Progress Perspective: Digital Automotive Industry
Chris Legg is a partner and Senior Managing Director at Progress Partners. Chris lives in Cambridge, MA, and is based in Boston.
Over the last few years, the automotive industry has experienced a considerable evolution as key players work to navigate the rapidly evolving market. A few particularly strong trends have stood out; trends that are both shaping the automotive ecosystem and are heavily influencing adjacent verticals.
With the increase in digital ad spend in the automotive space, we have seen dealers and OEMs alike focus their efforts on taking a more digital approach. With this, the innovation behind opportunities for new revenue sources like Vehicles as a Service (VaaS) are emerging, aligning with new methods around evolved spending habits and consumer purchasing patterns. The increasing importance of data, as the pool of data on drivers and consumers continues to grow, is made increasingly valuable by new platform developments through which brands can target consumers.
The Automotive Future is Increasingly Digital
The entire car-buying process has shifted digital. Consumers in-market for a car are spending significantly less time in a physical car dealership than ever before. To put this in perspective, it used to take 3 visits to a dealer before buying a car. Today, that has been reduced to 1.3 visits and it is expected to eventually result in a single visit, where the final touchpoint of the car pick-up has moved entirely online. Digital ad spend in the U.S. automotive industry is predicted to grow to $14.4B in 2020. Capitalizing on this estimate, companies are looking to take advantage through increased advertising and other lead generation through digital channels. Excluding retail, automotive digital ad spend is expected to have the highest CAGR of any industry through 2020. Dealerships will continue to work on streamlining the entire process in order to decrease customers’ time and energy spent on the car buying experience.
Marketers and advertisers will come out on top in the shift to digital in automotive Self-driving technologies will enable these companies to tap into a market where they were once shutout. With the increasing efforts behind development of in-car screens and potential ad-serving platforms, marketers and advertisers will not only be able to accelerate their collection of valuable data, but will also enable many more touch points with consumers. According to Fortune, Intel and Strategy Analytics predict that autonomous vehicles (“AVs”) will be part of $7T industry by 2050, making it a very large pie that these advertising and marketing companies will want a slice of. We expect this to drive a change in the flow of ad dollars to the agencies who have the best relationships with OEMs, as well as a continued strengthening of brand-direct advertising. As we see these new layers develop in an already fast-changing marketing ecosystem, the digital strategies will start to command a top spot in more automotive marketing and advertising budgets; but in new ways, and on new platforms.
Focusing on The Tech: OEMs and Dealers
Original Equipment Manufacturers (OEMs) and Automotive Dealers are facing a growing concern around competing emerging technology companies and radical changes disrupting the auto industry. With the recent growth of Information and Communication Technology (ICT) companies like Apple, Google, and nuTonomy, OEMs are at a crossroads. There is an opportunity for manufacturers like Cadillac, Volvo, and Ford, and tech companies to create relationships through acquisitions or partnerships, but their concern remains that ICTs may cut OEMs out of the process entirely.
While it is unclear who will truly master the creation and distribution of next-gen vehicles, OEMs and dealer networks alike could see their entire business models upended as ICTs surpass the traditional automotive players in both the creation of tech, and the realization of resulting revenue and business efficiencies. According to a KPMG survey, 44% of automotive CEOs believe that the threat to their business models is posed most strongly by ICTs and their increased focus on the industry. It seems as though OEMs and dealers are inherently aware of the implications of inaction and know that without technological innovation to compete with ICTs, they will be will be left in the dust as their competitors seek control over the entire manufacturing and distribution process.
The Newest Acronyms: Vehicles-as-a-Service (Vaas) or Cars-as-a-Service (CaaS)
The future of car buying is in a state of flux as Vehicles-as-a-Service (VaaS) becomes a more attractive alternative to purchasing a car. A study cited in a Business Insider article claims that private car ownership in the U.S. will drop by 80% by 2030, and the number of passenger vehicles on U.S. roads will decrease from 247M in 2020 to only 44M in 2030. Cars – it seems – will serve as operating costs in the VaaS model. In addition to the perceived monetary benefits through opting for VaaS, Cisco predicts that there will be incremental gains in safety that consumers are likely to support, including self-driving technology and inter-vehicle communication.
Coupled with the safety benefits to society, the convenience of ride-sharing and ride-hailing apps are all too great, and their efficiency is starting to outrank the consumer’s need to own a car and drive themselves. Investors have already shown clear interest in these car fleets and are investing heavily into related technologies. Whether it is Delphi acquiring nuTonomy for $450M, Ford purchasing Cruise Automation for $1B, Intel’s $15.3B acquisition of Mobileye, or Google’s development of Waymo, it is clear that autonomous vehicles are attracting capital and encouragement from a wide range of companies.
The Importance of Data in Automotive
There are other incentives driving this increase in digital ad spend, including the augmented value of a single vehicle sale and the data collection afforded by the digitization of automotive. Many believe that one connected vehicle could possibly generate 10x higher revenue streams than a legacy vehicle, presenting a material opportunity for new players entering into the market.
Further surveys conducted have shown that consumers are more willing to send automobile data back to companies as opposed to behavioral data. Personal and/or behavioral data, however, is significantly more valuable for advertising and marketing companies. With the influx of data, various advertising and marketing companies will have the ability to draw deeper insights from their end consumers and can then leverage this intel to organize more customized and personalized ad campaigns, with the end goal of generating incremental sales for their clients.
With the rapid changes in the automotive industry, it is inevitable that the legacy industry will be upended, and with this evolution players will both consolidate and emerge. Between the rapid growth and pivoted focus toward implementing digital solutions, a natural partnership emerging between OEMs, Dealers, and ICTs, the emergence of new revenue streams like VaaS, and the increasing importance of data, the automotive ecosystem is becoming one of the most ubiquitous and fast-growing sectors in today’s market. We expect to see an increased number of acquisitions and resulting consolidation from this market progression and anticipate a considerable change in related business models. What remains to be unseen is who will be the last man standing: the OEM? Dealers? ICTs? Data providers and aggregators? No matter the outcome, there is no doubt that it will be an exciting race to the finish, with more green lights for some than others.