Automotive OEMs And the New Normal

“The New Normal'' is a term which has been used to describe a fundamental change in the world situation. The notion is that there has been an inflection point and the world before and after this inflection point are materially different. While this inflection point can be a sudden event such as the “dot-com” crash, in many situations the new “normal” reveals itself over time. A classic example of this latter shift has been the rise of ecommerce. In the early days, the hanging open question was: “Will a customer actually buy something from a random stranger across the internet without being able to touch it ?” This was an open problem until it suddenly wasn’t. After this point, ecommerce has become the new normal in retail.

This article will argue that the automotive industry and especially the major automotive OEMs are now in a “New Normal” which has fundamentally different characteristics from the past. This new normal demands changes in strategy, products, and potentially the most difficult, fundamental cultural changes in the executive suite. With that, let’s get started.

Before looking at the “New Normal,” it is useful to examine the world before the inflection point. In the case of the automotive industry, this consisted of an evolution over decades of the optimization of a well-honed tiered supply chain. In automotive hotspots such as Japan, Germany, Korea and parts of the United States, the automotive OEMs have been the dominant leading edge regional industrial players wielding tremendous power. At its apex(1950s), Charles Wilson, the President of GM, reportedly said “What’s good for General Motors is good for America.”

The key characteristics of the automotive ecosystem were:

1. Market Control: Automotive OEMs owned the brand and the product definition.
2. Keiretsu: To optimize cost, the market matured to a point where automotive OEMs “offshored” significant subsystems to tiered suppliers while maintaining quite a bit of direct control.
3. Talent: Automotive OEMs had sufficient market power to attract talent to their preferred locales. Some even started their own universities (Kettering University today).

What is the “ecommerce” of the automotive industry? The rise of the electronics sector.

While the automotive industry was maturing, the electronics industry was exploding and fundamentally changing the nature of society. As shown in the figure below, electronics has had distinctive waves of growth. In the first wave, electronics optimized the G&A function of industry with the introduction of centralized computing. The winners were companies like IBM, DEC, Wang, and others. The second wave (still in-flight) consists of a move of electronics to the “edge” (cell phones, laptops) which enabled companies to connect directly with customers. The winners are the edge device makers (Apple, Samsung), internet infrastructure (Microsoft Cloud, Cisco, etc), and advertising/marketing (Google, Facebook, Amazon). This mega-trend has at least one more decade of growth. Now, a third wave is ramping up right now around the intelligent edge. This is the world of internet of things (IOT) and Artificial Intelligence (AI). Autonomy in its various forms is enabled by this electronics megatrend.

This tremendous economic growth in electronics has allowed for massive investments in fundamental technologies such as semiconductors, software, and artificial intelligence. One can get a sense of the size of these investments by comparing the whole US Defense Prime Industry (Table 2) with just one consumer company (Apple). Apple invests more yearly in R&D than the sum of all the major defense primes.

Where does this leave the Automotive Industry?

Over the last 20 years, just like every other sector, Automotive has been aggressively increasing the content of electronics as a part of the product. In fact, recent estimates show that electronics account for over 40% of the cost of an automobile. This is all before the shift to electronification and autonomy when the expected percentage will jump up significantly. However, unlike the past, the automotive market is just a small component of the overall electronics marketplace. This basic reality has profound implications on strategy. These include:

1. Semiconductor Suppliers: One large implication is that Automotive OEMs will have to shift thinking from driving the supply chain to developing strategies for leveraging the supply chain driven by other markets or cooperatively developing methods to raise volume to justify semiconductor investments.
2. Software and Artificial Intelligence (AI): Similar to semiconductors, the level of investment in other markets in software/AI dwarfs anything possible strategically by an individual OEM. Building system designs which leverage platforms from other markets is critical to success.
3. Talent: Gaining electronics talent is going to be critical to success. This likely will mean moving to where the talent exists and building a strategy to grab talent in the context of very competitive alternatives from the broader electronics market.

However, all of the above factors are dependent on a much bigger cultural shift from the role of the king to that of a sly fox. This is a deep cultural shift which will require quite a bit of leadership to manage. One can see the gyrations from various automotive OEMs executive teams as they attempt to grapple with the “New Normal.” This is not surprising as most of them have only lived in the old world where automotive OEMs dictated the rules. The key business lesson to be learned is well represented in the book: “Who moved my Cheese?” The executive teams who recognize that the cheese has moved and take appropriate actions are likely to succeed.

Further Reading: For those interested in a deeper view of the thoughts expressed in these articles.

1. Rahul Razdan, Author at EPS News: EPSNews is a trade publication which focuses on semiconductors and these series of articles describe the issues related to Long Life Cycle (LLC) Products. Automotive, Industrial, Defense, Medical are all examples of LLC products.
2. Rahul Razdan, Author at SemiWiki: SemiWiki is a trade publication which focuses on electronics design and these services of articles describes how design methods can be used to address these issues. There is a recent article on the Defense market which is especially appropriate.