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?OUTLOOK ON THE AUTOMOTIVE SOFTWARE AND ELECTRONICS MARKET THROUGH 2030

INTRODUCTION

?The COVID-19 pandemic and its consequences have been expediting the future of mobility, with intense effects on customer preferences, technology adoption, and regulation. New participants continue to enter the electric vehicle (EV) market and many commands higher valuations than incumbent OEMs. In this environment, automotive companies are looking to software and electronics as the next frontier to transform the industry. Automotive companies and their suppliers are investing huge capital in software and electrification. In this perspective, based on the popularity and fascination of the surprising development in software technology, computer sciences, and quantum mechanics, recently introduced based on innovative products. People are willing to purchase the same products with amazing novel systems. Accordingly, the automotive software and electronics market is having a composed and self-assured manner for exponential growth ahead of the next decade. Our latest market projections offer a glimpse into the industry’s future. The forces disrupting the automotive industry—known combinedly as ACES (autonomous driving [AD], connected vehicles, the electrification of the powertrain, and shared mobility)—have achieved rapid momentum not seen ever.

?These disruptive technologies are empowered by the major contribution to the rapid growth of automotive software and electronics industries. By 2030, the global automotive software and electronics market is expected to reach $468 billion, representing a 5.6 percent CAGR from 2019 to 2030. Contrarily, the entire automotive market for passenger cars and light commercial vehicles (LCVs) is projected to grow at a compound annual rate of 1 percent in the same period, which means from 89 million units in 2019 to just 102 million units in 2030. This reality reflects a significant shift in the future of mobility, propelled by the expansion of urban-access restrictions (such as bans on internal combustion engine [ICE] vehicles), higher adoption of nonownership models (including car sharing and micro-mobility), and disruptive technologies (such as urban AD). Nonownership is a classification used in mortgage origination, risk-based pricing, that the owner does not occupy the property. ?For this, a declaration of nonownership?is a form completed with the?DMV?asserting that the person?does not own a vehicle. If approved, it can?exempt a person from having to install an?ignition interlock device. It can also be used to defend against?traffic or a parking ticket.

The latest research delivers an updated perspective on the trajectory of the automotive software and electrical and electronic components (E/E) market through 2030. The adoption of driver assistance systems and AD?will be fueled by changing customer preferences; regulations that prioritize safety and allow higher levels of autonomous driving; and technology breakthroughs, such as the availability of high-performance computers, advanced software, or light detection and ranging (LiDAR) sensors. For example, we expect strong annual growth of up to 30 percent for Level 2 advanced driver assistance systems (ADAS) through 2025, largely driven by regulations that require new vehicles to have these sensors. By 2030, we estimate that 12 percent of vehicles will be equipped with Levels 3 and 4 AD capabilities, compared with only 1 percent in 2025.

While passenger car and LCV sales?will rise slightly from 89 million vehicles in 2019 to 102 million in 2030 (just higher than 1 percent CAGR), the automotive software and electronics market is projected to grow at nearly four times that rate during the same period. Making up the largest share of the market, electronic control unit (ECU) and domain control unit (DCU) sales are expected to reach $144 billion by 2030. The second-largest share of the market will be software development including integration, verification, and validation, with a revenue prospect of $83 billion by 2030. Power electronics is by far the fastest-growing component market, with EV adoption fueling an expected CAGR of 23 percent through 2030. Sensors are projected to grow at a compound annual rate of 7 percent, driven by AD/ADAS sensors.

The automotive software market?is projected to more than double in size from $31 billion in 2019 to roughly $80 billion in 2030—a CAGR of more than 9 percent. ADAS and AD software will account for much of this growth and makeup almost half the software market by 2030. Timing also plays a role: the development of software for higher-level autonomous driving (for example, urban AD) will precede market introduction by several years. Infotainment, connectivity, security, and connected services will also grow at pace with the overall software market, becoming the second-largest software market by 2030. This growth is driven by a high share of connected vehicles and demand for features such as in-car payments, location-based services, and music streaming. The market for body and energy software will exhibit a CAGR of 10 percent as a result of increasingly stern energy management requirements for EVs and an increasing number of premium comfort features in lower vehicle segments. The ECU/DCU market?is projected to grow to $144 billion by 2030 and is mostly driven by growth in DCUs. In 2019, DCUs made up less than 1 percent of the combined ECU/DCU market. We expect this share will increase to 16 percent by 2025 and to 43 percent by 2030. However, ECU/DCU market growth will be slashed by reducing unit costs in some domain types and the consolidation of ECUs into DCUs.The centralization of the E/E architecture will continue to drive demand for more complex and powerful DCUs at the expense of classic ECUs. DCU adoption will be the highest record within the infotainment and AD domains both are prospected to surpass 70 % adoption by 2030. Infotainment?(a?portmanteau?of?information?and?entertainment), also called?soft news?as a way to distinguish it from serious journalism or?hard news, is a type of?media, usually television or online, that provides a combination of information and?entertainment.?The term may be used disparagingly to devalue infotainment or soft news subjects in favor of more serious hard news subjects. Infotainment-based?websites?and?social media?apps?are gaining traction due to their focused publishing of infotainment content, e.g.,?BuzzFeed.

We expect the automotive sensor market?to grow from $25 billion in 2019 to $52 billion in 2030, mostly driven by growing demand for ADAS and AD sensors—specifically for LiDAR, cameras, and radars. Traditional powertrain sensors will experience a slight decline during this period, in line with the ICE automotive market. Growth in new sensors for electric drives will not be able to offset the reduced demand for sensors in ICE vehicles, which comprise advanced sensor content per vehicle. Body sensors signify a growing market because of new comfort features and higher demand for existing comfort features—especially in smaller vehicle segments and at nonpremium OEMs. The future is here?for automotive software and electronics. As the software-defined vehicle turned into reality, automotive companies across the value chain must act swiftly and conclusively to attach its potential. With a transfer outlook on market dynamics, automotive players can take a number of strategic and operational actions to align with the future landscape. Automotive OEMs must develop and refine their strategic perspective based on their resources, capabilities, and industry positions. In response to increasing per-vehicle hardware and software costs, OEMs can consider partnering with other OEMs to make economies of scale, making software reusable across platforms, and simplifying the E/E architecture.

?Automakers should also reinforce their software development competencies by hiring and developing the right talent and building their competencies along the full technology stack (including middleware, the operating system, the hardware abstraction layer, and cloud computing). Breaking down silos and creating a cross-functional development organization can progress efficiency and speed up time to market. Tier-one suppliers will need to redefine their software and E/E strategy to respond to the new potential and sourcing decisions of OEMs. By positioning themselves as thought partners to OEMs, they can work together to describe the future E/E architecture and shape the necessities. Suppliers can set an important advantage by investing in software enhancement and integration areas to grasp a larger share of the growth. And similar to OEMs, tier-one suppliers will need to break down domain silos and promote cross-functional cohesion to remain competitive and respond to their customers’ molding needs. The market for automotive software and for electrical and electronic apparatuses is estimated to grow boldly in the next decade. Autonomous driving,?connected vehicles, the electrification of the powertrain, and shared mobility (also called?the ACES trends) are mutually reinforcing developments in the automotive sector. Combined, they are disrupting the automotive value chain and affecting all its stakeholders. Additionally, they are also important drivers of the projected 7 % CAGR in the market for automotive software and for electrical and electronic components (E/E), which is projected to grow to $469 billion, from $238 billion, between 2020 and 2030. At this rate, the software and E/E market is expected to upsurge growth widely in the overall automotive market, which is estimated to grow at a CAR of 3% within a time frame. Software and electronics have therefore become the focus of most automotive companies and their executives. In this context, we offer a perspective based on our extensive research and analyses of three critical questions. Some of the specific forces behind the automotive sector’s software and E/E growth dynamics and changing landscape through 2030. How will these forces affect the automotive industry’s deep-rooted value chains? How can players in and out of the industry be optimally ready for ensuring market growth?

\Our new report,?Automotive software, and electronics 2030 look closely at these issues. The remainder of this excerpt outlines some high-level findings. The automotive software and E/E component market will grow rapidly, with significant segment-level variation driven by the disparate impact of the ACES trends. The overall trend toward?a more centralized software and E/E architecture?will drive the market’s expected expansion through 2030 (projected at a 7% CAGR). A significant variation is expected across the market segments. ?

Power electronics is expected to occupy the high end of the market’s growth, at an annual rate of 15 percent.?Autonomous driving?will fuel growth in the software and sensors segments, expected to reach 9 percent and 8 percent, respectively. The segment that includes control units (ECUs) and domain control units (DCUs) will continue to hold the largest share of the market, but growth here is likely to be relatively low, at 5 percent. While ECUs and DCUs will be used increasingly in autonomous-driving applications, price decreases from efficiency gains will counterbalance growth in the segment. Electric vehicle platforms will be a new market for high-voltage harnesses, but the demand for low-voltage ones is expected to shrink, so the harness segment will grow at the slowest rate. A separation of hardware and software would fundamentally change the dynamics of the automotive sector’s landscape of players and value. The days when OEMs comprehensively defined specifications and suppliers delivered them may be nearing an end. Neither OEMs nor traditional suppliers can fully define the technical requirements of new systems. Co-development between OEMs and suppliers is expected to become not just prevalent but also necessary. In addition, tech-native companies are expected to enter the space more boldly something that will become easier as hardware and software sourcing become more separate. This separation would break up established value pools, reducing barriers to entry. For OEMs, the separation would also make sourcing more competitive and scaling less complex, and it would provide a standardized platform for application software while maintaining competition on the hardware side.

Both archetype-specific and cross-player strategies can position companies for success in the future landscape. The strategic moves for OEMs include plans to keep the ever-growing cost of hardware and software development under control and to establish more agile cross-functional development organizations. Cross-functionality would benefit tier-one suppliers too, and so would actively partnering with OEMs to define their E/E architectures. Tier-two suppliers will want to specialize further and scale within an attractive niche to thrive even as many components become commodities. All players will benefit from building their software-delivery and E/E-architecture capabilities, embracing the latest technological innovations (including those related to the user interface, the user experience, and analytics), and abandoning absolutist notions of competition while analyzing the benefits of partnership within?an emerging ecosystem.

New EV entrants disrupt Europe’s automotive market

?Asian EV players are entering Europe at high speed, with widely different strategies—and consumers are interested.

It’s all over the news:?new Asian electric-vehicle (EV) OEMs are entering the European market in unprecedented numbers. Many have already established footholds in European countries and are planning their expansion (for example, NIO had already hired more than 700 employees in Europe in September 2022). Others intend to enter soon—Geely announced it will start selling with its brand Zeekr in 2023 and NETA (owned by Hozon Group) has announced that a European market entry is on the horizon. In this article, we explore which go-to-market (GTM) strategies these new entrants are deploying and discuss what they should consider when serving European customers. We also look at the consequences for incumbent players.

Asian EV players position themselves differently in the sales ecosystem

In the last two years, more than ten new entrants have started sales in Europe. And while current sales figures remain low (largely between 100 and 2,000 cars per brand per year), the ambitions of these players are high. For example, BYD announced a deal with a market-leading rental company to provide them with 100,000 cars through 2028 Europe, and Xpeng reportedly aims to sell 100,000 vehicles in Europe in 2023. There are also signs that European customers will accept these new car brands. Our customer research shows, for example, that almost two-thirds of European customers are interested in buying an entirely new brand when moving to an EV, including so-called “disruptor” brands.

The new entrants, however, have chosen vastly different GTM strategies. These range from direct-to-consumer (DTC) strategies that feature their own outlets (such as NIO and Lynk & Co.), strategic partnerships with importers for wholesale distribution (for example, BYD), pure importer models (for instance, Skywell) and partnerships with non-automotive retailers (such as Airways that has partnered with an electronics retailer in Germany). These varied approaches reflect differing goals that range from building a leading customer-first GTM model to delivering a fast and predictable sales ramp-up. A customer-centered GTM approach requires strong control of sales channels, which new entrants can best achieve through their own sales outlets. However, building these outlets takes time and resources. If speed to market is the priority, players will instead opt for partnerships with established importers and dealer groups to benefit from their existing network reach and market expertise. We clustered entrant strategies into four archetypes, based on the trade-offs they take between the degree of control (which implies a certain investment need) and speed to market

?Own retail

Players following this strategy fully own their online and offline sales channels. Their sales models typically incorporate an “online-first” priority, with selected physical touchpoints such as flagship stores in city centers. Online channels (website and app) work as the connecting glue across all customer touchpoints. They center their physical presence on “experience stores” that sometimes go beyond cars. For example, NIO regards its facilities as community spaces, and Lynk & Co. clubs double as cafés and bars. One of the key objectives of this GTM strategy is to control the customer experience fully to ensure high customer satisfaction, which should in turn generate higher customer lifetime value. Centering their strategies on both online and offline user experience and the goals of fostering a community and brand buzz beyond cars differentiate the new entrants from many incumbent European brands, which often put a stronger emphasis on the product’s engineering excellence. Fully-owned retail channels further enable central price setting and strong sales steering. The strategy requires no coordination among intermediaries, and the people working in the stores are the companies’ employees rather than partners. This enables a consistent pricing and offering strategy across channels and retail locations. Further, OEMs that own their channels can hold vehicle stock centrally because they own the cars until the final handover to customers. They can therefore optimize overall stock levels by only distributing vehicles to retail locations once they sell the cars (instead of having decentralized stock in a traditional dealer setup). For other GTM elements, such as aftersales, leasing, or financing, even new entrants with fully-owned sales channels often deploy external partners to benefit from existing network reach and local market expertise.

An OEM-owned retail strategy works well in a “customer-pull” situation, where natural demand for the vehicles exceeds their supply. The combination of strong online channels and an attractive brand enables players to achieve high sales numbers without the reach of a large physical network. Beyond strong online channels, OEMs need excellent lead-generating skills, including analytics and digital marketing capabilities, to produce sufficient customer pull. Excellent customer experience across channels is also necessary to keep satisfaction high, which in turn works best with full sales channel control. Even if the owned network is smaller than the typical established OEM network, an own retail strategy requires significant resources and takes time to build up. This also means that a European market entry for a new player with that strategy will most likely follow a country-by-country sequence, as it is challenging to build up its own channels in several markets at once.

Examples:?NIO provides a well-known example of a company entering Europe with its own retail GTM strategy. NIOs showrooms follow a home concept, where customers can view recent models and purchase new lifestyle and design products from NIO’s collaborations with independent designers and top design schools. The company fosters a community-based sense of belonging to increase customer loyalty both online (on their app) and offline (through events). Customers can collect points for interacting with the community online, for representing the brand at gatherings, and for referrals. In this way, NIO aims to generate sufficient customer pull. This strategy also enables NIO to offer one price across all channels (apps, stores, and websites). Lynk & Co. offers another example of its own retail strategy and has designed its showroom clubs to be more than retail stores. The clubs also serve as cafés, playgrounds, and art stores, and host local events like concerts and fashion workshops.

Similarly, VinFast aims to enter Europe through fully-owned retail channels and, in addition, has announced plans to run its service operations with mobile service agents. Even though it follows its own retail approach where it can centrally steer prices and stock, it has set up three separate country organizations in France, Germany, and the Netherlands. These market organizations operate relatively independently, with no central European headquarters to steer prices, volumes, or product range. Rather, as an expert on the company stated, the market organizations make bottom-up pricing suggestions and the global headquarters in Vietnam takes the final pricing decision for each market.

2. Agency

Entering Europe via an agency model combines direct-to-consumer sales with immediate access to a local retail network. Typically, the new entrant takes over significant amounts of marketing and lead-management activities, and prices are set by the new entrant that works through the purchase contract with the customer. Agents receive a fixed commission for each sale, sometimes differentiated according to whether the sale occurred online or at the agent’s premises. Agents execute sales on behalf of the OEM, which enables the OEM to influence the customer experience strongly by giving clear guidelines to agents. The OEM also owns the vehicle stock and can therefore centrally steer and optimize it across the network. For several new entrants, the agency partner’s network provides aftersales services (for example, Xpeng’s agency partner in Sweden). In a few instances, sales and aftersales partners are different due to the available partners in each country (for instance, Airways partners with an independent aftermarket chain in Germany).

Companies following this strategy seek to establish themselves in the European market but aim to generate reach through partner networks to increase speed to market and create customer pull. They combine a strong influence on customer experience with the benefit of fast access to a large network. Entering Europe through an agency model requires the new entrant to build local capabilities for lead generation and management, marketing, and pricing for the European market. Hence, collaboration with agency partners is also a means to learn from their market expertise. Often, new entrants also invest in their own retail channels—such as pop-up stores or city-center flagship stores—next to the agency network, which shows their desire to be directly involved in customer interactions and demonstrates their commitment to a European market entry.

Examples:?Xpeng sells its three models through both its own retail channels (website and city-center experience stores), as well as its agency partners’ networks. It partners with local established dealer groups, thereby benefiting from their network reach and local expertise. The agency model enables Xpeng to steer pricing and product offerings centrally (that is, models are harmonized for all of Europe) from their European headquarters in Amsterdam. The headquarters’ organization also centrally defines the e-commerce strategy, marketing, and showroom design. The retail experience is then slightly adapted to country-specific needs by Xpeng’s relatively lean market organizations, which serve as the interface to the agency partners.

Airways follows a hybrid strategy with different sales models in various European markets. For example, in Germany, it partners with a consumer electronics retailer using the agency model, so that Airways sets prices and develops marketing materials in its European headquarters in Munich, where it currently employs around 75 people. The agency partner displays the cars in its retail locations and offers test drives and sales consultations. It processes customer orders through the Airways website, with the agency partner providing support. In the Netherlands, customers can buy Always through the company’s online channel assisted by a call center. In most other countries, the company works with importers.

3. Import+

Players following an import+ strategy do not sell directly to their customers but instead, work with established importers who take over sales and aftersales tasks. Companies following this strategy still engage in the local market and seek some customer-facing interactions (for example, via their brand websites), but do not fully own the customer relationship. They provide price recommendations and can agree on volume targets, but final prices and discounts are set by the distribution partner. The distribution partner is also responsible for local marketing and lead management and holds all vehicle stock. The OEM has less control over the customer experience compared with a direct sales model (such as own retail or agency). However, new entrants that follow this strategy still show a vested interest in the European market, as they build strategic partnerships with the importers with whom they are working and seek to learn from them. The benefit of this approach is rapid access to large and established sales and aftersales networks, enabling quick market entries potentially across several parallel markets, as well as an increased ramp-up of sales volumes. Entrants can also keep their initial investments relatively low by focusing on selectively owned customer interactions, for instance, via online portals or pop-up stores.

Examples:?BYD partners with different established importers that take over its distribution, sales, and aftersales across European countries. These partners also operate some of the BYD “pioneering stores.” However, it also engages with its customers directly through its website and selected owned stores. The OEM is building a local presence from its headquarters in Rotterdam. Great Wall Motors partners with one established importer across several European markets. According to experts on the company, the partnership goes beyond pure import activities, as the OEM strongly engages with its distribution partner on desired marketing activities and corporate identity for the Ora brand (it distributes its WEY brand through an agency model).

4. Import only

Companies following an import-only strategy often simply sell their vehicles to importers who take over full distribution, marketing, and customer engagement activities. In this model, the OEM has few direct customer interactions in Europe and its products might appear on multiple importer websites, or even be “white-labeled” and sold under a different name. While this strategy means that the OEM has limited influence over customers’ end-to-end purchase experiences, it is the least resource-intensive option. OEMs do not have to build a local presence in Europe and importers hold vehicle stock. Importers and their dealers also carry investments at the point of sale, although the OEM can provide guidance on messaging and vehicle presentation. Importers are typically responsible for marketing and lead management and take leadership in all customer interactions. A pure import strategy is therefore a fast way to enter a market (or even several markets at once), benefitting from existing networks and local market expertise. Aligning volume targets with importers creates greater certainty regarding the expected number of vehicles sold.

Examples:?An example of an import-only model is ZhiDou (a Geely joint venture), which sells its micro city car to several importers in Europe that conduct all distribution activities. Some distributors operate with the ZhiDou brand (for example, Zhidou Electric Auto and Eauto Zhidou), while others use their own. For example, the German importer Elaris has rebranded the ZhiDou to the Elaris PIO, offering it on its own website.2?Elaris has done the same with other Chinese-owned brands such as the SUV ET5 from Skywell, which it is selling under the brand name BEO. Next to its own website, it distributes the imported models through an established aftermarket chain that offers test drives and aftersales serviceDongfeng Sokon (DFSK) is another example of a pure import strategy, selling its three models to different established multi-brand importers in several European markets. Importers distribute the cars through their affiliated dealerships, taking over all marketing activities and customer interactions.

Different strategies tied to different goals

Our review reveals there is no single right way to enter a new market. The chosen entry strategy depends on the new entrant’s goals and the respective trade-off decisions it is willing to make. An?own retail?strategy will enable players to strongly control the customer experience and engage with their customers across channels. Building up its own channels, however, takes time and resources, so an alternative strategy might involve an?agency model. Working with an agency partner provides access to the partner’s distribution network while the OEM remains the owner of the customer contract and relationship. This approach enables a fast market entry but requires the OEM to hold vehicle stock. A direct sales model (via own retail or agents) also requires a certain amount of customer pull. For OEMs that want to bring their vehicles into a new market quickly and at scale, working with?importers?can be the right strategy. Established importers provide expertise and have access to distribution networks. They will take over stock ownership and conduct marketing activities, making the market entry relatively “asset-light” for the new entrant. The importers make final pricing and discounting decisions (based on the manufacturer’s recommendation) and lead customer interactions. At the same time, several players have established their own online presence and built up a local presence by having a regional headquarters in Europe as an?import+?strategy. A?pure import?strategy with (almost) no local presence is the leanest and fastest way to enter a market but comes with the least control over customer interactions. OEMs need to weigh their desire for market entry speed, control over the customer experience, and available resources to decide on the best strategy for them. The initial decision for a market entry strategy does not mean OEMs have to stick with the first chosen model forever.

NINE TAKEAWAYS FOR A EUROPEAN MARKET ENTRY

It is crucial to forming a sales strategy that fits local consumer needs. Learnings from European consumers indicate that new OEMs could consider various ways to make a successful market entry. The current shift to EVs creates a unique window of opportunity for new and incumbent players to redefine the game. Insights from the McKinsey Center for Future Mobility (MCFM) show that brand loyalty plays a decreasing role for EVs and customers are willing to try new brands. MCFM regularly surveys several thousand customers worldwide on their mobility and car-purchasing behavior. To understand customers’ needs, pain points, and trends in the European market, we analyzed survey answers from approximately 2,000 Europeans and focused on two different groups. First, Europeans who would consider an Asian disruptor brand (such as BYD, Hongqi, Lynk & Co., or NIO) for their next purchase, are called “disruptor considerers.” Second, Europeans would consider an incumbent brand, or “incumbent considerers.” These two groups have widely different characteristics. Disruptor considerers are younger, with about 55 percent under 40 years old, versus about 40 percent of incumbent considerers. The former is two-thirds male versus a 50:50 gender split with incumbent considerers. Disruptors live in (sub)-urban areas and, on average, have a higher income. Forty-three percent already own an EV, in contrast to only 16 percent of incumbent considerers. New European market entrants could consider these nine takeaways, both from insights on European customers (disruptor and incumbent considerers) as well as from the actions observed among players that have already entered the market.

1. Take control of the purchase experience.?Two of the top pain points among European car buyers are non-transparent and inconsistent pricing and overly complex configurations. The direct-to-consumer strategies (own retail or agency) that several of the new entrants take enable them to own and control fully the customer purchase journey and experience. They can easily implement consistent prices across channels, as well as provide a simple online purchase journey. Entrants like NIO, Lynk & Co., and VinFast are good examples, with fully-owned online and offline channels through which they take full control of all customer touchpoints and offer their cars at consistent, non-negotiable prices. Xpeng also sells directly online and partially owns its physical showrooms (in addition to working with agency partners). This strategy enables new entrants to design and control the purchase journey and experience, centering them on customer needs. Further, new entrants bank on simplicity, as they offer simple online vehicle configurations that customers can complete in five to seven clicks (for example, NIO, VinFast, Xpeng, and Lynk & Co.).

2 Build great online channels and design physical touchpoints around them.?

Regardless of the chosen entry strategy, customers expect online channels that seamlessly connect all their touchpoints with an OEM—the online channel needs to be the “only source of truth” that connects all interactions, regardless of whether customers shop from their couches at home, at an OEM-owned city showroom, or a partner’s store. Building an online channel that is well integrated into the overall customer journey is an opportunity for new entrants to differentiate their brands from those of incumbent players. Customer research shows that the lack of seamless customer experience (CX) and online ordering are still major pain points. Younger European car buyers especially see them as problematic—twice as often as car buyers over 56 years of age. Online channels are even more important for customers who claim they are considering a disruptor brand for their next purchase. In Germany, this shares almost triples from 22 percent to 58 percent if a physical touchpoint (such as a test drive) is offered in addition to the online journey. This emphasizes the importance of great online channels for new entrants and incumbents alike.

3. Target your customers precisely using a data-driven approach.?

New entrants often have neither the benefit of a well-known brand nor the luxury of large marketing budgets to build one. Fortunately, Europeans considering a disruptor brand have an overall 53 percent likelihood of switching to a new brand when moving to an EV, which varies between 44 percent in Germany and 63 percent in the United Kingdom. Additionally, the willingness of premium car buyers to try new disruptor brands is twice as high as for the volume segment. This means a successful market entry does not have to engage in broad and high-investment brand building through traditional media channels. Instead, companies can “surgically” address customers within a specific target segment and build their awareness. This requires digital marketing based on precise, data-driven segmentation. Precise targeting is further an enabler of a personalized digital marketing approach, which is especially important to address younger customers. Players could thus have the right digital and analytical capabilities for segmentation, digital marketing, and lead management. They also will need a proactive approach to consent management and data privacy to assure fully compliant usage of customer data.

4. From brand to community for ongoing, meaningful engagement.?

Designing a seamless customer journey is nothing new for all market players. However, now’s the time to take it one step further: make the brand a continual lifestyle factor in the customer’s life. In other words, don’t lose touch with the customer once the sales process is done—increase the engagement frequency. Lifecycle revenues are no longer an add-on option: they’re becoming core to the business model. Building a community that feels loyal to the brand can be a valuable facilitator. Vibrant product communities are already widely established in China.3?While European culture is different and the Chinese product-community approach likely requires adjustments to fit European customer needs, our data show that about 70 percent of European customers want to remain engaged with their OEMs over their vehicle’s lifecycle. NIO provides an example of how community building can lead to impressive results. The company claims that 70 percent of its purchases worldwide come from peer-to-peer recommendations—compared with the industry average of 10 percent. The company does this by expanding the NIO brand beyond the car (for example, NIO Life offers branded customer products) and by continually engaging customers via the NIO app. The company further tangibly rewards customer engagement with NIO points that they can redeem to, for example, buy NIO Life products. Lynk & Co. also puts the community at the center of its strategy and encourages its customers to become members rather than one-time buyers. Its clubs serve as centers to build a community that hosts events “beyond the car.” Fostering a sense of community and loyalty beyond the product or service offered is a concept long established in the airline and hotel industries, for instance. In these industries, companies have created programs where they offer loyalty points to customers who repeatedly use their services. Customers can redeem these points for more services (for example, flights and hotel stays) or use them to buy lifestyle products. They further instill a sense of belonging and loyalty toward specific brands by awarding their guests differing levels of loyalty status with increasing privileges as they earn more points.

5. Consistently deliver on aftersales needs and impress your customers with innovative services.?

Consumers expect a dedicated aftersales network and list the availability of a service network as one of the key influencing factors for their purchase decision. However, service networks do not have to be as dense as they are for many incumbent OEMs today. Eighty percent of consumers in the disruptor-considerer group state they would be willing to travel longer distances than today (versus 65 percent in the incumbent-considerer group). Consumers also consider it acceptable if service is delivered by partners, with 40 percent (regardless of whether incumbent or disruptor considerers) fine with going to a partner workshop, even if that includes longer travel. Overall, price (80 percent) remains the most important criterion for workshop choice. For new entrants to deliver on consumers’ aftersales needs, a partnership with a large and trusted workshop chain (or chains) can be a shortcut to building out an owned service network while still satisfying customer needs.

Most new entrants—even those that operate fully owned sales channels—work with partners for aftersales services. For example, Lynk & Co. use the service facilities of its parent brand; BYD partners with the same dealer group per market for service, which also runs their sales operations; and Aiways in Germany works in partnership with an independent aftermarket chain. VinFast plans its own aftersales operations with a pick-up, drop-off service, and mobile service agents—an offering about 70 percent of European customers state they are interested in. Digital service offerings are also becoming more common. For example, NIO provides a “one-click service” on their app for customers to book appointments, while others like MG and VinFast offer over-the-air (OTA) software updates that customers can book using the app.

6. Offer the full spectrum of ownership models, including subscriptions.?

New entrants can provide flexible and traditional purchase and financing options to capture all pockets of demand. Research shows that flexible ownership options are increasingly important for younger generations and people who own EVs. Despite the rising trend toward subscription, there remains a substantial segment of customers who prefer traditional purchase options: 40 percent of premium-segment and 55 percent of volume-segment EV buyers still prefer an outright purchase to other ownership options. To avoid hitting a demand ceiling, new entrants could offer both traditional as well as more flexible purchasing offers. Several new entrants offer subscriptions. For example, Lynk & Co. provides its own offering with a fulfillment partner in the background, while Aiways partners with a large subscription platform that sells its cars. NIO originally intended to enter Germany with a subscription-only offer, however, it faced customer backlash after its launch event where customers demanded a purchase option—it introduced one a few days later. Traditional credit financing and leasing also see high demand and are especially important for younger customers—these factors represent a key pain point for 20 percent of under-40 customers compared with 7 percent of those over 50. Demand for leasing, in particular, is currently rising and our research has shown that new entrants often partner with established non-captive financing and established leasing providers to offer those services.

7. No-fleet strategy equals no right to play in the long run.?

New entrants need to prepare a fleet offering, even if their initial focus is the end-customer market. A fleet offering is essential to capture market share in Europe since the business-to-business (B2B) segment is around 40 to 50 percent in most European markets, including a large share of company cars. As many Asian EV brands are currently entering the European market and growing their portfolios, most have introduced first-fleet offerings and are planning to expand their corporate offers and key account relations. Some players have already closed large deals—for example, a major rental player bought 65,000 vehicles from an Asian EV OEM for Australian, European, and North American markets.

Most new entrants currently focus primarily on business-to-customer (B2C) buyers. Compared with B2B, the B2C segment offers larger profits and less risk because there is no buy-back stipulation in B2C, and OEMs do not need a strategy for disposing of “young” used cars. While this focus on B2C is a viable strategy in the short term, the market will mature at some point if there is a general excess demand for electric vehicles. To avoid hitting a volume ceiling and to keep desired market shares in the medium term, players could prepare now to build the capabilities to sell to different types of B2B customers. For example, building key-account teams with the right capabilities for fleet advisory and perhaps even fleet management services will likely be important for long-term success.

8. Don’t leave used cars unattended.?

OEMs can control vehicle value over the product lifecycle and build trust by taking the residual value risk off the customer’s shoulders. Twenty-five percent of Europeans already consider buying a used EV but battery retrofit is their top concern. OEMs can remove risk and uncertainty by introducing used-car programs like those already offered by some incumbents or maintaining ownership of the battery (since it is typically the component with the highest value). Currently, most new entrants focus on selling new cars in the B2C segment to take advantage of the higher margins. The lower share of B2B sales currently results in few buy-back deals and therefore fewer young used cars to handle. This works if players experience excess demand and therefore don’t face the risk of cannibalization from young used cars. Players could make sure they have a used-car strategy and the capability to execute it in the medium term. Excess demand could decrease with more EV entrants and incumbent EV offers in the future, so the risk of cannibalization will likely rise. Some examples of the used car strategies of new entrants are MG (now Chinese-owned, originally a European brand), which handles used cars through its dealer network and offers a used car platform on its website. VinFast is planning to offer “battery-as-a-service,” while NIO will offer battery swaps at over 100 stations in Europe by the end of 2023.

?9. Don’t enter without partners—a European market entry is an ecosystem play.?

Accessing the European automotive market at a reasonable speed requires multiple partners along the value chain. Even new entrants that emphasize control over their GTM strategies and seek close oversight of the customer experience typically work with partners in the later stages of the value chain. Established partners not only signal trust to buyers (for instance, for aftersales or leasing) but also significantly increase speed to market while keeping investments low. Strategic partnerships can further help build necessary capabilities (for example, for import administration, pricing, and marketing), and help OEMs to become more independent in the medium term. All current new EV entrants work with local partners in some areas. For instance, companies with their own retail channels like NIO and Lynk & Co. have partnerships for aftersales, leasing, or processing subscriptions. Others have a single strategic partner in Europe (such as GWM) or partner with different players, like Xpeng, while yet others partner with assorted players depending on the market.The nine takeaways summarize the key elements that new entrant GTM models could cover to achieve long-term success in Europe. However, they by no means represent a definitive recipe for success. Each entrant will have to carefully study the European customer segment that it aims to address and build its offering around that segment’s needs. The actions taken by new entrants over the past two years already show vastly different approaches to European market entry, with different offers and varying target segments. Time will tell which approaches customers embrace.

What can European incumbents learn?

Capabilities to master the sales transformation

Current new entrants provide examples for other potential new players, but their activities are also relevant for incumbent players. European OEMs could keep the following points in mind when thinking about transforming their sales models. (For more insights on specific skills needed during this phase, “Capabilities to master the sales transformation”).

The time is now: the shift to EVs is a unique window of opportunity to make changes.?

Incumbents should use this time to make a move; if not, they risk falling behind. In the next few years, the European automotive sector will likely experience substantial discontinuities from a customer, dealer, and competitor perspective. Our customer research shows that younger customers are especially willing to switch to EV disruptor brands, even in traditionally brand-loyal countries. This gives new entrants an edge as they enter the market without legacy networks and systems and can design their GTM models around future customer needs. The companies able to capture early EV customers will have an advantage going forward as they win their loyalty and thus their lifecycle value. Be clear about the “why”: transitioning to a new sales model is a means to an end, not the end itself.?Changing the sales model should enable OEMs to serve future customers better. They should focus on deeply understanding what their customers need and build the target picture of their sales model around it. Depending on an OEM’s current setup and the trade-off decisions in terms of investment versus control they are willing to make, the “right” future sales model might be different, ranging from their own retail channels, an agency model, or an optimized wholesale approach. A sales model transition can further enable OEMs to design new offerings that more strongly engage their customers along the lifecycle. This could mean introducing new lifecycle services (for example, digital services), redesigning their aftersales service offers, or offering new ownership models (such as subscriptions).

Pick an approach: “speedboat” or “big bang?”?Incumbents can transform their sales models on a step-by-step basis. For example, they can start with a single market, an individual brand, or selected models—or switch the entire portfolio at once. Selectively testing a new sales model can serve as a “speedboat” to iterate and learn rapidly. The company can use the learnings for the next step of the roll-out (for example, the next market or brand). A potential downside could be a prolonged roll-out and a certain period where the organization needs to manage parallel sales setups. A “big-bang” transformation that switches the entire sales model to a new setup at once has the benefit of consistency across the organization. However, it might be more complex to handle.

Decide how to manage the transformation: from within the existing organization or through a separate agile unit.?

Transforming a large organization in its entirety takes time and sometimes established processes can hinder more than helpful when it comes to building a new structure. Given the speed of change in the European automotive market—new players entering and incumbents piloting new business models—now is the time to act. While a full organizational transformation has the benefit of avoiding duplications and parallel structures, a more agile approach can help increase speed to market. Consequently, building a team that can work in a start-up-like culture can facilitate the quick build-up and testing of new sales approaches.

Don’t forget people: mindset is as important as structure.?

Transforming the organizational structure is only the first step—a customer-centered mindset is just as important. Meeting customers where they are and providing them with the right personalized interactions along the lifecycle will likely become more important in the future. For many OEMs, this means a fundamental cultural transformation from a historically product-centered mindset to consistently making the customer the center of attention—advocates for customer experience within the organization should be central stakeholders in all key decisions. This includes the design of new models as much as the design of the customer journey.

?Winning direct-to-consumer strategies for auto OEMs in China

‘Future vehicles require future insurance’

?Insurance discusses how telematics data will usher in a new era of auto insurance. As electric vehicles become?more affordable and ubiquitous, auto insurers must harness new underwriting capabilities and claims processes to not only encourage safer driving but also reward drivers for their existing safety habits. One tool that has been a game changer for auto insurers everywhere is telematics data. By using these real-time insights, insurance companies can track driving behaviors, accurately assess accidents and report claims, and provide better value for their customers. At?InsureTech Connect 2022, Andrew Rose, president of OnStar Insurance and executive vice president of GM Financial, spoke to McKinsey’s Tanguy Catlin about how telematics data have changed the insurance landscape and how companies should adapt to keep up with the industry’s future. The following transcript has been edited for clarity.

Data can be transformative

The future car has also changed the most in the insurance industry over the past few years.?We saw credit come to bear in the early part of this century, and now the next big transformation is telematics data—how you operate a vehicle has become a bigger part of how insurance prices products. How can you make it more causal and less correlative? That’s where the future is. We are in a unique position to discuss and talk about the power of data. The preparedness of Insurance, and their assessments of pricing or managing claims.??Data has the opportunity to be transformative. For 25 years, we’ve been collecting data at OnStar. So, we were a connected-vehicle manufacturer before there was such a term as a connected vehicle. Now we can bring that data to bear in insurance use cases, whether that be by segmenting and pricing products for customers, finding the best drivers and rewarding them for their performance, or finding drivers who need a bit of advice on how they can be better drivers and providing that to them. The data can also be transformative in the claims part of the process. We can know that an accident has occurred, understand automatically what parts are broken or if a vehicle is a total loss, and determine what kinds of injuries the individual may have. All those things are possible now as an OEM, and being an insurer inside of an OEM is exciting.

The massive data an insurance carrier currently uses for underwriting, pricing, or claims, is not adequate. Most of those advances currently exist in a small subset of vehicles. The average manufacture date of a vehicle on the road today is 2011, which means there’s a lot of technology coming. As those vehicles bring that technology to the road, insurers can use the data. Right now, it’s a small fraction of the vehicles on the road, but the future will be transformative.

Vehicle data will transform safety and insurance

The future of insurance will have new challenges.?From a GM standpoint, hopefully, the realization of our “zeros”: zero congestion, zero emissions, zero crashes. The more the vehicle can augment the driver’s ability to understand what’s happening on the road and be there to assist, the better. We want to take those ADAS [advanced driver-assistance systems] features to the next level. The liability considerations of who’s responsible for what when an accident does occur is an interesting point for insurers as well. OEMs have an opportunity to participate in the insurance ecosystem in ways we haven’t had in the past. Our access, our understanding of the technology that’s coming for vehicles, and the data that comes from those vehicles afford us a unique opportunity to be part of the insurance equation going forward. Brands will still be important, but tightly intertwining the auto and auto insurance ecosystems could be a more relevant part of the future.

Carriers are competitors or partners. The new think about the evolution of the ecosystems. We supply our data into the insurance ecosystem now as General Motors. We intend to continue to do that. We have zero crashes as our goal. From that standpoint, we want to reward good behavior on the road, whether someone’s insurance comes from OnStar Insurance or one of our competitors. Creation of a system within OnStar Insurance that expands the value and benefit of that data to the broader GM ecosystem. It will be embedded; integrated insurance is the future. Vehicle data can help first responders and inform claims

To rethink pricing, it seems that we need to find a way to combine data from vehicles and how the driver is behaving with the claims data. ?It’s still in its infancy, but it’s getting better. Their opportunity now is to get more sophisticated telematics data. When an accident occurs, it helps in many important like what damage is done to the vehicle. It has a pretty good idea. Now it is also possible to know the angle of that accident. Now Insurance company, and know the severity and the deceleration components. They know, from an OnStar standpoint, where people were sitting in the vehicle and who might be the most harmed. That information helps us prioritize first responders. We also took it a step further in our Cruise business, an autonomous-vehicle company of which GM is the majority owner. Now it may be to have video evidence of an accident, so exactly what happened and there’s indisputable evidence. That will be the future for regular automobiles beyond the Cruise platform as well. But we’re not there yet.

Modern vehicles require modern insurance

They recently completed some analyses with many automakers and insurer partners and observed that the old insurance—the one that’s based on credit ratings for cars that don’t have sensors—is no longer growing. But there’s new insurance that’s emerging for cars equipped with the technology you mentioned and for electric vehicles in general. We think that the market will grow three times faster than the old market was growing. What will define the winners and the losers in this small but fast-growing insurance market? The companies that use and access the data will turn it into the strategic advantage that it can be. That will be the winner’s move. No needs to sit on the sidelines anymore and say, “It’s always worked; it will keep working.” It will work only for very old vehicles. Modern vehicles require modern insurance.

CONCLUSION

We have to embrace new technology. Traditional underwriting for older vehicles can still work, but we would argue that there’s an opportunity to use telematics to benefit older vehicles. But future vehicles require future insurance.

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