Today’s automakers face dynamic customer and product demands, driven by the urbanization of the US, the industrialization of India and China, the global recession, and the heightened focus on in-car innovation and alternative energy.
As the US urbanizes, and as Chinese and Indian economies industrialize, demand for smaller cars is expected to continue to grow. Substantial changes in demand don’t mesh organically with the high fixed cost nature of automotive assembly processes, and many manufacturers have bent to the point of breaking. For example, subcompact cars achieve a narrower profit margin than do larger cars. Thinner margins force manufacturers to assemble subcompacts outside of the US, often in joint venture with foreign-based automakers (excluding the Detroit-built Chevy Sonic), and some manufacturers have scrambled to find production capacity. The recession has compounded the small car challenge.
The US new car annual run rate peaked at 16.9 million units in 2005, and is at 12.1 million annualized units as of September 2011. Clearly, falling volume makes bad problems worse, and will continue to push automakers to adapt quickly to a changing highway. A less obvious outcome of the recession has derived from the increased flow of money into higher-risk asset classes such as venture capital.
Risk-tolerant investors have poured cash into startups over the past couple of years (whether these young companies will last is another question). Many new ventures have focused on car manufacturing-relevant domains, including efficient materials, mobility applications, electric vehicle technologies, and safety and convenience advancements. Many new technologies have made it into manufacturer assembly lines, and they represent an increasing mindshare of the driving experience. For example, ‘infotainment’ systems account for a growing portion of consumer and industry feedback. One manufacturer has recently fallen substantially in JD Power rankings due to usability challenges with its ambitious interface. Truly, rapid technology change isn’t always easy for car makers to manage.
Manufacturers with steeped histories in automobile assembly are suddenly faced with a host of counter-cultural management challenges such as software design, usability, iteration, feature prioritization and scaling. One way around such problems is to buy innovation, rather than to develop it in-house, but such a strategy doesn’t solve production design and scaling challenges. An increasing number of manufacturers are raising dedicated venture capital funds to further bridge the build versus buy gap. Regardless of their strategies, the best way for automakers to keep pace with the increasing speed of car innovation, now more than ever, is to stay in-tune with the needs of drivers.