• First, happy New Year to all reading this post. I hope 2015 ended well and your 2016 is off to a great start. The new year always holds excitement for me personally as I get to see a showcase of latest and future auto products and tech up close through the North American International Auto Show in Detroit and now the Consumer Electronics Show (CES) in Las Vegas.

The CES, which is first and starts January 6th, continues to reinforce the convergence of mobility and consumer electronics in the automotive industry. The conference organization reports that this year 9 automakers and another 115 auto technology companies, including 10 Tier 1 suppliers, will be exhibiting—an increase of 25% in exhibition space dedicated to auto over last year. In addition, Mary Barra, CEO of GM, has been chosen to deliver the CES Keynote speech. If you didn’t think of automotive as a consumer electronic product before maybe you should.

Rapid innovation coming from outside disruptors.

The CES marks the rapid innovation in our industry. Among the 115 automotive technology companies exhibiting, a fair share is expected to be start-ups and entrants from Silicon Valley. The growing trend of tech companies entering the auto space has given me and others pause.

If Silicon Valley is able to disrupt the automotive industry as they have other industries, what does that mean for the traditional players? The question arises whether there is a meaningful future role for traditional auto suppliers at all.

In our latest supplier study, “Embracing the Silicon Valley Challenge” (find the PDF for free download below), we aim to find out just who is disrupting the industry, how they are doing it and what current players should do to adapt.

Rapid innovation coming from outside disruptors

When we looked “Out West” we found that entrants include tech giants and start-ups alike. These new groups are bringing business concepts and a mindset, which is fundamentally different from the traditional automotive approach. This disruption is for real and is already impacting the entire ecosystem. Just to name an example, Amazon’s Alexa could turn into a serious competitor to all incumbent automotive infotainment and HMI suppliers in the near future.

We've distilled the formula that allows these new entrants to be successful into four unique characteristics:

1. Ecosystem approach
   Silicon Valley players build broad and collaborative ecosystems around their portfolios allowing them to derive value from multiple industries. Google is a great example where its multifaceted play in the automotive industry is just a piece of a bigger puzzle, a Google ecosystem.
2. Scale
   Tech giants’ interconnected products share technologies and thus generate major economies of scale in the range of hundreds of millions of units. Apple has developed a common platform comprised of its proprietary chip set, iOS and its cloud with these technologies scaled across a 300 million unit annual volume. Can individual suppliers ever match this scale?
3. Services
   Services offered by tech players are expanding the very definition of service in the auto industry and are allowing for massive valuations with no assets. Uber is an example of a company that has disrupted multiple “asset-heavy” industries without owning a single vehicle. In the San Francisco metro market alone, Uber has generated approximately USD 1bn in revenues with effectively zero assets.
4. Speed
   The tech giants are innovating at ten times the speed of the automotive industry, creating new customer expectations. While an average vehicle goes through one lifecycle, a smartphone typically cycles through up to ten generations.

What should incumbents do?

Does Silicon Valley spell doom and gloom for the current industry? Is there no hope for the more traditional supplier base? Certainly not. I truly believe it is a matter of recalibrating both business models and cultures to embrace and incorporate pieces of the Silicon Valley model to succeed. However, this is by no means easy and would demand current players to adjust to a radically different environment to maintain a leading role in the “new industry”.

Collaboration vs. traditional value-chain dynamics

As business models transition from hierarchical value chains to flat ecosystems, suppliers need to collaborate with each other and with other players to compete on level terms with Silicon Valley. Collaboration is required to achieve scale and build automotive and cross-industry service platforms as well as to create new value at the intersection of different roles in the ecosystem.

The new automotive environment requires suppliers to think beyond traditional “products”. A vision how to build and leverage platforms to expand technologies into holistic consumer solutions and how to monetize services in a new era of mobility is going to be crucial for all players who want to maintain a leading role in the new industry. Given the existing legacy of more than 100 years of doing business more or less the same way, this thinking may be the biggest challenge facing incumbent players.

Embrace Silicon Valley speed, culture and mindset

While it’s important to embrace the ecosystem, it is equally critical to master a new collaborative approach to innovation. Innovation must be expanded beyond traditional R&D and include the startup playing field, which might be the hardest one for the traditional supplier to master.

However, ignoring it is to ignore the richest pool of creative thought available in the market place as contemporary automotive innovation is, largely, the work of startups. Corporate venture activities must play a crucial role, but can only be successful if approached correctly. Here too, traditional mindsets are seen as the major hurdle to leveraging outposts in Silicon Valley to the fullest extent.

The challenges ahead are manageable

Fortunately for traditional players, I believe there is still time to “reset” and start from a clean slate. The challenges ahead are manageable – but only with the ambition to go beyond traditional dynamics and behavior. Our chart illustrates the CEO agenda for suppliers, which represents a seismic change to a traditional way of doing things.

• Photo Credit: Chesky_W / iStockphoto