Connected car report 2016: Opportunities, risk, and turmoil on the road to autonomous vehicles

Richard Viereckl, Dietmar Ahlemann, Alex Koster, Evan Hirsh, Felix Kuhnert, Joachim Mohs, Marco Fischer, Walter Gerling, Kaushik Gnanasekaran, Julia Kusber, Juliane Stephan, David Crusius, Henning Kerstan, Trent Warnke, Manuel Schulte, Jonas Seyfferth, Edward H. Baker
September 28, 2016

Executive summary

The race to build the fully connected car, and ultimately the completely autonomous vehicle, is already under way. Who will cross the finish line successfully, and where exactly that finish line is, remains to be seen. In this report — based on extensive market research, interviews with auto industry experts, and engagement with auto manufacturers, suppliers, and technology companies across the globe — the automotive practice of Strategy&, PwC’s strategy consulting group, addresses these questions.

Today, 70 percent of global connected service sales come from premium brands. By 2022, that number will fall to 50 percent, at the expense of falling margins. Although connected services will generate sales of US$155 billion, most of this value will be offset by falling sales from legacy features such as navigation, entertainment, and safety systems. These trends will contribute to a squeeze in profits for OEMs and suppliers. Higher R&D expenses will not convert into higher overall sales. On the supply side, by 2030, profits available to traditional automakers and suppliers may drop from 70 percent to less than 50 percent of the industry total. The balance of $120 billion may be captured by new entrants, including suppliers of new technology, mobility services, or digital services. Many of today’s manufacturers and suppliers lack the skill, agility, and boldness to turn their companies digital quickly enough to take advantage of this change.

The report is divided into seven sections, each of which focuses on one key question about the opportunities and risks to be found in the industry’s business models, ecosystem, market growth, geographic distribution, and technologies involved in developing the connected car:

  • How does technological change affect the distribution of value in the rapidly restructuring automotive industry?
  • How can automakers recoup their investments in connected and autonomous vehicles?
  • How quickly will the market for connected car packages grow, and how will the revenue opportunities break down in terms of region, car segment, and type of package?
  • How will suppliers be transformed by this industry-wide change, and what will it take for them to succeed?
  • How will China move into the connected car market, and how will those efforts, abetted by its digitally sophisticated car buyers and broad range of innovation, affect the car of the future?
  • How will connected car technology be protected against cyber-attack, and how can automakers effectively meet the related organizational and technical challenges?
  • How will autonomous vehicle technologies, now in the early stages of development, transform the driving experience of tomorrow?

Automakers, suppliers, and technology companies are beginning to jockey for position. Our goal here is to provide you with a deep understanding of where your company stands, and what it will take for you to win.

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Introduction: Industry profits at risk

Drivers around the world are getting used to the increasing amount of digital technology in their cars. Many of the normal features of the car — monitors of performance data like speed, fuel efficiency, and gas tank levels; heating and air conditioning; and the audio system — all have been digitized in hopes of providing the driver with easier operation and better information. And the car — including smartphones and other devices carried onboard by drivers and passengers — now reaches out to the surrounding world for music streamed from the cloud, real-time traffic information, and personalized roadside assistance. Recent innovations allow automobiles to monitor and adjust their position on the highway, alerting drivers if they are drifting out of their lane, and slowing down if they get too close to the car in front of them. All in all, the car of today is a technological marvel.

And there’s much more to come.

Tomorrow’s car will represent a step change in form and function, compared with what’s being offered now. Although many commentators have described this future in terms of the autonomous vehicle, that’s just a part of the change to come. The vehicle of the future is already taking shape in a variety of forms, although it is unlikely to reach full fruition on public streets and highways for 10 to 20 years. Nonetheless, there will be enough innovation before then to transform the automobile. There will be new levels of connectivity among vehicles, enabling new services inside and outside the car. There will be new kinds of cars, many dedicated to specific uses, such as ride-hailing and ride-sharing fleets. The culture of the automobile, including conventional wisdom about how vehicles should be owned and driven, will also change. Already, the very notion of what a car is for is being radically rethought.

These changes to motor vehicles will, of course, also transform the auto industry. As the connected car matures technologically, it will influence market trends and automakers’ relationships. Features like safety sensors, detailed engine maintenance signals, and smartphone integration are already becoming common in new upmarket vehicles. Industry leadership will shift, in some cases, to new players, while conventional original equipment manufacturers (OEMs) will be pressed to substantially accelerate their drive for innovation — not just in technology, but in their cultures, merger and acquisition approaches, management styles, and recruitment of talent.

In this report, we will take an in-depth look at how the car is being transformed through technology, and what the economic consequences of that transformation will be for the many stakeholders in the auto industry around the globe — the auto manufacturers, suppliers, technology and software companies, fleet operators, and others. But first, it will be useful to put it all in context, and look at the market shifts and structural changes that are underpinning the current and future development of the connected car and autonomous vehicle.

For the purposes of this report, we use the following definitions:

  • Connected cars are those that have access to the Internet and a variety of sensors, and that are thus able to send and receive signals, sense the physical environment around them, and interact with other vehicles or entities.
  • Autonomous vehicles (also known as self-driving cars or robotic cars) are motor vehicles that operate without a human driver, which reduces the cost of transportation and improves convenience and (in most cases) safety.

This report contains the results of the 2016 Connected Car Study, the fourth since 2013. This annual study is conducted by the automotive practice at Strategy&, the strategy consulting group of PwC. It is based on analysis of market volume, innovation and sector growth data, consumer research, and interviews with industry leaders. It explores the technologies involved in developing these new motor vehicle forms, the likely industry dynamics, and the emerging market for them — present and future.

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Evan Hirsh

Principal, USA

Dietmar Ahlemann

Partner, PwC Germany