On this episode of the Futurum Tech Podcast – Interview Series I am joined by Tom Madonna, an Industry Advisor for the Automotive Industry at SAP. This is the first episode in a new series — done in partnership with SAP — where I will be speaking with advisors and executives across seven different industries on the state of their industry and how SAP Industry Cloud plays a vital role in the future.
The Future of the Automotive Industry
In our conversation we discussed the following:
- A look back on 2020 in the automotive industry
- A highlight of the changes retailers and dealers have dealt with recently
- How customer ownership changes are impacting dealers and OEMs
- An overview of the state of service
- Why the SAP Industry Cloud is a gamechanger for the automotive industry
The automotive industry is experiencing one of the biggest transformations in recent years. My conversation with Tom explores these changes and a little bit more. It’s definitely one you don’t want to miss.
If you’d like to learn more about the industry cloud and the Intelligent Enterprise strategy, be sure to check out our research brief: Adopting the Intelligent Enterprise is Table Stakes for the Automotive Industry.
Listen to my interview with Tom on your favorite streaming platform here:
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Daniel Newman: Welcome to the Futurum Tech Podcast, I’m Daniel Newman, principal analyst, and founding partner at Futurum Research. This is part of the Industry Cloud Series of podcasts that we are doing in partnership with SAP and Intel. Excited today to be joined by Mr. Tom Madonna of SAP. I will be bringing him into the show momentarily. Going to be a great, automotive-focused industry cloud conversation today. We’re going to spend the next 15 or 20 minutes with you, hearing all about what’s going on in the automotive industry from a dealer standpoint, OEM standpoint, and from the customer experience standpoint. And then of course, what the industry cloud is and how it is going to help drive the automotive industry forward.
Before I go ahead and get started with this episode, just want to say, thank you to all of you out there that are listening. A reminder, this is for information and entertainment purposes only. So while we are talking to and about publicly-traded companies, please do not take anything we say as investment advice. All right. Without further ado, we’d like to welcome Mr. Tom Madonna. Tom, welcome to the Futurum Tech Podcast, Industry Cloud Series.
Tom Madonna: Good day, Daniel. And thank you for bringing me back, and hello, listeners.
Daniel Newman: Yeah. We’ve had you here before, some good conversations in the past. I believe you joined for the Intelligent Enterprise Series that we did last year. We had a great conversation. I’m a bit of a car head. Won’t bore the audience with that today though, because we’re talking to industry cloud and we’re talking tech. But hey, if there isn’t an industry that’s moving fast towards technology, it has been automotive, everything from EVs and charging stations to news I heard today, Tom, about the rising prices, because we’re seeing, what is it, all the aluminum, and manufacturing components, and copper, and everything’s on the rise, and larger debts and higher prices. And by the way, we saw all year long, a shortage of actual vehicles available, which also drove the price up. So despite the fact that it was a bit of a crazy and tough 2020, the automotive industry had a pretty solid year in a lot of ways.
Tom Madonna: Actually it did. If you look at core quarter-on-quarter, on the fourth quarter, it was only about a one or 2% difference, compared to ’19. Obviously, we had to shut down 45, 60 days in second quarter. The industry definitely rebounded as we came back. But you’re spot on in regards to the commodity industry. At this point in time, rubber, copper, aluminum, steel are all, up based upon those pieces. And that doesn’t even include some of the shortages in regards to parts. Personally, I’ve had my vehicle in a couple of times, and six months to wait for a part is not uncommon right now. So it’s really impacting both the service, as well as the execution. But they are rebounding, and things are getting back. Lots are starting to fill back up. Some are actually shutting down, some of the OEMs are shut down. But it is a new and interesting time.
Daniel Newman: Yeah, the transformation and the forced evolution of businesses over the last year certainly did create a bit of a digital divide. It created companies that were able to act quick. The shutdowns were universal. Didn’t matter how much technology you had running your back and front office. That was a health issue. But as we came out of that, and as we learned how to cope and keep operations running, there was definitely a divide. Companies that had the tech were able to accelerate, get back to a more normal, I would say that with a big parenthesis, more normal, not normal, and the industry as a whole. And like I said, demand is pretty high. Vehicles are flying off the lots.
There’s some interesting economic trends, for sure, that have come in the wake of this virus. The shutdown of the year in automotive is one of them. I want to spend the next, I don’t know, 15 minutes chatting to you, Tom, about a few things that are going on. I mentioned dealerships and OEMs. So you ready to rock?
Tom Madonna: Sure.
Daniel Newman: All right, let me hit you up with a few things. One of the things that’s really interesting to me, and we alluded to this, is the change that the retail side of this business has had to go through. So dealers, for instance, and those selling vehicles at the retail level, have really had their business models disrupted in a big way. So how are they changing? What happened? What’s changing? What will continue to change?
Tom Madonna: Sure. So if you look at ’19, roughly 1% of transactions occurred online. So the whole, go in, kick the tires, do the test drive, et cetera, the dealerships were part of that. As we moved into 2020, that had a thousand percent increase in regards to transactions, so roughly 10%. Interesting enough, even with 10%, the current studies that we’ve seen from NADA and others, an average customer still spends two hours and 46 minutes in the dealership, even after going through their journey to find the vehicle, to configure the vehicle, to put it in stock, to actually take transaction, to do all the financing, they still spend that much time. And we’re seeing the customers having a different want, a different experience, which actually pushed the dealerships. And this was actually something that was very interesting in a couple of conversations this past week, where the dealerships were waiting for being perfect in regards to that digital transformation for the customer.
And they just couldn’t do that in 2020. Perfect was not something they could achieve. Good enough is where they actually went through.
And so you start to see things around the journey itself and how they are interacting with the OEM, and the bonding of their sites with the OEM sites. So feature, function, execution are all part of what’s going to be coming from the OEM. The dealership then needs to consider where they are in inventory and what’s going on. And if they are a large consortium, do they have another vehicle somewhere else in their structure. Then they’ve got to worry about getting that customer, moving that customer through the transaction. And then lastly, the customer is looking for an experience that goes all the way through drive. So we started talking just recently about design through operate, and part of that is vehicles being held longer. You and I are probably driving vehicles a little bit longer than what we’ve had in the past. And the average lifespan of a vehicle now has gone from eight years to 10 years. So that means that there’s more transaction, there’s more financials that are going to go in with the service, and all of those things are changing.
So we see omni-channel changes, like I’ve talked about in regards to how they’re buying. We’ve seen customer journey changes in regards to what the customer’s really wanting. The last study I just saw this morning from an NADA and IHS was, the customer really wants, by 2025, wants to spend over half the time basically doing a digital transaction. They’re comfortable with it. They want to go do it. They want to see that. Personally, it was probably four or five vehicles ago, I actually had the best digital process in place. I was in the dealership about eight minutes. And so part of that was, everything was bought. I found it, did it, pushed it. And at the end of the point, they were able to do that for me. So the dealerships are starting to invest in technology. They’re starting to invest in the customer experience, and they’re starting to invest in the employee experience. Happy customer and happy employees definitely increase the volume and the sales.
Daniel Newman: Yeah, I think all of those things are really good points, Tom. Of course, I’d be remiss to not add a whole series of new companies that have sort of popped up that were almost COVID-perfect for doing retail car sales. So the first wave of that came years ago with CarMax, really focusing on a new angle in the customer experience, which was all about transparent pricing, consistency, buy your car, whether or not you buy ours. And now we’re seeing this sort of, we’re seeing these Carvana towers going up all over the place. We’re seeing Vroom and just different apps, really being built to meet the demand need. And, like I said, during COVID, to meet the touchless approach of being able to buy a vehicle, have it delivered.
So I think dealers are evolving quickly to try to augment and offset some of that, to say, “Hey, we can do that too. We can deliver the vehicle. You can shop online. You can buy. You can have a whole customer journey with us, but still have the benefit of a local dealership,” which anyone that’s owned a car that even needed a little bit of maintenance knows, there’s a great value in having a local dealership, a relationship to work off of. But of course, these new disruptive models are certainly gaining steam and gaining momentum. And I don’t think we’re going to see those go away anytime soon.
Which brings me to my next question for you, which you mentioned some customer ownership changes, you mentioned longer time periods that people hold cars. This has to have an impact to both the supply chain, the number of vehicles that are being manufactured, what dealerships are putting an inventory. I imagine as customization grows, more just-in-time, as manufacturers can make cars that have slight levels of customization to meet customers’ needs, so there’s a lot of things pending. Talk a little bit about how the customer ownership changes are affecting the dealers and OEMs.
Tom Madonna: Sure. So let’s talk about the demographics first. The Millennials, and really even some of the Generation Z really had transpired into, “I really didn’t want to own a vehicle. I didn’t want to drive a vehicle. I was moving towards the ride share, I was moving towards the ability, whether that was an urban or a rural situation.” What we found this past year was, that has changed. The security, the cleanliness, the ability for health, has flipped the switch on their abilities to actually change. And I think, again, one of the studies that just came out of IHS, a 10% increase in Millennials owning vehicles this year. So you start to think about what that’s going to mean in regards to the decline, and is there a decline, and what that’s going to mean to the products?
You started talking a little bit about the products. I mean, the ownership is moving, this year was kind of an environmental change across the globe in regards to people not driving, things not being on the road. And you started to see large cities, Shanghai, LA, where the air cleanliness has started, gone back up, based upon that, so that’s now pushed into our rejuvenation BEV vehicles. And we start to see things like Zoox and Zgren, et cetera, where we’re starting to see autonomous. And so the change is occurring. I’ve done a couple of prediction shows this past year, and what I saw was about a 5% BEV to about a 10% BEV, AV from about 2 to about 6 or 8%. I think those are going to continue to grow.
But what we start to see is the ownership changes the wants. This year, I think there was 50 changes in models over the course of the year, from a re-do of a model, and roughly 25 plates in regards to a BEV, a full Bev vehicle. And when we talk BEV, battery electric, so not a hybrid, but something that’s going to be full battery. The current thought process is, by 2025, there’ll be 500, 500 selections, which means basically half of what’s on the market will be a BEV option. And whether or not that’s in a regular Mustang versus a marquee, all of those things are going to be what people are going to want to drive and what they want to own.
The other thing that’s interesting about this is, you start to look at what that vehicle means, and this is the transaction of the vehicle. It’s built differently, it’s supplied differently, it’s serviced differently. The lifespan of the batteries are going to well outlive the actual components themselves. So you start to think about, what’s that mean for an OEM? Is an OEM going to own the vehicle and lease it and then have a one or two lives on a vehicle? You take it, you basically lease it for your four to five years, you bring it back, you take the full, complete top off of it, you put another top on top of it with new entertainment structures, you put it back out. The powertrain of the [inaudible] is going to be longer, because of less moving parts, so there’s less things to break down.
But as you start to think about what that means, I think quote/unquote, the new normal, is that what I seem to be calling it in regards to what that’s going to mean after 2020, the new normal is a demographic change, economic change, and environmental change. And the disruptors that are actually moving into the industry are becoming mainstream. S you start to think around, the big three in Detroit have all made huge announcements in regards to what that’s going to mean. So as you start to look what I would call Y2K in regards to what happened with IT, I think we’re in Y2020, in regards to what’s happening with auto, based upon the execution, the direction and really the intention of the industry to actually better themselves and increase the speed going forth. And all that’s going to be based upon IT, let it be technology in the car, let it be technology in the building, let it be technology in regards to the servicing and the customer experiences, so that technical transformation is occurring.
Daniel Newman: Yeah, you covered a lot of things. You sort of weaved your way into my third topic, which I was going to talk to you about, but I just want to kind of circle back on a few things you said there. There are a number of big forces. You’ve got a generation that has less interest in necessarily owning a garage full of vehicles, the affinity towards vehicles, and the relationship between consumers and vehicles is changing. I mean, there’s still aficionados out there. I, of course, love vehicles and will always want to own mine, and have many different vehicles, because I love them. And I like combustion. I like loud exhaust systems.
But that’s not the norm. The norm is, “I need transportation. I need to get from point A to point B.” And we’ve seen a lot of apps tools. You mentioned ride sharing. Of course, that was booming. It slowed a little when mobility slowed and travel slowed and people didn’t necessarily want to get in other people’s vehicles from a safety, health standpoint. But that’ll return. That’s still there, especially in high density, urban areas, that’s going to continue to be a big thing.
You also mentioned a few things about the shift to autonomous and electric vehicles, which we’re seeing the big OEMs are all doing it. We’re also seeing new players, right? Of course, everyone knows Tesla, but there’s dozens of them. You’ve got Lucid and you’ve got Neo and you’ve got like Xpeng and companies from China. You’ve got the domestic automotive. And also you mentioned something that’s kind of interesting is the skateboard technology that they call it, sort of for the electric vehicles. Where they’re building essentially, if you haven’t heard this expression before, it’s basically the chassis and the bottom. The motors are right there with the wheels. It’s all in the suspension in the bottom. And you can literally lift the top off the thing. There’s no big engine and all the wiring components that we’re used to. It’s a bunch of chips. It’s a few small motors that are powering, in general, independent to the front and rear wheels, sometimes to each wheel.
And you could do what you said. You could totally change the entire consumption model, because that skateboard will last for decades. Where the body of the vehicle will go out of style, or it will have certain weathering that’ll impact it, but that base won’t really change. There’s a lot of interesting factors at play here, and that’s changing how we train services, what dealerships are going to offer, how we customize things, what we need, right? The whole chip supply shortage, right? Because we went from a few chips inside of vehicles to now 50 or a hundred semiconductors in a single vehicle. And that number is growing as cars get smarter, and as we move from level two, which is where we’re kind of at with a lot of our autonomous driving right now, to three and four, where we’re going to go to full ADAS. I mean the future of us riding around in a vehicle that we either own or use and don’t drive at all, is there. It is going to happen. So these are all really fascinating things that are taking place.
I got two more questions, but this next question, let’s get a little… I just jumped 10 years, 20 years into the future a little bit. Let’s go back for a moment here. We talked about shortages of parts, six-month waits, changes to service. With all that’s going on with parts and shortages, what is the state of service?
Tom Madonna: Let’s talk a little bit about that chip conversation you just had. An average vehicle right now has somewhere between 1,000 and 1,400 chips in it.
Daniel Newman: Yeah. Sorry, underquoted.
Tom Madonna: Yeah. You start looking at that trend in regards to the bounce or the, what they call it, the double bounce, this is history repeating itself. If you think about what happened in IT and technology, and I know you talked to Patrick last week in regards to high tech, this occurred in 2010, when the tsunami hit Japan, and people couldn’t get semiconductors produced, et cetera. So what did we learn from that? We learned at this point in time that forecasting, the execution, and the firming up of what that’s going to mean in regards to delivery of those orders are definitely going to be part of it. And again, that’s going to continue to change. At this point, there’s going to be more, there’s going to be a higher need, and there’s going to be a need to actually firm up that demand.
But again, you start to see what’s occurring right now within the service structure, and how this is affecting some of the things going on. What does that customer experience mean if you drive your vehicle in and you basically have two things done on it and they come back and say, “Okay, by the way, you’ve got to wait six months.” For me personally, I bought a vehicle in 2020. We changed out my wife’s vehicle. We took it in, in September, it was there for five weeks waiting for a part. And they came back and said, “We don’t have a determination of a time. I will make an appointment for you.” And again, we bought the vehicle in November, but they made a service appointment for the middle part of February. I said, “Fine, screw it. You guys keep the vehicle. I’m going to get something new.” And then they still called me in the middle part of February and asked if I wanted to come in and have the part replaced.
So the structure that’s going on right now in regards to the shortages are happening both on the OEM, as well as the dealer and service sites. And it’s an impact. And what you start to see is, a situation that is extremely interesting and boils down to a couple business situations. One is the business continuity planning. And if you look at the OEMs, you look at the Tier 1s, on average, and this was a study that was done last year, 65% of the OEM’s DOT 5, Tier 1s, do not have a business continuity plan of their supply chain. So what does that mean? If the chips go out, I don’t know about it until I’m actually not getting shipments. So as you start to think about that, that’s really driven a digital transformation in the supply chain, and planning, that is really needed to understand where those shortages are going to be, shift around the production, et cetera. You see the effects of those not happening today.
You know, Ford announced shutting down the plant for three weeks. Now, they’re going to basically shut it down for six. A study this morning I was reading stated that it’s going to get worse before it gets better. The situation is, it’s going to take a good 90 to 180 days for that chip recovery to occur. And so you’re going to see a recovery model in end of the second, first of the third quarter. And so what does that mean in regards to production? Well, exactly what you said earlier. There are going to be shortages on the lots. There’s going to be higher prices. There’s going to be people not happy, because they ordered something and they can’t get it. I think even the study that came out of Auto News this past week, where people were getting refunded money for vehicles they ordered, they were not going to be able to get for a quarter.
So inventories are causing impacts across the board, across the supply chain, and everyone is being impacted. So the question becomes, how does that change? And I think part of that is, building out that supplier collaboration, building out the supply chains, building out the execution models, and getting out of, a point you made earlier, and that is kind of what we call in discrete manufacturing, the build of one, as compared to build the stock. And so customers want this, they want this in it, and they want that particular color, and they want this to go. So the reactive agility that needs to happen with the supply chain and the OEMs needs to really crystallize itself with, can they accomplish that with the technology they’re currently using? And in most cases, it’s going to be impactful.
The platform providers are really coming at this as a greenfield. So when you start talking about Karma, Lucid, Zoox, et cetera, those guys didn’t have an infrastructure, didn’t have 50 or 100 years of technology or factories that basically ran a certain way. So they are able to, with very quick agility, put in a full suite of products, and go from design to operate, on one platform. Let it be an industry structure like industry cloud, or let it be an on-prem structure, but they’re able to basically put it in and they don’t have to worry about the integration, and they’re up and running. These guys are putting vehicles out in 12 to 18 months. If you think about the whole summer vacation, or the summer shutdown, to redo the lines, that’s got to be more nimble. And so things like Lordstown, and things like Karma and Lucid, who are moving at lightning speed, everyone’s going to need to do that. And everyone’s going to need to adapt to that. And that’s going to be a huge industrial change, let it be industrial 4.0 or industrial 5.0, but it’s coming.
Daniel Newman: Absolutely. So many great insights here, Tom. And look, I only have a couple minutes left here before I have to part adieu, as I would like to say so affectionately, but tie this together for me. SAP, talk about the industry cloud and just give me a quick, what are you doing for this? Like what is all the technology? What’s the magic? Of course, I want the viewers to know. That’s something I think they should hear.
Tom Madonna: So we see a change. I mean, if you look at the pivotal point last year of on-prem software versus cloud, it was a pivotal year. We actually, in most industries, went to a 50/50, as compared to a heavy prem to cloud. So what does that mean? It means that customers are looking for edge applications. They’re looking for planning, whether it be IBP, they’re looking for purchasing, whether it be Ariba. But they’re looking for agility to hit those transformations, to start with.
Secondarily, if their ability to change quickly would be the platform, then they’re putting a whole suite in, let it be S/4 and all the associated processes. We’re adapting to that. We’re also giving out new structures and new functions that haven’t been there in the past. If you look at BEV in particular, we’ve gone 80, 90% coverage model in regards to the customers that are currently using our products across the industry in regards to the battery, because they needed that agility. They needed to be able to adapt.
And I think part of the industry cloud that we’re starting to see, we’re starting to see both partners, as well as a development put out these, are this new functionality that will require a backbone that will integrate within S/4. And it’s a seamless integration that’s going to be part of that. I think part of what we’re seeing is that the technical debt that’s currently out there and an industry, at this point in time, they want to move fast. They want to move agile. They want to get a business return very quickly, and they want to have that benefit showing. And I think part of that is going to be speed, part of that’s going to be edge, and part of that’s going to be, again, a digital transformation framework that allows them to provide incremental support and incremental benefit in a very rapid pace.
Daniel Newman: Absolutely. Well Tom, I want to say thank you so much for spending some time with me today here on the Futurum Tech Podcast, the Industry Cloud Series. Automotive, passion of mine, very interesting industry, definitely facing a number of different external disruptive factors, everything from autonomous driving, to electric vehicles, to a completely different go-to-market model, and you hit all that really well today. And I’m excited to bring you back in the future and talk about where we landed on some of these things. So thanks for joining me today.
Tom Madonna: Thanks Daniel. Thanks for having me.
Daniel Newman: And for everybody out there that enjoyed this show, hit that subscribe button. We have plenty more here on the Industry Cloud Series of the Futurum Tech Podcast. We also, of course, have our regular Futurum Tech Podcast shows, and we’d love for you to stay with us. Watch us on YouTube, hit us up on Spotify and Apple. But for this particular show, I have to say goodbye and bid everyone farewell. We will see you back again very soon. Have a great day. We’ll talk to you soon.