roland berger automotive engineering 2025 20110430

7/27/2019 Roland Berger Automotive Engineering 2025 20110430

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Ame Eeer 2025

April 2011

Dr. Wolfgang Bernhart

Dr. Thomas Schlick

Roland Berger Strategy Consultants Automotive Competence Center


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Edra

Dear reader,

In our recently published study, "Automotive 2025", we gave an overview of mega-

trends which will heavily impact the automotive industr y over the next 15 years.

We described ten key findings based on these megatrends, the different scenarios

and the key success factors common to them, to help management define their

long-term strategy for

> Markets, customers and products

> Partnerships, business models and the value chain

> Organizational structures, employees and necessary changes

With this "Automotive Engineering 2025", we take our findings to the next level

and outline approaches for coping with the special challenges automotive engineering

is facing.

We hope you find some time to read through this special edition and would be

happy to discuss our perspectives and approaches with you in greater detail.

Best regards,

Ra Kamba Dr. Wa Berar

Head of Global Partner

Automotive Competence Center Automotive Competence Center


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A. "MoRE With lEss" fivE MAin chAllEngEs foR AutoMotivE EnginEE-Ring ovER thE nExt 15 yEARs

Cars and systems "closely tailored to the demand for low cost and flexible enough

to allow upgrades and personalization" that's how we described future product and

technology trends in our recent "Automotive 2025" study [1]. "R&D will take place

close to the market and local R&D centers will be connected by strong, flexible net-

works. Partnerships will grow in importance as a way of providing timely access to new

technologies, markets and business models." This phenomenon will be independent

from the different scenarios ("budget world", "sustainable world", "high tech world")

that may develop.

Let's first recap the main trends influencing automotive engineering over the

next 15 years.

> Sales and production will shift further to BRIC markets, but triad markets

still account for over 40% of global sales and production

> Clear distinction to other vehicles for individual mobility blurring;

increasing importance of low-budget cars

> Rise of new technologies (materials, electrification, connectivity)

> Shortage of qualified employees, especially in traditional triad markets

These trends will not only increase the complexity and amount of engineering work,

but also call for "deliver y at same cost". Before we discuss the resulting requirements

to engineering organizations in detail, let's have a closer look at the above mentionedtrends first.

1. frer ae ad rd BRic marke

new "ead marke" dee

Sales and production will shift from triad markets especially to the BRIC countries,

which will surpass the triad by between 2020 and 2025 in absolute production

and sales figures (Fig. 1).

Sales Production

CAGR [%]

80%

53%44%

22%31%

11% 14% 11%

Triad

China

BRI

Other

2025

114

14%

2010

69

11%

2000

57

3%6%

CAGR [%]

86%

59%44%

22%

32%

9% 8%

Triad

114

China

BRI

Other

2025

15%

2010

69

11%

2000

57

3%6%

5%2.8

6.8

12.4

0.4

2.8

6.7

12.8

0.2

Fig. 1: Sales and production of light vehicles by region2000-2025 [m units], "Base scenario"

Source: Roland Berger


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The emerging markets also have different product requirements: while emissions andsafety standards are likely to converge, customer requirements remain different. Not

only are they looking for a higher share of low-budget solutions, but car functionality

will also see different requirements.

At the 2011 Shanghai Motor Show, the first Chinese car will be shown featuring

speech/audio-enabled online navigation, web access to stock prices, personalized

points of interests, music stored "in the cloud" and RSS feeds.

In 2025, nearly a quarter of all Chinese car drivers will be younger than thirty, and

only around 10% will be older than sixty. By contrast, only 6-7% of all drivers in Ger-

many will be under thir ty, while the share of elderly drivers (sixty years old or over) will

increase to over a third of all drivers. These distinct groups have completely different

priorities regarding ergonomics, comfort and driver assistance.

Markets like China will therefore not only become more important from a sales and

production perspective, but they will also become lead markets for specific tech-

nologies. Basic technologies are usually available in all markets, but differentiating

know-how is being generated only by applying these technologies in engineering and

production and interacting with the customer "learning by doing" and "learning

by using". As centers of economic growth shift and demographics change, new lead

markets will arise. These lead markets are characterized by increased competit ive

intensity, which leads to better designs and faster cost reduction. Empirical studies

show that companies actively innovating and developing in the lead markets are moresuccessful than those who tr y to innovate from the home market only, usually with

an ever-widening gap to their competition.

Challenge 1: Successful innovation therefore means not only innovation at the right

time, but also at the right place managing a much higher regional complexity.

2. cear d er ee r dda mb brr irea

mrae w-bde ar

Increasing urbanization and the raise of megacities will lead to massive congestion

problems. Coupled with increased environmental awareness, especially in Europe, new

forms of mobility (such as car sharing concepts) as well as new means of individual

transportation will increasingly gain significance.

With new vehicles such as the Renault Twizy ZE (to be launched in 2012) or concept

studies shown by GM at the Shanghai Expo in 2010, the portfolio of most car compa-

nies will be expanded to include very small vehicles blurring the formerly clear line

to single-track vehicles.

At the same time, driven by the increasing share of new vehicle sales in emerging

markets, low-budget solutions will become more important and a major source of

future growth. To participate in that segment, automotive players need to integrate

design effectiveness while leveraging low operating costs with a high share of

localized parts (Fig. 2).


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Challenge 2: Product requirements management will become much more complex

from the market, customer and product portfolio perspectives. Implementing local

or locally adapted solutions will also increase requirements for localization.

3. Re ew ee

Revival of hydrogen fuel cell activities, increasing importance of lightweight materials,

electrification of the powertrain, "always connected, always online" these are just a

few examples of the new technologies to be covered by OEMs in addition to their cur-

rent technology portfolio. At the same time, OEMs need to invest in improving conven-

tional technologies. Figure 3 shows an example of new technologies to be developed

to improve the conventional combustion engine at current cost levels.

Fig. 2: Leveraging cost advantages of local production is a "must" forlow-budget solutions

Local component supply

Cost ofproduction [%]1)

Increasing local content is essential

for optimizing production costs

Transportation cost of selected

components [EUR/unit2)]

84%

79%

74%

Localcontent[value, %]45%

55%

65%

1) Assumption: Cost of production = 100% if local content = 0

2) Assumption: Distance 1,000 km by ship and truck, i ncl. packaging

100

31

19

18

8

7

2

1

Dashboard

Front bumper

Rear door

Trunk

Radiator grill

Drive shaft

Brake cylinder

Radio


400 200

250

2015+

1,700

-250

2015

1,700-200

2010

1,700

2005

1,300

Turbo Direct inject. VVT Var. pumps

Down-sizing(3 cyl.)

Additionalfunctions

(BiVVT, VVL,2nd gen DI,

etc.)

Lean(3rd gen DI,AGR, etc.)

Necessarycost

reduction

Line4 2.0l 16V Line3 1.2l Direkt,Turbo, BiVVT, VVL

Line4 1.6l Direkt,Turbo, VVT

Line3 1.2l Lean,Turbo

1) Installed costs, excl. R&D

Fig. 3: Cost development1) gasoline engine over time Example: 140 hp engine[EUR]



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European OEMs alone need to invest another EUR 1.7 billion over the next 5 years todevelop this functionality (Fig. 4). These costs need to be more than offset to free up

budgets for alternative powertrain technologies.

Challenge 3: A much broader technology portfolio needs to be covered at current en-

gineering cost levels new materials, electronics, electro-chemistry, information and

communications technology, etc. At the same time, the understanding of the vehicle

as part of a larger transportation and communications system needs to be improved.

4. srae aed emee eea rada rad marke

As outlined above, regional, market, customer, product portfolio, technology and

supply chain complexity will increase dramatically. This will result in demand for

highly qualified workers not only in t raditional vehicle engineering disciplines, but

also in adjacent skill areas, combined with intercultural skills. But statistics indicate

a growing gap of qualified engineers and developers in mature markets new talent

sources need to be developed and integrated.

Challenge 4: "War for talent" Automotive engineering will need to compete with

other industries for qualified employees, especially those with a strong background

in engineering and other natural sciences. Relative wage levels may increase, and

engineering needs to manage high (cultural) diversity.

5. A e abe, we "deer a ame ee"

While the complexity of automotive engineering will reach unprecedented levels, the

industry as a whole needs to increase its financial performance to remain attractive

to investors. As competition increases, there is lit tle room to push price levels up.

Costs therefore need to come down, and engineering will not be exempt.

This leads us to the fifth, overarching challenge:

Challenge 5: Automotive engineering needs to improve effectiveness and efficiency

to deliver more at the same or better yet, lower cost levels than today's.

5.7

-1.6

-1.68.91.7

7.2

1) Combustion processes, variability, etc.

Developmentexisting enginefamilies (incl.

replacements)

Cumulated basedevelopment

costs1)

Additionaldevelopment

costs2)

Reduction ofOEM engine

families

Common enginefamilies (with

partners)

Targetdevelopment

efforts

-1.5

Fig. 4: Cost of engine development, EU OEMs2011-2016 (w/o application) [EUR bn]

Increasing development costs Countermeasures



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B. "EffEctivE gloBAl covERAgE" DoMinAnt REquiREMEnt foR thEEnginEERing oRgAnizAtion of toMoRRoW

To cope with these challenges, the engineering organization needs to be transformed

from worldwide presence to worldwide integration. Automotive engineering needs to

become "glocal", adapting a global framework to local particulari ties (Fig. 5).

Local market know-how (both of customer and supply markets) needs to be seam-

lessly integrated with engineering competences in multiple locations. Trend scouting

using dragnet methods such as the lead-user approach as well as tradit ional market

research needs to take place in lead markets. If a specific technology is used broadly

in a specific lead market, concept and prototype development should be done there

as well. Centers of competence need to be defined accordingly, e.g.

> India for low-budget solutions> Japan/East Asia for 3-D (online) navigation solutions

> Brazil for alternative fuels

> China or California for online infotainment solutions, etc.

New products need to be launched nearly simultaneously on a global scale, based

on architectures and construction kits developed and industrialized in the respective

lead markets. To do so, a balanced approach of strong global coordination and local

freedom is necessary.

Multiregional locations

Centralization of development

Sequential launches of new products,

based on centrally developed platforms

Dispersed production network

Local/regional purchasing bases,

limited projects in partnerships with

other OEMs

Multiregional integration

Network of development centers globally integrated

though a competence center approach

Simultaneous launch of models, based on architectures

and construction kits developed in lead markets

Standardized processes, combined with a superior level of out-put coordination and greater use of socialization and networks

Global purchasing base and broad partner network

Regionalcomplexity

Effectiveness:"Delivery at same

cost levels"

Market/customer/product portfolio

complexity

Technology/systems

complexity

"War for talent"(cultural)diversity


From worldwide presence to worldwide integration

Fig. 5: Requirements for the engineering organization of tomorrow


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Most large automotive companies have already realized the need for global, mul-tinational integration and consequently started to decentralize their development

activities. This geographic dispersion is coupled with significant effor ts to coordinate

development activities. Our recently finished study [3] showed that such coordination

is successful if it is rooted in a combination of two factors. The first is superior levels

of output coordination (focusing on targeted outputs through plans, goals, monitoring

and reporting systems rather than specific employee behavior).

The second key factor is an increased use of social ization and networks. Socialization

refers to encouraging employees to share a corporate culture that encompasses

values, vision and mission. A common corporate cul ture shared by all employees

is the key to managing diversity arising from the different (cultural) backgrounds

of talent recruited from across the globe. Networks are used to promote the (non-

hierarchical) sharing of information through formal relationships such as task forces,

cross-functional teams and management transfers.

And finally, engineering must focus on what is truly essential for the long-term success

of the company. Effective engineering focuses on the aspects of products, accompany-

ing services and technologies that really set the brand apart. This means:

> Developing new in-house competences needed to gain competitive advantage

> Shedding those in-house activities that do not lead to differentiation from

competition, and rather partnering with others to improve economies of scale

or to leverage each partner's specific strengths

Transforming the engineering organization into a more focused globally integrated one,

changing the culture to share a common vision and values, embracing diversity at the

same time and entering into partnerships even with competitors these are enormous

tasks and require a structured approach.


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c. "AutoMotivE EnginEERing 2025" fivE stEps to MAnAgE thE tRAns-foRMAtion into A highly EffEctivE glocAl EnginEERing oRgAnizAtion

Most automotive companies realize that they need more globally integrated deve-

lopment. However, most development employees and hence most development

work are still located in the company's home region. Whereas basic development is

often focused in one region (the home, and not necessarily the lead market), adaptive

development is frequently located in two regions (the home and the largest foreign

market).

The need to cover a broader technology and product portfolio is well understood and

the new skills needed for the future have been defined. However, determining what

areas to shed is much more difficult and not always supported, especially by middle

management, who tend to be skeptical regarding transferring competences to external

partners.

Increased diversity is stated as a goal, but in reality, a single nationality clear ly

dominates at most automotive companies, especially on VP and SVP levels. This

is particularly true for OEMs.

And last but not least, improving engineering effectiveness and efficiency is a clear

objective but how to attain that objective is unclear.

To achieve these goals, we propose a f ive-step framework for managing the trans-formation into a highly effective glocal engineering organization (Fig. 6).

Before beginning with the first step, the company needs to clearly define its vision,

mission, intended strategic position and overall business model.

1 Develop a scenario-based product and technology roadmapand identify potential lead markets

2

Define long-term roadmap (10 years) to close gaps

3

4

Assess current status and identify gaps

5 Create short-term (3-year) action plan and set up animplementation organization to start transformation

Define long-term requirements for the organization

(core competencies/skills, regions, partners needed)


Fig. 6: Framework for transforming the engineering organization


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Once these have been firmly established, the first step is to develop a scenario-based product and technology roadmap. This roadmap should seek to link automotive

macroscenarios (i.e. scenarios applicable to the entire industry) with company-

specific microscenarios. Companies need to identify potential lead markets based

on the latter's market requirements, trends and economic demand. Once the lead

markets have been identified, designs can be drafted and tailored to meet a market's

unique profile.

The second step is to define requirements for the organization: What will be its core

competence(s)? What areas can be eliminated? In considering these and similar

questions, one must take into account the predicted impact on the brand and/or the

desired strategic position/business model. The target organizational set-up needs to

be defined, e.g. (regional) centers of competence based on lead markets and other

key features, target skills/headcount and ideal partnership structure.

At this point, the company needs to figure out how far it is from the defined "ideal"

organizational set-up. To do so, it must assess its current status, identify gaps and

then derive high-level measures to close them.

The measures for closing the gaps then need to be prioritized by synchronizing them

with roadmaps ( technologies, products, ..). When prioritizing the measures, companies

must take into account uncertainties, impact on competitive position, availability of

resources and economic levers.

In the last step, a detailed improvement plan needs to be developed with a short-term

(3-year) action plan. Finally, all that's left is to start the transformation.


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D. suMMARy AnD conclusion

Over the next 15 years, the automotive industry will undergo the greatest transfor-

mation of its history. Complexity is rising everywhere, putting tremendous pressure on

engineering organizations to become more effective, more efficient and faster. They

also have to become more innovative as they will need to master a broader spectrum

of technologies.

The right setup is crucial but it also takes time. To be prepared for the upcoming

challenges, transformation needs to start now, and with a clear target picture in mind.

Solid and profound know-how of the challenges ahead, a deep understanding of

automotive engineering and hands-on experience in working in the automotive

industry are necessary to add value in this process.

That's what we have at Roland Berger and we would be happy to support you

in meeting these new challenges.

Further reading:

[1] Kalmbach, R.; Bernhart, W.; Grosse Kleimann, P.; Hoffmann, M.:

Automotive landscape 2025: Opportunities and challenges ahead

Study, Roland Berger Strategy Consultants GmbH, Munich 2011

[2] The next wave: Emerging market innovation Threats and opportunities

Study, Roland Berger Strategy Consultants GmbH, Munich 2007

[3] Schmid, S.; Grosche, P.; Bernhart, W.; Schott, S.:

Focus on corporate culture and networks How automotive companies

successfully coordinate their activities across borders.

A survey of the automotive industr y.

ESCP Europe Business School & Roland Berger Strategy Consultants,

Munich 2011


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contAct

The authors welcome feedback and will be glad to

address any questions.

Dr. Wa Berar

Partner

Roland Berger Strategy Consultants

Lffelstrae 46

70597 Stuttgart, Germany

Phone: +49 (711) 3275-7421

E-mail: [email protected]

Dr. tma sk

Partner


Bockenheimer Landstrae 2-8, OpernTurm

60306 Frankfurt, Germany

Phone: +49 (69) 29924-6202


Co-authors:

Ma BaePartner


11, rue de Prony

75017 Paris, France

Phone: +33 (1) 53670-907


Ra Kamba

Partner


Mies-van-der-Rohe-Strae 6

80807 Mnchen, GermanyPhone: +49 (89) 9230-8669


Dr. sa naama

Partner


1-12-32 Akasaka

Tokyo 107-6023, Japan

Phone: +81 (3) 358 76-683


per M. nPartner


Vasagatan 43 B

41137 Gothenburg, Sweden

Phone: +46 31 75755 - 10


Jere Reer

Partner


2401 West Big Beaver Road, Suite 500

Detroit, MI 48084, USAPhone: +1 248 729 - 5115


J se

Partner


23F Shanghai Kerry Center, 1515 Nanjing

Shanghai 200040, China

Phone: +86 (21) 52986677-874


roland berger automotive engineering 2025 20110430

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