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Electronics as Valuable as Horsepower for Auto Innovations

Electronic systems and digital services will drive as much value creation for the auto industry as horsepower , said an Audi executive at the recent Consumer Electronics Show in Shanghai.

“By 2020, 50% of value creation will be based on apps, software, electronic systems and digital services,” Luca de Meo, Audi's sales chief, said in a prepared speech during CES Shanghai and reported here by Bloomberg.

The endless number of opportunities de Meo refers to are poised to change the auto industry, according to the Bloomberg story.

Audi, like many of its competitors, is investing in research and development projects that will influence how the shifting future of the automotive industry. In the post-recession economic recovery era and as the Internet of Things ushers in greater machine-to-machine connectivity, many industry observers expect the automotive industry to fundamentally change as companies go head-to-head with new competitors, form different kinds of alliances and battle for global revenue.

One way auto companies are already adjusting to this shift is by honing their offerings with country and region-specific solutions.

Audi, like its competitors, has been doing that for a few years now. On its website, the company states that since 2013, Audi engineers have been working in the company's Beijing research and development Center to develop solutions especially for Asian markets.

“A precise knowledge of local conditions is a key factor in making our technical innovations a success in our most important international market,” said Prof. Dr. Ulrich Hackenberg, board member for development, referring specifically to the large Chinese market potential. “Our engineers in China are working on such aspects as chassis tuning, assistance systems and user interfaces as well as localization of high-voltage battery components.”  Audi also said it is developing Asia-specific infotainment and connectivity features in Beijing.

At the Shanghai CES show, Audi showed off its connected car of the future, with infotainmentservices, new control and display concepts and innovative new light features.

Piloted driving from Silicon Valley to Las Vegas for CES 2015
Source: Audi

Piloted driving from Silicon Valley to Las Vegas for CES 2015 Source: Audi

These kinds of statements about electronic systems innovation being a key part of the automakers' value creation alongside new product initiatives and updated operational strategies put the automotive supply chain squarely in the middle of potential chaos as OEMs and suppliers race to market with glitzy hardware, app and digital services interfaces.

As Strategy&, formerly Booz & Company and now under PwC's umbrella, wrote in its 2015 auto trends perspective post, the cost of electronics and software content in autos was less than 20% of the total cost a decade ago. Now, it is as much as 35%, the company said, citing studies done by Manfred Broy, a professor of informatics at Technical University, Munich. Additionally, Strategy& points out that electronics systems continue to contribute more than 90% of innovations and new features. And, a recent Consumer Reports survey found that infotainment equipment was the most troublesome feature in 2014 vehicles, which Strategy& suggests could mean “a powerful upside for companies that can devise superior systems.”

It added:

The increasing importance of infotainment and telematics systems is disruptive for OEMs and traditional suppliers, putting a premium on innovation and changing the ways that industry players design and develop new products and services. Software breakthroughs are becoming as critical as hardware innovation, and competition is increasingly coming from nontraditional players. Ever more vital software content has also accelerated the pace of change in products and features. Whereas the time frame for new vehicle launches is typically three to four years, the cycle for new software iterations, often driven by interactivity with mobile devices, is measured in months.

How ready are you for the disruption that sets to happen in the auto industry?

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