automakers would afford Chinese companies greater access to international markets, and could also provide World 1 companies with increased access to the enormous Chinese auto market.
- China’s emergence as both the top consumer market and top production market for vehicles will be a major disruptor for the global auto industry. As noted above, automakers everywhere will need to cater more to Chinese drivers’ tastes, especially at the high end. And as the world’s leading production center, China could become a source of technical innovations that spread to other vehicle markets. Depending on the quality of Chinese vehicles, established OEMs everywhere could face disruptive competition.