Digital transformation is re-shaping every industry. Long-established players are being up-ended by the emergence of new technologies and start-ups offering faster, better services. Nowhere is this more apparent than in sectors traditionally dominated by manufacturing. With high capital requirements barring new entrants, manufacturers may have had little competition in the past, but digital technologies such as cloud, mobile, artificial intelligence (AI) and the internet of things (IoT) are democratizing forces. In the automotive industry, for example, new market entrants offering innovative smart mobility alternatives and connected car capabilities are challenging incumbent manufacturers to adapt to survive in a rapidly evolving competitive landscape. Staying in the game requires open collaboration and real-time data exchange among partners behind the scenes to deliver smarter, more personalized services. This is driving demand for interconnection, the direct and private exchange of traffic between key business partners.[i]In fact, the Global Interconnection Index (GXI) Volume 3, a study published by Equinix, projects that the manufacturing sector will account for 11.6% of all interconnection bandwidth, or 1,547 Tbps, by 2022.
Where is automotive headed?
McKinsey and PwC both predict significant disruption in the automotive value chain as the industry continues to rapidly shift toward an inclusive, service-oriented model.[ii] By 2023, McKinsey expects that 46% of automotive revenue growth would come from digital services.[iii] In another study, PwC projects that, by 2030, profit share from traditional car sales, parts and aftersales will shrink from 70 to 55% of the total automotive market while non-traditional profit shares could grow from 5 to 25%.i To stay in the game and meet customer expectations, automotive companies will need to transform IT and business operations for agility, real-time customer engagement, partner-based collaboration and scalable service delivery.
Distribution – from bricks to clicks
In the past, automotive manufacturers have largely focused on engineering improvements while leaving sales and distribution to franchise dealer networks. However, changing customer expectations and other trends such as the shift to autonomous, connected, electric and shared (ACES) vehiclesi are shrinking profit margins and driving automakers and dealers to rethink their business models.
In the past, a typical car buying experience might look something like this: You visit a few dealers to look at the different cars and do a test drive. Once you decide on the model you want, then you start negotiating the price and financing with the salespeople. By the time you actually leave the dealership with your car, the whole process could have taken nine hours.
By contrast, mobile and web technologies have paved the way for a seamless buying experience. Digital channels like Autotrader, Cars.com or the CostCo Auto Program allow you to research, compare vehicles and find the best deals and discounts. When you are ready to make purchase, turning to disruptors such as Carvana, Shift, Vroom and Roadster will enable you to complete the entire buying process online with transparent pricing. Traditional dealers are also adapting by offering omni-channel buying experiences as well. Now you can be anywhere in the country, look for your desired brand and configuration online and then have the target model and car shipped to your closest location. In some cases, this may even include delivering the purchased car to your home, skipping hours of paperwork and pricing negotiations. Ensuring that these online experiences are consistent and reliable, regardless of location, requires an integrated digital platform that can enable real-time collaboration and data exchange among ecosystem partners.
Maintenance and upgrades over the air
Digital technologies are also changing the way cars are serviced. Previously if an auto manufacturer needed to issue a recall, a notice was mailed to each owner who then had to schedule an appointment with their local dealer for servicing, at the expense of time, cost and customer satisfaction. With built-in wireless connections, automakers can now deliver over-the-air (OTA) updates to vehicles without owners needing to bring their cars into the dealership for maintenance. OTA updates empower manufacturers to not only deliver service updates but also new features such as anti-theft camera enhancements or entertainment options.
Speaking from personal experience, when I purchased a Tesla about a year ago, they did not have the surveillance system feature. But when the feature became available, Tesla just pushed an OTA update, so now my rear camera has this enhanced security feature. Interestingly, there was a shooting incident at a basketball game I recently attended, and when I got back to my car, a police officer approached me to ask if my surveillance camera was on. It was and it captured footage of the suspects on video, which I was able to provide to the police. As our cars and devices become more connected, it opens the door for safer communities as well.
In the next decade, the automotive industry will face a magnitude of change that has not been seen in a century, driven primarily by four mutually reinforcing trends, i.e., autonomous, connected, electric, and shared (ACES) vehicles. These will result in different user behaviors and mobility preferences, shifting value pools, innovative business models, and new entrants into automotive.McKinsey
Innovation is the name of the game
Speed of innovation is another key challenge for automakers today. One example is the autonomous driving deep-learning stack. Given the nature of deep-learning, there are currently hundreds of different start-ups and companies working on developing autonomous driving software models. That will often include multiple cloud service providers and analytic SaaS analytic services to train these models as well. Therefore, when a manufacturer decides to utilize services from these companies or acquire them, they’ll need to adapt to the digitally integrated ecosystems that these technologies were built on.
These digital platforms require a flexible, adaptive and scalable interconnection infrastructure. As omni-channel and connected services prevail, an infrastructure based on an Interconnection Oriented Architecture™ (IOA™) approach, such as the one illustrated in the diagram below, would allow companies to effectively and efficiently integrate, analyze and deliver real-time inventory information, critical product updates, and digital, connected customer experience.
What is your digital transformation strategy for your automotive business?
Read the GXI Volume 3 to learn more about how private interconnection is powering Manufacturing and other industries around the world.
You may also be interested in reading the Digital Edge Playbook for Automotive to see how industry leaders are harnessing digital ecosystems to address increasing demand for connected car capabilities and digital services.
[i]Interconnection bandwidth is defined as the total capacity provisioned to privately and directly exchange traffic, with a diverse set of partners and providers, at distributed IT exchange points inside carrier-neutral colocation data centers.