2014 Global Innovation 1000: Automotive industry findings

In the 2014 Global Innovation 1000, Strategy& analyzed R&D spending and innovation trends of the automotive industry. We take a closer look at how automotive compares to other industries when it comes to innovation strategies. See what innovations have been successful to the automotive industry, as well as what is on the horizon.

Show transcript

The 2014 Global Innovation 1000
Automotive industry findings

Automotive industry findings 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. Effective innovation will be critical to coping with each of these trends.

About the Global Innovation 1000: For the 10th year, Strategy& analyzed R&D investment at the 1,000 biggest-spending public companies in the world. In addition to undertaking our recurring analysis of R&D spending trends, we interviewed and surveyed more than 500 R&D executives and innovation leaders to get their perspectives on changes in innovation at their companies over the last decade and what they expect in the 10 years to come.
Strategy& 2

Automotive R&D spending has generally risen over the past decade
Overall, R&D spending by automotive companies has gone up by an average CAGR of 4.6% over the past 10 years. The growth has generally been smooth, with just two years of decline in R&D spending during that time. In fact, over the past five years, R&D spending by the automotive industry has consistently trended upward, while a number of other sectors, including healthcare, consumer goods and telecommunications, have decreased their R&D spending in the past year.



Increases in automotive R&D spending will likely remain sustained to keep up with the accelerating need for autos to become safer and more efficient yet more technologically advanced.
Barry Jaruzelski, Senior Partner, Strategy&

$105bn $70bn
89 71 2005 2010

2014

post-crisis dip
99 87 103 105

86 70 68 74

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Sources: Bloomberg data; Capital IQ data; Strategy& analysis. Results reflect the previous fiscal year, as of June 30 of the respective year shown. More information about our methodology is available on p. 15 of our strategy+business (Issue 77, Winter 2014) article, “Proven Paths to Innovation Success.”
Strategy& 3

Automotive companies rank #3 in innovation spending
Together the Global Innovation 1000 invested US$647 billion last year. Of that, nearly $105 billion was spent by automotive companies. Only computing and electronics and healthcare companies invested more. When it comes to R&D intensity—how much companies are spending as a proportion of revenues—automotive companies rank third.

Percentage of the total R&D spend for all sectors

26%
Computing & electronics

21%
Healthcare

16%
Automotive

11%
Industrials

9%
Software and Internet

4%
Chemicals

3%
Aerospace & defense

3%
Consumer

3%
Energy

2%
Telecom

2%
Other

Average % of revenue spent on R&D
11% 7% 4% 2%
Industrials Software and Internet

13%

3%

4% 2%
Aerospace & defense Consumer

0.4%
Energy

2%
Telecom

1%
Other

Computing & electronics

Healthcare

Automotive

Sources: Bloomberg data; Capital IQ data; Strategy& analysis. Results reflect the previous fiscal year, as of June 30 2014.

Want to see more how industries compare over time and across regions? Check out our interactive comparison of R&D spending by regions and industries
Strategy& 4

Chemicals

…but being great at innovation requires more than large R&D budgets
We asked survey participants which companies they believe are the most innovative to create our 10 Most Innovative companies list. Their responses and our list of Top 10 R&D Spenders match less often than you might expect. Indeed, Toyota has been the only automotive company to ever make both lists—in 2010–12. More recently, in 2013 and 2014, Tesla Motors has been the only automotive company among the 10 Most Innovative, despite investing far less on R&D than the industry’s biggest spenders.



What counts the most isn’t how much you spend. It’s what you get back from your investment.
Evan Hirsh, Managing Partner North America Automotive Practice, Strategy&

Top 10 R&D spenders

Amazon

IBM

GE

Samsung

Volkswagen

Intel

Roche

Apple

Proctor & Gamble Tesla

3M

Microsoft

Novartis

Toyota

Johnson & Johnson

Google

Merck

10 most innovative

US$10bn US$5bn US$1bn

Sources: Bloomberg data; Capital IQ data. Results reflect the previous fiscal year, as of June 30. More information about our methdology is available on p.15 of our Strategy + Business (Issue 77, Winter 2014) article, “Proven paths to innovation success.”

Want to see who the Top Spenders and Innovators were last year too? Check out our interactive list of the Top 20 R&D Spenders and 10 Most Innovative companies, 2005-2014
Strategy& 5

Moving in the right direction

Regardless of spending trends, automotive executives think their companies are moving in the right direction when it comes to improving their innovation efforts. Ninety percent say they’ve gotten better at innovation and almost half say they are performing financially better relative to their peers.



The rapid rate of change of technology will keep the auto industry clamoring for the most cutting-edge innovations, spurring on competition for years to come.
Barry Jaruzelski, Senior Partner, Strategy&

Performing better financially
My company is performing better than the competition in financial terms

Getting better at innovation
My company is better at innovation today than it was ten years ago, on the basis of the share of specific product or service ideas that have met commercial goals

46%

90%

Two big factors driving these improvements:
getting closer to the customer

better alignment

Note: Analysis is based on survey questions “How much better, if at all, is your company at innovation today than it was 10 years ago, on the basis of the share of specific product or service ideas that have met commercial goals?” (Base: 28) and “How do you perceive your company’s current overall financial performance relative to competitors’?” (Base: 30) Sources: Strategy& 2014 Global Innovation 1000 survey data and analysis

Strategy&

6

Aligning innovation with business strategy

Our overall research has shown that companies which closely align their innovation and business strategies perform better than those that don’t. The automotive industry’s performance in this regard mirrors the average across all industries, but there is room for improvement – roughly a third of automotive companies say their innovation and business strategies are not highly aligned.

In our experience many OEMs have not been able to holistically align their connected car strategy with their overall business strategy. Many players have created parallel organizations tasked with identifying and pursuing incremental service revenue streams which seem relatively elusive in a world where consumers are used to free apps.



Being truly innovative – having the know-how to generate ideas and the resources and business acumen to make them a reality – is a part of doing business in the constantly changing automotive industry. The days of simply being a commodity supplier to the world’s OEMs are vanishing rapidly.
Evan Hirsh, Managing Partner North America Automotive Practice, Strategy&

36%
My company’s innovation strategy is not highly aligned with its business strategy

64%
My company’s innovation strategy is highly aligned with its business strategy

innovation strategy business strategy
Strategy&

innovation strategy business strategy

Note: Analysis is based on survey question “How closely aligned is your company’s innovation strategy (or approach to innovation) with its overall business strategy?” (Base: 28) Responses of 1, 2, or 3 were defined as “Not Highly Aligned”, while responses of 4 or 5 were “Highly Aligned”. Sources: Strategy& 2014 Global Innovation 1000 survey data and analysis
7

Understanding the customer

Most automotive executives (86%) believe they understand customer wants and needs better than they did 10 years ago. In fact, one-third of automotive survey respondents say their knowledge of customers has even become much more detailed.

Digital advances are of course making it easier to get comprehensive data on customers in all industries. In the automotive industry, social media in particular has improved understanding of the customer as has analyzing data from drivers more directly.



The exponential growth of new and cheaper features in vehicles is substantial today but will become even more significant over time. Innovation at every automotive company has to accelerate to keep pace and they will use customer data to achieve this.
Evan Hirsh, Managing Partner North America Automotive Practice, Strategy&

34%
My knowledge of customers has become much more detailed

52%
My knowledge of customers has become more detailed

Note: Analysis is based on survey question #18 “How, if at all, has your company’s understanding of your customers’ wants and needs changed over the past 10 years?” (Base: 28) Sources: Strategy& 2014 Global Innovation 1000 survey data and analysis; Strategy& Industry Perspectives: 2015 Auto Industry Trends
Strategy& 8

Using technology to drive innovation forward

The connected car Cars are getting more and more digital, features from internal sensors monitoring critical engine functions to external sensors scanning the roadway for traffic backups and safety hazards are becoming more commonplace. Onboard entertainment and communications interfaces connect with the Internet. Autonomous driving features help with basic functions like parking and keeping a safe distance. And that’s just the beginning.

Getting social Customers, dealers, suppliers, and prospects are discovering, connecting, and sharing their experiences with automotive brands through social media and digital platforms. Brand advocates and detractors now share their purchase and ownership experiences through text, photo, and video postings on their personal networks. That’s having an impact on the cars consumers buy—and driving the need for more innovation in organizational design.



With the accelerating electronic content in vehicles, innovation in the automotive industry is more challenging than ever.
Evan Hirsh, Managing Partner North America Automotive Practice, Strategy&

The connected car

Getting social

Keys to success: A strong handle on data security; ability to collaborate with players in other industries. The next step: The networked mobility market is likely to quadruple in size to more than €115 billion (US$148 billion) globally by 2020. The increase will be driven not only by demand for connected-car components, but also by the rise of entirely new digital business opportunities.

Keys to success: Strong management of all digital touch points, whether they be company-managed, co-owned, or even just loosely affiliated; maintaining a user-centered focus. The next step: A fully developed and coordinated “digital ecosystem” that pulls together automakers, dealers, and drivers in real time.

Sources: Strategy& Racing Ahead: The Connected [email protected] 2014 Study; PwC, Social Selling: A Digital Blueprint for the Automotive Industry
Strategy& 9

How does your company innovate? Need or Seekers (43%):Driver? Need Seeker, Market Reader, Technology Market Readers (18%
Our study classifies companies into one of three innovation models. While all three strategies can be productive, our research suggests that need seekers have an advantage. Regardless of which strategy automotive companies choose, the way automotive companies have to innovate in the future will look different than the relatively stable world of today’s OEMs and their tiered suppliers.

Companies that are Need Compan Seekers tend to engage Connected car technology is becoming a more Readers consumers directly to generate important purchasing criterion. Consumers have become accustomed to the annual product cycletypically new ideas, and then develop in the consumer tech world and car companies closely m original products and services need to create more optionality and flexibility to addressing unarticulated needs make technology bets within the constraints of custome a multi-year product cycle. This also require and get them towill market first. focusing partnerships or alliances with non-traditional value th types of suppliers (e.g., software companies). innovati

Automotive companies are using a range of innovation models

Market (18%): Need Seekers Need Seekers (40%) (43%): Market ReadersReaders (23%) Technology Drivers (37%)

Technology Drivers (3

Benefits of this strategy for Companies that are Need Companies defined as Market Compan healthcare companies: Seekers tend to engage Readers are fast followers. They Drivers Understanding how consumers directly to generate typically generate ideas byend internal using new ideas, and then develop closelyconsumers monitoringare their markets, to devel medications and treatments ca original products and services customers, and competitors, services help healthcare companies find focusing largely on creating breakth Companies unarticulated defined as Market needs Companies that are Need Seekers addressing Companies that are Technology are fast followers. They tend to engage consumers directly andReaders Drivers depend heavily their ways both toon improve efficienc get them to market first. value through incremental increme typically generate ideas by closely to generate new ideas, and then internal technological expertise to and develop new service monitoring their markets, customers, innovations develop original products and services develop new products and services, to current products. needs o addressing unarticulated needs and get and competitors, focusing largely on driving both breakthrough innovation offerings for patients. Itnew cantec als creating value through incremental them to market first. and incremental change to meet innovations to current products. the needs of their customers help identify thevia most promisin Benefits of this strategy for new technology. therapeutic areas for research. Benefits of this strategy for automotive companies: Automotive
companies that are able to get close to consumers can focus innovation efforts on what really matters to car buyers. Benefits of this strategy for Technology Drivers (39%): automotive companies: This strategy takes advantage of engineering Market Readers (18%): automotive companies: If your company has a strong global footprint, you may be able to generate momentum by transferring innovation across regions or platforms.

function, which is improved Companies that are Technology even further if you pair product Benefits ofability thisto strategy Companies defined as Market Drivers development with the depend heavily on their for innovate in business models and healthcare companies: Readers are fast followers. They internal technological expertise operational capabilities. Pharma focused on typically generate ideas by to develop newcompanies products and Sources: Strategy& 2014 Global Innovation 1000 survey data and analysis generics and/or closely monitoring their markets, services, driving both biosimilars can use thisinnovation strategy toand increase customers, and competitors, breakthrough Wondering where your company fits in? Check out our online innovation market share. to meet the focusing largely on creating incremental change strategy profiler value through incremental needs of their customers via innovations to current products. new technology. Strategy& 10

Innovation can be managed Innovation, although different from operations, sales, and marketing, is nevertheless a function that can be managed: There are principles that are known, capabilities that can be built, and recognized levers that can be pulled to improve the process over time. The stakes for making these efforts are high—the disparities in innovation performance show that there are tremendous opportunities for getting more from your R&D spending, and for improving your competitive position and your financial performance. To learn more: strategyand.pwc.com/ innovation1000

Strategy&

11

Contacts

Evan R. Hirsh Managing Partner, Automotive Practice Mobile: +1-216-287-3723 Email: [email protected] Barry H. Jaruzelski Senior Partner, Global Leader of Engineered Products and Services Practice Mobile: +1-973-410-7624 Email: [email protected]

www.strategyand.pwc.com/innovation1000
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact. We are a member of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com. © 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.