The automotive industry prides itself on a culture of constant innovation and change. The lean manufacturing principles that have made the sector a productivity powerhouse are based on the relentless reassessment of established methods and processes. If a better way to do something can be found, it is quickly standardized and adopted across the world.

Some changes, however, go beyond the incremental. Right now, automotive companies in every part of the industry and every tier of the supply chain are riding a wave of disruption that may transform the very basis of their businesses. When consultancy KPMG asked automotive executives earlier this year to rate the chances of major business model disruption in the sector, 83 percent said they thought such change was likely, up from only 12 percent two years ago.

Going glocal

The first of these forces is geography. Global demand for cars is still growing and annual motor vehicle production is expected to pass 100 million by the end of this decade. That growth is far from evenly distributed, however. Car ownership levels have stabilized in many developed economies, but they are rising rapidly elsewhere. Since car making is now a global business, that matters for all the original equipment manufacturers (OEMs) and their major suppliers. Adapting production and supply networks to match the distribution of new customers hasn't been easy, however. Of the four BRIC countries seen as key target markets at the turn of the century, two - Brazil and Russia - have been hit by recessions. India and China, by contrast, continue to grow rapidly.

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Vehicle manufacturers depend on highly orchestrated just-in-time logistics links with suppliers to meet their cost, quality and delivery goals. The challenges involved in running those supply chains are compounded by global manufacturing footprints. The rapid expansion of production in emerging regions is putting local logistics infrastructure under strain, for example. In some countries, such as China and Mexico, road networks and air and sea terminals are already struggling to cope with the demands of the automotive sector, and demand on that infrastructure continues to rise faster than supply. And it isn't just physical infrastructure that's in short supply. It can also be tough to secure the skilled workforces required in automotive production and logistics operations in these new markets.

While carmakers often pursue local sourcing strategies, developing the necessary capacity often takes time, forcing them to feed their plants with components from elsewhere in the world. That brings a host of tough challenges, from the need to manage customs controls to increased risk of in-transit disruption and delay. To meet them, automotive players are ramping up their logistics and supply management capabilities, investing in dedicated tools to assess and manage risks across their networks, for example, and implementing 24/7 logistics control towers so they can respond more rapidly to incidents and delays.

Technology on wheels

Then there's technology. Today's cars contain dozens of separate computer systems, controlling everything from the performance of the engine to the position of the passenger seats. New features, such as autonomous driving capabilities, are increasing the power and complexity of those in-vehicle computer systems. And cars are no longer isolated computer networks on wheels. A growing number of features call for internet connectivity too, allowing users to access online services on the move and vehicles to share data on their condition and location across the cloud.

Technology is reshaping automotive supply chains in many different ways. Electronic components tend to be smaller, lighter and more valuable than traditional car parts. They can be more fragile too, requiring protection from extremes of temperature, electrostatic discharge, shock and vibration during transportation. That requires companies to think hard about their choice of transport mode, storage and packaging. Some technology products, like integrated circuits or advanced sensors, require highly specialized production capabilities too, which means they tend to be manufactured in a few locations and shipped worldwide.

SMART THINKING: The technology powering autonomous cars is reshaping automotive supply chains.

High-technology products are also altering the relationship between carmakers and their suppliers. New players are entering the market, many of them huge companies in their own right, with customers spread across dozens of industries. That can expose carmakers to capacity constraints created by demand peaks from other sectors and makes it harder to negotiate the tough cost and quality improvement agreements that the industry is used to.

But technology is an enabler as well as a challenge in automotive logistics. Robotic systems, from automated guided vehicles to "cobots" that can work safely alongside human operators, are now being applied beyond the production environment and in the supply chain. That can improve the speed and accuracy of logistics processes and help companies overcome staffing challenges. The internet of things is helping to improve supply chain visibility, with robust, low-cost tracking devices that can monitor and report the precise location of shipments. Automotive companies and their logistics partners are also making use of advanced analytics techniques to comb through gigabytes of supply chain data to spot potential problems earlier and find new ways to streamline processes and cut costs.

High-technology products are altering the relationship between carmakers and their suppliers.

A cleaner future

Even the internal combustion engine, the fundamental technology of the automotive industry, is facing the threat of obsolescence. Concerns about the impact of vehicle emissions on the global environment and local air quality are accelerating the development of alternative powertrain technologies. Electric propulsion, in the form of plug-in hybrid designs or pure electric vehicles, is the current leader in this area. Volvo, for example, announced in July that by 2019 every vehicle it produces will incorporate an electric drive of some form. Other technologies are under development too. Several manufacturers are already producing hydrogen fuel cell-powered vehicles in small volumes. Honda and GM have announced plans to invest $85 million in a joint venture to manufacture fuel cells in the U.S., for example.

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Alternative powertrain components present unique logistics challenges. The lithium-ion batteries that power the current generation of electric and hybrid vehicles are expensive, heavy and highly flammable. They are categorized as Class 9 Dangerous Goods under international transport regulations. Some battery technologies need careful temperature control during storage, or must be cycled to keep them in top condition prior to installation in the vehicle. Batteries also have particular requirements at end of life, which may occur in the middle of the lifecycle of the vehicle they power. Used batteries, which may be damaged or in poor condition, require specialist packaging for safety reasons.  

New model armies

The third big disruption comes from customers. On the design side, companies must cope with growing diversity in customer requirements. Middle-class buyers in emerging economies want simple, reliable vehicles that don't cost too much to buy or run. Wealthy buyers across the world still want high levels of performance and comfort, and rich feature sets. Companies must attempt to meet all those needs while still retaining the economies of scale provided by global standardization in platforms and vehicle architectures. And they must repeat the trick with increasing frequency. Over the past two decades the lifecycle of a typical vehicle model has shrunk from 10 years to four or five. Getting new product development right is critical for profitability. Consultancy McKinsey estimates that a six-month delay in the launch of a new product can reduce its lifetime profit by 30 percent.

Logistics plays a critical role in the automotive product development process. Automotive companies now do much more of their development and validation work in virtual environments using advanced computer-aided design and simulation tools, but they still need to ship prototype parts and complete vehicles around the world for testing, and to support launch marketing efforts. And once production starts, new supply chains take time to stabilize as teething problems are overcome. By one estimate, logistics account for 10 percent of the cost of a new vehicle launch, and problems in logistics are at the root of around 30 percent of launch delays.

Perhaps most profoundly, consumer attitudes to vehicles, and vehicle ownership, are changing. Customers in many markets are becoming as interested in the connectivity of their cars as they are in traditional features like power or fuel economy. And some customers are eschewing car ownership altogether, opting instead for a new generation of mobility-on-demand services, including ride-hailing services such as Uber and Didi Chuxing or car-sharing services such as Zipcar or Car2Go.

Shifting value

These macro-level changes are impacting the core of vehicle manufacturers' business: designing, building and selling cars. But it is also rippling out through the supply chain both upstream and downstream. OEMs have been shifting complexity out of their own final assembly plants and onto suppliers for years, asking them to deliver ever-larger and more sophisticated modules. As more of the value of the finished vehicles is embedded in its electronics, that trend is accelerating.

HARD CHARGE: Components for electric and hybrid vehicles – such as this Audi e-tron Sportback concept car – present unique logistics challenges.

If car companies are ceding more upstream value to suppliers, they are actively pursuing opportunities to capture new sources of value once the vehicle is in the hands of the end customer. The connected car provides a platform for the delivery of a wide range of services. Some of those are already established, like entertainment, navigation and traffic information. Others are just emerging. DHL’s parcel delivery arm is piloting a car drop service in four German cities that allows a courier to locate a customer’s vehicle while it is parked outside their workplace and gain one-time access to the trunk to deposit or pick up packages. Electric vehicles may play a part in home or neighborhood energy networks, accumulating electricity when it is available at low cost and returning it to smooth peaks in demand.

Emerging business models have implications for vehicle design too. Today, cars destined for shared use are usually standard models modified with appropriate remote access and location tracking systems. In the future, dedicated vehicles may appear, with the ability to configure themselves automatically to suit the needs and tastes of different drivers, for example.

Mobility services also make different demands on vehicle reliability. Sharing models typically result in much higher utilization levels, which puts more stress on components and creates extra pressure to keep vehicles on the road, earning money. That’s going to drive the adoption of predictive maintenance technologies and the supply chains and logistics processes required to support them. 

Do all these trends mean the end of the car company as we know it today? Fathi Tlatli, President, Global Automotive Sector, DHL Customer Solutions & Innovation, doesn’t think so. “Mobility services, like car-sharing or ride-hailing schemes, still need vehicles to operate them. And there are millions of people in emerging markets who want the opportunity of car ownership,” he says. “At least for the foreseeable future, car companies are not going away. Instead they are going to increase the scope of the products and the services they offer, so they can meet the mobility needs of a wider variety of end customers.” —  Jonathan Ward

Published: November 2017

Images: Viaframe/Getty Images; Susana Gonzalez/Bloomberg/Getty Images; Sean Gallup/Getty Images; Angel Navarrete/Bloomberg/Getty Images; AUDI AG