CompetitionCompetitive advantageThe new value chain of the automotive industry, stakes for carmakers

Technologies, whether digital or not, are changing the value chain of the automotive industry. New value propositions, new critical resources, new business models: carmakers are forced to forge alliances with their best frenemies, the digital giants. How to secure value capture with these ambitious partners?

Technologies (software, mobile, cloud, electric engine, artificial intelligence, internet of things,…) transform the industry. New value propositions emerge (service and usage), with electric engine, manufacturing tends to commoditization and software is becoming a key resource.

Consequently, the value chain evolves. Activities related to cloud storage, software development, machine learning capabilities are becoming strategically critical and financially significant for both manufacturing activities and service or shared self-driving car offers.

Carmakers are forced to decide on their position on the value chain. Manufacturing remaining the central activity, how far should they enter in digital and service activities? Even if strategies differ among the carmakers, the following and combined four actions are observed:

  • scale internal capabilities to develop proprietary software (like the 7B€ invested by Volkswagen to start a subsidiary with this objective or the 3 000 developers to be hired by GM)
  • partner with cloud companies to access to their capacity. Volkswagen and Toyota partnered with Amazon to use the cloud infrastructure for their internal operations and for opening new revenue sources associated with data monetisation or usage. Microsoft announced an investment in Cruise, the GM subsidiary for self-driving offers
  • exit from service activities they couldn’t leverage efficiently. Daimler sold their ridesharing activity to Uber, GM shut down its ridesharing service Maven.
  • develop internally new services activities related to financing, one core historical activity, as announced by Renault with their Mobilize operations

The development of strategic partnerships with digital giants embodies two strategic battles for carmakers. The first one is the fight between carmakers. As the digital cost increases, each of them is aiming at securing a cost advantage through lower prices agreements. The second one is between carmakers and digital players for the value capture of the mobility market. Carmakers are used to that kind of battle, it already took place with their Tier 1 and Tier 2 suppliers in the past. In that fight, the bargaining power and size are key to get the lion’s share. Given the size and cash pile of digital giants, it’s not evident that carmakers would get as much as they got from their manufacturing suppliers in the 1990’s.

In the battle with digital giants, carmakers have several cards to play. One would have been to buy one of them to integrate that part of the value chain and control the value capture. That option doesn’t seem to be at hand given the size of these players. However, other moves are possible to weaken the position of the digital players. For example, they could forge an alliance between carmakers to strengthen their position and defend their share of value. Another option could be to favor the emergence of a new and independent player coming from somewhere else in the world.

In this frenemy relationship, each side will try to get the benefit of the partnership while maximising their individual outcomes. Another perfect field for game theory addicts.

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