Over the last century, the auto industry has put more than 1 billion vehicles on the world’s roadways—and continues to add more.
In 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.
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
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.
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: Over the last two decades, emerging markets have become increasingly important to the auto industry. And none has become more critical to the industry’s present and future than China. The lion’s share of global sales growth over the last decade has come not from traditional automotive markets (i.e., North America, Europe, and Japan), but from China and other emerging markets. Between 2004 and 2014, while sales in traditional markets flattened, car and truck sales have nearly tripled in China—from less than 8.5 million cars in 2004 to an estimated 25 million in 2014. This rapid growth has made China the world’s largest automotive market. (Sales in the North American market, now second to China, are projected to be 20 million in 2014, and in Europe, 19 million.) While China’s growth rate will certainly slow throughout the rest of the decade, IHS Automotive nonetheless projects annual sales of 30 million vehicles in China by 2020.
- Increasing regulations: Regulations are also transforming the auto industry—and the use of cars and trucks as well. Across the world, automotive regulations encompass everything from passive safety measures (e.g., seat belts and air bags) and crash protection (e.g., bumpers, crumple zones) to resource conservation and pollution reduction (e.g., fuel economy standards and emissions limitations). Before the end of the decade, automotive regulations in the developed world will likely expand their scope to address connected vehicles as well. The US National Highway Traffic Safety Administration (NHTSA), for example, is already considering making vehicle-to-vehicle communications mandatory.
- New digital technologies: Technological advancements—proceeding from vehicle connectivity to interactive safety systems and ultimately to self- driving cars—are also transforming the auto industry. Cars will integrate multiple technologies—many of them in the digital realm—and become components of a larger mobility network that unites all connected cars as well as the roadways on which they travel. This has already begun, since the majority of automotive advances in recent years have involved augmenting vehicles with electronic innovations. As a result, a high-end car today has about seven times more code than a Boeing 787. Connected cars, already hitting the road, are a certainty. Cars will transmit and receive millions of bits of data, communicating not only with other vehicles (V2V), but increasingly with intelligent roadway infrastructure as well (V2I).
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.