Future of automotive industry: Transformation into a software-driven company

The automotive industry is undergoing disruptive change: The needs and expectations of its clientele are changing massively, stricter regulatory requirements are creating new framework conditions, and drive and software technologies are changing rapidly.

In addition, new participants are entering the market and putting increasing pressure on traditional vehicle manufacturers.

To meet these challenges, automakers must master the transformation to an automotive software-driven company and combine it with their strengths in the hardware area.

After all, the digital customer experience will be the most important differentiating factor in the automotive industry of the future.

Three dimensions play a central role in this comprehensive transformation of the automotive industry: people, technology and business.

Lever for the future 1:

The people

Automotive companies and their employees have to embrace structural changes such as “software first” in their everyday work. This is not possible without a profound change in mentality.

Today: Over more than a hundred years, the automotive industry has perfected its products, its business model, and the processes derived from them. It has achieved an impressive optimization of traditional development and production processes.

But this has also resulted in conditions that are turning into weaknesses in the face of new challenges. For example, four-year and longer development cycles for new vehicle generations no longer fit in with the fast-moving demands of customers.

Highly specialized, global supply chains are proving to be too volatile in the face of crises.

Tomorrow: Every transformation is driven by people and their vision. To meet the challenges of transformation in the automotive industry, companies and their employees must break through rigid structures and achieve a change in mentality throughout the organization.

Structural changes also result in increasing complexity in some places – dealing with it is another challenge. The right “mindset” is always at the center.

Because without genuine acceptance among employees, far-reaching changes such as “software first” are doomed to failure.

Biggest opportunities

• To achieve the necessary adaptability, automotive manufacturers must build adaptive and agile structures. Existing silos must be broken down. The goal is to maintain existing strengths while increasing flexibility
• Thinking about development processes and product offerings from the customer’s perspective requires mastery of complex product interrelationships and thus systemic thinking. If this can be achieved, improvements can be integrated into the product more quickly
• A pure focus on figures and quarterly results will not meet the challenges of the automotive industry in the future. If thinking can be aligned with “purpose” or visions, the open mindset required for rapid adaptation will be promoted

Biggest risks

• Efficient structures are not necessarily adaptable structures. Adaptation also requires breaking away from the tried and true to some extent – if necessary even against internal resistance
• Iterative innovation cycles can promote silo formation. The challenge is to remain innovative and adaptable at the same time
• Frequent changes in the market today lead to the formation of task forces. In the current frequency, this leads to a high organizational and process-related need for change and thus hinders the ability to adapt quickly

Lever for the future 2: The technology

Automotive software will be at the center of the automotive customer experience in the future. Product and technology development must follow this paradigm shift.

Today: Until just under ten years ago, the focus in the automotive industry was primarily on optimizing the hardware product.

Combustion engines were becoming more powerful, smoother-running and more efficient, and driving dynamics were improving from vehicle generation to vehicle generation.

But one trend, which had already been emerging since the 1990s, gathered massive momentum: Increasingly, software has been playing a decisive role in the vehicle. Cars are highly digital and connected.

Customer expectations are now shaped by habits such as smartphone use.

Tomorrow: Software will be at the heart of the automotive industry in the future. Manufacturers and many of their suppliers will have to transform into an automotive software-driven company.

Highly digital vehicles will therefore pave the way for new mobility options such as assisted, highly automated or later autonomous driving.

More “digital” offerings in turn result in higher demands in terms of data and IT security, which require regular software updates over the entire lifetime of a vehicle.

Brand identities and differentiation from the competition will also be increasingly shaped by software in the automotive industry in the future.

Product and technology development must follow this approach.

Biggest opportunities

• “Software first” is the answer to meeting smartphone-driven customer expectations in the car as well. Digital services and updates will accompany the vehicle throughout its entire life cycle until the end of service.
• Connectivity and software centricity enable new offerings and revenue models in the automotive industry. They are an essential prerequisite for future developments such as autonomous driving
• Robust IT architectures designed for long-term use provide a solid basis for the requirements of the future

Biggest risks

• Connected vehicles have been on the market for a good ten years. Increased customer expectations and changing conditions are also affecting these existing vehicles – where changes and adaptations are no longer feasible or only at great expense
• Increased connectivity and digital transformation in the automotive industry also increases the risk of cyberattacks. Secure IT structures and a cybersecurity strategy for vehicles (“front–end”) and back–end systems are indispensable
• Connected cars place the highest demands on both functional (vehicle) safety and data security. The automotive industry faces the challenge of developing what is probably the most technically demanding product of all, consisting of hardware and software, and keeping it secure throughout its life cycle

Lever for the future 3:

The business

The future of the automotive industry is more uncertain than ever. Organizations must adapt to this ambiguity and design their business models and processes accordingly.

Today: Innovation management, supply chain optimization and sales increases – these were the main drivers in yesterday’s automotive business.

Business models and processes were clearly hardware-driven. If software now moves to the center, this will have a significant impact on strategies and business models.

However, it is also clear that it would be a big mistake to abandon the strengths developed over more than a hundred years.

Instead, these strengths must be combined with tailored responses to the new challenges.

Tomorrow: It has never been so difficult to predict what the car will look like in ten years’ time. Adaptability and the ability to respond quickly to changing market conditions and customer requirements will therefore be crucial.

For companies, this means above all putting their customers at the center of their strategy and business models.

Automotive manufacturers and their suppliers must streamline their processes and make them more efficient, open up new business areas, and enter into strategic partnerships with companies from other sectors.

Biggest opportunities

• A consistently digital and omnichannel-focused customer journey meets the expectations of customers and engages them in the channels they are already using
• The product experience when buying and using a car is still an emotional one – this is an important lever for addressing customers, but it must be realized consistently on all channels
• If implemented correctly, digital products and services as well as data-driven business and sales models offer many new opportunities

Biggest risks

• Sales structures and dealers are hardly prepared for many of the effects of disruption (such as ordering vehicles online). They need to be actively involved through training, but also by providing incentives or adapting revenue models
• There are many hurdles to overcome: Silos in the company often correspond to data silos – companies must break them down. Legal frameworks for the use of data differ between markets. Offers and business models must take this into account
• Data protection is key. Companies should use customer data for improvements, but not sell it. The customer is not the product

The “components” for transformation in the automotive industry: How the connected, software-centric car of tomorrow is taking shape

The change in framework conditions, customer behavior and customer expectations is swift and unstoppable.

Automakers that fail to respond to these developments in time are therefore in danger of being cut off from the decisive factors in value creation.

The giants of the software and services world such as Google and Apple want to disruptively change the automotive market and essentially take it over in the process. OEMs must position themselves to meet this challenge.

After all, they do not want to be degraded to suppliers of interchangeable hardware platforms.

But in order to achieve the necessary transformation to a software-driven company in the future, companies in the automotive industry face a number of challenges.

How can they break through rigid structures, place their customers at the center of their strategy and their business, and develop the appropriate mindset?

Five central fields of action support the automotive industry on its way into the future: