the starting grid for change: why the automotive sector...

White paperThe starting grid for change: Why the automotive sector must prepare for the inevitable shift to a service-based model by 2025Global, generational and technological trends are converging to turn car usage and ownership models on their head.

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White paper The starting grid for change: Why the automotive sector must prepare for the inevitable shift to a service-based model by 2025

Introduction Global, generational and technological trends are converging to turn car usage and ownership models on their head.

Embracing and adapting to these shifts will do nothing short of ensuring the survival of automotive businesses in the long term. Auto-makers will need to transform to meet changing demand, and any organization that fails to do so will do so at its peril.

This white paper explores the factors causing the changes in the global automotive landscape and the impacts they are having. It also reveals why 2025 is a crucial year in the transformation of the automotive industry as the uptake of mobility as a service rapidly accelerates. If automotive businesses have failed to respond by this time, their very survival will be in serious doubt.

The global trendsSeveral global developments are taking place to fuel the shifts we are seeing in the automotive sector. These include increased urbanization, technological innovation and changes in attitudes toward both cars and digital services.

The rise of megacities, fueled by urban population growth and rural-to-urban migration, is the first global trend putting pressure on the automotive sector’s traditional way of doing things.

According to the UN, which defines a megacity of having a population of 10 million or more, there are currently 33 megacities. By 2030, there are projected to be 431, with the fastest-growing cities in Asia and Africa.

The concept of individuals owning and driving cars in these megacities will be impossible to sustain, with public transport and car sharing becoming the preferred choice of the majority of people living and working in these metropolises.

China has been the largest auto market for the past decade, a position it’s likely to maintain. What happens in China will have a huge impact on the automotive sector.

The shifts taking place in the automotive sector are in evidence in the world’s most populous nation as car sales fell for the first time in 20 years in 20182. Alongside this, the shared mobility market attracted a total of ¥168.9 billion between 2013 and 20173, with more than 80 percent of capital going to ride-hailing platforms. DiDi, the overwhelming ride-hailing market leader, has more than 100 million users and provides 20 million rides per day. DiDi’s carpooling service has more than 30 million users.

The impact of technologyTechnological developments will also have a major impact. The cost per mile for a personal car in the US is currently $0.70, compared to $3.50 for a taxi and $1.50 to use Uber4.

The first fleet of autonomous taxis started to operate in Tokyo in August 2018, costing $13.50 per trip5, while the UK government has approved three trials of self-driving vehicles, which are expected to reach UK roads by 20216. At this rate of development, autonomous taxis are forecast to cost just $0.26 per mile by 2025, according to one estimate7. In that context, car ownership suddenly makes much less sense.

The rise of services like Uber has also fueled an expectation of instant gratification when it comes to digitally enabled services.

Consumers expect responses to their questions or concerns quickly if not immediately. Demonstrating this, research by Statista8 found that in 60 seconds Google had more than 3.8 million search requests, more than 400 hours of video were uploaded to YouTube, more than 350,000 tweets were sent on Twitter, viewers watched 87,000 hours of video on Netflix, and 65,000 photos were uploaded to Instagram. In addition, 40 percent of consumers are likely to abandon a website if it doesn’t load within three seconds9, and Amazon enables shoppers to wait no more than a day to receive almost any item they order.

People don’t want the hassle of parking, driving and maintaining a car. This is especially true when a car can turn up at their location on demand and whisk them to their destination with the press of a button.

Another aspect to this is that, with vehicles parked at home or in a car park, the vast majority of car ownership is actually waste. The amount of time privately-owned cars are in use is minimal, with some estimates as low as 5 percent of the time10. The idea of other people paying to use the car when their primary owner doesn’t need it therefore makes increasing sense.



1https://shared.uoit.ca/shared/faculty-sites/sustainability-today/publications/population-predictions-of-the-101-largest-cities-in-the-21st-century.pdf2 https://www.bbc.co.uk/news/business-468098673https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/about-deloitte/dttp/deloitte-cn-dttp-vol7-ch3-future-of-shared-travel-en.pdf4 https://static1.squarespace.com/static/585c3439be65942f022bbf9b/t/591a2e4be6f2e1c13df930c5/1494888038959/RethinkX+Report_051517.pdf5 https://asia.nikkei.com/Business/Business-trends/World-s-first-autonomous-taxi-starts-operating-in-Tokyo6 https://www.fleetnews.co.uk/fleet-management/london-taxi-fleet-to-lead-autonomous-vehicle-trials7 https://ark-invest.com/research/autonomous-taxi-model#fnref-63899-18 https://www.statista.com/chart/13157/what-happens-in-the-digitalized-world-in-one-minute-in-2017/9 https://www.forbes.com/sites/jiawertz/2017/07/17/why-site-speed-design-can-make-or-break-your-google-ranking/#610031833ce910 http://fortune.com/2016/03/13/cars-parked-95-percent-of-time/

There is also a changing attitude toward cars. Younger generations are much less interested in cars as status symbols and many don’t even hold a driving license. According to analysis by the UK’s Department of Transport11, license rates for those aged between 20 and 29 dropped from 75 to 63 percent between the early 1990s and 2014 – due to a lack of need or the expense of learning. They would much prefer to use public transport or rideshare.

Taking all these factors together, it makes sense that private car ownership, which stood at 74 percent in 2015, is forecast to fall to 66 percent by 2025 and to just 46 percent by 203012.

This means automotive companies must take decisive action to change the way they operate. And they must do so quickly, with some – such as General Motors, with its service that lets owners rent out their personal GM-branded vehicles through its Maven car-sharing platform13 – already making moves.

For automotive companies that haven’t started to shift, a big cultural shift will be needed. These businesses need to start investing in service portfolios that they don’t know much about, and where ROI is less tangible than in their existing model.

2025 and the accelerating S-curve of changeWhen assessing and predicting the path a product or service will take once it’s been introduced to a market, the S-curve is a popular method. It describes a graph with a defined point – or "tipping point" – where uptake will rise exponentially, before leveling out once market potential has been reached.

Technological developments have contributed to shorter S-curve cycles in recent years, with smartphone adoption a case in point. And it’s now often the case that the winner takes almost all of the market share. When Apple’s iPhone first appeared on the scene in 2007, Nokia dominated the global mobile market. Now, Nokia’s business depends more on patent licensing than on mobile phone production, while Apple holds a fifth of the market, trailing Samsung’s 32 percent market share14.

The third element related to the S-curve of change is that it’s critical to capture market share, and remain innovative and relevant at the inflection point where the market accelerates. If a business fails to do this, it’s almost impossible to recover, as the fortunes of Nokia and BlackBerry show.

When you consider the S-curve of change for mobility services, a steep rise in the curve shows the inflection point is going to arrive at or around 2025, with the uptake of shared mobility forecast to rise from 20 percent to 50-60 percent between 2025 and 2030.

When that happens, and with so many fewer people buying cars, automotive companies will need new service-based strategies to stay relevant – and stay in business. Just as the model of renting individual videos from Blockbuster has been replaced by streaming services such as Netflix, a similar transition needs to take place in the automotive industry.

A sector of three layers As part of the shift that will take place, automotive companies will need to move up the value chain by reinventing themselves as a service offering.

Examples of this already taking place are Ford’s FordPass app15, which helps users to find and pay for parking and locate gas stations, as well as providing access to vehicle information such as service reminders. Porsche Passport16, meanwhile, is an app-based subscription service that allows customer to drive a Porsche of their choice on demand. Those at the top will aim to push the commodity and capex elements down the supply chain – to component manufacturers that will also need to reinvent themselves as a service.

The following three-layer model will emerge in the automotive sector:

• Mobility as a Service (MaaS) – Pure-play mobility companies that offer businesses and individuals the ability buy mobility services tailored to their needs for a monthly tariff. For example, customers could rent a car on demand or order an autonomous taxi.

• Vehicle as a Service (VaaS) – Companies (likely to be today’s car brands) that provide autonomous vehicles for mobility services. These companies will sell vehicles to MaaS players as a service and won’t have the capital expenditure of manufacturing the car.



11 https://www.autoexpress.co.uk/car-news/102466/number-of-young-adults-with-driving-licences-falls-by-40-per-cent12 https://www.rolandberger.com/publications/publication_pdf/roland_berger_tab_automotive_intransition_20160404.pdf13 https://techcrunch.com/2018/07/24/gm-launches-a-peer-to-peer-car-sharing-service/14 http://gs.statcounter.com/vendor-market-share/mobile15 https://owner.ford.com/fordpass.html16 https://www.porschepassport.com/

Service

Commodity

Data to support user tariff management• Level of service

• Service options- extras

• Affects from VaaS and CaaS

Data to support Vehicle Tariff management• Optimized usage

• Vehicle outage

• Flexibility

• Brand

Data to Support Component Tariff management• MTBF

• Driver affect – Tyres, Brakes, Batteries

• Service Schedules

VALU

EVehicle asa Service

Mobility asa Service

Component as a Service

The Forward Journey (Monetizing data)

• Components as a Service (CaaS) – The foundational layer in which members of the current supply chain will provide vehicle components as a service. For example:

• A seat-maker could sell the seat as a service to a VaaS player, and recover the cost based on usage, potentially using IoT sensors.

• Component manufacturers could bring their products together to create services offerings – providing the axle, wheel and tire assembly as a "corner-as-a-service" with VaaS providers paying a subscription that covers replacement components.

There is also likely to be digital convergence across finance, insurance and other elements of the traditional marketplace. If, for example, Amazon Prime is integrated with the car service, consumers could order groceries and find them waiting for them in the car that takes them home. Or insurance providers could create new products to cover MaaS providers and the specific risks they represent, with the cost passed onto customers via the subscription fee.

An entirely new mobility ecosystem will emerge.

Wholesale changeOne financial institution Fujitsu works with used our Cloud Service K5 platform to digitalize its services for high-value customers, allowing it to roll out a device-agnostic, mobile wealth management solution; it also launched a similar mobile solution for employees that enables them to make critically important financial decisions quickly from anywhere. Essentially mobile-banking- as-a-service, or MBaaS, this solution uses APIs to connect disparate sources of data on legacy systems, and deliver all of the information that investors and employees need in real time via an easy-to-use dashboard.

In fact, the "Finplex" approach from Fujitsu, which is built on top of Cloud Service K5, is designed specifically to support such innovative, digital open banking programs, particularly by leveraging today’s rapidly- growing API economy.

Driving costs down... and growth upAs the love affair with car ownership starts to fade, being in denial is not going to help a business in the automotive sector survive. The dominant and long-established model of developing a car for five years, then selling it for 5-10 years with the occasional facelift, won’t be able to persist.



2 trillion USD

Mobility Society Innovation

New Business OpportunityFrom product to service business

-Improving value technology solutions

Legacy BusinessGas, diesel, HEV engine-KAIZEN Process

2010 20302020 2040

Tech

nolo

gy

Value

Mobilityas a Service

Vehicle as a Service

Component as a Service

Networkas a Service

Companies will have to prepare for a converged marketplace that doesn’t yet exist or know how people will consume these services, making it that much harder to make the cultural shift they’ll need to make.

But if auto companies don’t develop a strategy with some elements of service, they risk being left behind. Even if they don’t have a complete strategy in place by 2025, being ready will put businesses in a good position to prosper in the changing market.

Setting up for the futureThere are a number of things auto businesses need to do if they are going to be ready for 2025.

First, they need to be fearless and avoid being stuck in the manufacturing world and digitally transform their organizations. They need to move to a service-led model and understand how to derive value from data. The use of data analytics and artificial intelligence will be powerful capabilities for developing and improving offerings – and monetizing the data at the disposal of automotive businesses – as the sector continues to evolve.

They need to define their business within the three-layer model and look at the dynamics of the business to develop a bold hypothesis for the company’s future, including where they can play in a new data-driven economy.

For a tire-maker it would be part of the CaaS layer, providing tires as a subscription service to VaaS operators, ensuring they can be replaced with minimal intervention from end users, potentially by locating close to a central VaaS depot where cars are located when not in use.

Once that hypothesis is established, companies need to go back to today’s reality and assess how far away from the vision the organization currently is. Only then can they decide on the tangible steps the business can take toward this new world, with a set of objective measures. This will enable them to keep an eye on market developments, to ensure any investment is heading in the right direction. Their strategy should also be agile enough to respond to industry shifts.

While some steps will be structural and organizational, most will be digital, with new applications and tools and cloud migration. In addition, making the shift will require recruiting people with the relevant skills.

Partnerships will also be crucial as companies work out which players from other sectors could bring value and successfully break into the automotive space.

Organizations should also keep an eye on the market to ensure their chosen direction and hypothesis for the future are (and remain) correct. As auto companies adapt their strategy in response to the market, an agile framework that enables rapid evolution could be a powerful tool.

The changes to the automotive market could start as early as 2025, and if auto players aren’t on the starting grid with a services-led strategy, it could be the beginning of the end – something that increasing consumer demand for instant gratification will only accelerate.

Industry Challenges- Fujitsu Solutions

Tomorrow Converged MarketsDigital

ConvergenceVision

Today

What are the business implications of digital convergence in the Auto sector

SegmentedMarkets

Digital Partner

Business Operating Model Technology Model Customer Experience Model

DigitalPlatformsDigital Enablement

Intelligent Enterprise

Advanced Technology

CyberSecurity

TangibleDigital Automotive

TangibleDigital Insurance

TangibleDigital Financial



While all this poses a major challenge, change is possible. Automotive businesses must take the plunge and determine the part they want to play and how far they are from playing it today. They then need to undertake the digital transformation needed to get there, while constantly taking the pulse of the rapidly evolving market.

By 2030, the mobility landscape might include not the major global automotive manufacturer groups, but an assortment of major MaaS players, along with autonomous vehicle giants, CaaS players and others. Where will your business fit in such a landscape? The time to start thinking about that is now.

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