1. 2015 Auto
industry trends

2. 2 Strategy&
Contacts
Chicago
Reid Wilk
Senior Executive Advisor
+1-248-872-6792
reid.wilk
@strategyand.pwc.com
Cleveland
Evan Hirsh
Partner
+1-312-578-4725
evan.hirsh
@strategyand.pwc.com
Arjun Kakkar
Principal
+1-216-925-4027
Arjun.Kakkar
@strategyand.pwc.com

3. 3Strategy&
About the authors
Evan Hirsh is a partner with Strategy& based in Chicago, focusing on
operational improvement programs and strategy development for
automotive and other industrial companies.
Arjun Kakkar is a principal with Strategy& based in Cleveland. He
focuses on developing growth strategies for automotive and industrial
companies.
Akshay Singh is a senior associate with Strategy& based in Cleveland,
focusing on enterprise and business unit growth strategy and portfolio
prioritization for automotive and other industrial companies.
Reid L. Wilk is a senior executive advisor with Strategy& based in
Detroit. Part of the automative and industrials practice, he works with
clients on product and portfolio strategy, operational improvements,
and strategic sourcing.

4. 4 Strategy&
Executive summary
Even with recent global sales gains, automakers must navigate three
powerful forces to build market share now and widen profits from their
rapidly changing products.
The worldwide automotive industry has been enjoying a period of
relatively strong growth and profitability, and annual sales have
reached prerecession levels in some regions. Yet considerable
uncertainty about the future remains.
The most immediate challenge is the unevenness of global markets.
Auto industry executives and experts tend to be optimistic about the
U.S. market, forecasting annualized sales in North America in the near
term of a relatively robust 16 million cars, up from only 13 million in
2008. However, the outlook in Europe is much weaker as the region is
emerging fitfully from a six-year sales slump. And sales have plunged in
Russia and South America — they were down by about 25 percent and
15 percent, respectively, in August 2014 year-over-year. Meanwhile, the
Indian market’s performance has been inconsistent. And growth in
China — the world’s largest vehicle market — has slowed, even though
investments by most original equipment manufacturers (OEMs), which
are betting big on future demand, continue to ramp up. Reacting
strategically to these demand shifts will be an absolute priority for
industry leaders in 2015.
Against this backdrop of macroeconomic uncertainty, we believe major
transitions are under way that will transform auto manufacturing over
the next 10 years. OEMs, suppliers, and dealers not only must navigate
through these changes in the short term to build market share and
profitability — they also should take steps now to position themselves
for success in the next decade.

5. 5Strategy&
What’s driving change
From the ground level, three powerful forces are roiling the auto
industry: shifts in consumer demand, expanded regulatory requirements
for safety and fuel economy, and the increased availability of data and
information.
Shifts in consumer demand. Consumers appear to be rethinking their
long love affair with individual automobile brands and viewing cars
more as transportation machines. Although this is not likely to have a
major impact on sales volume, it is affecting how much people are willing
to pay for automobiles. That willingness is also affected by the waning of
product differentiation, due partly to a general increase in vehicle quality
throughout the industry. The Detroit Three have caught up with Japanese
OEMs, and the mass market is catching up with luxury. Consumers are
also demanding more sophisticated infotainment systems at a low price,
and are expecting more high-end features to be standard.
Expanded regulatory requirements. Tighter corporate average fuel
economy (CAFE) regulations in the United States as well as the rest of the
world are more expensive for OEMs to comply with, requiring higher
volume to amortize increasing costs. Regulators are also mandating that
more safety-related features, such as backup cameras, be included as
standard equipment on new models, adding further to costs.
Increasing availability of data and information. Information about
vehicle usage and driver behavior usage is proliferating as sensors and
telematics systems become more common. All players across the
automotive value chain are interested in collecting more customer and
car data, but uncertainty about how to use it is still widespread.
Meanwhile, consumers are awash in easily accessible information about
automobile specifications, prices, discounts, quality, and performance,
giving buyers greater bargaining power.
All players are
interested in
collecting more
customer and
car data, but
uncertainty
about how to use
it is widespread.

6. 6 Strategy&
Impact on the auto industry
These trends offer huge risks and equally outsized opportunities for the
auto sector. To address them in a way that results in real competitive
advantage, it’s critical to understand the specific ways that these trends
are already affecting companies in the industry.
Increased electronics and software content
The cost of electronics and software content in autos was less than 20
percent of the total cost a decade ago. Today it is as much as 35 percent,
according to studies by Manfred Broy, a professor of informatics at
Technical University, Munich. More importantly, electronics systems
continue to contribute more than 90 percent of innovations and new
features. All major OEMs are targeting traditional product areas such as
quality and safety; infotainment provides a way for OEMs and suppliers
to differentiate their products. A recent Consumer Reports survey found
that infotainment equipment was the most troublesome feature in 2014
vehicles, suggesting a powerful upside for companies that can devise
superior systems.
Telematics features, including semiautonomous driving aids such as
automatic parallel parking and lane-keeping assistance as well as
sensor-based reporting on car maintenance and usage, also present the
chance to forge a closer relationship with customers and increase
margins. For example, OEMs and dealers can offer more convenient
proactive service, alerting a car owner to upcoming maintenance or
repairs. In addition, telematics features afford opportunities for tie-ins
with insurers, such as offering discounts for customers who drive safely.
Most OEMs are thus far focusing on collecting customer and vehicle
data, and in only rare instances have OEMs articulated a strategy to
utilize the data. Mercedes, for example, has a program called Mercedes
Me in Europe, which is a package of customer services covering vehicle
purchasing, financing, servicing, and even short-term rentals that are
tailored for individuals and available on multiple digital platforms. The
goal is to consolidate disparate customer data and identifying
Electronics
systems continue
to contribute
more than
90 percent of
innovations and
new features.

7. 7Strategy&
information to increase consumer loyalty and purchases, emulating the
models of Internet companies such as Apple, Amazon, and Google.
The increasing importance of infotainment and telematics systems is
disruptive for OEMs and traditional suppliers, putting a premium on
innovation and changing the ways that industry players design and
develop new products and services. Software breakthroughs are
becoming as critical as hardware innovation, and competition is
increasingly coming from nontraditional players. Ever more vital
software content has also accelerated the pace of change in products
and features. Whereas the time frame for new vehicle launches is
typically three to four years, the cycle for new software iterations, often
driven by interactivity with mobile devices, is measured in months.
Product-mix changes made to meet regulatory requirements
Regulatory pressures to reduce overall fleet emissions are steadily
adding to automakers’ costs. For example, U.S. CAFE standards that will
go into effect in 2016 are projected to add as much as US$1,000 to the
production cost of a vehicle, according to the National Automobile
Dealers Association. Only a minority of auto buyers are willing to pay
for more environmentally friendly choices such as electric vehicles, so
the cost pressure falls largely on OEMs. One way to meet the tighter
standards, which mandate that manufacturers’ fleets average 34.1 miles
per gallon, is to reduce weight by substituting lighter materials — most
dramatically evidenced by Ford’s decision to replace a substantial
amount of steel with aluminum in the 2015 version of its F-150 pickup
truck. This adds some $500 per truck in raw materials costs, more than
the $395 MSRP increase Ford has announced for the new base model,
according to a number of websites that cover Ford news.
The expense of mandated safety equipment is also difficult for OEMs to
pass along. For example, the U.S. Department of Transportation’s
requirement that all new vehicles have a backup camera increases
vehicle costs by as much as $200, at least some of which OEMs will have
to cover themselves.
Next-generation platforms and platform modularization
Pressured by both consumer preference for more segmented vehicles and
the need to reduce costs for competitive and regulatory reasons, OEMs
are adding to the number of models they offer and at the same time
reducing the number of vehicle architectures on which they are built,
drastically improving product commonality. Volkswagen, the first major
OEM to embrace the strategy, is moving toward four modular platforms.
Software
breakthroughs
are becoming
as critical as
hardware
innovation.

8. 8 Strategy&
GM is going from 30 core and regional platforms in 2010 to 26 in 2015,
and has announced plans to move to four flexible platforms by 2025.
Toyota, Ford, and other OEMs are following a similar approach. The
resulting complexity increases costs somewhat, but the additional
expense is outweighed by savings from the sharing of common
components between cars and platforms, and increased volume.
The adoption of these next-generation common platforms will also lead
to a consolidation of suppliers that will result in a smaller number of
large, global players. Ford recently stated that it will reduce its supplier
base from its current 1,150 to 750, and other OEMs plan to follow suit.
The changing face of retail
Consumers want a seamless car-buying experience that includes the
purchase decision, financing, and insurance — and both customers and
dealers are motivated to speed up the transaction. Most vehicle
purchasers already browse online to gather the information they need
to choose a car, and although they still may want to take a test drive,
many also have expressed that they would like to have an online “buy
now” button and a no-pressure auto purchasing experience. Obviously,
even as the Internet gains in importance as a shopping channel, dealers
will still want to use the test drive as a way to get face-to-face with
consumers and close a sale. Accommodating these shifting attitudes
about buying a car will require equal changes to dealers’ processes,
including investment in new technology.
Dealers earn little from new-car sales; their profits come largely from
service, parts sales, and used-car sales. They will, however, continue to
be an important part of the sales chain, and the lack of a robust
dealership network will for the foreseeable future be a competitive
disadvantage for any automaker.
Most vehicle
purchasers
already browse
online, and
many would like
an online “buy
now” button.

9. 9Strategy&
Industry imperatives
Faced with powerful new forces and consequences for the sector,
automotive companies clearly have their work cut out for them. Here
are our recommendations for how categories in the industry should
marshal their resources and where they should focus their strategic
development efforts.
OEM priorities
Given the increase in electronic content, OEMs need to collaborate with
suppliers and experts outside the traditional auto industry. Accomplishing
this will require changes in the way OEMs function. For example, they
may need to use venture funds to nurture and support companies that
can innovate technologically, and provide access for more nontraditional
suppliers, including hardware and software companies. One promising
and efficient path would be to move toward more standardized interfaces,
systems, and modules for telematics and infotainment.
OEMs should also prioritize R&D and engineering projects to focus on
those that offer the best value and differentiation and to address new
safety and environmental regulations in the most cost-effective way. To
address the new rules, they should also work closely with suppliers to
determine whether the OEM or the vendor, or a combination of the two, is
best equipped to develop the technology and innovative solutions needed
to meet the regulations. Moreover, OEMs must improve their skills in
gathering and analyzing consumer data to serve their customers better
and improve brand loyalty. The move to modular platforms will require
OEMs to work closely with suppliers to realize the cost savings and
manufacturing improvements that they hope to gain by increasing scale.
Supplier priorities
Suppliers should partner with innovative nontraditional automotive
electronics and infotainment suppliers to utilize their speed-to-market
and (sometimes) higher scale. They should also rationalize their
OEMs need to
collaborate with
suppliers and
experts outside
the traditional
auto industry.

10. 10 Strategy&
portfolios and strive to be among the top two or three suppliers for each
of their “core” products. OEMs will be looking to their top suppliers to
co-invest in new global platforms, and suppliers should carefully
evaluate the opportunities in expanding their manufacturing footprint
as their primary OEMs move toward single worldwide architectures.
Early collaboration will reap long-term dividends.
Dealer priorities
Dealers need to invest in data management and customer care
technologies that will make the buying transaction faster, more
efficient, less pressured, and more pleasing to consumers. They must
also improve their online capabilities, like all other retailers, so that the
distinction between bricks-and-mortar and the Web diminishes greatly.
In so doing, they must foster a continuous connection with customers
through vehicle life-cycle software and apps to drive ongoing service
and parts sales.
Automotive perspective 2015
The main challenge is that the global
automotive market is uneven
Trends affecting the automotive industry
Increased electronics and software content
Sales have
plunged in
Russia –
down by 25
percent in
August 2014
North
America is
enjoying robust
forecasts of 16
million cars, up
from 13 million
in 2008
Meanwhile, the
Indian market’s
performance has
been inconsistent
Sales have
plunged in
South
America –
down by about
15 percent in
August 2014
Europe is
weaker as the
region is
emerging from a
six-year slump
Though the UK
bucks this trend
– here car
manufacturing
volumes are on
course to break
all-time records
by 20171
And growth in
China – the
world’s largest
vehicle market –
has slowed,
even though
investments by
most original
equipment
manufacturers
(OEMs), which
are betting big
on future
demand,
continue to
ramp up Source: Strategy& analysis

11. 11Strategy&
1
According to the Society of Motor Manufacturers and Traders
© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its
member firms, each of which is a separate legal entity. Please see www.pwc.com/structure
for further details.
Disclaimer: This content is for general information purposes only, and should not be used
as a substitute for consultation with professional advisors.
Cost of electronics
and software is
<20%
of the cost
10 years ago
U.S. CAFE
standards
come into
effect
in 2016
New
regulations
to ensure
vehicles must
now average
34.1 miles per gallon
decreasing
vehicle
architecture
increasing
model
choice
meaning there
are smaller
numbers of larger
global players
Greater numbers
of customers
utilising
online
Customers expect a
seamless service
across purchasing
decisions, financing,
and insurance
Electronics systems
contribute
>90%
of innovations
and new features
Timeframe for new vehicle launches is 3–4 years,
the cycle for new vehicle software is measured in months
Trends affecting the automotive industry
Increased electronics and software content
Increasing regulatory requirements
Next generation platforms and
platform modularisation
Changing face of retail
all-time records
by 20171
on future
demand,
continue to
ramp up
Consolida
tion of supplie
rs
OEMs are
while
meaning common components can be
produced in greater numbers, more cheaply
Source: Strategy& analysis

12. © 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further
details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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