Strict regulatory standards are putting the focus on powertrain optimization, while increasingly tech-savvy customers demand new and innovative services and mobile apps that plug seamlessly into ubiquitously connected solutions. According to the latest annual global survey conducted by KPMG, the automotive sector will need to achieve a fine balance between its traditional product and technology-driven past and its potentially ubiquitously connected consumer lifecycle-centric future. As this year’s survey findings demonstrate, the industry seems to be positioned at the halfway point. The Global Automotive Executive Survey is KPMG International’s annual assessment of the current state and future prospects of the worldwide automotive industry. In this year’s survey, KPMG researchers interviewed 200 senior executives from the world’s leading automotive companies, including automakers, suppliers, dealers, financial services providers, rental companies, and mobility solution providers. Two hundred automotive executives participated, over half of them business unit heads or higher. The respondents come from all parts of the automotive value chain including vehicle manufacturers; Tier 1, 2, and 3 suppliers; dealers, financial services providers, and mobility service providers (including auto rental and car sharing companies). Thirty-seven per cent of the executives are based across Western and Eastern Europe, with 13% in North America, 13% in South America, and 13% in China. Over two-thirds of all participants represent companies with annual revenues greater than US$1 billion. Nearly 40% of all respondents are from companies with annual revenues of more than US$10 billion. Respondents to this year’s survey believe their agenda is dominated by traditional trends such as growth in emerging markets, optimizing the internal combustion engine (ICE), standardized platforms, and rationalized production. Newer, industry-changing developments such as self-driving cars, connectivity, urban vehicle design, and mobility services are still considered relatively less important. The survey results show that auto players are adapting to regulatory restrictions on CO2 emissions, and are aware of the significant impact of cost pressures and portfolio shifts. However, in the face of growing environmental pressures, it is surprising that battery electric mobility and fuel cell electric mobility have significantly decreased in importance since the corresponding 2013 survey. KPMG says the respondents may be underestimating the effect on their business models of changing mobility needs. A majority seems to underplay the importance of connected car technologies and automated driving, even though these developments are at an advanced stage and receiving plenty of industry and media attention.
Understanding What Consumers Want Concerns over vehicle quality have risen following several high-profile product recalls, with more and more customers now seeking vehicles with longer lifespans. OEMs have to maintain a careful balance between product quality and cost optimization. The intense cost pressures on suppliers in recent years, combined with the increased use of platform strategies, have raised the risk of quality problems. Markets of all levels of maturity are seeing growing demand for state-of the-art technology in vehicles. The relatively low priority assigned to connectivity does not resonate with the growing consumer expectation of ubiquitous access to mobile online services. The high emphasis on fuel efficiency and enhanced vehicle lifespan shows the rising prevalence of the idea of total cost of ownership (TCO) for private consumers. Survey respondents believe that consumers still have a strong desire for comfort, which is slightly at odds with the quest for better mileage, as more energy is needed to power the associated technology. In building more efficient vehicles, automakers will have to focus not just on the powertrain, but also on the communications infrastructure. A further consequence of connected driving is concern over safety, as travellers cede control of the vehicle. Finally, vehicle styling and exterior has risen sharply in importance between 2013 and 2015. Regardless of what is on the inside, customers still want to buy from trusted brands that reflect their own self-image. Auto executives believe that consumers are still fixated on traditional product issues like fuel efficiency, safety, and comfort. One factor that has leapt in importance is enhanced vehicle lifespan, which was ranked just eighth in 2013, but is now the second most important factor influencing the buying decision. Although both rank relatively low on consumers’ wish lists, there is still a preference for plug-in rather than vehicle-bound Internet connectivity solutions. The use of alternative fuel technologies remains a lower priority, suggesting strongly that, like last year’s survey, the consumer purchase decision is driven more by the wallet than the conscience. The good news for the industry is that all segments are predicted to increase in volume. Within the next two years, global vehicle sales will pass the magical 100 million mark and continue to rise until the end of this decade, on the back of increasing demand in emerging markets like China. Yet, the majority of auto executives cling to the expectation of growth of small and basic vehicles – so-called budget cars – based upon a historical preference for such automobiles in developing countries. Formal forecasts for light vehicle sales present a different picture compared to that of many of the executives involved in KPMG’s survey, with small and basic cars not predicted to increase their market share, which is set to remain at just 6%. Conversely, the compact-sized, pick-up, SUV, and sport segments are forecast to outpace overall market growth rates up to 2020, with compact-sized being the real success story. Almost one-third of all vehicles sold worldwide are expected to come from this segment in 2020. This puts the spotlight on recent efforts by global OEMs to invest in small budget cars in the BRICS (the acronym for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa) and other high-growth territories, with a question mark hanging over the long-term sales volume and margin potential for this segment. Most auto executives from the TRIAD (Japan, Western Europe, and North America) markets anticipate a significant drop in sales of larger cars, which could signal the end of an era. BRICS executives are particularly optimistic, with a majority expecting significant growth in all car segments, although sales of small, basic, and medium-sized cars are predicted to increase faster than larger segments like limousines, pick-ups, and SUVs. KPMG says the expected fall in sales of larger vehicles is likely due to the stricter environmental restrictions than to any decline in popularity of bigger cars. However, buyers are likely to switch back as oil prices drop further. More efficient powertrains, like hybrids, could also significantly reduce the total cost of ownership. North American respondents’ views are notable and surprising, with 92% forecasting an increased demand for small and basic cars. In China, on the other hand, sports car sales are expected to grow strongly, reflecting a fast-maturing consumer with ever more sophisticated tastes. The auto executives in the survey believe that, regardless of which part of the value chain they represent, people of all ages will continue to desire their own set of wheels. Although the younger generation is considered more open to alternative mobility solutions, the respondents still feel that under-25-year-olds are keen to possess a vehicle. Even the financial services and mobility service providers – whose business model is largely focused around vehicle usage rather than ownership – are suggesting that their customers will still want to own cars. KPMG says that, despite a universal preference for possessing one’s own vehicle, the main auto players need to consider carefully which user segments are most susceptible to alternatives. With increasing vehicle restrictions in inner city areas, and a greater awareness of total cost of ownership, more and more customers are likely to reappraise whether to have their personal set of wheels. Consequently, all mobility stakeholders should be ready to offer easy-to-use, price-competitive solutions. The under-25-year-olds may appear to be the most obvious target, but with mature markets in particular experiencing aging populations, those over 50 could also be seeking better and cheaper ways to get around. Despite the promise of new, cleaner technologies, automotive executives still believe downsizing the traditional internal combustion engine is likely to yield the best results in the short- to medium-term. When it comes to alternatives, fuel cells have moved ahead of battery electric systems to become the number-two priority for investments until 2020. In the past 12 months, respondents from TRIAD have reduced their interest in ICE downsizing, which is possibly an acknowledgment of more onerous regulations on CO2 emissions in their home markets. This trend is even more profound among the OEM TRIAD respondents, who have already shifted their investment priority from ICE downsizing to hybrid fuel systems. Such laws are not as well developed in some emerging markets, hence the relatively higher priority assigned to ICE downsizing among the BRIC auto executives. In 2020, less than one in 20 vehicles produced are forecast to be equipped with electrified powertrains, the majority of which will be only slightly electrified full or partial hybrids. While the survey respondents believe that plug-in hybrids will generate the most consumer demand by the end of this decade, projections show that this segment will make up just 1% of total worldwide engine production in 2020.
Understanding What Drives Customers’ Behaviour Communication technologies such as car-to-car, car-to-infrastructure, or car-to-home may bring significant benefits to consumers, but these factors, known collectively as the Internet of Things, simply represent a commodity. “To capture the real value of connectivity, vehicle manufacturers have to use the power of data to get inside customers’ heads, understand what drives their behaviour, and adapt business models to ever-smaller target groups of like-minded individuals. Connected car technologies can be a crucial interactive media, especially when linked to location, offering not just traffic guidance, but also useful local retail or leisure options, personalized news and entertainment, and other services – all of which can provide a healthy revenue stream,” explains Dieter Becker, global head of Automotive KPMG International. Over half of all auto executives think it is somewhat unlikely or not likely at all that a major disruption to existing business models will occur in the next five years, with just approximately one in 10 expecting a major change. This conservative outlook extends to expectations of market dominance, with almost three out of four respondents expecting OEMs to continue owning the customer relationship until 2020.
Who Is Best Positioned For Sustainable Growth? In the medium term, the traditional OEMs are forecast to maintain their dominance, but it’s vital they prepare for a more disruptive future in the long term, says KPMG. As the survey indicates, the winners in the new mobility culture will be those companies that achieve the right balance of marketable technologies and apply the appropriate business models to cater to increasingly tech-savvy heterogeneous customer groups. nJN