Impact of current industry trends on OEM revenues and profit up to 2035 (Euro5, China, Japan, United States)
Even before COVID-19, the automotive industry was facing far-reaching challenges with profound effects on business models. Megatrends from connectivity and alternative drivetrains to shared mobility and autonomous driving are fundamentally reshaping the landscape of automotive sales and aftersales. The goal of our study is to provide a clearer picture of current trends and their implications on the future of vehicle sales and aftersales as well as opportunities in financial services, mobility as a service and car as a platform from now until 2035. We identify key challenges and offer sensible approaches for OEMs (original equipment manufacturers) navigating an uncertain future.
Car sales and automotive aftermarket in 2035
These are just some of the challenging questions facing all stakeholders as they look to the future:
- Will OEMs be able to keep profitability at current levels in years to come?
- Will OEMs hold their own against tech players in developing cutting-edge technologies and services?
- How much will electrification affect the highly profitable aftersales business?
- How will market potential and customer behavior vary from region to region?
With current trends potentially closing doors in the traditional automotive space, we can expect new business opportunities to arise in a reshaped mobility industry. Should OEMs move into these innovative markets, leverage development efforts of third parties, forge alliances or perhaps even stay out of it entirely?
The study “Future of Automotive Sales and Aftersales” relies on various scenarios to examine how automotive megatrends like connectivity, alternative powertrains, car sharing and autonomous vehicles will affect revenues and profits in the sales and aftersales business. With a time horizon until 2035, the study focuses on the global markets China, the US and Japan as well as the five largest EU markets Germany, France, the UK, Italy and Spain (Euro5).
By 2035, we assume that 100% of cars will have basic connectivity, with around one-third operating at full connectivity. Consumers are expected to attach a higher value to connected services and make a strong shift towards online purchasing.
In the future, we predict that different drivetrains will coexist, with battery electric vehicles leading the way. The emergence of alternative drivetrains will differ across regions and is mainly driven by falling production costs, new regulations, charging infrastructure and improved performance.
Shared mobility will increase utilization rates per vehicle and shift ownership from private customers to fleet operators. Growth in mobility services is expected to accelerate with the emergence of autonomous driving.
The biggest technological hurdle lies between level 3 and level 4 autonomous driving. Initially in the run-up to 2035, level 4 connectivity and higher is only likely to be used in specific use cases. However, in a disruptive scenario significantly high shares of autonomous vehicles are expected across all regions.
Key findings of the study for the markets Euro5, China, Japan and the United States: The future at stake
The following results represent a “base case” relying on the trend assumptions most likely to occur and assuming the proxy OEM does not pursue significant corporate transformation. In a more disruptive scenario, we can expect results to be even more drastic.
The base case scenario assumes that the compound annual revenue growth rate of our proxy OEM remains stable at 3 percent between 2018 and 2035. China is expected to contribute the most to overall growth relative to the other markets in our study, which show only moderate or minor positive growth. We even forecast a decline for traditional business segments in EU5 and Japan, where these losses can only be compensated through growth in new business segments. Although global revenue development seems promising, a glimpse at the profitability reveals that without significant transformation OEMs will struggle remaining as profitable as today.
The overall vehicle sales of the proxy OEM are forecast to grow by 25 percent in the base case. Most of that growth comes from China, though a slight uptick is forecast for the United States as well. EU5 and Japan show a drop in both new car and used car revenue. All of the markets in our study are expected to experience a major shift from private to fleet segments and from stationary to online sales – yet another sign that mastering omnichannel and direct sales will be key success factors across all markets.
By 2035, we expect an 11 percent decline in the aftersales business of our proxy OEM, even in the base case. More disruptive scenarios will result in a much stronger decline. We see industry trends – especially alternative drivetrains – putting at risk the aftersales profits OEMs are generating today. China is the only market with growth in aftersales business driven by the strong increase in car sales, though it also has the highest expected share in alternative drivetrains.
Our latest study predicts further erosion in profitability, with manufacturers up against a quicker, more severe fallout from the pandemic – particularly given the massive collapse in sales we are seeing right now in our featured markets.
Dr. Thomas Schiller, Managing Partner Clients & Industries at Deloitte
Opportunity in new business segments?
There is a lot of market potential for revenues in new business segments, but compensation for the losses in traditional business will not come easily – particularly when it comes to contribution margin.
The strong growth in sales in China will almost double financial services revenues, accounting for more than half of our proxy OEM’s overall revenue from financial services in 2035.
Service-based business is expected to grow in all four markets as new business segments take off, while mastering omnichannel with a focus on direct sales will be a key success factor for asset-based and service-based business in all markets. Especially the increasingly digitalized consumer behavior in times of COVID-19 will also have an impact on the automotive industry. We expect that digital sales and service processes will become extremely relevant.
In the base case scenario, our OEM will already be able to yield significant revenue growth through Mobility as a Service by 2035 and achieve a total compound annual growth rate of 11 percent. Fleet services benefit from the rise in shared mobility and expand to include more multi-brand offerings. There is substantial profit potential to be leveraged by actively shaping the new mobility environment, but this implies becoming a holistic “full-service mobility provider”. OEMs could then tap substantial synergies by controlling end-to-end user touchpoints and optimizing costs throughout all revenue substreams. Make no mistake: they will have to undergo a massive transformation to achieve this.
Car as a Platform sales are expected to increase direct revenues, but the main role of connectivity is to act as an enabler for other revenue streams or as a cost optimizer. Overall, Car as a Platform business will likely remain relatively small, accounting for only 4 percent of total OEM business in the base case. Revenues generated in China from connected services will drive most of the growth in overall revenue. OEMs need to carefully review their initiatives and partnerships so that they can avoid sunk cost investments and still deliver the best offering to their customers.
Deep Dive Germany: Future of automotive sales and aftersales in Germany
In general, we can summarize that the traditional business segments vehicle sales and aftersales will strongly decline in Germany until 2035.
New vehicle sales are expected to drop by overall 7% which can be strongly attributed to socioeconomic factors, such as aging population but also shared mobility. Aftersales revenues will suffer from a shrinking overall car parc and the emergence of alternative drivetrains putting 12% of overall current OEM profits at risk. Maintenance & services revenues are affected strongest and expected to decline by 84% for a proxy OEM in Germany and without engagement in large-scale corporate transformation. The implementation of a direct sales network and the restructuring of stationary retail formats are urgent to address growing fleet and online sales in both business segments.
Financial services revenues experience constant growth in credit and leasing revenues driven by an improved residual value management and new business models around used car remarketing. Beyond that, the proxy OEM in Germany generates revenues from transaction fees generated through its proprietary payment solution platform for third parties.
Revenues in new business segments involve large market potential but cannot easily compensate the loss in traditional business segments.
In Mobility as a Service, fleet services revenues rise in line with an increased share of fleet customers. Moreover, if industry trends emerge strongly, the OEM in Germany can expectedly address a 16.7bn€ market when providing ride hailing and ride pooling services in urban areas. Not all OEMs will be able to capture significant market share: In particular, mobility services, which will take place closely to the end users, will be exposed to a competitive “winner takes all” market dynamic. High investments and a holistic portfolio strategy are necessary to yield profitability and correspond to future user needs. Direct revenues with Car as a Platform services, such as value-added services or data-as-a-service may not contain the expected revenue potential. Nevertheless, investments in connectivity are in all respects urgently required to capture revenues in other business segments and improve bottom line.