Driving but not Owning Connected Eco Cars

Future gazing at the 29th Automotive Sector Meeting

13/11/2014 Barcelona

29th Automotive Industry Meeting

Why Automobile? 29th Automotive Industry Meeting

This year's IESE Automotive Industry Meeting has shed light on these vital issues while addressing strategic questions affecting Spanish, European and global markets, thus allowing IESE to continue its longstanding tradition of gathering industry experts to debate and discuss the challenges confronting "the industry of industries." Get inspired! Subscribe to IESE's YouTube Channel: http://bit.ly/IESEyoutube http://www.iese.edu/
Rainer Feurer, vice president of sales and development strategy at the BMW Group: “Driving an electric car is not the solution if you don’t look at the way the car has been made and how the electricity is produced.” / Photo: Jordi Estruch

Why buy a car? This was the question-cum-challenge put to the main car manufacturers who met at the IESE and KPMG 29th Automotive Sector Meeting. The debate focused on how demographic, cultural and environmental factors are re-configuring the value proposition in the so-called “industry of industries.”

The meeting drew out global trends that demonstrate these changes:

  • A growing market. World demand for cars is increasing at 5% per annum. It is estimated that 90 million cars will have been produced in 2014 around the world and that by 2018 it will be more than 100 million. 

  • Shift in demand. The main increase in demand for cars will come from the growth in the emerging middle class, principally in Asia, and particularly China and India. 

  • Digitization and connectivity. Clients demand more connectivity so they can do in their cars what they do from home or via their smartphone such as seeking information and entertainment. 

  • Mega-cities. Mega-cities are a growing phenomenon. For the first time in history more people live in cities than in the countryside and it is estimated that by 2050 70% of the world’s population will be urban.

  • Sustainable mobility. With growing environmental consciousness and pressure to reduce CO2 emissions there is a challenge to manage mobility efficiently in densely populated cities. 

  • Increasing regulation. The need to reduce congestion and urban car pollution is being translated into new measures to tax or penalize vehicle use, such as tolls, taxes and restrictions.

Three main themes emerged from the debate on how car manufacturers can transform these challenges into opportunities: winning over and retaining young clients; producing greener cars without losing performance; and getting a good foothold in the Asian market, which is forecast to lead the sector.

Selling to Younger People

For many young city-dwellers, buying a car is not a priority. It’s expensive to purchase, maintain, insure and to park. Where possible, they use bicycles or public transport. Alternatively they resort to car sharing and other more flexible forms of achieving mobility, which don’t necessarily involve ownership. A strategy for this group is to offer very flexible financing programs with easy payments and with the option for clients to decide, after two or three years, to change their car, take it back or keep it. This formula is already being successfully exploited by Mercedes-Benz in its Alternative program.

The change in paradigm from owners to users may see big companies moving from making cars to selling mobility services - a future envisaged by Rainer Feurer, vice president of sales and development strategy at the BMW Group, and Vicenç Aguilera, president of the Clúster de la Indústria d'Automoció de Catalunya.

Mercedes, a brand associated with people of a certain age and social standing, launched a communication campaign, “Something is happening at Mercedes,” in order to rejuvenate the brand and capture the younger market. The product was hardly shown at all. Most of the campaign was focused on young clients, Mercedes’ new target, who “were almost apologizing for having bought or thought about a Mercedes.” When the new Class A models arrived, they used other methods reach their targets: introducing improvements to make them more customer friendly, reducing bureaucracy and paperwork and adopting a new sales strategy.

Reiner Hoeps, managing director of Mercedes Spain, believes the sales force is out of touch with the young. “Salespeople have forgotten how to do their jobs,” he said. “They have become accustomed to dealing with lifelong clients, while young clients expect different methods and transaction models. Mercedes is now experimenting with displaying its new models in alternative venues such as clubs, which resonate more closely with younger people’s lifestyles.”

Emilio Herrera, managing director of Kia Motors Iberia, identifies “change” as the key concept in marketing to younger targets. Kia is a fairly new brand. Nonetheless, the brand reinvents itself with each new product launch. “This change is being carried out at the level of the product and design but also at the marketing level and digital marketing.” Kia Spends 28% of its annual marketing budget on digital marketing. It has also sponsored sporting events and as a result as ambassadors such as the tennis player Rafa Nadal and the NBA basketball players Ricky Rubio and José Manuel Calderón, who have mass appeal with younger audiences.

However, there’s more to it than brand rejuvenation, model redesign or adopting new communications strategies.

The next revolution is set to be the connected car. And so convinced of this are Internet and telecoms giants like Google, Microsoft and Telefónica, that they now have major stakes in the automobile industry.

Although this revolution is still relatively indiscernible, the industry is predicting a world of connected cars. The cars of the near future will be externally connected to other cars or other infrastructures, according to forecasts. This opens up a multitude of possibilities in terms of mobility services, active security, diagnosis of key parts of the vehicle and remote monitoring; as well as in-vehicle, web-based information and entertainment resources. “Connectivity means having a mobile computer in our car, and security with cameras, displays and 360° vision,” said Josep Maria Pujol, president of Sernauto and Ficosa.

Sustainable and Eco-Efficient Mobility

While hybrid vehicles have become a reality in the market and the performance of electric cars is improving, manufacturers continue to work hard to produce cars that are both more efficient and that damage the environment less. Government pressure to reduce CO2 emissions, the search for alternative methods of propulsion that would reduce dependency on fossil fuels and increasing regulation to limit and penalize the worst polluters is driving this sector rapidly towards sustainable mobility solutions.

Many manufacturers face a paradox, however: consumers want green cars but when it comes to buying we’re not prepared to compromise on speed, autonomy and price.

According to Feurer, the strategy has to work on two fronts; combining the evolution of current models (designing more efficient internal combustion engines and using innovative technologies) with definitive step forward in innovation. This implies new approaches such as alternative methods of propulsion and new mobility services.

Until we see a definitive eco breakthrough or revolution, 100% electric cars present the best option for short city journeys, while hybrids are a real alternative for longer journeys. Panelists stressed that the demand for greater environmental consciousness is not only limited to the combustion methods nor to the materials used in making a car, but to the industry’s entire value chain. As Feurer pointed out, “driving an electric car is not a solution in itself. You need to take into account the way the car has been made and how the electricity is produced.”

Asia Driving Demand

The automobile sector has been embracing globalization for decades. However the center of gravity is moving inexorably towards Asia. This is not just because the continent produces more cars than anyone other, but because of varieties of the middle class – 2.6 billion people in 2050 – who are set to drive demand over the coming decades.

The big manufacturers are gearing sales strategy towards this growing mass of clients in growth markets. China already accounts for 25% of global car sales and India, Japan, South Korea, Thailand and Indonesia are also significant markets. Component manufacturers, such as Ficosa or Group Antonlín, are also strengthening their position in these markets. Antolín CEO, José Manuel Temiño, confirmed that the company is now doing 10% of its business in China.