The 2014 Global Innovation 1000 Automotive industry findings
Automotive industry findings From the ground level, three powerful forces are roiling the auto industry: shifts in consumer demand, expanded regulatory requirements for safety and fuel economy, and the increased availability of data and information. Effective innovation will be critical to coping with each of these trends. About the Global Innovation 1000: For the 10th year, analyzed R&D investment at the 1,000 biggest-spending public companies in the world. In addition to undertaking our recurring analysis of R&D spending trends, we interviewed and surveyed more than 500 R&D executives and innovation leaders to get their perspectives on changes in innovation at their companies over the last decade and what they expect in the 10 years to come. 2
Automotive R&D spending has generally risen over the past decade Overall, R&D spending by automotive companies has gone up by an average CAGR of 4.6% over the past 10 years. The growth has generally been smooth, with just two years of decline in R&D spending during that time. In fact, over the past five years, R&D spending by the automotive industry has consistently trended upward, while a number of other sectors, including healthcare, consumer goods and telecommunications, have decreased their R&D spending in the past year. Increases in automotive R&D spending will likely remain sustained to keep up with the accelerating need for autos to become safer and more efficient yet more technologically advanced. Barry Jaruzelski, Senior Partner, 2014 $105bn 2005 $70bn 2010 post-crisis dip 70 68 74 86 89 71 87 99 103 105 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: Bloomberg data; Capital IQ data; analysis. Results reflect the previous fiscal year, as of June 30 of the respective year shown. More information about our methodology is available on p. 15 of our strategy+business (Issue 77, Winter 2014) article, Proven Paths to Innovation Success. 3
Automotive companies rank #3 in innovation spending Together the Global Innovation 1000 invested US$647 billion last year. Of that, nearly $105 billion was spent by automotive companies. Only computing and electronics and healthcare companies invested more. When it comes to R&D intensity how much companies are spending as a proportion of revenues automotive companies rank third. Percentage of the total R&D spend for all sectors 26% 21% 16% 11% 9% Computing & electronics Healthcare Automotive Industrials Software and Internet 4% 3% 3% 3% 2% 2% Chemicals Aerospace & defense Consumer Energy Telecom Other Average % of revenue spent on R&D 11% 13% 7% 4% 2% 3% 4% 2% 0.4% 2% 1% Computing & electronics Healthcare Automotive Industrials Software and Internet Chemicals Aerospace & defense Consumer Energy Telecom Other Sources: Bloomberg data; Capital IQ data; analysis. Results reflect the previous fiscal year, as of June 30 2014. Want to see more how industries compare over time and across regions? Check out our interactive comparison of R&D spending by regions and industries 4
but being great at innovation requires more than large R&D budgets We asked survey participants which companies they believe are the most innovative to create our 10 Most Innovative companies list. Their responses and our list of Top 10 R&D Spenders match less often than you might expect. Indeed, Toyota has been the only automotive company to ever make both lists in 2010 12. More recently, in 2013 and 2014, Tesla Motors has been the only automotive company among the 10 Most Innovative, despite investing far less on R&D than the industry s biggest spenders. What counts the most isn t how much you spend. It s what you get back from your investment. Evan Hirsh, Managing Partner North America Automotive Practice, Top 10 R&D spenders Amazon IBM GE Samsung Volkswagen Intel Roche Apple Proctor & Gamble 3M Microsoft Novartis Toyota Johnson & Johnson Tesla Google Merck 10 most innovative US$10bn US$5bn US$1bn Sources: Bloomberg data; Capital IQ data. Results reflect the previous fiscal year, as of June 30. More information about our methdology is available on p.15 of our Strategy + Business (Issue 77, Winter 2014) article, Proven paths to innovation success. Want to see who the Top Spenders and Innovators were last year too? Check out our interactive list of the Top 20 R&D Spenders and 10 Most Innovative companies, 2005-2014 5
Moving in the right direction Regardless of spending trends, automotive executives think their companies are moving in the right direction when it comes to improving their innovation efforts. Ninety percent say they ve gotten better at innovation and almost half say they are performing financially better relative to their peers. The rapid rate of change of technology will keep the auto industry clamoring for the most cutting-edge innovations, spurring on competition for years to come. Barry Jaruzelski, Senior Partner, Performing better financially Getting better at innovation My company is performing better than the competition in financial terms 46% 90% My company is better at innovation today than it was ten years ago, on the basis of the share of specific product or service ideas that have met commercial goals Two big factors driving these improvements: better alignment getting closer to the customer Note: Analysis is based on survey questions How much better, if at all, is your company at innovation today than it was 10 years ago, on the basis of the share of specific product or service ideas that have met commercial goals? (Base: 28) and How do you perceive your company s current overall financial performance relative to competitors? (Base: 30) Sources: 2014 Global Innovation 1000 survey data and analysis 6
Aligning innovation with business strategy Our overall research has shown that companies which closely align their innovation and business strategies perform better than those that don t. The automotive industry s performance in this regard mirrors the average across all industries, but there is room for improvement roughly a third of automotive companies say their innovation and business strategies are not highly aligned. In our experience many OEMs have not been able to holistically align their connected car strategy with their overall business strategy. Many players have created parallel organizations tasked with identifying and pursuing incremental service revenue streams which seem relatively elusive in a world where consumers are used to free apps. Being truly innovative having the know-how to generate ideas and the resources and business acumen to make them a reality is a part of doing business in the constantly changing automotive industry. The days of simply being a commodity supplier to the world s OEMs are vanishing rapidly. Evan Hirsh, Managing Partner North America Automotive Practice, 36% 64% My company s innovation strategy is not highly aligned with its business strategy My company s innovation strategy is highly aligned with its business strategy innovation strategy business strategy innovation strategy business strategy Note: Analysis is based on survey question How closely aligned is your company s innovation strategy (or approach to innovation) with its overall business strategy? (Base: 28) Responses of 1, 2, or 3 were defined as Not Highly Aligned, while responses of 4 or 5 were Highly Aligned. Sources: 2014 Global Innovation 1000 survey data and analysis 7
Understanding the customer Most automotive executives (86%) believe they understand customer wants and needs better than they did 10 years ago. In fact, one-third of automotive survey respondents say their knowledge of customers has even become much more detailed. Digital advances are of course making it easier to get comprehensive data on customers in all industries. In the automotive industry, social media in particular has improved understanding of the customer as has analyzing data from drivers more directly. The exponential growth of new and cheaper features in vehicles is substantial today but will become even more significant over time. Innovation at every automotive company has to accelerate to keep pace and they will use customer data to achieve this. Evan Hirsh, Managing Partner North America Automotive Practice, 34% My knowledge of customers has become much more detailed 52% My knowledge of customers has become more detailed Note: Analysis is based on survey question #18 How, if at all, has your company s understanding of your customers wants and needs changed over the past 10 years? (Base: 28) Sources: 2014 Global Innovation 1000 survey data and analysis; Industry Perspectives: 2015 Auto Industry Trends 8
Using technology to drive innovation forward The connected car Cars are getting more and more digital, features from internal sensors monitoring critical engine functions to external sensors scanning the roadway for traffic backups and safety hazards are becoming more commonplace. Onboard entertainment and communications interfaces connect with the Internet. Autonomous driving features help with basic functions like parking and keeping a safe distance. And that s just the beginning. Getting social Customers, dealers, suppliers, and prospects are discovering, connecting, and sharing their experiences with automotive brands through social media and digital platforms. Brand advocates and detractors now share their purchase and ownership experiences through text, photo, and video postings on their personal networks. That s having an impact on the cars consumers buy and driving the need for more innovation in organizational design. With the accelerating electronic content in vehicles, innovation in the automotive industry is more challenging than ever. Evan Hirsh, Managing Partner North America Automotive Practice, The connected car Getting social Keys to success: A strong handle on data security; ability to collaborate with players in other industries. The next step: The networked mobility market is likely to quadruple in size to more than 115 billion (US$148 billion) globally by 2020. The increase will be driven not only by demand for connected-car components, but also by the rise of entirely new digital business opportunities. Keys to success: Strong management of all digital touch points, whether they be company-managed, co-owned, or even just loosely affiliated; maintaining a user-centered focus. The next step: A fully developed and coordinated digital ecosystem that pulls together automakers, dealers, and drivers in real time. Sources: Racing Ahead: The Connected C@r 2014 Study; PwC, Social Selling: A Digital Blueprint for the Automotive Industry 9
How does your company innovate? Need Seeker, Market Reader, or Technology Driver? Our study classifies companies into one of three innovation models. While all three strategies can be productive, our research suggests that need seekers have an advantage. Regardless of which strategy automotive companies choose, the way automotive companies have to innovate in the future will look different than the relatively stable world of today s OEMs and their tiered suppliers. Connected car technology is becoming a more important purchasing criterion. Consumers have become accustomed to the annual product cycle in the consumer tech world and car companies need to create more optionality and flexibility to make technology bets within the constraints of a multi-year product cycle. This will also require partnerships or alliances with non-traditional types of suppliers (e.g., software companies). Automotive companies are using a range of innovation models Need Need Seekers Seekers (40%) ( Market Market Readers Reade (23%) Technology Drivers (37%) Companies that are Need Seekers tend to engage consumers directly to generate new ideas, and then develop original products and services addressing unarticulated needs and get them to market first. Benefits of this strategy for automotive companies: Automotive companies that are able to get close to consumers can focus innovation efforts on what really matters to car buyers. Companies defined as Market Readers are fast followers. They typically generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to current products. Benefits of this strategy for automotive companies: If your company has a strong global footprint, you may be able to generate momentum by transferring innovation across regions or platforms. Companies that are Technology Drivers depend heavily on their internal technological expertise to develop new products and services, driving both breakthrough innovation and incremental change to meet the needs of their customers via new technology. Benefits of this strategy for automotive companies: This strategy takes advantage of engineering function, which is improved even further if you pair product development with the ability to innovate in business models and operational capabilities. Sources: 2014 Global Innovation 1000 survey data and analysis Wondering where your company fits in? Check out our online innovation strategy profiler 10
Innovation can be managed Innovation, although different from operations, sales, and marketing, is nevertheless a function that can be managed: There are principles that are known, capabilities that can be built, and recognized levers that can be pulled to improve the process over time. The stakes for making these efforts are high the disparities in innovation performance show that there are tremendous opportunities for getting more from your R&D spending, and for improving your competitive position and your financial performance. To learn more: strategyand.pwc.com/ innovation1000 11
Contacts Evan R. Hirsh Managing Partner, Automotive Practice Mobile: +1-216-287-3723 Email: evan.hirsh@strategyand.pwc.com Barry H. Jaruzelski Senior Partner, Global Leader of Engineered Products and Services Practice Mobile: +1-973-410-7624 Email: barry.jaruzelski@strategyand.pwc.com www.strategyand.pwc.com/innovation1000 is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we ll help you create the value you re looking for with speed, confidence, and impact. We are a member of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com. 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.