The coming automotive revolution shifts focus onto services
Services, not the sale of vehicles, will soon deliver the bulk of profits in the automotive industry. Companies working in the auto industry need to change their businesses fast – and that includes financial services. We brought together some of the key players to explore the implications of the impending second automotive revolution, at a recent online conference.
In partnership with
Corporate Value Associates
Corporate Value Associates is a Global Strategy Boutique supporting market leaders in creating value through its customer-centric approach.
Services, not the sale of vehicles, will soon deliver the bulk of profits in the automotive industry. Companies working in the auto industry need to change their businesses fast – and that includes financial services. We brought together some of the key players to explore the implications of the impending second automotive revolution, at a recent online conference.
“Our principle is to make our work as profitable for the buyer as for the seller," declared Henry Ford, as he oversaw the birth of the first automotive revolution.
Ford and other pioneers of the auto industry harnessed advances in technology, design and manufacturing to make motor vehicles they could sell at a healthy profit to legions of increasingly affluent consumers. And the mobility provided by those vehicles richly enhanced the lives of their new owners.
Automotive manufacturers around the world have stuck to this business model for close to a century. They’ve sold around two billion cars using this playbook.
Now auto suppliers must find a new way to do business.
Why? Because a second automotive revolution is on the horizon.
Soon auto manufacturers won’t be able to earn sufficient profits just from the sales of their vehicles. Their retail margins are falling fast. To keep ahead of competitors, auto manufacturers must generate substantial revenues from services associated with their vehicles. This is a big shift. Some auto companies will struggle to make the transition to an industry dominated by mobility services while other more nimble firms will likely thrive.
“We’re moving to a services business model where the asset value of a vehicle becomes less important. Services and the activity of the consumer are where the real value will lie,” says Jose Ignacio Puente, CEO of Ulity, the mobility platform launched by Santander Consumer Finance last year.
Puente was one of the key speakers at the recent online conference hosted by the Qorus Mobility Community and consulting firm Corporate Value Associates (CVA). The conference identified several of the likely effects of the coming automotive revolution. It also examined how auto manufacturers, agents, dealers, resellers and the many firms that provide rentals, leasing, finance and insurance must change their businesses.
Four key questions dominated the conference.
1. When will the automotive industry switch to a services business model?
Many automotive original-equipment-manufacturers (OEMs) have already begun to prepare for the shift, says Amelia Bradley, Senior Manager of CVA’s Automobility Platform. Several firms, including Volkswagen, Stellantis and BMW, have announced plans to change their distribution models towards more direct engagement with customers.
Most conference participants expect the automotive industry to transition to a services business within two to five years. “It’s a massive market with lots of change,” emphasizes Puente.
2. What are the causes of the new automotive revolution?
Several powerful forces are driving the automotive revolution, according to Bradley. They include:
• Increased competition within the automotive industry spurred by recent entrants using integrated sales and manufacturing processes to drive down costs.
• Established auto manufacturers’ big investments in the production of electric vehicles putting further pressure on their profit margins.
• Increasingly tech-savvy consumers want seamless and integrated digital offerings from automotive suppliers, dealers and service providers.
• Growing popularity among consumers of electric vehicles as well as increasing demand for mobility services that charge according to vehicle usage.
• Volatile customer demand for new vehicles spurred by rising inflation and interest rates and fears of a looming economic recession.
3. How will the shift to services affect participants in the automotive industry?
The coming automotive revolution and the rise of mobility services will reshape the auto industry. Distribution channels, for example, will need to be overhauled to accommodate very different relations between auto manufacturers, suppliers, distributors and customers.
Auto manufacturers will move closer to the buyers of their vehicles and take more ownership of customer data and relations with those purchasers, says Ludger Reffgen, a former executive at Stellantis. This move will give OEMs more influence over the pricing, distribution and marketing of their products. “They’ll take more control over the whole value chain,” adds Reffgen.
CVA’s Bradley anticipates a broad division within the auto industry. Some of the big auto manufacturers are likely to integrate their offerings across the value chain, encompassing production, logistics, marketing, sales, aftersales, resales and services, to capitalize on their economies of scale. They’ll engage with customers through dedicated agents or direct salesforces.
Conversely, a few large dealers will broaden their businesses and work with a wider variety of manufacturers to retain and strengthen ties with their customers, says Bradley. They’ll incorporate products from these manufacturers into their own marketing, sales, aftersales, resales and services initiatives.
Both distribution models are likely to provide opportunities for financial services firms and other service providers.
Ulity’s Puente points out that Europe’s automotive markets are diverse. “Europe has a lot of fragmentation because of different regulations,” he notes. The impact of the coming automotive revolution on the vehicle market in Europe will be complex and varied.
4. How can incumbents prepare for the coming transition?
Companies currently providing services to the automotive industry need to ready themselves to capitalize on the transformation that’s beginning to reset the market.
Financial services firms, for example, will have to tailor their funding and insurance offerings to meet the new requirements of auto manufacturers and dealers. Both these groups will need to extend the scope of their operations. Their balance sheets and risk profiles will change substantially.
The delivery of financial services to the customers of manufacturers and dealers will also have to change.
Juan Manuel Pino Dronet, Head of Sales, Marketing and CSR at CA Auto Bank, expects financial services firms to pay greater attention to building relationships with consumers. “Banks have tended to focus on acquiring customers, but they’ve sometimes forgotten what to do with them; how they should communicate with them and serve them,” he says.
CA Auto Bank and its rental and leasing subsidiary Drivalia are rolling out a digital platform that is delivering financial services to consumers in 19 countries. “Our mission is to democratize green mobility. By 2030, around 80% of our new vehicle portfolio will be green; either fully electric or hybrid,” says Dronet. “The acquisition of a car will become more difficult for retail customers and mobility services will be key,” he adds.
CA Auto Bank is also adapting to meet the changing needs of automotive manufacturers, dealers and retailers in Europe. It is working with 45 automotive brands ranging from luxury marque makers and electric vehicle suppliers to motorcycle manufacturers and caravan vendors. “We provide our customers with a multi-country, multi-language, multi-currency and multi-device platform that is simple to use,” says Dronet.
Opportunities for service providers in the automotive industry will stretch beyond traditional finance. They include process and software integration, trade-cycle management and integrated mobility services.
Ulity, for example, is marketing mobility services to automotive manufacturers, transport operators, rental firms, leasing companies, fleet managers and car dealers. A subsidiary of financial services giant Santander, Ulity has already deployed its software-as-a-service (SaaS) solutions in eight countries in Europe.
“Our focus is to develop a capacity that's software-driven to enable flexible term pay-per-use options for any type of vehicle in any market,” says Puente.
The first automotive revolution brought mobility to consumers by giving them a chance to buy mass-produced vehicles. The oncoming second revolution will offer customers a host of convenient mobility services.
“If you look at the most successful companies in the world today, they're all centered on the customer; owning the customer relationship and providing value to the customer,” adds Puente.
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