Automation in manufacturing
- October 06
- 7 min
Table of contents
German automotive market – an overview
German automotive market – location, position in the EU and in the world
Concerns about autonomous vehicles in Germany – problem statement
The consequences for Central Europe
First steps of business transformation in German automotive
German automotive companies are far away from the rest of the world in new technologies
Self-driving cars – not the end of the story
Business design strategy is a chance for the German automotive sector
The automotive industry has been the driving force behind Germany’s economic growth over the past two decades. Between 1999 and 2017, German companies became leading manufacturers thanks to foreign expansion. Their share of the global market grew from 15.1% to 18.5%.
Car manufacturers and their subcontractors employ 1.8 million people. It is one of Germany’s most profitable industries. 80% of premium cars sold worldwide are made in factories owned by German manufacturers. It generates a significant share of demand for products and services from other important sectors of the country’s economy, such as the electromechanical, chemical, and logistics divisions.
This concerns above all the giant automotive cluster in southern Germany (Bavaria and Baden-Württemberg), where orders from car manufacturers are sometimes the only source of income for many companies.
The European economy had already begun to visibly slow down in 2019, before the COVID-19 epidemic. Mainly due to the deteriorating condition of the automotive industry. All companies announced that they would restructure their factories e.g.: Germany and subcontractors intended to shut down their plants or cut employment levels.
Until 2019, the car companies generated good financial results and had high sales, but their strength is based on the past.
German automotive industry may even plunge into a long-term crisis which will seriously affect its global position. Furthermore, there is a risk of serious job cuts in the countries which are important links in the supply chain. The effects of this may include:
Additional factors are that the digital transformation of German automakers has been very slow.
The biggest automotive market in Europe is Germany. The German automotive sector’s strong global position is one of the country’s greatest economic success stories. In 2018, two out of the three top global automakers achieving the highest sales volumes originated from Germany. 80% of all premium-class cars produced were German brands. Therefore, it is not surprising that the automotive sector was the key driving force of the economy that helped the country recover so quickly from the global financial crisis and achieve the position of the EU’s unquestioned leader.
However, dark clouds are gathering over the automotive sector today. The new era in international relations, where politics and trade are fraught with tension, is particularly affecting the global supply chain system built by the EU automotive industry.
German carmakers’ managers are also concerned about the vision of autonomous electric cars that may lead to the ruin of the traditional model of automobile industry based on the combustion engine.
This paper analyses the causes of the crisis in the German automotive industry and lists its potential consequences for Central Europe.
Many problems in the German automotive sector could have been avoided, if not for the tardiness in working on new technologies. The industry for a long time ignored Tesla’s work on the development of autonomous electric cars, depreciating them and seeing them as a rather unrealistic attempt to conquer the automotive market by a small firm from Silicon Valley.
However, technological progress and rapidly growing sales made it clear to the Germans that Tesla may set a new trend in the global automotive industry. The vehicle digitalization trend may pose an even more serious risk to German automakers than electromobility.
If vehicles are reduced to autonomously moving devices in the future, and software becomes the criterion for choosing the optimal model instead of such parameters as driving comfort, a large share of the value added generated by the automotive industry will be taken over by IT tycoons.
The weakening of Germany’s automotive industry could completely change the nature of the economic relationship between it and Central Europe, giving rise to serious risks and new development opportunities for the region.
Over the past few years, investments made by German vehicle manufacturers have been a major development trigger, especially in the Czech Republic, Slovakia and Hungary. The reduction of their scale will put those countries’ economic models to the test and will provide an answer to the question of whether their reliance on the automotive industry has reached a level that poses a threat to those countries’ macroeconomic stability.
Each of the aforementioned challenges facing the German automotive industry could pose a threat to companies based in Central Europe. The requirement to move a greater share of their production to non-EU markets will reduce exports from all factories owned by German corporations – not only those located in Germany but also those in Central Europe.
The largest share of the tasks linked to the automotive industry’s transformation will rest with the carmakers themselves. German companies will be forced to develop new business models in order to capitalize on some of their old advantages whilst simultaneously developing new ones.
For a long time, their response to electromobility has been limited to attempts to adapt part of the electric drive to the existing platforms for combustion models.This cautious strategy served to limit the losses in case electric cars turned out to be merely a rich clients’ fad. However, it has also resulted in poorer capacity of the electric cars on offer.
The German automotive sector has already realized there is no turning point from electromobility. Volkswagen was the first German automaker to declare a radical technology shift and has allocated 60 billion euros on investments in electromobility and digitalization.
VW embarked upon designing a platform dedicated only to electric cars, hoping to set new standards in the industry this way. If this plan is successful, the firm will be able to manufacture cars that will have performance equal to Tesla’s while reducing the prices owing to mass production.
The direction of change set by Volkswagen is already translating into losses for its numerous subcontractors as VW is discontinuing its orders for further improvement of combustion vehicle systems with dim prospects. Many companies already have problems with remaining on the market because an electric vehicle requires different competencies, and its production involves a lower workload.
In the pessimistic scenario, a sudden withdrawal from financing investments in combustion technologies may lead to the need to restructure entire regions (as was the case with restructuring mining areas) which have for decades been building the automotive cluster manufacturing combustion engines, especially diesel. This would particularly affect regions in southern Germany.
Today’s economies are dramatically changing, triggered by development in emerging markets, the accelerated rise of new technologies, sustainability policies, and changing consumer preferences around ownership.
Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving a rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity, like e.g.: Driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30 percent, adding up to $1.5 trillion.
In the last year, more than 30% of all automotive patents were automotive driving and new IT technologies. The leaders in new tech patents in 2020 were: Toyota, Hyundai, Tesla Ford, Robert Bosch, and Denso. Not only German automotive companies, but all European firms are far behind American and Asian companies in business transformation and implementation of new IT technologies. In the near future, there will be a lack of IT and UX experts in these areas.
Learn more about the importance of good UI and UX.
But self-driving cars are not the end of the story. Let’s focus now on current challenges. Look at the McKinsey research from 2020. Self-driving cars and security themes are only some of the challenges posed to the German automotive sector.
Learn why IT automotive companies should be TISAX compliant
What about connectivity, and later autonomous technology? Will it increasingly allow the car to become a platform for drivers and passengers to use their time in transit to consume novel forms of media and services or dedicate the freed-up time to other personal activities?
The increasing speed of innovation, especially in software-based systems, will require cars to be upgradable. As shared mobility solutions with shorter life cycles will become more common, consumers will be constantly aware of technological advances. This will further increase demand for upgradability in privately held cars as well. The following trends could be visible in the automotive sector:
A detailed analysis suggests that dense areas with a large, established vehicle base are fertile ground for these new mobility services, and many cities and suburbs of Europe and North America fit this profile.
New mobility services may cause a decline in private vehicle sales, but this decline is likely to be offset by increased sales of shared vehicles, which require more frequent servicing due to increased exploitation and wear and tear.
#2. Consumer mobility behavior is changing, leading to up to one out of ten cars sold in 2030 potentially being a shared vehicle and the subsequent rise of a market for fit-for-purpose mobility solutions.
Changing consumer preferences, tightening regulations, and technological breakthroughs add a fundamental shift in individual mobility behavior. Individuals increasingly use multiple modes of transportation to complete their journey; goods and services are delivered to rather than fetched by consumers. As a result, the traditional business model of car sales will be complemented by a range of diverse, on-demand mobility solutions, especially in dense urban environments that proactively discourage private-car use.
Consumers today use their cars as all-purpose vehicles, whether they are commuting alone to work or taking the whole family to the beach. In the future, they may want the flexibility to choose the best solution for a specific purpose, on-demand and via their smartphones.
We already see early signs that the importance of private-car ownership has declined. In the United States, for example, the share of young people (16 to 24 years) who hold a driver’s license dropped from 76 percent in 2000 to 71 percent in 2013, while there have been over 30 percent annual growth in car-sharing members in North America and Germany over the last five years.
Consumers’ new habit of using tailored solutions for each purpose will lead to new segments of specialized vehicles designed for very specific needs. For example, the market for a car specifically built for e-hailing services—that is, a car designed for high utilization, robustness, additional mileage, and passenger comfort – would already be millions of units today, and this is just the beginning.
Understanding where future business opportunities lie requires a more granular view of mobility markets than ever before. Specifically, it is necessary to segment these markets by city types based primarily on their population density, economic development, and prosperity. Across those segments, consumer preferences, policy and regulation, and the availability and price of new business models will strongly diverge.
In megacities such as London, for example, car ownership is already becoming a burden for many, due to congestion fees, a lack of parking, traffic jams, et cetera. By contrast, in rural areas such as the state of Iowa in the United States, private-car usage will remain the preferred means of transport.
Fully autonomous vehicles are unlikely to be commercially available before 2030. Meanwhile, Advanced Driver-Assistance Systems (ADAS) will play a crucial role in preparing regulators, consumers, and corporations for the medium-term reality of cars taking over control from drivers. The market introduction of ADAS has shown that the primary challenges impeding faster market penetration are pricing, consumer understanding, and safety/security issues
Automotive incumbents cannot predict the future of the industry with certainty. They can, however, make strategic moves now to shape the industry’s evolution. To get ahead of the inevitable disruption, incumbent players need to implement a four-pronged strategic approach:
Prepare for uncertainty. Success in 2030 will require automotive players to shift to a continuous process of anticipating new market trends, exploring alternatives and complements to the traditional business model, and exploring new mobility business models and their economic and consumer viability. This will require a sophisticated degree of scenario planning and agility to identify and scale new attractive business models.
Leverage partnerships. The industry is transforming from competition among peers toward new competitive interactions, but also partnerships, and open, scalable ecosystems. To succeed, automotive manufacturers, suppliers, and service providers need to form alliances or participate in ecosystems—for example, around infrastructure for autonomous and electrified vehicles.
Drive transformational change. With innovation and product value increasingly defined by software, OEMs need to align their skills and processes to address new challenges like a software-enabled consumer value definition, cybersecurity, data privacy, and continuous product updates.
Check the case study:
Optimized quality control of post-sales servicing
for automotive giant
Reshape the value proposition. Car manufacturers must further differentiate their products/services and change their value proposition from traditional car sales and maintenance to integrated mobility services. This will put them in a stronger position to retain a share of the globally growing automotive revenue and profit pool, including new business models such as online sales and mobility services, and cross-fertilizing the opportunities between the core automotive business and new mobility-business models.
It is important to understand that researching and implementing UX methods is not enough to make a business transformation in the German automotive sector successful. To plan the transformation more effectively, one needs to create a broader business and technology strategy. This is where different methodologies and design approaches come to the rescue.
Business Design Strategy is one of them. It gives more possibilities and allows us to define and focus on solving a real problem from the point of view of different stakeholders in the transformation process: business, market, competitors, employees and users.
Planning such a strategy can be summed up in a few general steps: Being data-first, defining strategy, conducting product discovery, setting metrics, and optimizing. The whole strategic approach was explained in detail in the previous article: How to avoid business transformation failure by using Business Design Strategy. Feel invited to take a read and in case of any questions, feel invited to get in touch! We are here to help!
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