Automotive OEMs And the New Normal

“The New Normal” is a term that has been used to describe a fundamental change in the world situation. The idea is that there has been an inflection point and the world before and after this inflection point is substantially different. Although this inflection point is a sudden event can be like the “dot-com” crash, in many situations the new “normal” reveals itself over time. A classic example of this latter shift was the rise of e-commerce. In the early days, the open question was: “Would a customer really buy something without being able to touch it from a random stranger over the internet?” This was an open problem until suddenly it wasn’t. After this point, e-commerce became 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” that has fundamentally different characteristics than the past. This new normal requires changes in strategy, products, and possibly the most difficult, fundamental cultural changes in the executive suite. Let’s start with that.

Before looking at the “New Normal,” it’s helpful to examine the world before the inflection point. In the case of the automotive industry, this consisted of an evolution over decades of optimizing a well-honed supply chain. In automotive hotspots such as Japan, Germany, Korea and parts of the United States, the automotive OEMs were the dominant leading local industrial players who wielded immense power. At its peak (1950s), Charles Wilson, the president of GM, is said to have said “What’s good for General Motors is good for America.”

The key features of the automotive ecosystem were:

1. Market control: Automotive OEMs owned the brand and the product definition.
2. Keiretsu: To optimize costs, the market has matured to a point where automotive OEMs have “offshored” significant subsystems to tiered suppliers while retaining some direct control.
3. Talent: Automotive OEMs had sufficient market power to set costs for suppliers and attract talent to their preferred venues. Some even started their own universities (today Kettering University).

What is the “e-commerce” 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 characteristic waves of growth. In the first wave, electronics optimized the G&A function of industry with the introduction of centralized computers. The winners were companies like IBM, DEC, Wang and others. The second wave (still in flight) consists of a move from electronics to the “edge” (mobile phones, laptops) that enabled the ability of companies to connect directly with customers. The winners are the makers of the best devices (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 rising at the moment around the intelligent edge. This is the world of the Internet of Things (IOT) and Artificial Intelligence (AI). Autonomy in its various forms is made possible by this electronic mecha trend.

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 entire US Defense Prime Industry (Table 2) with just one consumer company (Apple). Apple annually invests more in R&D than the sum of all the major defense premiums.

Where does this leave the automotive industry?

Over the past 20 years, just like every other sector, Automotive has aggressively increased the content of electronics as part of the product. In fact, recent estimates show that electronics make up more than 40% of the cost of a car. This is all before the shift to electrification and autonomy when the expected percentage will rise significantly. However, unlike in the past, the automotive market is only a small component of the overall electronics market. This basic reality has profound implications in strategy. This includes:

1. Semiconductor suppliers: One major implication is that automotive OEMs will need to shift thinking from driving the supply chain to developing strategies for leveraging the supply chain driven by other markets, or co-developing methods to increase volume to drive semiconductor investments justify.
2. Software and Artificial Intelligence (AI): Similar to semiconductors, the level of investment in other markets in software/AI dwarfs anything strategically possible by an individual OEM. Building system designs that leverage platforms from other markets are critical to success.
3. Talent: Acquiring electronic talent is going to be critical to success. This will likely mean moving to where the talent exists and building a strategy to grab talent in the context of many competing alternatives from the broader electronics market.

However, all of the above are really operations dependent on a much larger cultural shift from the role of the king to that of a sly fox. This is a deep cultural shift that will require quite a bit of leadership to manage. One can see the twists and turns of various auto OEMs’ executive teams as they try to grapple with the “New Normal.” It’s not surprising since most of them only lived in the old world where automotive OEMs set the rules. The key business to be learned is well represented in the book: “Who Moved My Cheese?” Executive teams that recognize that the cheese has moved and take appropriate action are likely to succeed.

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

1. Rahul Razdan, Writer at EPS News: EPSNews is a trade publication focused on semiconductors and this series of articles describes the issues related to Long Life Cycle (LLC) products. Automotive, industrial, defense, medical are all examples of LLC products.
2. Rahul Razdan, Writer at SemiWiki: SemiWiki is a trade publication that focuses on electronic design and this service of articles describes how design methods can be used to address these issues. There is a recent article on the defense market that is particularly apt.