How to increase automotive profit margins in the era of electric
It can seem pretty incredible that electric cars were more popular than gas-powered ones in the late 19th century. However, by the late 1920s, the introduction of the assembly line and inexpensive gasoline gave the Internal Combustion Engine (ICE) car the edge it needed to win the race for global dominance. Now, after 100 years of lying dormant, electric vehicles (EVs) are making a comeback – with technology that could only be imagined by its predecessors.
Ignoring the fundamentals may blow a fuse
While automotive innovation is important, it’s equally important not to lose sight of the fundamentals that never change, such as product quality and reliability, reducing waste, and improving customer affordability and profitability. Let’s look at two examples – vehicle recalls and vehicle affordability. According to the NTHSA, 1,000 recalls for vehicles, car seats, tires, RVs and other equipment in 2023 affected nearly 35 million vehicles in the U.S. alone. That’s costing companies like yours a lot of money.
As for vehicle affordability, according to recent data from Cox Automotive, the average transaction price for new cars in the U.S. is $48,759. Although prices have stabilized or even decreased a bit lately in some cases, they remain close to record highs. Inflation and higher interest rates persist, and autoworker wage hikes will likely result in further price increases.
And let’s not forget the “war on waste” that you and your OEM partners have been waging for many decades, from the engineering lab to the production floor to the dealer showroom. As you know, this work is never done, as there’s always some cost and inefficiency waiting to be removed from multiple areas of the business, with improved profit margins to be realized.
The auto industry has entered one of its most unique and challenging periods. Cars and trucks were designed and produced for decades via incremental and steady improvements. It’s an entirely new ballgame now with the integration of EV and digital technologies, but we must be sure not to lose sight of these fundamentals that have stood the test of time.
Don’t get zapped by manual processes
As important as technology innovation is to the success of an automotive business, cash flow is just as or even more critical. If we look at the management of vehicle incentive programs, automakers like you routinely plan compelling offers and incentives to drive sales. However, cumbersome systems, manual-based processes and lack of adequate controls considerably increase the risk of errors, such as improperly paid incentives or lower-than-expected margins. This can hurt your cash flow.
Experts predict that automotive data monetization of connected services will soar over the next decade to about $20 billion in 2030. To fully realize the potential revenue benefits of this, you must use your data to drive strategies that optimize pricing. For most auto companies like yours, evolving technology trends like electrification and increasing vehicle connectivity mean you need an unclouded vision of the end-to-end revenue management process.
Predictive analytics offers valuable improvement opportunities, whether using old tried-and-true statistical techniques like SPC, deploying ML/AI techniques on large data sets, or using the latest digital twin simulation technology to design your next-generation EV. Simulation and analytics are not only helpful when developing exciting new technologies; they can also help improve the results you achieve in some key margin-impacting processes on the sales side of your business. To put it bluntly, if you’re using cutting-edge digital twin simulation software for your designs but still using spreadsheets or home-grown legacy solutions for your go-to-market processes, you’re probably not winning the war on waste.
May the volt be with you
Whether you’re a vehicle manufacturer or subsystems/component supplier, deploying the correct revenue management system for your automotive business will allow you greater control of your critical go-to-market plans and invaluable insights on key margin-impactful processes, such as configuration pricing.
How do you currently manage and manufacture the numerous vehicle, subsystem or component variations you utilize? If you’re working with the assorted options on a spreadsheet or another way that fails to deliver optimal results, consider automating this while adding predictive modeling capabilities. You could model the various configuration options and determine the combinations that will meet and generate the best demand while maximizing your financial return. In addition, a rules engine would help with automated configurations and pricing of vehicle option packages or component variations.
If you’re a vehicle manufacturer, you could gain real-time insight into the effectiveness of your incentive program by analyzing those programs across brands, regions and dealers. If you’re a component or subsystems supplier, you could gain the same insights into your pricing. Either way, you’ll be able to reduce your complexity and costs through automation and improve margins by running simulations and modeling variables that are most applicable to your business. Now, that’s what I call innovation!